-----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, V1jlythytBvQ25xaZUHLYqNzJE0o/XbPbPpIRuOwDvl832MfW5t8pA6Et9wOpgOQ +XARFTyCLh2gOOdWPr6nNg== 0000950116-98-001002.txt : 19980506 0000950116-98-001002.hdr.sgml : 19980506 ACCESSION NUMBER: 0000950116-98-001002 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19980504 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-3 SEC ACT: SEC FILE NUMBER: 333-51787 FILM NUMBER: 98609874 BUSINESS ADDRESS: STREET 1: 515 PENNSYLVANIA AVE CITY: FT WASHINGTON STATE: PA ZIP: 19034 BUSINESS PHONE: 2157939300 S-3 1 As filed with the Securities and Exchange Commission on May 4, 1998 Registration No. 333- ============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 NCO GROUP, INC. (Exact name of Registrant as specified in its charter) Pennsylvania 23-2858652 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 515 Pennsylvania Avenue Fort Washington, Pennsylvania 19034 Telephone (215) 793-9300 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Michael J. Barrist, Chairman of the Board, President and Chief Executive Officer NCO Group, Inc. 515 Pennsylvania Avenue Fort Washington, Pennsylvania 19034 Telephone (215) 793-9300 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Francis E. Dehel, Esquire Lawrence R. Seidman, Esquire Blank Rome Comisky & McCauley LLP Piper & Marbury L.L.P. One Logan Square 36 South Charles Street Philadelphia, Pennsylvania 19103 Baltimore, Maryland 21201 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE ===============================================================================
Proposed Proposed maximum maximum Amount of Title of securities Amount to be offering price aggregate registration to be registered registered(1) per share (2) offering price(2) fee - --------------------------------------------------------------------------------------------------------- Common Stock, no par value...... 7,549,750 $ 25.44 $192,065,640 $56,660
=============================================================================== (1) Includes 984,750 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 April 30, 1998, 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 MAY 4, 1998 6,565,000 Shares [GRAPHIC OMITTED] Common Stock Of the 6,565,000 shares of Common Stock offered hereby (the "Offering"), 5,800,000 shares are being sold by NCO Group, Inc. ("NCO" or the "Company") and 765,000 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 May 1, 1998, the last sale price of the Common Stock as reported on the Nasdaq National Market was $27 5/16 per share. See "Price Range of Common Stock." See "Risk Factors" commencing on page 9 of this Prospectus for a discussion of certain factors that should be considered by prospective purchasers of the Common Stock offered hereby. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ===============================================================================
Price to Underwriting Proceeds to Proceeds to Public Discount (1) Company (2) Selling Shareholders - ----------------------------------------------------------------------------------------- Per Share ......... $ $ $ $ - ----------------------------------------------------------------------------------------- Total (3) ......... $ $ $ $
=============================================================================== (1) See "Underwriting" for information concerning indemnification of the Underwriters and other matters. (2) Before deducting offering expenses payable by the Company, estimated at $600,000. (3) The Company and certain Selling Shareholders have granted to the Underwriters a 30-day option to purchase up to an additional 887,233 and 97,517 shares, respectively, of Common Stock at the Price to Public shown above solely to cover over-allotments, if any. If the Underwriters exercise this option in full, the total Price to Public, Underwriting Discount, Proceeds to Company and Proceeds to Selling Shareholders will be $ , $ , $ , and $ , respectively. See "Principal and Selling Shareholders" and "Underwriting." The shares of Common Stock are offered by the several Underwriters named herein when, as and if delivered to and accepted by the Underwriters and subject to their right to reject any order in whole or in part. It is expected that delivery of the certificates representing the shares will be made against payment therefor at the office of NationsBanc Montgomery Securities LLC on or about , 1998. ---------------- NationsBanc Montgomery Securities LLC BT Alex. Brown Janney Montgomery Scott Inc. The Robinson-Humphrey Company , 1998 [Pictures depicting certain of the Company's call centers and the Company's Computer Center. The Company's logo also appears on this page.] IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS, IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE AND PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, contained elsewhere in this Prospectus. Unless otherwise indicated, all references in this Prospectus to the "Company" or "NCO" mean NCO Group, Inc., a Pennsylvania corporation and its subsidiaries and predecessors. Unless otherwise indicated, all information in this Prospectus: (i) assumes no exercise of the Underwriters' over-allotment option; (ii) gives effect to a 3-for-2 stock split effected in December 1997; but (iii) does not give effect to the pending acquisitions of FCA International Ltd. ("FCA") and MedSource, Inc. ("MedSource") (collectively, the "Pending Acquisitions"). Unless otherwise indicated: (i) 1997 pro forma information assumes that the acquisitions of Goodyear & Associates, Inc. ("Goodyear"), Tele-Research Center, Inc. ("Tele-Research"), CMS A/R Services ("CMS A/R"), the Collections Division of CRW Financial, Inc. ("CRWCD"), Credit Acceptance Corporation ("CAC") and ADVANTAGE Financial Services, Inc. ("AFS") (collectively, the "1997 Acquisitions"), the acquisitions of the Collection Division of American Financial Enterprises, Inc. ("AFECD") and The Response Center ("TRC") (collectively, the "1998 Acquisitions") and the Pending Acquisitions occurred on January 1, 1997; (ii) 1998 pro forma information assumes that the TRC acquisition and the Pending Acquisitions occurred on January 1, 1998; and (iii) information with respect to MedSource gives pro forma effect to acquisitions completed by MedSource in 1997 as if such acquisitions had occurred on January 1, 1997. The Company NCO is a leading provider of accounts receivable management and other outsourced services. The Company develops and implements customized management solutions for clients. The Company provides these services on a national basis from 22 call centers located in 14 states using advanced workstations and sophisticated call management systems comprised of predictive dialers, automated call distribution systems, digital switching and customized computer software. Through extensive utilization of technology and intensive management of human resources, the Company has achieved rapid growth in recent years. As a result of rapid internal growth and selected strategic acquisitions, the Company's revenue has grown from $7.4 million in 1993 to $188.4 million in 1997 on a pro forma basis. Since April 1994, the Company has completed 12 acquisitions which have enabled it to increase its penetration of existing markets, establish a presence in certain new markets and realize significant operating efficiencies. In addition, the Company has leveraged its infrastructure by offering additional services including customer service call centers, market research and other outsourced administrative services. The Company believes that it is currently among the five largest accounts receivable management companies in the United States. The Company provides its services principally to clients in the financial services, healthcare, retail and commercial, education, telecommunications, utilities and government sectors. The Company has over 8,000 clients, including Bell Atlantic Corporation, Mellon Bank Corporation, NationsBank Corporation, Citicorp, MCI Communications Corporation, Federal Express Corporation and Airborne Freight Corporation. No client accounted for more than 3.6% of the Company's revenue (no more than 2.8% on a pro forma basis) in 1997. For its accounts receivable management services, the Company generates substantially all of its revenue on a contingency fee basis. The Company seeks to be a low cost provider, and as such its fees typically range from 15% to 35% of the amount recovered on behalf of the Company's clients. For many of its other outsourced services, the Company is paid on a fixed fee basis. While NCO's contracts are relatively short-term, the Company seeks to develop long-term relationships with its clients and works closely with them to provide quality, customized solutions. Increasingly, companies are outsourcing many non-core functions to focus on revenue generating activities, reduce costs and improve productivity. In particular, many corporations are recognizing the advantages of outsourcing accounts receivable management and other services as a result of numerous factors including: (i) the increasing complexity of such functions; (ii) changing regulations and increased competition in certain industries; and (iii) the development of sophisticated call management systems 3 requiring substantial capital investment, technical capabilities and human resource commitments. Consequently, industry-wide revenues rose 10.7% to $5.5 billion in 1996 from $5.0 billion in 1995, according to estimates published by M. Kaulkin & Associates, Inc. ("MKA"), an industry consultant. While significant economies of scale exist for large accounts receivable management companies, the industry remains highly fragmented. Based on information obtained from the American Collectors Association, Inc. ("ACA"), an industry trade group, there are approximately 6,500 accounts receivable management companies in operation in the United States, the majority of which are small, local businesses. Given the financial and competitive constraints facing these small companies and the limited number of liquidity options for the owners of such businesses, the Company believes that the industry will continue to experience consolidation in the future. See "Business -- Industry Background." The Company strives to be a cost-effective, client service driven provider of accounts receivable management and other outsourced services to companies with substantial outsourcing needs. The Company's business strategy encompasses a number of key elements which management believes are necessary to ensure quality service and to achieve consistently strong financial performance. First, the Company focuses on the efficient utilization of its technology and infrastructure to constantly improve productivity. The Company's infrastructure enables it to perform large scale accounts receivable management programs cost effectively and to rapidly and efficiently integrate the Company's acquisitions. Second, NCO is committed to client service. Management believes that the Company's emphasis on designing and implementing customized accounts receivable management programs for its clients provides it with a significant competitive advantage. Third, the Company seeks to be a low cost provider of accounts receivable management services by centralizing all administrative functions and minimizing overhead at all branch locations. Lastly, the Company is targeting larger clients which offer significant cross-selling opportunities and have greater outsourcing requirements. See "Business -- Business Strategy." The Company seeks to continue its rapid expansion through both internal and external growth. The Company has experienced and expects to continue to experience strong internal growth by continually striving to increase its market share, expand its industry-specific market expertise and develop and offer new value-added outsourced services. In addition, the Company intends to continue to take advantage of the fragmented nature of the accounts receivable management industry by making strategic acquisitions. Through selected acquisitions, the Company will seek to serve new geographic markets, expand its presence in its existing markets and add complementary services. The Company's principal executive offices are located at 515 Pennsylvania Avenue, Fort Washington, Pennsylvania 19034, and its telephone number is (215) 793-9300. Pending Acquisitions The Company has an outstanding tender offer to acquire all of the outstanding stock of FCA which is expected to close in May 1998. In addition, on May 4, 1998 the Company entered into a definitive agreement to acquire all of the outstanding stock of MedSource which is expected to close in the second quarter of 1998. There can be no assurance that the Company will close any of the Pending Acquisitions. FCA International Ltd. In March 1998, the Company entered into an agreement with FCA pursuant to which NCO is making a cash tender offer (the "FCA Tender Offer") for all of the outstanding common shares of FCA at $9.60 per share, Canadian (equivalent to $6.77 in U.S. dollars based upon the exchange rate as of the date of the agreement). The purchase price of approximately $67.6 million will be paid with borrowings under the Company's revolving credit facility. The FCA Tender Offer is conditioned upon the tender of two-thirds of the outstanding FCA common shares, on a fully-diluted basis, and the satisfaction of certain conditions, including regulatory approvals. The FCA Tender Offer will expire on May 6, 1998 unless withdrawn or extended. FCA's Board of Directors has approved the agreement and recommended that shareholders tender their common shares into the offer. Pursuant to the agreement, Fairfax Financial Holdings Limited ("Fairfax") has agreed, subject to certain conditions, to tender to the bid, the common shares of FCA owned or controlled by it. Fairfax currently owns or controls approximately 27% of the 4 common shares of FCA outstanding on a fully-diluted basis. If at least two-thirds of the outstanding shares of FCA common stock, on a fully-diluted basis, are tendered and the other conditions to closing have been satisfied or waived, the Company will be required to purchase the shares so tendered and may have to pursue other means, including calling a special meeting of FCA shareholders to approve an amalgamation, merger or other transaction, in order to complete the acquisition of the outstanding FCA shares not tendered. In such event, the remaining holders of FCA shares may have the right to dissent to such transaction and demand payment for the fair value of their FCA shares. Founded in 1926, FCA is the largest accounts receivable management company in Canada with significant operations in the United States and the United Kingdom. FCA provides accounts receivable management services principally to the government, financial, education, telecommunications, utilities, healthcare, retail and commercial sectors. FCA has undergone a major reorganization, consolidating 88 branch offices into 17 branch locations including three new major branches in Mobile, Alabama, Brantford, Ontario and Vancouver, British Columbia. For the fiscal year ended June 30, 1997 and the nine months ended March 31, 1998, FCA's revenues were approximately $62.8 million and $45.0 million, respectively. Approximately 45% of FCA's consolidated revenues in 1997 was derived from U.S. operations, 40% from Canadian operations and 15% from operations in the United Kingdom. The acquisition of FCA will give the Company the leading market presence in Canada, significantly expand its U.S. operations and provide a platform for further expansion into Europe from the United Kingdom. The Company also expects to realize substantial cost savings from integrating FCA with its operations. MedSource Acquisition. On May 4, 1998, the Company entered into a definitive agreement to acquire all of the outstanding stock of MedSource for approximately $17.9 million in cash. In connection with the acquisition, the Company will repay debt of $17.1 million. The closing is subject to the satisfaction of certain closing conditions, including regulatory approval and other customary conditions. Founded in 1997, MedSource provides traditional accounts receivable management services and pre-delinquency outsourcing services primarily to hospitals located throughout the United States. Pre-delinquency outsourcing services include insurance billing and follow-up, insurance claim resolution, private pay collections, and outsourcing of central business office functions. Since its inception, MedSource has completed four acquisitions of other accounts receivable management companies which specialize in providing services to the healthcare industry. Headquartered in Goodlettsville, Tennessee, MedSource has additional offices located in Phoenix, Arizona; Springfield, Missouri; Chicago Heights, Illinois; Waterford, Michigan; Johnstown, Pennsylvania; and Mount Laurel, New Jersey. For the fiscal year ended December 31, 1997, on a pro forma basis, and the three months ended March 31, 1998, MedSource's revenues were approximately $22.7 million and $5.3 million, respectively. The acquisition of MedSource significantly enhances NCO's market position as a leading provider of accounts receivable management services to the healthcare sector. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. 5 The Offering Common Stock offered by the Company ....................... 5,800,000 shares Common Stock offered by the Selling Shareholders .......... 765,000 shares (1) Common Stock to be outstanding after the Offering ......... 19,251,834 shares (2) Use of proceeds ........................................... For repayment of bank debt to be incurred in connection with the FCA Tender Offer, to finance the MedSource acquisition, to repay indebtedness of FCA and MedSource fol- lowing the completion of the Pending Acquisitions and for working capital and other general corporate purposes, including other future acquisitions. Nasdaq National Market symbol ............................. NCOG
- ------------- (1) Includes an aggregate of 61,058 shares of Common Stock which are being sold by certain Selling Shareholders upon the exercise of outstanding stock options. (2) Excludes: (i) an aggregate of 1,991,601 shares of Common Stock reserved for issuance under the Company's 1995 Stock Option Plan, 1996 Stock Option Plan and 1996 Non-Employee Director Stock Option Plan; (ii) 63,755 shares of Common Stock reserved for issuance upon the conversion of the Company's $900,000 Convertible Note issued as partial consideration for the Goodyear acquisition; and (iii) 375,000 shares of Common Stock reserved for issuance upon the exercise of warrants issued as partial consideration for the CRWCD acquisition. See "Pending and Recent Acquisitions." 6 SUMMARY FINANCIAL DATA (Amounts in thousands, except per share data)
For the Years Ended December 31, ------------------------------------------------------------------------------------ 1993 1994 1995 1996 1997 --------- --------- -------------- -------------- ------------------------------ Pro Forma As Actual Adjusted(1)(2) ------------ ---------------- Statement of Income Data: Revenue ........................... $7,445 $8,578 $ 12,733 $ 30,760 $ 85,284 $ 188,395 Operating costs and expenses: Payroll and related expenses ..... 4,123 4,558 6,797 14,651 42,502 94,315 Selling, general and administrative expenses ......... 2,391 2,674 4,042 10,033 27,947 62,525 Depreciation and amortization expenses ........................ 141 215 348 1,254 3,369 11,540 Reorganization charge ............ -- -- -- -- -- 1,517 ------ ------ --------- --------- -------- --------- Income from operations ............ 790 1,131 1,546 4,822 11,466 18,498 Other income (expense) ............ 11 (45) (180) (575) 388 1,074 ------ ------ --------- --------- -------- --------- Income before provision for income taxes ..................... 801 1,086 1,366 4,247 11,854 19,572 Income tax expense(4) ............. 320 434 546 1,706 4,780 8,642 ------ ------ --------- --------- -------- --------- Net income(4) ..................... $ 481 $ 652 $ 820 $ 2,541 $ 7,074 $ 10,930 ====== ====== ========= ========= ======== ========= Net income per share: Basic(4) ............................................. $ 0.12 $ 0.34 $ 0.59 $ 0.65 ========= ========= ======== ========= Diluted(4) ........................................... $ 0.12 $ 0.34 $ 0.57 $ 0.62 ========= ========= ======== ========= Weighted average shares outstanding: Basic ................................................ 7,093(5) 7,630(5) 11,941 16,944 Diluted .............................................. 7,093(5) 7,658(5) 12,560 17,576 Three Months Ended March 31, --------------------------------------- 1998 --------------------------- Pro Forma As 1997 Actual Adjusted(2)(3) ---------- ------------ -------------- Statement of Income Data: Revenue ........................... $18,077 $ 27,609 $ 48,399 Operating costs and expenses: Payroll and related expenses ..... 9,046 14,144 24,832 Selling, general and administrative expenses ......... 5,932 8,568 15,173 Depreciation and amortization expenses ........................ 716 1,155 2,094 Reorganization charge ............ -- -- -- ------- -------- -------- Income from operations ............ 2,383 3,742 6,300 Other income (expense) ............ (82) 153 150 ------- -------- -------- Income before provision for income taxes ..................... 2,301 3,895 6,450 Income tax expense(4) ............. 994 1,579 2,984 ------- -------- -------- Net income(4) ..................... $ 1,307 $ 2,316 $ 3,466 ======= ======== ======== Net income per share: Basic(4) ....................... $ 0.12 $ 0.17 $ 0.20 ======= ======== ======== Diluted(4) ..................... $ 0.12 $ 0.17 $ 0.19 ======= ======== ======== Weighted average shares outstanding: Basic .......................... 10,656 13,240 17,452 Diluted ........................ 11,230 13,801 18,013
March 31, 1998 ------------------------------------- Pro Pro Forma As Actual Forma(6) Adjusted(7) ---------- ---------- ------------- Balance Sheet Data: Cash and cash equivalents . $ 16,088 $ 9,148 $ 60,707 Working capital . 22,173 2,199 56,640 Total assets . 105,708 227,420 278,979 Long-term debt, net of current portion . 923 94,715 923 Shareholders' equity . 91,956 91,956 240,284
7 - ----------- (1) Assumes that the 1997 Acquisitions, the 1998 Acquisitions and the Pending Acquisitions occurred on January 1, 1997. Gives effect to: (i) the elimination of payroll and related expenses relating to certain redundant collection and administrative personnel costs immediately eliminated at the time of the 1997 Acquisitions and the 1998 Acquisitions and expenses identified during the due diligence process which will be eliminated upon the closing of the Pending Acquisitions; (ii) the elimination of certain rental expenses and related operating costs attributable to facilities which were closed at the time of the 1997 Acquisitions and the 1998 Acquisitions and facilities identified during the due diligence process which will be closed upon the completion of the Pending Acquisitions; (iii) the increase in amortization expense resulting from the acquisitions; (iv) the elimination of depreciation and amortization expense related to assets revalued or not acquired; (v) interest expense on borrowings related to the acquisitions; (vi) the estimated income tax expense, after giving consideration to non-deductible goodwill expense; (vii) the elimination of interest expense on debt assumed to be repaid with a portion of the proceeds from the Offering; (viii) the issuance of 517,767 shares of Common Stock and warrants exercisable for 375,000 shares of Common Stock in connection with the acquisition of CRWCD; (ix) the issuance of 1,425,753 shares of Common Stock in the July 1997 Offering at the public offering price of $19.67 per share which, net of the underwriting discount and offering expenses paid by the Company, would be sufficient to repay acquisition related debt of $8.4 million and to fund the acquisitions of AFECD and TRC; (x) the issuance of 46,442 shares of Common Stock issued in connection with the acquisition of AFS; and (xi) the issuance of 4.2 million shares of Common Stock at an assumed public offering price of $27.00 per share, net of the estimated underwriting discount and offering expenses payable by the Company, which would be sufficient to repay acquisition related debt of $75.0 million, repay debt of $21.9 million recognized in connection with the Pending Acquisitions and pay an additional $10.5 million necessary to fund the Pending Acquisitions. (2) Includes reorganization charges and other costs of $1.9 million and $90,000 for the year ended December 31, 1997, and the three months ended March 31, 1998, respectively. Net income per share - basic, and net income per share - diluted would have been $0.72 and $0.69, respectively, and $0.20 and $0.20, respectively, on a pro forma basis, assuming those charges had not been incurred. (3) Assumes that the TRC acquisition and the Pending Acquisitions occurred on January 1, 1998. Gives effect to: (i) the elimination of payroll and related expenses relating to certain redundant collection and administrative personnel costs immediately eliminated at the time of the TRC acquisition and expenses identified during the due diligence process which will be eliminated upon the closing of the Pending Acquisitions; (ii) the elimination of certain rental expenses and related operating costs attributable to facilities which were identified during the due diligence process and will be closed upon the completion of the Pending Acquisitions; (iii) the increase in amortization expense resulting from the TRC acquisition and the Pending Acquisitions; (iv) the elimination of depreciation and amortization expense related to assets revalued or not acquired; (v) interest expense on borrowings related to the Pending Acquisitions; (vi) the estimated income tax expense, after giving consideration to non-deductible goodwill expense; (vii) the elimination of interest expense on debt assumed to be repaid with a portion of the proceeds from the Offering; and (viii) the issuance of 4.2 million shares of Common Stock at an assumed public offering price of $27.00 per share, net of the estimated underwriting discount and offering expenses payable by the Company, which would be sufficient to repay acquisition related debt of $75.0 million, repay debt of $21.9 million recognized in connection with the Pending Acquisitions and pay an additional $10.5 million necessary to fund the Pending Acquisitions. (4) The Company was taxed as an S Corporation prior to September 3, 1996. Accordingly, income tax expense and net income have been provided on a pro forma basis as if the Company had been subject to income taxes in all periods presented. (5) Assumes that the Company issued 374,637 shares of Common Stock at $8.67 per share to fund the distribution of undistributed S Corporation earnings of $3.2 million through September 3, 1996, the termination date of the Company's S Corporation status, to existing shareholders of the Company. (6) Gives effect to: (i) the pending acquisition of FCA for approximately $67.6 million in cash, which was assumed to be borrowed against the Company's credit facility, and the recognition of certain acquisition related liabilities; and (ii) the pending acquisition of MedSource for approximately $17.9 million in cash, of which $7.4 million was assumed to be borrowed against the Company's credit facility, and the recognition of certain acquisition related liabilities. The Company expects to recognize goodwill of $56.2 million and $36.3 million for the FCA and MedSource acquisitions, respectively. (7) Gives effect to the issuance of 5.8 million shares of Common Stock at an assumed public offering price of $27.00 per share and the application of the net proceeds therefrom. See "Use of Proceeds." 8 RISK FACTORS Certain statements included in this Prospectus, including, without limitation, statements regarding the anticipated growth in the amount of accounts receivable placed for third-party management, the continuation of trends favoring outsourcing of other administrative functions, the Company's objective to grow through strategic acquisitions, the Company's ability to realize operating efficiencies upon the completion of the recent acquisitions, Pending Acquisitions, and other acquisitions that may occur in the future, the Company's ability to expand its service offerings, the anticipated changes in revenues from acquired companies and trends in the Company's future operating performance, and statements as to the Company's or management's beliefs, expectations or opinions are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act") which are intended to be covered by safe harbors created thereby. The factors discussed below and elsewhere in this Prospectus could cause actual results and developments to be materially different from those expressed in or implied by such forward-looking statements. Accordingly, in addition to the other information contained in "Pending and Recent Acquisitions," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of Common Stock offered by this Prospectus. Risks Associated with Recent and Pending Acquisitions The 1998 Acquisitions and the Pending Acquisitions had combined revenues of $94.5 million in 1997 compared to the Company's revenue of $85.3 million in 1997. The Company is currently in the process of integrating the acquisitions of AFS, CAC, and the 1998 Acquisitions. There can be no assurance that the Company will successfully consummate the FCA Tender Offer or the MedSource acquisition. In the event that the Company completes these acquisitions, the integration of such companies could divert management's attention from the daily operation of the Company, require additional management, operational and financial resources, and place significant demands on the Company's management and infrastructure. There can be no assurance that the recently acquired businesses and the Pending Acquisitions, will be successfully integrated with that of the Company, that the Company will be able to realize operating efficiencies or eliminate redundant costs, or that their businesses will be operated profitably. Further, there can be no assurance that clients of the acquired companies will continue to do business with the Company, or that the Company will be able to retain key employees of the acquired companies. In addition, there can be no assurance that the acquired companies will not have additional liabilities or contingencies that were unanticipated by the Company at the time of the acquisitions. Risks Associated with the FCA Acquisition There are several risks associated with the acquisition of FCA including the ability to complete the acquisition of any outstanding shares of FCA not purchased by the Company in the FCA Tender Offer, the ability to operate FCA's business profitably and the fact that FCA has significant operations outside of the United States. With respect to the FCA Tender Offer, if at least two-thirds of the outstanding shares of FCA common stock, on a fully-diluted basis, are tendered and the other conditions to closing have been satisfied or waived, the Company will be required to purchase the shares so tendered and may have to pursue other means, including calling a special meeting of FCA shareholders to approve an amalgamation, merger or other transaction, in order to complete the acquisition of any outstanding FCA shares not tendered. In such event, the remaining holders of FCA shares may have the right to dissent to such transaction and demand payment for the fair value of their FCA shares. As a result, the Company may incur additional delays and costs in completing the acquisition of all of the outstanding shares of FCA common stock. FCA has had net losses of $4.4 million, and $1.4 million for its fiscal years ended June 30, 1996 and 1997, respectively. There can be no assurance that the Company will be able to operate FCA's business profitably following the acquisition of FCA. To date, all of the Company's operations have been conducted in the United States. FCA is headquartered in Canada and also has offices in the United Kingdom and, as a result of such acquisition, a portion of the Company's operations would be conducted outside the United States. There are a number of risks inherent in international operations including government controls, regulatory requirements that may be more onerous than those imposed in the United States, difficulties in managing international operations and fluctuations in currency exchange rates. See "Recent and Pending Acquisitions -- FCA International Ltd." 9 Risks Associated with Rapid Growth The Company has experienced rapid growth over the past several years which has placed significant demands on its administrative, operational and financial resources. The Company seeks to continue such rapid growth which could place additional demands on its resources. Future internal growth will depend on a number of factors, including the effective and timely initiation and development of client relationships, the Company's ability to maintain the quality of services it provides to its clients and the recruitment, motivation and retention of qualified personnel. Sustaining growth will also require the implementation of enhancements to its operational and financial systems and will require additional management, operational and financial resources. There can be no assurance that the Company will be able to manage its expanding operations effectively or that it will be able to maintain or accelerate its growth, and any failure to do so could have a materially adverse effect on the Company's business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Growth Strategy." Risks Associated with Future Acquisitions A primary element of the Company's growth strategy is to continue to pursue strategic acquisitions that expand and complement the Company's business. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. There can be no assurance that the Company will be able to identify additional acquisition candidates on terms favorable to the Company or in a timely manner, enter into acceptable agreements or close any such transactions. There can also be no assurance that the Company will be able to continue to execute its acquisition strategy, and any failure to do so could have a materially adverse effect on the Company's business, financial condition, results of operations and ability to sustain growth. In addition, the Company believes that it will compete for attractive acquisition candidates with other companies, consolidators or investors in the accounts receivable management industry. Increased competition for such acquisition candidates could have the effect of increasing the cost to the Company of pursuing this growth strategy or could reduce the number of attractive candidates to be acquired. Future acquisitions could divert management's attention from the daily operations of the Company and otherwise require additional management, operational and financial resources. Moreover, there is no assurance that the Company will successfully integrate businesses acquired in the future into its business or operate such acquired businesses profitably. Acquisitions also may involve a number of additional risks including: adverse short term effects on the Company's operating results; dependence on retaining key personnel; amortization of acquired intangible assets; and risks associated with unanticipated problems, liabilities or contingencies. See "Business -- Growth Strategy." The Company may require additional debt or equity financing to fund any future acquisitions, which may not be available on terms favorable to the Company, if at all. To the extent the Company uses its capital stock for all or a portion of the consideration to be paid for future acquisitions, dilution may be experienced by existing shareholders, including the purchasers of Common Stock in this Offering. In the event that the Company's capital stock does not maintain sufficient value or potential acquisition candidates are unwilling to accept the Company's capital stock as consideration for the sale of their businesses, the Company may be required to utilize more of its cash resources, if available, in order to continue its acquisition program. If the Company does not have sufficient cash resources or is unable to use its capital stock as consideration for acquisitions, its growth through acquisitions could be limited. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Fluctuations in Quarterly Operating Results The Company may experience quarterly variations in operating results as a result of many factors, including the costs and timing of completion and integration of acquisitions, the timing of clients' accounts receivable management programs, the commencement of new contracts, the termination of existing contracts, costs to support growth by acquisition or otherwise, the effect of the change of business mix on margins and the timing of additional selling, general and administrative expenses to support new business. In connection with certain contracts, the Company could incur costs in periods prior to recognizing revenue under those contracts which may adversely affect the Company's operating results in a particular quarter. The Company's planned operating 10 expenditures are based on revenue forecasts, and if revenues are below expectations in any given quarter, operating results would likely be materially adversely affected. While the effects of seasonality on the Company's business historically have been obscured by its rapid growth, the Company's business tends to be slower in the third and fourth quarters of the year due to the summer and holiday seasons. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Dependence on Key Personnel The Company is highly dependent upon the continued services and experience of its senior management team, including Michael J. Barrist, Chairman of the Board, President and Chief Executive Officer. The loss of the services of Mr. Barrist or other members of its senior management could have a materially adverse effect on the Company. The Company has employment contracts with Mr. Barrist and certain other key executive officers which expire in 2001. In addition, the Company has a $2.0 million key person life insurance policy on Mr. Barrist. See "Management." Dependence on Certain Sectors; Contract Risks Most of the Company's revenues are derived from clients in the financial services, healthcare, retail and commercial, education, telecommunications, utilities and government sectors. A significant downturn in any of these sectors or any trends to reduce or eliminate the use of third-party accounts receivable management services could have a materially adverse impact on the Company's business, results of operations and financial condition. The Company enters into contracts with most of its clients which define, among other things, fee arrangements, scope of services and termination provisions. Clients may usually terminate such contracts on 30 or 60 days notice. Accordingly, there can be no assurance that existing clients will continue to use the Company's services at historical levels, if at all. Under the terms of these contracts, clients are not required to place accounts with the Company but do so on a discretionary basis. In addition, substantially all of the Company's contracts are on a contingent fee basis in which the Company recognizes revenues only as accounts are recovered. See "Business -- Client Relationships." Competition The accounts receivable management industry is highly competitive. The Company competes with approximately 6,500 service providers, including large national corporations such as Outsourcing Solutions Inc., GC Services, Inc. and Equifax Inc. and many regional and local firms. Some of the Company's competitors have substantially greater resources, offer more diversified services and operate in broader geographic areas than the Company. In addition, the accounts receivable management services offered by the Company, in many instances, are performed in-house. Moreover, many larger clients retain multiple accounts receivable management providers which exposes the Company to continuous competition in order to remain a preferred vendor. There can be no assurance that outsourcing of the accounts receivable management function will continue or that the Company's clients which currently outsource such services will not bring them in-house. The Company also competes with other firms, such as SITEL Corporation, APAC Teleservices, Inc. and TeleTech Holdings, Inc., in providing teleservices. As a result of these factors, there can be no assurance that the Company will be able to compete successfully with its existing or future competitors. See "Business -- Competition." Risk of Business Interruption; Reliance on Computer and Telecommunications Infrastructure The Company's success is dependent in large part on its continued investment in sophisticated telecommunications and computer systems, including predictive dialers, automated call distribution systems and digital switching. The Company has invested significantly in technology in an effort to remain competitive and anticipates that it will be necessary to continue to do so in the future. Moreover, computer and telecommunication technologies are evolving rapidly and are characterized by short product life cycles, which require the Company to anticipate technological developments. There can be no assurance that the Company will be successful in anticipating, managing or adopting such technological changes on a timely basis or that the Company will have the capital resources available to invest in new technologies. In addition, the Company's business is highly 11 dependent on its computer and telecommunications equipment and software systems, the temporary or permanent loss of which, through casualty or operating malfunction, could have a materially adverse effect on the Company's business. The Company's business is materially dependent on service provided by various local and long distance telephone companies. A significant increase in the cost of telephone services that is not recoverable through an increase in the price of the Company's services, or any significant interruption in telephone services, could have a materially adverse impact on the Company. See "Business - -- Operations." Risks Associated with Year 2000 NCO has implemented a program to evaluate and address the impact of the year 2000 on its information systems in order to ensure that its network, computer systems and software will manage and manipulate data involving the transition of dates from 1999 to 2000 without functional or data abnormality and without inaccurate results related to such data. The Company does not expect year 2000 compliance costs to have a material adverse impact on the Company's business or results of operations. No assurance can be given, however, that unanticipated or undiscovered year 2000 compliance problems will not have a material adverse effect on the Company's business or results of operations. In addition, if the Company's clients or significant suppliers and contractors do not successfully achieve year 2000 compliance, the Company's business and results of operations could be adversely affected, resulting from, among other things, the Company's inability to properly exchange and/or receive data. See "Management's Discussion and Analysis and Results of Operations -- Year 2000 System Modifications." Dependence on Labor Force The accounts receivable management industry is very labor intensive and experiences high personnel turnover. Many of the Company's employees receive modest hourly wages, and a portion of these employees are employed on a part-time basis. A higher turnover rate among the Company's employees would increase the Company's recruiting and training costs and could adversely impact the quality of services the Company provides to its clients. If the Company were unable to recruit and retain a sufficient number of employees, it would be forced to limit its growth or possibly curtail its operations. Growth in the Company's business will require it to recruit and train qualified personnel at an accelerated rate from time to time. There can be no assurance that the Company will be able to continue to hire, train and retain a sufficient number of qualified employees. Additionally, an increase in hourly wages, costs of employee benefits or employment taxes also could materially adversely affect the Company. See "Business -- Personnel and Training." Government Regulation The accounts receivable management and telemarketing industries are regulated under various federal and state statutes. In particular, the Company is subject to the federal Fair Debt Collection Practices Act (the "FDCPA") which establishes specific guidelines and procedures which debt collectors must follow in communicating with consumer debtors, including the time, place and manner of such communications. The Company is also subject to the Fair Credit Reporting Act which regulates the consumer credit reporting industry and which may impose liability on the Company to the extent that the adverse credit information reported on a consumer to a credit bureau is false or inaccurate. The accounts receivable management business is also subject to state regulation, and some states require that the Company be licensed as a debt collection company. With respect to the other teleservices offered by the Company, including telemarketing, the federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 broadly authorizes the Federal Trade Commission (the "FTC") to issue regulations prohibiting misrepresentations in telemarketing sales. The FTC's telemarketing sales rules prohibit misrepresentations of the cost, terms, restrictions, performance or duration of products or services offered by telephone solicitation and specifically address other perceived telemarketing abuses in the offering of prizes and the sale of business opportunities or investments. The federal Telephone Consumer Protection Act of 1991 (the "TCPA") limits the hours during which telemarketers may call consumers and prohibits the use of automated telephone dialing equipment to call certain telephone numbers. A number of states also regulate telemarketing and some states have enacted restrictions similar to the federal TCPA. The failure to comply with applicable statutes and regulations could have a materially adverse effect on the Company. There can be no assurance that additional federal or state legislation, or changes in regulatory implementation, would not limit the activities of the Company in the future or significantly increase the cost of regulatory compliance. 12 The collection of accounts receivable by collection agencies in Canada is regulated at the provincial and territorial level in substantially the same fashion as is accomplished by federal and state laws in the United States. The manner in which the Company carries on the business of collecting accounts is subject, in all provinces and territories, to established rules of common law or civil law and statute. Such laws establish rules and procedures governing the tracing, contacting and dealing with debtors in relation to the collection of outstanding accounts. These rules and procedures prohibit debt collectors from engaging in intimidating, misleading and fraudulent behavior when attempting to recover outstanding debts. In Canada, the Company's collection operations are subject to licensing requirements and periodic audits by government agencies and other regulatory bodies. Generally, such licenses are subject to annual renewal. If the Company engages in other teleservice activities in Canada, including telemarketing, there are several provincial and territorial consumer protection laws of more general application. This legislation defines and prohibits unfair practices by telemarketers, such as, the use of undue pressure and the use of false, misleading or deceptive consumer representations. In addition, accounts receivable management and telemarketing industries are regulated in the United Kingdom, including a licensing requirement. If the Company expands its international operations, it may become subject to additional government controls and regulations in other countries, which may be more onerous than those in the United States. Several of the industries served by the Company are also subject to varying degrees of government regulation. Although compliance with these regulations is generally the responsibility of the Company's clients, the Company could be subject to a variety of enforcement or private actions for its failure or the failure of its clients to comply with such regulations. See "Business -- Regulation." Possible Volatility of Stock Price Numerous factors, including announcements of fluctuations in the Company's or its competitors' operating results, market conditions for accounts receivable management, telemarketing industry or business services stocks in general, the timing and announcement of acquisitions by the Company or its competitors or government regulatory action, could have a significant impact on the future price of the Common Stock. In addition, the stock market in recent years has experienced significant price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These broad fluctuations may adversely affect the market price of the Common Stock. There can be no assurance that purchasers of Common Stock in this Offering will be able to resell their Common Stock at prices equal to or greater than the offering price hereunder. Shares Eligible for Future Sale Sales of the Company's Common Stock could adversely affect the market price of the Company's Common Stock and could impair the Company's future ability to raise capital through the sale of equity securities. Upon completion of the Offering, the Company will have 19,251,834 shares of Common Stock outstanding. Of these shares, all of the 6,565,000 shares sold in the Offering will be, and the 8,625,000 shares sold in prior public offerings are, available for resale in the public market without restriction, except for any such shares purchased by affiliates of the Company. The Company's directors, executive officers and the Selling Shareholders have agreed, subject to certain limitations, not to offer, sell or otherwise dispose of any shares of Common Stock for a period of 90 days after the closing of the Offering without the prior written consent of NationsBanc Montgomery Securities LLC. Following the expiration of this 90-day period, such persons will hold an aggregate of 3,723,099 outstanding shares of Common Stock (3,625,582 shares if the over-allotment option is exercised in full) which may be resold under Rule 144. Upon completion of the Offering, the Company also will continue to have outstanding a $900,000 Convertible Note convertible into 63,755 shares of Common Stock at any time on or before January 22, 2002 and a warrant to purchase 375,000 shares of Common Stock exercisable at any time on or before January 31, 2002. The holders of the Convertible Note and the warrants will continue to be entitled to certain demand and/or piggy-back registration rights following the completion of the Offering. The earn-out payable in connection with the TRC acquisition provides, among other things, that the seller may elect to be paid the earn-out in the form of a convertible note, convertible into NCO Common Stock at a price equal to $3.00 above NCO's trailing thirty day average closing per share price. In addition, the Company will have 1,991,601 13 shares of Common Stock reserved for issuance to its employees, directors, consultants and advisors under the Company's 1995 Stock Option Plan, 1996 Stock Option Plan and the 1996 Non-Employee Director Stock Option Plan upon the completion of this Offering. Anti-Takeover Provisions The Company's Amended and Restated Articles of Incorporation (the "Articles") and Bylaws (the "Bylaws") contain provisions which may be deemed to be "anti-takeover" in nature in that such provisions may deter, discourage or make more difficult the assumption of control of the Company by another corporation or person through a tender offer, merger, proxy contest or similar transaction. The Articles permit the Board of Directors to establish the rights, preferences, privileges and restrictions of, and to issue, up to 5,000,000 shares of Preferred Stock without shareholder approval. The Company's Bylaws also provide for the staggered election of directors to serve for one-, two- and three-year terms, and for successive three-year terms thereafter, subject to removal only for cause upon the vote of not less than 65% of the shares of Common Stock represented at a shareholders' meeting. Certain provisions of the Articles and Bylaws may not be amended except by a similar 65% vote. In addition, the Company is subject to certain anti-takeover provisions of the Pennsylvania Business Corporation Law. 14 PENDING AND RECENT ACQUISITIONS Since 1994, the Company has completed 12 strategic acquisitions which have expanded its client base and geographic presence, increased its presence in key industries and substantially increased its revenues and profits. A key element of the Company's growth strategy is to continue to pursue selected strategic acquisitions to serve new geographic markets or industries, expand its presence in its existing markets and add complementary service applications. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. The following is a summary of the Pending Acquisitions, the 1998 Acquisitions and the 1997 Acquisitions. FCA International Ltd. In March 1998, the Company entered into an agreement with FCA pursuant to which NCO is making a cash tender offer for all of the outstanding common shares of FCA at $9.60 per share, Canadian (equivalent to $6.77 in U.S. dollars based upon the exchange rate as of the date of the agreement). The purchase price is valued at approximately $67.6 million. The FCA Tender Offer is conditioned upon the tender of two-thirds of the outstanding FCA common shares, on a fully diluted basis, and the satisfaction of certain conditions, including regulatory approvals. The FCA Tender Offer will expire on May 6, 1998 unless withdrawn or extended. FCA's Board of Directors approved the agreement and has recommended that shareholders tender their common shares into the offer. Pursuant to the agreement, Fairfax has agreed, subject to certain conditions, to tender to the bid, the common shares of FCA owned or controlled by it. Fairfax currently owns or controls approximately 27% of the common shares of FCA outstanding on a fully-diluted basis. If at least two-thirds of the outstanding shares of FCA common stock, on a fully-diluted basis, are tendered and the other conditions to closing have been satisfied or waived, the Company will be required to purchase the shares so tendered and may have to pursue other means, including calling a special meeting of FCA shareholders to approve an amalgamation, merger or other transaction, in order to complete the acquisition of the outstanding FCA shares not tendered. In such event, the remaining holders of FCA shares may have the right to dissent to such transaction and demand payment for the fair value of their FCA shares. Founded in 1926, FCA is the largest accounts receivable management company in Canada with significant operations in the United States and the United Kingdom. FCA provides accounts receivable management services principally to the government, financial, education, telecommunications, utilities, healthcare, retail and commercial sectors. FCA has undergone a major reorganization, consolidating 88 branch offices into 17 branch locations including three new major branches in Mobile, Alabama, Brantford, Ontario and Vancouver, British Columbia. For the fiscal year ended June 30, 1997 and the nine months ended March 31, 1998, FCA's revenues were approximately $62.8 million and $45.0 million, respectively. Approximately 45% of FCA's consolidated revenue in 1997 was derived from U.S. operations, 40% from Canadian operations and 15% from operations in the United Kingdom. The acquisition of FCA will give the Company the leading market presence in Canada, significantly expand its U.S. operations and provide a platform for further expansion into Europe from the United Kingdom. The Company also expects to realize substantial cost savings from integrating FCA with its operations. MedSource, Inc. The Company has entered into an agreement to acquire all of the outstanding stock of MedSource for approximately $17.9 million in cash. In connection with the acquisition, the Company will repay debt of approximately $17.1 million. The closing is subject to the satisfaction of certain closing conditions, including regulatory approval and other customary conditions. Founded in 1997, MedSource provides traditional accounts receivable management services and pre-delinquency outsourcing services primarily to hospitals located throughout the United States. Pre-delinquency outsourcing services include insurance billing and follow-up, insurance claim resolution, private pay collections, and outsourcing of central business office functions. Since its inception, MedSource has completed four acquisitions of other accounts receivable management companies which specialize in providing services to the healthcare industry. Headquartered in Goodlettsville, Tennessee, MedSource has additional offices located in Phoenix, 15 Arizona; Springfield, Missouri; Chicago Heights, Illinois; Waterford, Michigan; Johnstown, Pennsylvania; and Mount Laurel, New Jersey. For the fiscal year ended December 31, 1997, on a pro forma basis, and the three months ended March 31, 1998, MedSource's revenues were approximately $22.7 million and $5.3 million, respectively. The acquisition of MedSource significantly enhances NCO's market position as a leading provider of accounts receivable management services to the healthcare sector. The Response Center On February 6, 1998, the Company purchased certain assets of TRC, which was an operating division of TeleSpectrum Worldwide, Inc., for $15.0 million in cash plus a performance based earn-out. TRC provided full-service custom market research services to the telecommunications, financial services, utilities, healthcare, pharmaceutical and consumer products sectors. Its capabilities included problem conceptualization, program design, data gathering (by telephone, mail, and focus groups), as well as data tabulation, results analysis and consulting. TRC, with offices in Upper Darby, Pennsylvania, and Philadelphia, Pennsylvania, had revenues of approximately $8.0 million for the year ended December 31, 1997. Collection Division of American Financial Enterprises, Inc. On January 1, 1998, the Company purchased certain assets of AFECD for $1.7 million in cash. AFECD, an accounts receivable management company, expanded NCO's penetration into the governmental and insurance sectors. AFECD's revenues for the year ended December 31, 1997 were approximately $1.7 million. ADVANTAGE Financial Services, Inc. On October 1, 1997, the Company purchased all of the outstanding stock of AFS for $2.9 million in cash, a $1.0 million Note and 46,442 shares of the Company's Common Stock. The Note bears interest payable monthly at a rate of 8.0% per annum with one-half of the principal paid in April 1998 and the balance due in January 1999. The acquisition was valued at approximately $5.0 million. AFS, an accounts receivable management company with offices in Dayton, Ohio and Bristol, Tennessee, allowed NCO further penetration into the medical, telecommunications and commercial sectors. AFS's revenues for the year ended December 31, 1996 were approximately $5.1 million. Credit Acceptance Corporation On October 1, 1997, the Company purchased all of the outstanding stock of CAC for $1.8 million in cash. CAC, an accounts receivable management company located in Pittsburgh, Pennsylvania, allowed NCO further penetration into the healthcare sector. CAC's revenues for the year ended December 31, 1996 were approximately $2.3 million. Collection Division of CRW Financial, Inc. On February 2, 1997, NCO purchased substantially all of the assets of CRWCD for $3.8 million in cash, 517,767 shares of Common Stock and warrants to purchase 375,000 shares of Common Stock at an exercise price of $18.42 per share. The purchase price was valued at approximately $12.8 million. CRWCD provided accounts receivable management services principally to the telecommunications, education, financial, government and utility sectors throughout the United States. In addition, CRWCD had a commercial collections division. CRWCD's revenues for the year ended December 31, 1996 were approximately $25.9 million. CMS A/R Services On January 31, 1997, NCO purchased substantially all of the assets of CMS A/R for $5.1 million in cash. CMS A/R, located in Jackson, Michigan, specialized in providing a wide range of accounts receivable management and administrative services to the utility sector, including traditional recovery of delinquent accounts, outsourced administrative services, early stage accounts receivable management and database management services. CMS A/R's revenues for the year ended December 31, 1996 were approximately $6.8 million. 16 Tele-Research Center, Inc. On January 30, 1997, NCO purchased certain of the assets of Tele-Research for $2.2 million in cash including contingent consideration paid. Tele-Research located in Philadelphia, Pennsylvania, provided market research, data collection and other teleservices to market research companies as well as end-users. Tele-Research's revenues for the year ended December 31, 1996 were approximately $1.8 million. Goodyear & Associates, Inc. On January 22, 1997, NCO purchased all of the outstanding stock of Goodyear for $4.5 million in cash and a $900,000 Convertible Note. The Note is convertible at any time into 63,755 shares of the Company's Common Stock and bears interest payable monthly at a rate of 8.0% per annum with principal due in January 2002. Goodyear, based in Charlotte, North Carolina, provided accounts receivable management services principally to the telecommunications, education and utility sectors. Goodyear's revenues for the year ended December 31, 1996 were approximately $5.5 million. 17 USE OF PROCEEDS The net proceeds from the sale of the 5,800,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $148.3 million after deducting the estimated underwriting discount and expenses of the Offering and based on an assumed public offering price of $27.00 per share. The Company will not receive any proceeds from the sale of Common Stock by the Selling Shareholders. Approximately $67.6 million of the net proceeds will be used to repay debt under the Company's Credit Agreement with Mellon Bank, N.A. ("Mellon") expected to be incurred in connection with the FCA Tender Offer. The Company entered into the Credit Agreement in July 1995 to obtain working capital and acquisition financing and to refinance certain existing debt. The Credit Agreement, as amended, provides a revolving line of credit which permits borrowings of up to $75.0 million at an interest rate ranging from LIBOR plus 0.75% to LIBOR plus 2.0% (LIBOR was 5.69% at March 31, 1998). See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Approximately $17.9 million of the net proceeds will be used to pay the cash portion of the MedSource acquisition, or the repayment of borrowings under the Credit Agreement used to finance the MedSource Acquisition, which acquisition is expected to close in the second quarter of 1998. The acquisition is subject to the satisfaction of certain closing conditions, including regulatory approval and other customary conditions. The Company intends to use approximately $21.9 million of the net proceeds to repay certain outstanding indebtedness of the Pending Acquisitions following the completion of such acquisitions. The Company intends to use the remaining net proceeds of $40.9 million for working capital and other general corporate purposes, including other possible future acquisitions. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. Pending the uses described above, the Company intends to invest its net proceeds in short-term, investment-grade securities. DIVIDEND POLICY The Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. In addition, the Company's Credit Agreement prohibits the Company from paying cash dividends without the lender's prior consent. The Company currently intends to retain future earnings to finance its operations and fund the growth of its business. Any payment of future dividends will be at the discretion of the Board of Directors of the Company and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other factors that the Company's Board of Directors deems relevant. 18 PRICE RANGE OF COMMON STOCK The following table sets forth the range of high and low closing sale prices for the Common Stock as reported on the Nasdaq National Market since the Company's initial public offering on November 6, 1996. The Common Stock is traded under the symbol "NCOG". The table has been adjusted to reflect the 3-for-2 stock split paid in December 1997. High Low ----------- ----------- 1996 Fourth Quarter (from November 6) .......... $12.96 $11.00 1997 First Quarter ............................. 18.92 11.17 Second Quarter ............................ 22.50 12.17 Third Quarter ............................. 26.50 20.58 Fourth Quarter ............................ 28.33 21.00 1998 First Quarter ............................. 29.25 21.87 Second Quarter (through May 1) ............ 28.00 23.75 On May 1, 1998, the last reported sale price of the Common Stock on the Nasdaq National Market was $27.31 per share. As of April 30, 1998, the Company's Common Stock was held by approximately 50 holders of record. Based on information obtained from the Company's transfer agent, the Company believes that there are approximately 1,000 beneficial owners of its Common Stock. 19 CAPITALIZATION The following table sets forth as of March 31, 1998: (a) the actual capitalization of the Company; (b) the pro forma capitalization of the Company giving effect to the Pending Acquisitions; and (c) the pro forma capitalization of the Company as adjusted to give effect to: (i) the exercise of stock options to purchase an aggregate of 61,058 shares of Common Stock which are being sold by certain Selling Shareholders in the Offering and the receipt by the Company of the aggregate exercise price of $157,920; and (ii) the sale by the Company of 5,800,000 shares of Common Stock in the Offering (at an assumed public offering price of $27.00 per share) and the application of the net proceeds therefrom as set forth in "Use of Proceeds." This table should be reviewed in conjunction with the Company's historical and pro forma financial statements and related notes appearing elsewhere in this Prospectus or incorporated herein by reference.
March 31, 1998 --------------------------------------------- Pro Forma Actual Pro Forma(1) As Adjusted(2) ---------- -------------- --------------- (In thousands) Long-term debt, net of current portion ........................ $ 923 $ 94,715 $ 923 Capitalized lease obligations, net of current portion ......... 225 909 814 Deferred taxes and other liabilities .......................... 2,284 2,287 2,287 ------- -------- -------- Total long-term liabilities ............................. 3,432 97,911 4,024 Shareholders' equity: Preferred Stock, no par value, 5,000,000 shares authorized; no shares issued and outstanding .............. -- -- -- Common Stock, no par value, 37,500,000 shares authorized; 13,390,651 shares issued and outstanding, actual, 19,251,709 shares issued and outstanding, as adjusted (3) ........................................... 80,802 80,802 229,130 Unexercised warrants (4) ................................... 875 875 875 Retained earnings .......................................... 10,279 10,279 10,279 ------- -------- -------- Total shareholders' equity .............................. 91,956 91,956 240,284 ------- -------- -------- Total capitalization .................................... $95,388 $189,867 $244,308 ======= ======== ========
(1) Gives effect to: (i) the pending acquisition of FCA for approximately $67.6 million in cash, which was assumed to be borrowed against the Company's credit facility, and the recognition of certain acquisition related liabilities; and (ii) the pending acquisition of MedSource, for approximately $17.9 million in cash, of which $7.4 million was assumed to be borrowed from the Company's credit facility, and the recognition of certain acquisition related liabilities. The Company expects to recognize goodwill of $56.2 million and $36.3 million for the FCA and MedSource acquisitions, respectively. (2) Gives effect to the issuance of 5.8 million shares of Common Stock at an assumed public offering price of $27.00 per share and the application of the net proceeds therefrom. See "Use of Proceeds." (3) Excludes: (i) an aggregate of 2,052,659 shares of Common Stock (1,991,601 shares, pro forma as adjusted) reserved for issuance under the Company's 1995 Stock Option Plan, 1996 Stock Option Plan and 1996 Non-Employee Director Stock Option Plan; (ii) 63,755 shares of Common Stock reserved for issuance upon the conversion of the Company's $900,000 Convertible Note issued as partial consideration for the Goodyear acquisition; and (iii) 375,000 shares of Common Stock reserved for issuance upon the exercise of warrants at an exercise price of $18.42 per share issued by the Company as partial consideration for the CRWCD acquisition. (4) Reflects 375,000 shares of Common Stock reserved for issuance upon the exercise of warrants at an exercise price of $18.42 per share issued by the Company as partial consideration for the CRWCD acquisition. 20 SELECTED FINANCIAL DATA (Amounts in thousands, except per share data) The selected financial data of the Company for each of the five years in the period ended December 31, 1997 are derived from the financial statements of the Company which have been audited by Coopers & Lybrand L.L.P., independent accountants. The selected financial data as of March 31, 1998 and for the three months ended March 31, 1997 and 1998 are derived from the unaudited financial statements of the Company and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) which are necessary to present fairly the results of operations and financial position for such periods. The results for the three months ended March 31, 1998 are not necessarily indicative of the results to be expected for the full year. The Pro Forma Consolidated Financial Statements do not purport to represent what NCO's actual results of operations or financial position would have been had the acquisitions occurred as of such dates, or to project NCO's results of operations or financial position for any period or date, nor does it give effect to any matters other than those described in the notes thereto. The following data should be read in conjunction with the Company's actual consolidated financial statements incorporated by reference in this Prospectus and the Company's pro forma consolidated financial statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
For the Years Ended December 31, ------------------------------------------------------ 1993 1994 1995 1996 ---------- ---------- -------------- -------------- Statement of Income Data: Revenue ...................................... $ 7,445 $ 8,578 $ 12,733 $ 30,760 Operating costs and expenses: Payroll and related expenses ................ 4,123 4,558 6,797 14,651 Selling, general and administrative expenses ................................... 2,391 2,674 4,042 10,033 Depreciation and amortization expenses 141 215 348 1,254 Reorganization charge ....................... -- -- -- -- ------- ------- -------- -------- Income from operations ....................... 790 1,131 1,546 4,822 Other income (expense) ....................... 11 (45) (180) (575) ------- ------- -------- -------- Income before provision for income taxes 801 1,086 1,366 4,247 Income tax expense (4) ....................... 320 434 546 1,706 ------- ------- -------- -------- Net income (4) ............................... $ 481 $ 652 $ 820 $ 2,541 ======= ======= ======== ======== Net income per share: Basic (4) ................................... $ 0.12 $ 0.34 ======== ======== Diluted (4) ................................. $ 0.12 $ 0.34 ======== ======== Weighted average shares outstanding: Basic ....................................... 7,093(5) 7,630(5) Diluted ..................................... 7,093(5) 7,658(5) December 31, ------------------------------------------------------ 1993 1994 1995 1996 -------- -------- ---------- ---------- Balance Sheet Data: Cash and cash equivalents ................... $ 562 $ 526 $ 805 $ 12,059 Working capital ............................. 445 473 812 13,629 Total assets ................................ 1,990 3,359 6,644 35,826 Long-term debt, net of current portion . 59 732 2,593 1,092 Shareholders' equity ........................ 876 1,423 2,051 30,648
21
For the Years Ended December 31, Three Months Ended March 31, -------------------------------- ----------------------------- 1997 1998 -------------------------------- ------------------------------- Pro Forma As Pro Forma As Actual Adjusted (1)(2) 1997 Actual Adjusted (2)(3) ------------- ----------------- ----------- ------------- ---------------- Statement of Income Data: Revenue ...................................... $ 85,284 $ 188,395 $ 18,077 $27,609 $ 48,399 Operating costs and expenses: Payroll and related expenses ................ 42,502 94,315 9,046 14,144 24,832 Selling, general and administrative expenses ................................... 27,947 62,525 5,932 8,568 15,173 Depreciation and amortization expenses 3,369 11,540 716 1,155 2,094 Reorganization charge ....................... -- 1,517 -- -- -- --------- --------- -------- -------- -------- Income from operations ....................... 11,466 18,498 2,383 3,742 6,300 Other income (expense) ....................... 388 1,074 (82) 153 150 --------- --------- -------- -------- -------- Income before provision for income taxes 11,854 19,572 2,301 3,895 6,450 Income tax expense (4) ....................... 4,780 8,642 994 1,579 2,984 --------- --------- -------- -------- -------- Net income (4) ............................... $ 7,074 $ 10,930 $ 1,307 $ 2,316 $ 3,466 ========= ========= ======== ======== ======== Net income per share: Basic (4) ................................... $ 0.59 $ 0.65 $ 0.12 $ 0.17 $ 0.20 ========= ========= ======== ======== ======== Diluted (4) ................................. $ 0.57 $ 0.62 $ 0.12 $ 0.17 $ 0.19 ========= ========= ======== ======== ======== Weighted average shares outstanding: Basic ....................................... 11,941 16,944 10,656 13,240 17,452 Diluted ..................................... 12,560 17,576 11,230 13,801 18,013 March 31, 1998 ---------------------------------------------- Pro Pro Forma As 1997 Actual Forma (6) Adjusted (7) --------- --------- ------------- ---------------- Balance Sheet Data: Cash and cash equivalents ................... $ 29,539 $ 16,088 $ 9,148 $60,707 Working capital ............................. 36,440 22,173 2,199 56,640 Total assets ................................ 101,636 105,708 227,420 278,979 Long-term debt, net of current portion . 1,437 923 94,715 923 Shareholders' equity ........................ 89,334 91,956 91,956 240,284
22 - ------------ (1) Assumes that the 1997 Acquisitions, the 1998 Acquisitions and the Pending Acquisitions occurred on January 1, 1997. Gives effect to: (i) the elimination of payroll and related expenses relating to certain redundant collection and administrative personnel costs immediately eliminated at the time of the 1997 Acquisitions and the 1998 Acquisitions and expenses identified during the due diligence process which will be eliminated upon the closing of the Pending Acquisitions; (ii) the elimination of certain rental expenses and related operating costs attributable to facilities which were closed at the time of the 1997 Acquisitions and the 1998 Acquisitions and facilities identified during the due diligence process which will be closed upon the completion of the Pending Acquisitions; (iii) the increase in amortization expense resulting from the acquisitions; (iv) the elimination of depreciation and amortization expense related to assets revalued or not acquired; (v) interest expense on borrowings related to the acquisitions; (vi) the estimated income tax expense, after giving consideration to non-deductible goodwill expense; (vii) the elimination of interest expense on debt assumed to be repaid with a portion of the proceeds from the Offering; (viii) the issuance of 517,767 shares of Common Stock and warrants exercisable for 375,000 shares of Common Stock in connection with the acquisition of CRWCD; (ix) the issuance of 1,425,753 shares of Common Stock in the July 1997 Offering at the public offering price of $19.67 per share which, net of the underwriting discount and offering expenses paid by the Company, would be sufficient to repay acquisition related debt of $8.4 million and to fund the acquisitions of AFECD and TRC; (x) the issuance of 46,442 shares of Common Stock issued in connection with the acquisition of AFS; and (xi) the issuance of 4.2 million shares of Common Stock at an assumed public offering price of $27.00 per share, net of the estimated underwriting discount and offering expenses payable by the Company, which would be sufficient to repay acquisition related debt of $75.0 million, repay debt of $21.9 million recognized in connection with the Pending Acquisitions and pay an additional $10.5 million necessary to fund the Pending Acquisitions. (2) Includes reorganization charges and other costs of $1.9 million and $90,000 for the year ended December 31, 1997, and the three months ended March 31, 1998, respectively. Net income per share -- basic, and net income per share -- diluted would have been $0.72 and $0.69, respectively, and $0.20 and $0.20, respectively, on a pro forma basis, assuming those charges had not been incurred. (3) Assumes that the TRC acquisition and the Pending Acquisitions occurred on January 1, 1998. Gives effect to: (i) the elimination of payroll and related expenses relating to certain redundant collection and administrative personnel costs immediately eliminated at the time of the TRC acquisition and expenses identified during the due diligence process which will be eliminated upon the closing of the Pending Acquisitions; (ii) the elimination of certain rental expenses and related operating costs attributable to facilities which were identified during the due diligence process and will be closed upon the completion of the Pending Acquisitions; (iii) the increase in amortization expense resulting from the TRC acquisition and the Pending Acquisitions; (iv) the elimination of depreciation and amortization expense related to assets revalued or not acquired; (v) interest expense on borrowings related to the Pending Acquisitions; (vi) the estimated income tax expense, after giving consideration to non-deductible goodwill expense; (vii) the elimination of interest expense on debt assumed to be repaid with a portion of the proceeds from the Offering; and (viii) the issuance of 4.2 million shares of Common Stock at an assumed public offering price of $27.00 per share, net of the estimated underwriting discount and offering expenses payable by the Company, which would be sufficient to repay acquisition related debt of $75.0 million, repay debt of $21.9 million recognized in connection with the Pending Acquisitions and pay an additional $10.5 million necessary to fund the Pending Acquisitions. (4) The Company was taxed as an S Corporation prior to September 3, 1996. Accordingly, income tax expense and net income have been provided on a pro forma basis as if the Company had been subject to income taxes in all periods presented. (5) Assumes that the Company issued 374,637 shares of Common Stock at $8.67 per share to fund the distribution of undistributed S Corporation earnings of $3.2 million through September 3, 1996, the termination date of the Company's S Corporation status, to existing shareholders of the Company. (6) Gives effect to: (i) the pending acquisition of FCA for approximately $67.6 million in cash, which was assumed to be borrowed against the Company's credit facility, and the recognition of certain acquisition related liabilities; and (ii) the pending acquisition of MedSource for approximately $17.9 million in cash, of which $7.4 million was assumed to be borrowed against the Company's credit facility, and the recognition of certain acquisition related liabilities. The Company expects to recognize goodwill of $56.2 million and $36.3 million for the FCA and MedSource acquisitions, respectively. (7) Gives effect to the issuance of 5.8 million shares of Common Stock at an assumed public offering price of $27.00 per share and the application of the net proceeds therefrom. See "Use of Proceeds." 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview NCO is a leading provider of accounts receivable management and other outsourced services such as customer service call centers, market research and other outsourced administrative services. In 1997, accounts receivable management services comprised more than 89.6% of the Company's revenue. As a result of rapid internal growth and selected strategic acquisitions, the Company's revenue has grown from $7.4 million in 1993 to $188.4 million in 1997 on a pro forma basis. The Company has historically generated substantially all of its revenue from the recovery of delinquent accounts receivable on a contingency fee basis. Contingency fees typically range from 15% to 35% of the amount recovered on behalf of the Company's clients, but can range from 6% for the management of accounts placed early in the recovery cycle to 50% for accounts which have been serviced extensively by the client or by other third-party providers. In addition, the Company generates revenue from fixed fee services for certain accounts receivable management and other related services. Revenue is earned and recognized upon collection of accounts receivable for contingency fee services and as work is performed for fixed fee services. The Company enters into contracts with most of its clients which define, among other things, fee arrangements, scope of services and termination provisions. Clients may usually terminate such contracts on 30 or 60 days notice. In the event of termination, however, clients typically do not withdraw accounts referred to the Company prior to the date of termination, thus providing the Company with an ongoing stream of revenue from such accounts which diminishes over time. The Company's costs consist principally of payroll and related costs, selling, general and administrative costs, and depreciation and amortization. Payroll and related expenses consist of wages and salaries, commissions, bonuses and benefits for all employees of the Company, including management and administrative personnel. As the Company has grown, payroll costs as a percentage of revenue have gradually declined. Selling, general and administrative expenses, which include postage, telephone and mailing costs, and other costs of collections as well as expenses which directly support the operations of the business including facilities costs, equipment maintenance, sales and marketing, data processing, professional fees and other management costs, have remained relatively constant as a percentage of revenue since 1993. To date, all of the Company's acquisitions have been accounted for under the purchase method of accounting with the results of the acquired companies included in the Company's statements of income beginning on the date of acquisition. In pursuing acquisitions, the Company typically seeks to serve new geographic markets or industries, expand its presence in its existing markets and add complementary services. Upon completion of an acquisition, the Company immediately focuses on achieving operating efficiencies by eliminating redundant expenses and reducing certain other expenses to levels consistent with the Company's current operating results. Included elsewhere in this prospectus are Pro Forma Consolidated Financial Statements which show the effect of the 1997 Acquisitions, the 1998 Acquisitions and the Pending Acquisitions as if the results of each acquired company had been included in the Company's statements of income for the periods presented. For the periods shown prior to September 3, 1996, the Company had been treated for federal and state income tax purposes as an S Corporation. As a result, the Company's shareholders, rather than the Company, were taxed directly on the earnings of the Company for federal and certain state income tax purposes. The Company terminated its status as an S Corporation effective September 3, 1996 and is now subject to federal and state income taxes at applicable C Corporation rates. Accordingly, the income tax expense has been calculated as if the Company were subject to federal and state income taxes for all prior periods. 24 Results of Operations The following table sets forth income statement data on an historical and pro forma basis as a percentage of revenue:
Years Ended December 31, -------------------------------------------------- 1995 1996 1997 ----------- ----------- ------------------------ Pro Actual Forma ----------- ----------- Revenue ....................................... 100.0% 100.0% 100.0% 100.0% Operating costs and expenses: Payroll and related expenses ................. 53.4 47.6 49.8 50.1 Selling, general and administrative expenses .................................... 31.7 32.6 32.8 33.2 Depreciation and amortization expenses. . 2.7 4.1 4.0 6.1 Reorganization charge ........................ -- -- -- 0.8 ------ ------ ------ ------ Total operating costs and expenses. ......... 87.8 84.3 86.6 90.2 ------ ------ ------ ------ Income from operations ........................ 12.2 15.7 13.4 9.8 Other income (expense) ........................ ( 1.4) ( 1.9) 0.5 (3.3) ------ ------ ------ ------ Income before income tax expense .............. 10.8 13.8 13.9 6.5 Income tax expense (1) ........................ 4.3 5.5 5.6 3.0 ------ ------ ------ ------ Net income .................................... 6.5% 8.3% 8.3% 3.5% ====== ====== ====== ====== Three Months Ended March 31, ------------------------------------- 1997 1998 ----------- ------------------------ Pro Actual Forma ----------- ----------- Revenue ....................................... 100.0% 100.0% 100.0% Operating costs and expenses: Payroll and related expenses ................. 50.0 51.2 51.3 Selling, general and administrative expenses .................................... 32.8 31.0 31.4 Depreciation and amortization expenses. . 4.0 4.2 4.3 Reorganization charge ........................ -- -- -- ------ ------ ------ Total operating costs and expenses. ......... 86.8 86.4 87.0 ------ ------ ------ Income from operations ........................ 13.2 13.6 13.0 Other income (expense) ........................ ( 0.5) 0.6 (3.7) ------ ------ ------ Income before income tax expense .............. 12.7 14.2 9.3 Income tax expense (1) ........................ 5.5 5.7 4.5 ------ ------ ------ Net income .................................... 7.2% 8.5% 4.8% ====== ====== ======
- ------------ (1) The Company was taxed as an S Corporation prior to September 3, 1996. Accordingly, income tax expense and net income have been provided as if the Company had been subject to income taxes in all periods presented. Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997 Revenue. Revenue increased $9.5 million or 52.7% to $27.6 million for the three months ended March 31, 1998 from $18.1 million for the comparable period in 1997. Of this increase, $3.6 million was attributable to the addition of new clients and growth in business from existing clients. Revenue attributable to the Goodyear, Tele-Research, and CMS A/R acquisitions completed in January 1997 represented $908,000 of the increase and $1.2 million of the increase was attributable to the CRWCD acquisition completed in February 1997. In addition, $2.1 million of the increase was attributable to the AFS and CAC acquisitions completed in October 1997 and $1.7 million of the increase was attributable to the AFECD and TRC acquisitions completed in the first quarter of 1998. Payroll and related expenses. Payroll and related expenses increased $5.1 million to $14.1 million for the three months ended March 31, 1998 from $9.0 million for the comparable period in 1997, and increased as a percentage of revenue to 51.2% from 50.0%. Payroll and related expenses increased as a percentage of revenue primarily as a result of the market research division having a higher payroll cost structure than that of the remainder of the Company. In addition, there were additional payroll costs attributable to the start up of a contract with the United States Department of Education (the "DOE Contract") which required the Company to hire and train a certain number of collection personnel prior to realizing any revenue under the contract. These higher costs were partially offset by lower payroll costs in the AFS and CAC acquisitions and by spreading the cost of management and administrative personnel over a larger revenue base. Selling, general and administrative expenses. Selling, general and administrative expenses increased $2.7 million to $8.6 million for the three months ended March 31, 1998 from $5.9 million for the comparable period in 1997, and decreased as a percentage of revenue to 31.0% from 32.8%. A portion of the decrease was attributable to the market research division having a lower selling, general and administrative expense structure than that of the remainder of the business. In addition, additional operating efficiencies were obtained by spreading selling, general and administrative expenses over a larger revenue base. Depreciation and amortization. Depreciation and amortization increased to $1.2 million for the three months ended March 31, 1998 from $716,000 for the comparable period in 1997. Of this increase, $90,000 was 25 attributable to the CAC and AFS acquisitions, and $120,000 was attributable to the AFECD and TRC acquisitions. The remaining $274,000 primarily consisted of depreciation resulting from normal capital expenditures incurred in the ordinary course of business. Other income (expense). Interest and investment income increased $139,000 to $232,000 for the three months ended March 31, 1998 from $93,000 for the comparable period in 1997. This increase was primarily attributable to the investment of funds remaining from the 1997 Offering, as well as an increase in operating funds and funds held in trust for clients. Interest expense decreased to $78,000 for the three months ended March 31, 1998 from $175,000 for the comparable period in 1997. During the first quarter of 1997, the Company borrowed $8.4 million on its revolving credit facility to partially finance the Goodyear, Tele-Research, CMS A/R and CRWCD acquisitions, and issued a $900,000 convertible note payable in connection with the Goodyear acquisition in January 1997. The revolving credit facility was repaid with a portion of the proceeds from the 1997 Offering. In addition, the $1.0 million convertible note payable issued in connection with the Management Adjustment Bureau, Inc. ("MAB") acquisition in September 1996 was converted to Common Stock in connection with the 1997 Offering. Income tax expense. Income tax expense increased to $1.6 million, or 40.5% of income before taxes, for the three months ended March 31, 1998 from $994,000, or 43.2% of income before taxes, for the comparable period in 1997. Income taxes were computed after giving effect to non-deductible goodwill expenses resulting from certain of the acquired companies. Net income. Net income increased $1.0 million or 77.2% to $2.3 million for the three months ended March 31, 1998 from $1.3 million for the comparable period in 1997. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Revenue. Revenue increased $54.5 million or 177.3% to $85.3 million for 1997 from $30.8 million in 1996. Of this increase in revenue, $8.7 million of revenue was attributable to the acquisition of MAB completed in September 1996 and $37.1 million of revenue was attributable to the 1997 Acquisitions. The addition of new clients and growth in business from existing clients represented $8.7 million of the increase in revenue. Payroll and related expenses. Payroll and related expenses increased $27.9 million to $42.5 million for 1997 from $14.7 million in 1996, and increased as a percentage of revenue to 49.8% from 47.6%. Payroll and related expenses increased as a percentage of revenue primarily as a result of the businesses acquired in the MAB acquisition and the 1997 Acquisitions which closed in the first quarter of 1997 having higher cost structures than that of the Company. This increase was partially offset by spreading the cost of management and administrative personnel over a larger revenue base. In addition, in the fourth quarter of 1997 there was $339,000 of additional payroll expense attributable to the start up of the DOE Contract which required the Company to hire and train a certain number of collection personnel prior to realizing any revenue under the contract. Selling, general and administrative expenses. Selling, general and administrative expenses increased $17.9 million to $27.9 million for 1997 from $10.0 million in 1996. Selling, general and administrative expenses increased slightly as a percentage of revenue to 32.8% from 32.6% due to start up costs attributable to the DOE Contract of $274,000. Also, the business acquired in the 1997 Acquisitions had a higher cost structure than that of the Company and the Company has continued to experience increased costs as a result of changes in business mix which require the increased use of national databases and credit reporting services. The increases were offset by realizing operating efficiencies and by spreading selling, general and administrative expenses over a larger revenue base. Depreciation and amortization. Depreciation and amortization increased to $3.4 million for 1997 from $1.3 million in 1996. Of this increase, $1.8 million was a result of the MAB acquisition and the 1997 Acquisitions. The remaining $260,000 consisted of amortization of deferred financing charges and depreciation resulting from capital expenditures incurred in the normal course of business. Other income (expense). Interest and investment income increased $778,000 to $1.0 million for 1997 from the comparable period in 1996. This increase was primarily attributable to the investment of funds remaining 26 from the Company's public offering completed in July 1997 (the "1997 Offering"), as well as an increase in operating funds and funds held in trust for clients. Interest expense decreased to $591,000 for 1997 from $818,000 in 1996. Although the Company's revolving credit facility had been repaid with a portion of the net proceeds from the Company's initial public offering completed in November 1996 (the "IPO"), the Company borrowed $8.4 million on its revolving credit facility to partially finance the 1997 Acquisitions which closed in the first quarter of 1997, and issued a $900,000 convertible note payable in connection with the Goodyear acquisition in January 1997. The revolving credit facility was repaid with a portion of the proceeds from the 1997 Offering. In addition, the $1.0 million convertible note payable issued in connection with the MAB acquisition in September 1996 was converted to Common Stock in connection with the 1997 Offering. As a result of the disposal of certain fixed assets in the move of the Company's corporate headquarters in July 1997, the Company incurred a loss on the disposal of fixed assets in the amount of $41,000. Income tax expense. Income tax expense for 1997 was $4.8 million or 40.3% of income before taxes and was computed after giving effect to non-deductible goodwill expenses resulting from certain of the acquired companies. In 1996, the Company was an S Corporation until September 3, 1996 and, accordingly, there was no income tax expense until that time. The income tax expense of $1.7 million for 1996 (assuming the Company was taxed as a C Corporation for the entire year) was computed utilizing an assumed rate of 40.0% after giving effect to non-deductible goodwill. Net income. Net income in 1997 increased to $7.1 million from net income of $2.5 million in 1996, a 178.4% increase. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Revenue. Revenue increased $18.0 million or 141.6% to $30.8 million in 1996 from $12.7 million in 1995. Of this increase, $5.0 million was attributable to the MAB acquisition completed in September 1996, $6.8 million was attributable to the Trans Union Corporation Collections Division ("TCD") acquisition completed in January 1996, and $1.3 million was attributable to a full year of revenue from the Eastern Business Services, Inc. ("Eastern") acquisition in 1996 versus three months in 1995. Additionally, $4.8 million of the increase was due to internal growth from the addition of new clients and a growth in business from existing clients. Of this internal growth, $2.9 million of the increase was due to a full 12 months of revenue in 1996 from a contract awarded to the Company by a government agency in April 1995. Revenue from other related services, which became an area of focus in 1996, increased $1.2 million to $1.5 million in 1996 from $259,000 in 1995. Payroll and related expenses. Payroll and related expenses increased $7.9 million to $14.7 million in 1996 from $6.8 million in 1995, but decreased as a percentage of revenue to 47.6% from 53.4%. The decrease in payroll and related expenses as a percentage of revenue was primarily the result of spreading the relatively fixed costs of management and administrative personnel over a larger revenue base and the increased utilization of "on-line" computer services and other outside services, as well as eliminating redundant administrative staff following the TCD and Eastern acquisitions. These efficiencies were offset in part by higher payroll and related expenses of MAB as a percentage of its revenue. The effect of MAB was minimized due to only four months of the operations of MAB being included in the income statements. Selling, general and administrative expenses. Selling, general and administrative expenses increased $6.0 million to $10.0 million in 1996, from $4.0 million in 1995, and increased as a percentage of revenue to 32.6% from 31.7%. A large percentage of the increase was due to the increased costs associated with litigation management services performed by the Company on behalf of its clients in states where the laws are more conducive to the utilization of the legal process for recovery of delinquent accounts. In addition, the Company experienced increased costs as a result of a change in business mix which required the increased use of national data bases and credit reporting services. These increases were offset in part by operating efficiencies resulting from the TCD acquisition. Depreciation and amortization. Depreciation and amortization increased to $1.3 million in 1996 from $348,000 in 1995. Of this increase, $605,000 was a result of the MAB, TCD and Eastern acquisitions. The remaining $301,000 consisted of amortization of deferred financing charges and depreciation resulting from capital expenditures incurred in the ordinary course of business. 27 Other income (expense). Interest expense increased to $818,000 in 1996 from $180,000 in 1995, primarily due to increased borrowings associated with the acquisitions of MAB, TCD and Eastern. Also included in other income (expense) for 1995 was a loss from the disposal of assets of $49,000. Income tax expense. Income tax expense of $1.7 million and $546,000 in 1996 and 1995, respectively (assuming the Company was taxed as a C Corporation for each of the respective years), was computed using an assumed tax rate of 40.0% after giving effect to non-deductible goodwill from certain of the acquired companies. Net income. Net income increased to $2.5 million in 1996 from $820,000 in 1995, a 210.0% increase. Quarterly Results The following table sets forth selected actual historical financial data for the calendar quarters of 1996 and 1997, and for the first calendar quarter of 1998. This quarterly information is unaudited but has been prepared on a basis consistent with the Company's audited financial statements incorporated by reference herein and, in the Company's opinion, includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented. The operating results for any quarter are not necessarily indicative of results for any future period.
Quarter Ended -------------------------------------------------- 1996 -------------------------------------------------- Mar. 31 Jun. 30 Sept. 30 Dec. 31 ----------- ----------- ---------- ------------ (dollars in thousands) Revenue .................... $ 6,044 $ 6,499 $ 7,715 $ 10,502 Income from operations ..... 915 1,156 1,183 1,569 Net income ................. 760 1,001 968 906 As a percentage of revenue: Income from operations ..... 15.1% 17.8% 15.3% 14.9% Net income ................. 12.6% 15.4% 12.5% 8.6% -------------------------------------------------------------------- 1997 1998 ------------------------------------------------------ ------------ Mar. 31 Jun. 30 Sept. 30 Dec. 31 Mar. 31 ------------ ------------ ------------ ------------ ------------ (dollars in thousands) Revenue .................... $ 18,077 $ 21,162 $ 21,739 $ 24,306 $ 27,609 Income from operations ..... 2,383 3,039 3,112 2,932 3,742 Net income ................. 1,307 1,717 2,082 1,968 2,317 As a percentage of revenue: Income from operations ..... 13.2% 14.4% 14.3% 12.1% 13.6% Net income ................. 7.2% 8.1% 9.6% 8.1% 8.4%
The Company has experienced and expects to continue to experience quarterly variations in operating results as a result of many factors, including the costs and timing of completion and integration of acquisitions, the timing of clients' accounts receivable management programs, the commencement of new contracts, the termination of existing contracts, costs to support growth by acquisition or otherwise, the costs and timing of completion and integration of acquisitions, the effect of the change of business mix on margins and the timing of additional selling, general and administrative expenses to support new business. In the fourth quarter of 1996, income from operations and net income as a percentage of revenue were lower than in prior quarters of 1996 largely as a result of the higher payroll and related expenses of MAB as compared to the Company's core business. Similarly, in the first quarter of 1997, the Company's operating and net margins were adversely affected by the higher cost structures of MAB and the 1997 Acquisitions which closed in the first quarter of 1997 as compared to the Company's core business. In addition, in connection with certain customers, the Company could incur costs in periods prior to recognizing revenue under such contracts. For example, income from operations and net income in the fourth quarter of 1997 were adversely affected by start-up costs attributable to the DOE Contract. Without such costs, the income from operations and net income for the quarter ended December 31, 1997 would have been 14.6% and 9.6%, respectively. Additionally, the Company's planned operating expenditures are based on revenue forecasts, and if revenues are below expectations in any given quarter, operating results would likely be materially adversely affected. While the effects of seasonality on the Company's business historically have been obscured by its rapid growth, the Company's business tends to be slower in the third and fourth quarters of the year due to the summer and holiday seasons. Liquidity and Capital Resources In July 1997, the Company completed the 1997 Offering, selling 2,166,000 shares of Common Stock and receiving net proceeds of approximately $40.4 million. In November 1996, the Company completed its IPO, selling 3,750,000 shares of Common Stock and receiving net proceeds of approximately $28.8 million. The Company's primary sources of cash have historically been cash flow from operations, bank borrowings and, in 1996 and 1997, the net proceeds from the IPO and the 1997 Offering, respectively. Cash has been used for acquisitions, S Corporation distributions to shareholders prior to the IPO, purchases of equipment and working capital to support the Company's growth. 28 Cash provided by operating activities was $4.9 million during the three months ended March 31, 1998, and $1.4 million for the comparable period in 1997. The increase in cash provided by operations was primarily due to the increase in net income to $2.3 million for the three months ended March 31, 1998 compared to $1.3 million for the comparable period in 1997. In addition the increase in cash provided by operations was also attributable to the decrease in other current and long term assets by $728,000 for the three months ended March 31, 1998 compared to $177,000 for the comparable period in 1997, and the increase in non-cash charges, primarily depreciation and amortization, to $1.2 million during the three months ended March 31, 1998 compared to $716,000 for the comparable period in 1997. Cash provided by operating activities was $6.7 million in 1997 and $2.8 million in 1996. The increase in cash provided by operations was primarily due to the increase in net income to $7.0 million in 1997 compared to $3.6 million in 1996, and the increase in non-cash charges, primarily depreciation and amortization, to $3.4 million in 1997 compared to $1.3 million in 1996. These increases were offset by a $3.9 million increase in accounts receivable in 1997 compared to a $1.8 million increase in 1996. Approximately $1.0 million of accounts payable and accrued expenses in acquired companies were reduced in order to bring the balances in line with NCO's payment policies. Cash provided by operating activities was $2.8 million in 1996 and $2.0 million in 1995. The increase in cash provided by operations was primarily due to the increase in net income to $3.6 million in 1996 compared to $1.4 million in 1995, and the increase in non-cash charges, primarily depreciation and amortization, to $1.3 million in 1996 compared to $348,000 in 1995. These increases were offset by a $1.8 million increase in accounts receivable in 1996 compared to a $572,000 increase in 1995 and a $222,000 increase in accounts payable and accrued expenses in 1996 compared to an $858,000 increase in 1995. Cash used in investing activities was $18.2 million during the three months ended March 31, 1998 compared to $15.9 million for the comparable period in 1997. The increase was primarily due to the cash portion of the purchase price paid for the acquisitions of AFECD and TRC in the first quarter of 1998 versus the cash portion of the purchase price paid for the acquisitions of Goodyear, Tele-Research, CMS A/R, and the CRWCD during the first quarter of 1997. In addition, during the three months ended March 31, 1998, capital expenditures were $1.1 million compared to $312,000 for the comparable period in 1997. Cash used in investing activities was $29.2 million in 1997 compared to $13.3 million for 1996. The increase was primarily due to the 1997 Acquisitions compared with the acquisitions of TCD and MAB in 1996. The Company financed the 1997 Acquisitions with the proceeds of the 1997 Offering and the IPO, borrowings under the Credit Agreement, seller financing and working capital. The 1997 Acquisitions collectively resulted in goodwill of $37.0 million. Cash used in investing activities was $13.3 million in 1996 compared to $2.1 million in 1995. The increase was primarily due to the acquisitions of MAB and TCD in 1996. The Company financed these acquisitions with borrowings under the Credit Agreement and seller financing. The 1996 acquisitions collectively resulted in goodwill of $14.0 million. In addition to equipment financed under operating leases, capital expenditures were $298,000, $976,000 and $3.4 million in 1995, 1996 and 1997, respectively. Cash used in financing activities was $108,000 during the three months ended March 31, 1998 compared to cash provided by financing activities of $8.2 million for the comparable period in 1997. During the first quarter of 1997, bank borrowings were the Company's primary source of cash from financing activities and were used for acquisitions. The Company raised net proceeds of approximately $40.4 million in the 1997 Offering and used a portion of the proceeds from the IPO and the 1997 Offering to repay $8.4 million of outstanding indebtedness under its revolving credit facility. 29 Cash provided by financing activities was $39.9 million in 1997 compared to $21.8 million in 1996. Net proceeds of $40.4 million from the 1997 Offering was the Company's primary source of cash from financing activities which was used for acquisitions and to repay outstanding indebtedness. Cash provided by financing activities was $21.8 million in 1996 compared to $280,000 in 1995. Bank borrowings had been the Company's primary source of cash from financing activities and were used for acquisitions and, along with cash provided by operations, for distributions to shareholders. The Company raised net proceeds of approximately $28.8 million in the IPO of which $15.0 million was used to repay outstanding indebtedness under the Credit Agreement and approximately $3.2 million was used to pay undistributed S Corporation earnings. Total distributions to shareholders were $4.1 million in 1996 and $1.1 million in 1995. In March 1998, the Credit Agreement was amended to, among other things, increase the Company's revolving credit facility with Mellon to provide for borrowings up to $75.0 million at an interest rate ranging from LIBOR plus 0.75% to LIBOR plus 2.0% (LIBOR was 5.69% at March 31, 1998). The Company has the right to permanently reduce the revolving credit facility by up to $25.0 million. There were no outstanding borrowings at December 31, 1996 or 1997 or March 31, 1998. The revolving credit line is collateralized by substantially all the assets of the Company and includes certain financial covenants such as maintaining minimum working capital and net worth requirements and includes restrictions on, among other things, acquisitions, capital expenditures and distributions to shareholders. In March 1998, the Company entered into an agreement with FCA pursuant to which NCO is making a cash tender offer for all of the outstanding common shares of FCA at $9.60 per share, Canadian (equivalent to $6.77 in U.S. dollars based upon the exchange rate as of the date of the agreement). The purchase price is valued at approximately $67.6 million. The Company expects to finance the FCA Tender Offer with borrowings under the Credit Agreement which borrowings will be repaid from the proceeds of this Offering. The Company has entered into an agreement to acquire all of the outstanding stock of MedSource for approximately $17.9 million in cash. The Company expects to finance this acquisition from the proceeds of this Offering or borrowings under the Company's revolving credit facility. The Company intends to use approximately $21.9 million of the net proceeds of this Offering to repay certain outstanding indebtedness of the Pending Acquisitions following the completion of these acquisitions. The Company believes that funds generated from operations, together with existing cash, the net proceeds from the Offering and available borrowings under its Credit Agreement will be sufficient to finance its current operations and planned capital expenditure requirements and internal growth at least through the next twelve months. However, the Company could require additional debt or equity financing if it were to make any other significant acquisitions for cash. Year 2000 System Modifications NCO has implemented a program to evaluate and address the impact of the year 2000 on its information systems in order to ensure that its network and software will manage and manipulate data involving the transition of dates from 1999 to 2000 without functional or data abnormality and without inaccurate results related to such data. This program includes steps to: (a) identify software that requires date code remediation; (b) establish timelines for availability of corrective software releases; (c) implement the fix to a test environment and test the remediated product; (d) integrate the updated software to NCO's production environment; (e) communicate and work with clients to implement year 2000 compliant data exchange formats; and (f) provide management with assurance of a seamless transition to the year 2000. The identification phase is substantially complete and delivery of the final software updates are scheduled for the third quarter of 1998. Management expects to complete the major portion of testing and acceptance procedures in 1998. The Company will continue to coordinate the year 2000 compliance effort throughout the balance of 1998 and into 1999 to synchronize data exchange formats with clients. For the years 1998 and 1999, the Company expects to incur total pre-tax expenses of approximately $200,000 to $250,000 per year. These costs are associated with both internal and external staffing resources for the necessary planning, coordination, remediation, testing, and other expenses to prepare its systems for the year 2000. However, a portion of these expenses will not be incremental, but rather represent a redeployment of 30 existing information technology resources. Management does not expect substantial additional license fee costs associated directly with year 2000 compliance because the Company's software vendors are incorporating necessary modifications as part of their normal system maintenance. The majority of the costs will be incurred through the modification and testing of electronic data interchange formats with the Company's clients. The cost of planning and initial remediation incurred through 1997 has not been significant. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting financial information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company is required to disclose this information for the first time it publishes its 1998 annual report. Management is in the process of evaluating the segment disclosures for purposes of reporting under SFAS No. 131. Management has not determined what impact the adoption of SFAS. No. 131 will have on the consolidated results of operations, financial condition or cash flows. Forward Looking Statements Certain statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as elsewhere in this Prospectus or in the Company's Annual Report on Form 10-K incorporated herein by reference, including, without limitation, statements regarding the anticipated growth in the amount of accounts receivable placed for third-party management, the continuation of trends favoring outsourcing of other administrative functions, the Company's objective to grow through strategic acquisitions and its ability to realize operating efficiencies upon the completion of recent acquisitions and other acquisitions that may occur in the future, the Company's ability to expand its service offerings, the anticipated changes in revenues from acquired companies, trends in the Company's future operating performance and statements as to the Company's or management's beliefs, expectations and opinions, are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, which are intended to cover safe harbors created thereby. The actual results and developments may be materially different from those expressed in or implied by such forward-looking statements. 31 BUSINESS NCO is a leading provider of accounts receivable management and other outsourced services. The Company develops and implements customized accounts receivable management solutions for clients' delinquent and current accounts. The Company provides these services on a national basis from 22 call centers located in 14 states using advanced workstations and sophisticated call management systems comprised of predictive dialers, automated call distribution systems, digital switching and customized computer software. Through extensive utilization of its technology and intensive management of human resources, the Company has achieved rapid growth in recent years. As a result of rapid internal growth and selected strategic acquisitions, the Company's revenue has grown from $7.4 million in 1993 to $188.4 million in 1997 on a pro forma basis. Since April 1994, the Company has completed 12 acquisitions which have enabled it to increase its penetration of existing markets, establish a presence in certain new markets, offer additional services and realize significant operating efficiencies. In addition, the Company has leveraged its infrastructure by offering additional services including customer service call centers, market research and other outsourced administrative services. The Company believes that it is currently among the five largest accounts receivable management companies in the United States. The Company provides its services principally to clients in the financial services, healthcare, retail and commercial, education, telecommunications, utilities and government sectors. The Company has over 8,000 clients, including Bell Atlantic Corporation, Mellon Bank Corporation, NationsBank Corporation, Citicorp, MCI Communications Corporation, Federal Express Corporation and Airborne Freight Corporation. For its accounts receivable management services, the Company generates substantially all of its revenue on a contingency fee basis. For many of its other outsourced services, the Company is paid on a fixed fee basis. While NCO's contracts are relatively short-term, the Company seeks to develop long-term relationships with its clients and works closely with them to provide quality customized solutions. Industry Background Increasingly, companies are outsourcing many non-core functions to focus on revenue generating activities, reduce costs and improve productivity. In particular, many large corporations are recognizing the advantages of outsourcing accounts receivable management. This trend is being driven by a number of industry-specific factors. First, the complexity of accounts receivable management functions in certain industries has increased dramatically in recent years. For example, with the increasing popularity of Health Maintenance Organizations ("HMOs") and Preferred Provider Organizations ("PPOs"), healthcare institutions now face the challenge of billing not only large insurance companies but also individuals who are required to pay small, one-time co-payments. Second, changing regulations and increased competition in certain industries such as utilities and telecommunications have created new outsourcing opportunities. Third, the ability to implement cost-effective specialized accounts receivable management, customer support and telemarketing programs has improved dramatically in recent years with the development of sophisticated call and information systems. These programs require substantial capital investment, technical capabilities, human resource commitments and extensive management supervision. The emphasis on cost-effective outsourcing solutions, the increasing sophistication of call center technology and the efficacy of third-party intervention in the recovery process has resulted in the steady growth of the accounts receivable management industry. According to estimates published by MKA, industry-wide revenues rose 10.7% to $5.5 billion in 1996 from $5.0 billion in 1995. The leading market segments within the overall accounts receivable management market are healthcare, financial services, telecommunications and utilities which represented approximately 35%, 21%, 12% and 9%, respectively, or an aggregate of 77%, of total industry referrals in 1996. The accounts receivable management industry is highly fragmented. Based on information obtained from the ACA, there are approximately 6,500 accounts receivable management companies in operation in the United States, the majority of which are small local businesses. The Company believes that many small accounts receivable management companies have insufficient capital to expand and invest in call center technology and sophisticated workstations and are unable to adequately meet the standards demanded by businesses seeking to 32 outsource their accounts receivable recovery function. In addition, there are a limited number of options for owners of such businesses to obtain liquidity or to sell their businesses. As a result, the Company believes that the industry will continue to experience consolidation in the future and that strategic acquisition opportunities will continue to become available. Business Strategy The Company strives to be a cost-effective, client service driven provider of accounts receivable management and other related services to companies with substantial outsourcing needs. To achieve this goal, the Company's business strategy is based on the following key elements: Efficient Utilization of Technology and Management Infrastructure to Improve Productivity. Efficient use of technology and intensive management of human resources enables the Company to provide cost-effective client solutions and perform large scale accounts receivable management programs. The Company has made a substantial investment in its infrastructure and is committed to utilizing the best available technologies to achieve operational efficiencies. This investment enables the Company to rapidly and efficiently integrate acquisitions. For example, in the MAB acquisition, the Company was able to reduce the workforce by approximately 16% while maintaining the same revenue base. In the CRWCD acquisition, the Company has been able to reduce the workforce by approximately 22%. The Company believes that its infrastructure is capable of supporting additional growth internally or through acquisitions without commensurate increases in costs. Commitment to Client Service. NCO is committed to providing superior service to its clients. The Company works closely with its clients to identify particular needs, design appropriate recovery strategies and implement customized accounts receivable management programs. The Company maintains a client service department to promptly address client issues, assigns dedicated field service representatives to assist larger clients and offers clients the ability to electronically communicate with the Company and monitor operational activity. Seek Low Cost Solutions. The Company seeks to be a low cost provider of accounts receivable management services by centralizing all administrative functions and minimizing overhead at all branch locations. Specifically, the Company has centralized such functions as payment processing, information systems, accounting, sales and marketing, payroll and human resources. Target Larger Clients. The Company continues to focus on expanding its base of larger clients while at the same time continuing to pursue mid-size prospects that have traditionally comprised the Company's client base. While the Company's traditional clients have provided a stable revenue base, the Company believes that larger clients offer significant cross-selling opportunities as they continue to outsource more of their accounts receivable management, customer support and telemarketing functions. The Company believes that its size and geographic diversity will help it to obtain larger national clients. Growth Strategy In light of the increasing volume of accounts receivable referred for third party management, the greater emphasis on the outsourcing of non-core competencies by businesses and the fragmented nature of the industry, the Company believes there are significant opportunities to expand its business. The Company's growth strategy includes the following key elements: Actively Pursue Strategic Acquisitions. The Company intends to continue to take advantage of the fragmented nature of the accounts receivable management industry, along with opportunities in related industries, by continuing to make strategic acquisitions. Through selected acquisitions, the Company will seek to serve new geographic markets or industries, expand its presence in its existing vertical markets and add complementary service applications. For example, the acquisition of FCA will allow the Company to market its services in Canada and the United Kingdom and provide it with an opportunity to expand further into the Canadian and European markets. The Company evaluates acquisitions using numerous criteria including size, service quality, industry focus, diversification of client base, management strength, operating characteristics and the ability to integrate the acquired businesses into the Company's operations and eliminate redundant costs. 33 Increase Market Penetration. The Company believes that its long-standing reputation as a quality provider of cost-effective accounts receivable management services is one of its most significant competitive advantages and intends to continue to build upon its reputation. The Company continually strives to increase its share of its clients' accounts receivable management business and to obtain new clients that have outsourced or are seeking to outsource these services. The sectors which the Company focuses on include many large corporations which rely heavily on third-party providers for a substantial portion of their accounts receivable management needs. In addition, the Company believes there is significant opportunity for growth in certain market segments, such as the retail credit card and insurance sectors and commercial accounts receivable management, in which it can leverage its accumulated business expertise and call center infrastructure. Expand Service Offerings. The Company regularly seeks to leverage its infrastructure by expanding the array of services offered to clients by cross-selling existing services and by developing new value-added services that strengthen its long-term relationship with existing clients. For example, the Company has already begun providing other outsourced administrative services such as customer service call centers, market research, and telephone-based auditing. Additionally, through the CMS A/R acquisition, the Company expanded into early stage accounts receivable management services and expanded into telephone-based market research through the acquisition of TRC. Substantially all of these services are presently provided to clients who utilize NCO's accounts receivable management services; however, in the future, the Company plans to continue to market these services to both existing and new clients. Accounts Receivable Management Services The Company provides a wide range of accounts receivable management services to its clients utilizing an extensive technological infrastructure. Although most of the Company's accounts receivable management services to date have focused on recovery of traditional delinquent accounts, the Company does engage in the recovery of current receivables and early stage delinquencies (generally accounts which are 90 days or less past due). The Company generates substantially all of its revenue from the recovery of delinquent accounts receivable on a contingency fee basis. In addition, the Company generates revenue from fixed fees for certain accounts receivable management and other related services. Contingency fees typically range from 15% to 35% of the amount recovered on behalf of the Company's clients, but can range from 6% for the management of accounts placed early in the accounts receivable cycle to 50% for accounts which have been serviced extensively by the client or by third-party providers. Recovery activities typically include the following: Management Planning. The Company's approach to accounts receivable management for each client is determined by a number of factors including account size and demographics, the client's specific requirements and management's estimate of the collectability of the account. The Company has developed a library of standard processes for accounts receivable management which is based upon its accumulated experience. The Company will integrate these processes with its client's requirements to create a customized recovery solution. In many instances, the approach will evolve and change as the relationship with the client develops and both parties evaluate the most effective means of recovering accounts receivable. The Company's standard approach, which may be tailored to the specialized requirements of its clients, defines and controls the steps that will be undertaken by the Company on behalf of the client and the manner in which data will be reported to the client. Through its systemized approach to accounts receivable management, the Company removes most decision making from the recovery staff and ensures uniform, cost-effective performance. Once the approach has been defined, the Company electronically or manually transfers pertinent client data into its information system. Once the client's records have been established in the Company's system, the Company commences the recovery process. Skip Tracing. In cases where the customer's telephone number or address is unknown, the Company systematically searches the United States Post Office National Change of Address service, consumer data bases, electronic telephone directories, credit agency reports, tax assessor and voter registration records, motor vehicle registrations, military records and other sources. The geographic expansion of banks, credit card companies, national and regional telecommunications companies and managed healthcare providers along with the mobility of consumers has increased the demand for locating the client's customers. Once the Company has located the customer, the notification process can begin. 34 Account Notification. The Company initiates the recovery process by forwarding an initial letter which is designed to seek payment of the amount due or open a dialogue with customers who cannot afford to pay at the current time. This letter also serves as an official notification to each customer of their rights as required by the FDCPA. The Company continues the recovery process with a series of mail and telephone notifications. Telephone representatives remind the customer of their obligation, inform them that their account has been placed for collection with the Company and begin a dialogue to develop a payment program. Credit Reporting. At a client's request, the Company will electronically report delinquent accounts to one or more of the national credit bureaus where it will remain for a period of up to seven years. The denial of future credit often motivates the payment of all past due accounts. Litigation Management. When account balances are sufficient, the Company will also coordinate litigation undertaken by a nationwide network of attorneys that the Company utilizes on a routine basis. Typically, account balances must be in excess of $1,000 to warrant litigation and the client is asked to advance legal costs such as filing fees and court costs. Attorneys generally are compensated on a contingency fee basis. The Company's collection support staff manages the Company's attorney relationships and facilitates the transfer of all necessary documentation. Payment Process. After the Company receives payment from the customer, it either remits the amount received net of its fee to the client or remits the entire amount received to the client and bills the client for its services. Activity Reports. Clients are provided with a system-generated set of standardized or customized reports that fully describe all account activity and current status. These reports are typically generated monthly, however, the information included in the report and the frequency that the reports are generated can be modified to meet the needs of the client. Quality Tracking. The Company emphasizes quality control throughout all phases of the accounts receivable management process. Some clients may specify an enhanced level of supervisory review and others may request customized quality reports. Large national credit grantors will typically have exacting performance standards which require sophisticated capabilities such as documented complaint tracking and specialized software to track quality metrics to facilitate the comparison of the Company's performance to that of its peers. Other Services The Company selectively provides other related services which complement its traditional accounts receivable management business and which leverage its teleservices infrastructure. The Company believes that the following services will provide additional growth opportunities for the Company. Market Research. The Company provides full-service custom market research services to the telecommunications, financial services, utilities, healthcare, pharmaceutical and consumer products sectors. Its capabilities include problem conceptualization, program design, data gathering (by telephone, mail, and focus groups), as well as data tabulation, results analysis and consulting. Telemarketing. The Company provides telemarketing services for clients, including lead generation and qualification and the actual booking of appointments for a client's sales representatives. Customer Service Call Center. The Company utilizes its communications and information system infrastructure to supplement or replace the customer service function of its clients. For example, the Company is currently engaged by a large regional utility to provide customer service functions for a segment of the utility's customer base that is delinquent. Accounts Receivable Outsourcing. The Company complements existing service lines by offering adjunct billing services to clients as an outsourcing option. Additionally, the Company can assist healthcare clients in the billing and management of third party insurance. Custom Designed Business Applications. The Company has the ability to provide outsourced administrative and other back-office responsibilities currently conducted by its clients. For example, the Company has a contract with United Healthcare Corporation, a national health insurer, to assume all administrative operations for its COBRA and individual conversion coverage, including all responsibility for premium billing and payment processing, customer service call center and policy fulfillment. 35 Operations Technology and Infrastructure. Over the past five years, the Company has made a substantial investment in its call management systems such as predictive dialers, automated call distribution systems, digital switching and customized computer software. As a result, the Company believes it is able to address accounts receivable management activities more reliably and more efficiently than many other accounts receivable management companies. The Company's systems also permit network access to enable clients to electronically communicate with NCO and monitor operational activity on a real-time basis. NCO provides its accounts receivable management services through the operation of 22 state-of-the-art call centers which are electronically linked through a national, wide area network. The Company utilizes two computer platform systems. One system consists of two Unix-based NCR 4300 computers which are linked via network servers to 873 workstations and which provide necessary redundancy (either computer can operate the system in the event of the failure of the other) and excess capacity for future growth. The other system consists of three Unix-based Hewlett-Packard computers which are linked via network servers to 479 workstations. The computers are linked via network servers to the Company's 1,352 workstations, which consist of personal computers and terminals that are linked to the microcomputers, but do not necessarily have separate processors. The Company utilizes 20 predictive dialer locations with 542 workstations to address its low balance, high volume accounts. These systems scan the Company's database and simultaneously initiate calls on all available telephone lines and determine if a live connection is made. Upon determining that a live connection has been made, the computer immediately switches the call to an available representative and instantaneously displays the associated account record on the representative's workstation. Calls that reach other signals, such as a busy signal, telephone company intercept or no answer, are tagged for statistical analysis and placed in priority recall queues or multiple-pass calling cycles. The system also automates virtually all recordkeeping and follow-up activities including letter and report generation. The Company's automated method of operations dramatically improves the productivity of the Company's collection staff. The Company employs a 20 person MIS staff led by a Vice President, Technology/Chief Information Officer. The Company maintains disaster recovery contingency plans and has implemented procedures to protect the loss of data against power loss, fire and other casualty. The Company has implemented a security system to protect the integrity and confidentiality of its computer system and data and maintains comprehensive business interruption and critical systems insurance on its telecommunications and computer systems. Quality Assurance and Client Service. The Company's reputation for quality service is critical to acquiring and retaining clients. Therefore, the Company and its clients monitor the Company's representatives for strict compliance with the clients' specifications and the Company's policies. The Company regularly measures the quality of its services by capturing and reviewing such information as the amount of time spent talking with clients' customers, level of customer complaints and operating performance. In order to provide ongoing improvement to the Company's telephone representatives' performance and to assure compliance with the Company's policies and standards, quality assurance personnel monitor each telephone representative on a frequent basis and provide ongoing training to the representative based on this review. The Company's information systems enable it to provide clients with reports on a real-time basis as to the status of their accounts and clients can choose to network with the Company's computer system to access such information directly. The Company maintains a client service department to promptly address client issues and questions and alert senior executives of potential problems that require their attention. In addition to addressing specific issues, a team of client service representatives will contact accounts on a regular basis in order to establish a close client rapport, determine the client's overall level of satisfaction and identify practical methods of improving the client's satisfaction. 36 Client Relationships The Company's client base currently includes over 8,000 companies in the financial services, healthcare, retail and commercial, education, telecommunications, utilities and government sectors. The Company's 10 largest clients in 1997 accounted for approximately 21.7% of the Company's revenue on a pro forma basis. In 1997, no client accounted for more than 3.6% of the Company's revenue (no more than 2.8% on a pro forma basis). In 1997, the Company on a pro forma basis derived 32.5% of its placements from financial institutions (which includes banks and insurance companies), 21.6% from healthcare organizations, 15.3% from educational organizations, 13.8% from retail and commercial entities, 5.9% from utilities, 5.6% from government entities, and 5.3% from telecommunications companies. The following table sets forth a list of certain of the Company's key clients:
Financial Services Healthcare Education - ------------------------------- ---------------------------------- ---------------------------------- First Union Corporation Catholic Healthcare Initiatives California Student Aid Commission Mellon Bank Corporation Hutchinson Hospital Corporation Penn State University NationsBank Corporation Kaiser Permanente Pennsylvania Higher Education The Progressive Corporation Medical Center of Delaware Assistance Agency United Healthcare Corporation Reimbursement Technologies, Inc. Rutgers University University of Pennsylvania Retail and Commercial Government and Utilities Telecommunications - ------------------------------- ---------------------------------- ---------------------------------- Airborne Freight Corporation Commonwealth Edison Company Bell Atlantic Corporation Emery Worldwide Massachusetts Department of BellSouth Corporation Federal Express Corporation Revenue Frontier Cellular The Bon Ton Stores, Inc. New York State Electric & Gas MCI Communications Corporation Corporation Sprint Corporation PECO Energy Company City of Philadelphia
The Company enters into contracts with most of its clients which define, among other things, fee arrangements, scope of services and termination provisions. Clients may usually terminate such contracts on 30 or 60 days notice. In the event of termination, however, clients typically do not withdraw accounts referred to the Company prior to the date of termination, thus providing the Company with an ongoing stream of revenue from such accounts which diminish over time. Under the terms of the Company's contracts, clients are not required to place accounts with the Company but do so on a discretionary basis. Sales and Marketing The Company utilizes a focused and highly professional direct selling effort in which sales representatives personally cultivate relationships with prospective and existing clients. The Company's sales effort consists of a 31 person direct sales force. Each sales representative is charged with identifying leads, qualifying prospects and closing sales. When appropriate, Company operating personnel will join in the sales effort to provide detailed information and advice regarding the Company's operational capabilities. Sales and operating personnel also work together to take advantage of potential cross-selling opportunities. The Company supplements its direct sales effort with print media and attendance at trade shows. Many of the Company's prospective clients issue requests-for-proposals ("RFPs") as part of the contract award process. The Company has on staff a technical writer for the purpose of preparing detailed, professional responses to RFPs. Personnel and Training The Company's success in recruiting, hiring and training a large number of employees is critical to its ability to provide high quality accounts receivable management, customer support and teleservices programs to its clients. The Company seeks to hire personnel with previous experience in accounts receivable management or as a telephone representative. NCO generally offers competitive compensation and benefits and offers promotion opportunities within the Company. 37 All Company personnel receive a comprehensive training course that consists of a combination of classroom and practical experience. Prior to customer contact, new employees receive one week of training in the Company's operating systems, procedures and telephone techniques and instruction in applicable federal and state regulatory requirements. Company personnel also receive a wide variety of continuing professional education consisting of both classroom and role playing sessions. As of March 31, 1998, the Company had a total of 1,568 full-time employees and 704 part-time employees, of which 1,769 were telephone representatives. None of the Company's employees is represented by a labor union. The Company believes that its relations with its employees are good. Competition The accounts receivable management industry is highly competitive. The Company competes with approximately 6,500 providers, including large national corporations such as Outsourcing Solutions Inc., GC Services, Inc., Equifax Inc. and many regional and local firms. Some of the Company's competitors have substantially greater resources, offer more diversified services and operate in broader geographic areas than the Company. In addition, the accounts receivable management services offered by the Company, in many instances, are performed in-house. Moreover, many larger clients retain multiple accounts receivable management and recovery providers which exposes the Company to continuous competition in order to remain a preferred vendor. The Company believes that the primary competitive factors in obtaining and retaining clients are the ability to provide customized solutions to a client's requirements, personalized service, sophisticated call and information systems, collection rates and price. The Company also competes with other firms, such as SITEL Corporation, APAC TeleServices, Inc. and TeleTech Holdings, Inc., in providing teleservices. Regulation The accounts receivable management industry is regulated both at the federal and state level. The FDCPA regulates any person who regularly collects or attempts to collect, directly or indirectly, consumer debts owed or asserted to be owed to another person. The FDCPA establishes specific guidelines and procedures which debt collectors must follow in communicating with consumer debtors, including the time, place and manner of such communications. Further, it prohibits harassment or abuse by debt collectors, including the threat of violence or criminal prosecution, obscene language or repeated telephone calls made with the intent to abuse or harass. The FDCPA also places restrictions on communications with individuals other than consumer debtors in connection with the collection of any consumer debt and sets forth specific procedures to be followed when communicating with such third parties for purposes of obtaining location information about the consumer. Additionally, the FDCPA contains various notice and disclosure requirements and prohibits unfair or misleading representations by debt collectors. The Company is also subject to the Fair Credit Reporting Act which regulates the consumer credit reporting industry and which may impose liability on the Company to the extent that the adverse credit information reported on a consumer to a credit bureau is false or inaccurate. The accounts receivable management business is also subject to state regulation. Some states require that the Company be licensed as a debt collection company. Management believes that the Company currently holds applicable licenses from all states where required. With respect to the other teleservices offered by the Company, including telemarketing, the federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 (the "TCFAPA") broadly authorizes the Federal Trade Commission (the "FTC") to issue regulations prohibiting misrepresentations in telemarketing sales. The FTC's telemarketing sales rules prohibit misrepresentations of the cost, terms, restrictions, performance or duration of products or services offered by telephone solicitation and specifically address other perceived telemarketing abuses in the offering of prizes and the sale of business opportunities or investments. The federal Telephone Consumer Protection Act of 1991 (the "TCPA") limits the hours during which telemarketers may call consumers and prohibits the use of automated telephone dialing equipment to call certain telephone numbers. A number of states also regulate telemarketing. For example, some states have enacted restrictions similar to the federal TCPA. From time to time, Congress and the states consider legislation that would further regulate the Company's telemarketing operations and the Company cannot predict whether additional legislation will be enacted and, if enacted, what effect it would have on the telemarketing industry and the Company's business. 38 The collection of accounts receivable by collection agencies in Canada is regulated at the provincial and territorial level in substantially the same fashion as is accomplished by federal and state laws in the United States. The manner in which the Company carries on the business of collecting accounts is subject, in all provinces and territories, to established rules of common law or civil law and statute. Such laws establish rules and procedures governing the tracing, contacting and dealing with debtors in relation to the collection of outstanding accounts. These rules and procedures prohibit debt collectors from engaging in intimidating, misleading and fraudulent behaviour when attempting to recover outstanding debts. In Canada, the Company's collection operations are subject to licensing requirements and periodic audits by government agencies and other regulatory bodies. Generally, such licenses are subject to annual renewal. Upon consummation of the FCA acquisition, management believes that the Company will hold all necessary licenses in those provinces and territories that require them. If the Company engages in other teleservice activities in Canada, including telemarketing, there are several provincial and territorial consumer protection laws of more general application. This legislation defines and prohibits unfair practices by telemarketers, such as the use of undue pressure and the use of false, misleading or deceptive consumer representations. In addition, accounts receivable management and telemarketing industries are regulated in the United Kingdom, including a licensing requirement. If the Company expands its international operation, it may become subject to additional government control and regulation in other countries, which may be more onerous than those in the United States. Several of the industries served by the Company are also subject to varying degrees of government regulation. Although compliance with these regulations is generally the responsibility of the Company's clients, the Company could be subject to a variety of enforcement or private actions for its failure or the failure of its clients to comply with such regulations. The Company devotes significant and continuous efforts, through training of personnel and monitoring of compliance, to ensure that it is in compliance with all federal and state regulatory requirements. The Company believes that it is in material compliance with all such regulatory requirements. 39 Facilities The Company currently operates 22 leased facilities. The chart below summarizes the Company's current call center facilities: Approximate Location of Facility Square Footage --------------------- --------------- Fort Washington, PA 82,000 San Diego, CA 3,200 Aurora, CO 4,800 Honolulu, HI 2,900 Hutchinson, KS 900 Wichita, KS 10,000 New Orleans, LA 6,900 Odenton, MD 13,400 Jackson, MI 10,800 Charlotte, NC 15,000 Buffalo, NY 30,000 Cleveland, OH 7,000 Dayton, OH 13,100 Tulsa, OK 13,900 Fort Washington, PA 12,300 Pittsburgh, PA 3,600 Philadelphia, PA 4,700 Philadelphia, PA 5,700 Philadelphia, PA 3,200 Upper Darby, PA 11,000 Columbia, SC 10,500 Bristol, TN 4,000 The leases of these facilities expire between 1998 and 2010, and most contain renewal options. The Company believes that these facilities are adequate for its current operations, but additional facilities may be required to support growth. The Company believes that suitable additional or alternative space will be available as needed on commercially reasonable terms. In addition, the Company leases sales offices in Little Rock, Arkansas; Tucson, Arizona; Boston, Massachusetts; Las Vegas, Nevada; Jericho, New York; McAllen and Stafford, Texas. Legal Proceedings The Company is involved in legal proceedings from time to time in the ordinary course of its business. Management believes that none of these legal proceedings will have a materially adverse effect on the financial condition or results of operations of the Company. 40 MANAGEMENT Directors, Executive Officers and Key Employees The following table sets forth certain information concerning the Company's directors, executive officers and key employees:
Name Age Position - ------------------------------- ----- ------------------------------------------------- Michael J. Barrist ............ 37 Chairman of the Board, President and Chief Executive Officer Charles C. Piola, Jr .......... 51 Executive Vice President and Director Bernard R. Miller ............. 50 Executive Vice President, Development and Director Steven L. Winokur ............. 38 Executive Vice President, Finance, Chief Finan- cial Officer and Treasurer Joseph C. McGowan ............. 45 Executive Vice President and Chief Operating Officer Patrick M. Baldasare .......... 42 President and Chief Executive Officer of NCO Teleservices, Inc. (Market Research Division) Steven L. Leckerman ........... 46 Senior Vice President, Collection Operations Stephen W. Elliott ............ 36 Senior Vice President, Technology and Chief Information Officer Eric S. Siegel (1) ............ 41 Director Allen F. Wise (1) ............. 55 Director
- ------------ (1) Member of Audit and Compensation Committees. Michael J. Barrist has served as Chairman of the Board, President and Chief Executive Officer of the Company since purchasing the Company in 1986. Mr. Barrist was employed by U.S. Healthcare, Inc. from 1984 to 1986, most recently as Vice President of Operations, and was employed by Gross & Company, a certified public accounting firm, from 1980 through 1984. Mr. Barrist is a certified public accountant. Charles C. Piola, Jr. joined the Company in 1986 as Executive Vice President, Sales and Marketing and has served as a director since that time. Prior to joining the Company, Mr. Piola was the Regional Sales Manager for Trans World Systems from 1983 to 1986 and IC Systems from 1979 to 1981, both accounts receivable management companies. Bernard R. Miller joined the Company as Senior Vice President of Development in 1994 when NCO acquired certain assets of B. Richard Miller, Inc. ("BRM"), a Philadelphia-based accounts receivable management company owned principally by Mr. Miller. Mr. Miller became a director in 1996 and an Executive Vice President in September 1997. Prior to joining the Company, Mr. Miller served as President and Chief Executive Officer of BRM since founding it in 1980. Steven L. Winokur joined the Company in December 1995 as Vice President, Finance, Chief Financial Officer and Treasurer and became Executive Vice President in September 1997. Prior to joining the Company, Mr. Winokur acted as a part-time consultant to the Company since 1986. From February 1992 to December 1995, Mr. Winokur was the principal of Winokur & Associates, a certified public accounting firm. From March 1981 to February 1992, Mr. Winokur was a partner with Gross & Company, a certified public accounting firm, where he most recently served as Administrative Partner. Mr. Winokur is a certified public accountant. 41 Joseph C. McGowan joined the Company in 1990 as Vice President, Operations and became Executive Vice President and Chief Operating Officer in September 1997. Prior to joining the Company, Mr. McGowan was Assistant Manager of the Collections Department at Philadelphia Gas Works, a public utility, since 1975. Patrick M. Baldasare joined the Company as President and Chief Executive Officer of NCO Teleservices, Inc. (Market Research Division) in February 1996 when the Company acquired certain assets of TRC. Mr. Baldasare has served as Chief Executive Officer and President of TRC since its founding in 1987. From 1983 through 1987, Mr. Baldasare served as President of Valley Forge Information Service, the market research division of Burlington Industries. Steven L. Leckerman joined the Company in September 1995 as Senior Vice President, Collection Operations. From 1982 to September 1995, Mr. Leckerman was employed by Allied Bond Corporation, a division of Union Corporation, an accounts receivable management company, where he served as manager of dialer and special projects. Stephen W. Elliott joined the Company in May 1996 as Senior Vice President, Technology and Chief Information Officer and provided consulting services to the Company since May 1995. Prior to joining NCO, Mr. Elliott was employed by Electronic Data Systems, a computer services company, since 1986, most recently as Senior Account Manager. Eric S. Siegel was appointed to the Board of Directors of the Company in December 1996. Mr. Siegel has been president of Siegel Management Company, a management consulting firm, since 1983. Mr. Siegel also is an adjunct faculty member at the Wharton School of the University of Pennsylvania and is co-author of The Ernst & Young Business Plan Guide. Allen F. Wise was appointed to the Board of Directors of the Company in December 1996. Mr. Wise has been a director and Chief Executive Officer of Coventry Corporation, a managed care company, since October 1996. Prior thereto, he was Executive Vice President of United Healthcare Corporation since October 1994, President of Wise Health Systems, a healthcare management company, from September 1993 to October 1994, Chief Executive Officer of Keystone Health Plan and Chief Operating Officer of Independence Blue Cross from September 1991 to September 1993 and Vice President of U.S. Healthcare, Inc. from April 1985 to September 1991. Mr. Wise is also a director of Transition Systems Inc. 42 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of April 30, 1998, and as adjusted to reflect the sale of the shares of Common Stock offered hereby by: (i) each Selling Shareholder; (ii) each person known by the Company to own beneficially more than 5% of the Company's outstanding Common Stock; (iii) each of the Company's directors; (iv) the Company's chief executive officer and the four most highly compensated executive officers; and (v) the Company's directors and executive officers as a group. Except as otherwise indicated, to the knowledge of the Company, the beneficial owners of the Common Stock listed below have sole investment and voting power with respect to such shares.
Shares Beneficially Shares Beneficially Owned Owned Prior to the Offering After the Offering ------------------------ Shares Being ----------------------- Name of Beneficial Owner Number Percent Offered Number Percent - ---------------------------------------- ------------ --------- -------------- ------------ -------- Annette H. Barrist (1) ................. 253,288 1.9% 38,000 215,288 1.1% Joshua Gindin, Esq. and Michael J. Barrist, Trustees, U/A/T dated 10/16/96, Annette H. Barrist, Settlor ............................... 76,744 * 11,500 65,244 * Michael J. Barrist (2)(3) .............. 2,632,690 19.6 394,000 2,238,690 11.6 Joshua Gindin, Esq. and Steven Winokur, CPA, Trustees, U/A/T dated 9/6/96, Michael J. Barrist and Natalie Barrist, Settlors ......... 179,160 1.3 27,000 152,160 * The Dayton Foundation .................. 10,384 * 10,384 -- -- Joshua Gindin (4) ...................... 374,949 2.8 56,500 318,449 1.6 Stephen W. Elliott (5) ................. 30,364 * 9,500 20,864 * William C. Fischer (5) ................. 2,500 * 2,500 -- -- Mark Macrone (5) ....................... 44,172 * 7,500 36,672 * Joseph C. McGowan (5) .................. 45,728 * 17,050 28,678 * Bernard R. Miller (6) .................. 236,216 1.8 31,000 205,216 1.1 Michael G. Noah (5) .................... 10,000 * 7,000 3,000 * Charles C. Piola, Jr. (2)(7) ........... 1,193,573 8.9 178,500 1,015,073 5.3 Joshua Gindin, Esq., Trustee U/A/T dated 9/6/96, Charles C. Piola, Jr. and June Piola, Settlors .......... 179,160 1.3 27,000 152,160 * PNC Bancorp, Inc.(8) ................... 1,068,401 8.0 -- 1,068,401 5.5 Provident Investment Counsel, Inc. (9) .............................. 665,796 5.0 -- 665,796 3.5 Eric S. Siegel (10) .................... 19,586 * -- 19,586 * Steven L. Winokur (11) ................. 222,709 1.7 42,008 180,701 * Allen F. Wise (12) ..................... 6,500 * -- 6,500 * Wright State University Foundation 36,058 * 36,058 -- -- All directors and executive officers as a group (7 persons) (13) ........... 4,357,002 32.2 662,558 3,694,444 19.1
- ------------ *Less than one percent. (1) Excludes 78,619 shares held in trust for the benefit of members of Mrs. Barrist's family, as to which Mrs. Barrist disclaims beneficial ownership. Mrs. Barrist is the mother of Michael J. Barrist. In the event that the Underwriters over-allotment option is exercised in full, Mrs. Barrist would sell an additional 5,700 shares and would beneficially own 1.0% of the outstanding Common Stock. (2) The address of such person is c/o NCO Group, Inc., 515 Pennsylvania Avenue, Fort Washington, Pennsylvania 19034. 43 (3) Includes: (i) 253,288 shares of Common Stock owned by Mrs. Annette Barrist (including 38,000 shares being sold by her in the Offering) which Mr. Barrist has the sole right to vote pursuant to an irrevocable proxy; (ii) 77,119 shares held in trust for the benefit of members of Mrs. Annette Barrist's or Mr. Barrist's family (including 11,500 shares being sold by such trust) for which Mr. Barrist is a co-trustee; and (iii) 7,500 shares issuable upon the exercise of options which are exercisable within 60 days after April 30, 1998. Excludes 179,160 shares held in trust for the benefit of Mr. Barrist's child, as to which Mr. Barrist disclaims beneficial ownership. Mrs. Annette Barrist is the mother of Michael J. Barrist. In the event that the Underwriters' over-allotment option is exercised in full, Mr. Barrist would sell an additional 63,117 shares (including 5,700 shares being sold by Mrs. Barrist) and would beneficially own 10.8% of the outstanding Common Stock after the Offering. (4) Represents: (i) 179,160 shares held in trust for the benefit of Mr. Barrist's child (including 27,000 shares being sold by such trust) for which Mr. Gindin is a co-trustee; (ii) 179,160 shares held in trust for the benefit of Mr. Piola's children (including 27,000 shares being sold by such trust) for which Mr. Gindin is trustee; and (iii) 16,629 shares issuable upon the exercise of options which are exercisable within 60 days after April 30, 1998. (5) Represents shares issuable upon the exercise of options which are exercisable within 60 days after April 30, 1998. Such person will exercise options to acquire all of the shares being sold by him in the Offering. (6) Includes 30,000 shares issuable upon the exercise of options which are exercisable within 60 days after April 30, 1998. In the event that the Underwriters' over-allotment option is exercised in full, Mr. Miller would sell an additional 4,650 shares. (7) Includes 5,000 shares issuable upon the exercise of options which are exercisable within 60 days after April 30, 1998. Excludes 179,160 shares held in trust for the benefit of Mr. Piola's children, as to which Mr. Piola disclaims beneficial ownership. In the event that the Underwriters' over-allotment option is exercised in full, Mr. Piola would sell an additional 29,750 shares and would beneficially own 4.9% of the outstanding Common Stock after the Offering. (8) Based upon a Schedule 13D, dated February 13, 1998, provided to the Company. The address of PNC Bancorp, Inc. is One PNC Plaza, 249 Fifth Avenue, Pittsburgh, PA 15265. (9) Based upon a Schedule 13D, dated February 10, 1998, provided to the Company. The address of Provident Investment Counsel, Inc. is 300 N. Lake Avenue, Suite 1001, Pasadena, CA 91101. (10) Includes 17,586 shares issuable upon the exercise of options which are exercisable within 60 days after April 30, 1998. (11) Represents: (i) 179,160 shares held in trust for the benefit of Mr. Barrist's child (including 27,000 shares being sold by such trust) for which Mr. Winokur is a co-trustee; (ii) 43,249 shares issuable upon the exercise of options which are exercisable within 60 days after April 30, 1998; and (iii) 300 shares held in custody for the benefit of Mr. Winokur's children for which Mr. Winokur is custodian. Mr. Winokur will exercise options to acquire all of the shares being sold by him in the Offering. (12) Represents shares issuable upon the exercise of options which are exercisable within 60 days after April 30, 1998. (13) Includes: (i) 253,288 shares of Common Stock owned by Mrs. Barrist (including 38,000 shares being sold by her in the Offering) which Mr. Barrist has the sole right to vote pursuant to an irrevocable proxy; (ii) 77,119 shares held in trust for the benefit of members of Mrs. Annette Barrist's or Mr. Barrist's family (including 11,500 shares being sold by such trust) for which Mr. Barrist is a co-trustee; (iii) 179,160 shares held in trust for the benefit of Mr. Barrist's child (including 27,000 shares being sold by such trust in this Offering) for which Mr. Winokur is a co-trustee; (iv) an aggregate of 155,563 shares issuable upon exercise of options which are exercisable within 60 days after April 30, 1998; and (v) 300 shares held in custody for the benefit of Mr. Winokur's minor children for which Mr. Winokur is custodian. Excludes 179,160 shares held in trust for the benefit of Mr. Piola's children. In the event that the Underwriters' over-allotment option is exercised in full, the directors and executive officers as a group would sell an additional 97,517 shares and would beneficially own 17.8% of the outstanding Common Stock after the Offering. 44 UNDERWRITING The Underwriters named below (the "Underwriters") have severally agreed, subject to the terms and conditions in the underwriting agreement (the "Underwriting Agreement"), by and among the Company, the Selling Shareholders and the Underwriters, to purchase from the Company and the Selling Shareholders the number of shares of Common Stock indicated below opposite their respective names, at the public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of the shares of Common Stock, if they purchase any. Number of Underwriter Shares - ----------- ---------- NationsBanc Montgomery Securities LLC ..................... BT Alex. Brown Incorporated ............................... Janney Montgomery Scott Inc ............................... The Robinson-Humphrey Company, LLC ........................ --------- Total .................................................. 6,565,000 ========= 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. The Company and certain of the Selling Shareholders have granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 984,750 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial shares to be purchased by the Underwriters. To the extent that the Underwriters exercise such over-allotment option, the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with the Offering. The Underwriting Agreement provides that the Company and the Selling Shareholders will indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. The Company, the Selling Shareholders and the Company's executive officers and directors who are also shareholders of the Company and who, immediately following the Offering (assuming no exercise of the Underwriters' over-allotment option) collectively will own an aggregate of 3,723,099 outstanding shares of Common Stock, have agreed that for a period of 90 days after the effective date of the Offering they will not, without the prior written consent of NationsBanc Montgomery Securities LLC, directly or indirectly, offer for sale, sell, solicit an offer to sell, contract or grant an option to sell, pledge, transfer, establish an open put equivalent position or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable or exercisable or convertible into shares of Common Stock held by them. The Company has also agreed not to issue, offer, sell, grant options to purchase or otherwise dispose of any of the Company's equity securities or any other securities convertible into or exchangeable with its Common Stock for a period of 90 days after the effective date of the Offering without the prior written consent of NationsBanc Montgomery Securities LLC, subject to limited exceptions and grants and exercises of stock options. In evaluating any request for a waiver of the 90-day lock-up period, the Underwriters will consider, in accordance with their customary practice, all relevant facts and circumstances at the time of the request, including, without limitation, the recent trading market for the Common Stock, the size of the request and, with respect to a request by the Company to issue additional equity securities, the purpose of such an issuance. 45 Until the distribution of the Common Stock is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, the Underwriters are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the Offering, i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus, the Underwriters may reduce that short position by purchasing Common Stock in the open market. The Underwriters may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The Underwriters may also impose a penalty bid on certain selling group members. This means that if the Underwriters purchase shares of Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the selling group members who sold those shares as part of the Offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither the Company nor any of the Underwriters makes any representation or predictions as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The public offering price of the Common Stock will be determined by negotiations among the Underwriters and the Company, and will be based largely upon the market price for the Common Stock as reported on the Nasdaq National Market. Affiliates of the Underwriters may utilize the Company's accounts receivable management services in the ordinary course of business. LEGAL MATTERS An opinion will be rendered by the law firm of Blank Rome Comisky & McCauley LLP, Philadelphia, Pennsylvania, to the effect that the shares of Common Stock offered by the Company hereby, when issued and paid for as contemplated in this Prospectus, will be, and the shares of Common Stock offered by the Selling Shareholders hereby are, legally issued, fully paid and non-assessable. Certain legal matters will be passed upon for the Underwriters by Piper & Marbury L.L.P., Baltimore, Maryland. EXPERTS The consolidated balance sheets of the Company as of December 31, 1997 and 1996 and the Company's consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997 incorporated by reference in this Prospectus and in the Registration Statement, have been incorporated herein in reliance on the report of Coopers & Lybrand, L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. The consolidated financial statements of FCA at June 30, 1996 and 1997 and FCA's consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1997 incorporated by reference in this Prospectus and in the Registration Statement have been audited by Arthur Andersen & Co., independent accountants, as set forth in their report, and are incorporated by reference herein in reliance upon such report given upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission a Registration Statement on Form S-3 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, filed as part of 46 the Registration Statement, does not contain all of the information included in the Registration Statement and the exhibits and schedules thereto, certain portions of which have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to the Registration Statement, including the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract, agreement or other document referred to herein are not necessarily complete and in each such instance, reference is made to the copy of such contract, agreement or other document filed as an exhibit to the Registration Statement for a more complete description of the matters involved, and each such statement shall be deemed qualified in its entirety by such reference. The Company is subject to the information requirements of the Exchange Act, and in accordance therewith, files reports and other information with the Securities and Exchange Commission. So long as the Company is subject to periodic reporting requirements of the Exchange Act, it will continue to furnish the reports and other information required thereby to the Securities and Exchange Commission. The Company will furnish to its shareholders annual reports containing financial statements audited by its independent accountants and will make available copies of quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. The Registration Statement, including the exhibits and schedules thereto, and any reports and information filed by the Company may be inspected without charge and copied at the offices of the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; 7 World Trade Center, 13th Floor, New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained at the prescribed rates from the Commission's Public Reference Section at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The Commission maintains a Web Site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of such Web Site is http://www.sec.gov. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission are incorporated herein by reference: (i) the Company's Annual Report on Form 10-K for the year ended December 31, 1997, as amended by Form 10-K/A filed April 30, 1998; (ii) the Company's Current Reports on Form 8-K filed February 24, 1998, February 25, 1998, April 22, 1998, and May 4, 1998; (iii) the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998; and (iv) the Company's Registration Statement on Form 8-A filed October 29, 1996 registering the Company's Common Stock under Section 12(g) of the Exchange Act. All documents filed by the Company with the Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date hereof and prior to the termination of the offering of the Common Stock registered hereby shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from the date of filing such documents. Any statements contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is, or is deemed to be, incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom this Prospectus is delivered, upon a written request of such person, a copy of any or all of the foregoing documents incorporated by reference into this Prospectus (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into such documents). Requests for such copies should be delivered to Steven L. Winokur, Executive Vice President, Finance, Chief Financial Officer and Treasurer, 515 Pennsylvania Avenue, Fort Washington, Pennsylvania 19034. 47 INDEX TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS NCO Group, Inc. Pro Forma Consolidated Financial Statements: Basis of Presentation ................................................................ F-2 Pro Forma Consolidated Balance Sheet as of March 31, 1998 ............................ F-3 Pro Forma Consolidated Statement of Income for the three months ended March 31, 1998.. F-4 Pro Forma Consolidated Statement of Income for the year ended December 31, 1997 ...... F-5 Notes to Pro Forma Consolidated Financial Statements ................................. F-6
F-1 Pro Forma Consolidated Financial Statements Basis of Presentation The Pro Forma Consolidated Balance Sheet as of March 31, 1998 and the Pro Forma Consolidated Statements of Income for the three months ended March 31, 1998 and the year ended December 31, 1997 are based on the historical financial statements of NCO Group, Inc. ("NCO" or the "Company"), Tele-Research Center, Inc. ("Tele-Research"), CMS A/R Services ("CMS A/R"), the Collection Division of CRW Financial, Inc. ("CRWCD"), Credit Acceptance Corporation ("CAC"), ADVANTAGE Financial Services, Inc. ("AFS"), the Collection Division of American Financial Enterprises, Inc. ("AFECD"), The Response Center ("TRC"), FCA International Ltd. ("FCA"), and MedSource, Inc. ("MedSource") (collectively, the "Acquisitions"). The Pro Forma Consolidated Balance Sheet as of March 31, 1998 has been prepared assuming the FCA and MedSource acquisitions (collectively, the "Pending Acquisitions") occurred on March 31, 1998. The Pro Forma Consolidated Statement of Income for the three months ended March 31, 1998 has been prepared assuming the TRC acquisition and the Pending Acquisitions occurred on January 1, 1998. The Pro Forma Consolidated Statement of Income for the year ended December 31, 1997 has been prepared assuming the Tele-Research, CMS A/R, CRWCD, CAC, and AFS acquisitions (collectively, the "1997 Acquisitions"), the AFECD and TRC acquisitions (collectively, the "1998 Acquisitions"), and the Pending Acquisitions, occurred on January 1, 1997. The Pro Forma Consolidated Balance Sheet and Statements of Income do not purport to represent what NCO's actual financial position or results of operations would have been had the acquisitions occurred as of such dates, or to project NCO's financial position or results of operations for any period or date, nor does it give effect to any matters other than those described in the notes thereto. In addition, the allocations of purchase price to the assets and liabilities of FCA and MedSource are preliminary and the final allocations may differ from the amounts reflected herein. The unaudited Pro Forma Consolidated Balance Sheet and Statements of Income should be read in conjunction with the Company's consolidated financial statements and notes thereto and the historical financial statements of FCA and MedSource, all of which are incorporated herein by reference. F-2 NCO GROUP, INC. Pro Forma Consolidated Balance Sheet March 31, 1998 (Unaudited) (Dollars in thousands)
Historical ---------------------------------- Pending Acquisitions ---------------------- NCO FCA (1) MedSource ---------- --------- ----------- ASSETS Current assets: Cash and cash equivalents ................... $ 16,088 $ 2,837 $ 732 Accounts receivable, trade, net ............. 14,848 6,322 3,049 Other current assets ........................ 1,557 3,774 1,054 -------- ------- ------- Total current assets ........................ 32,493 12,933 4,835 Funds held in trust for clients Property and equipment, net .................. 8,245 6,901 2,121 Other assets: Intangibles, net of accumulated amortization ............................... 63,130 1,729 16,224 Deferred financing costs .................... 849 -- 1,821 Deferred taxes .............................. -- -- 37 Other assets ................................ 991 5,076 76 -------- ------- ------- Total other assets ......................... 64,970 6,805 18,158 -------- ------- ------- Total assets ................................. $105,708 $26,639 $25,114 ======== ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion ............. $ 1,060 $ 2,542 $ 200 Capitalized lease obligations, current portion .................................... 106 249 140 Corporate taxes payable ..................... 462 -- -- Accounts payable ............................ 2,937 2,854 1,813 Accrued expenses ............................ 2,548 -- 362 Accrued compensation and related expenses ................................... 2,955 -- 531 Unearned revenue, net of related costs ...... 252 -- -- -------- ------- ------- Total current liabilities ................... 10,320 5,645 3,046 Funds held in trust for clients Long-term liabilities: Long term debt, net of current portion ...... 923 2,297 16,495 Capitalized lease obligations, net of current portion ............................ 225 589 95 Deferred taxes .............................. 2,253 3 -- Unearned revenue, net of related costs ...... 31 -- -- Convertible Preferred Stock .................. -- -- 6,003 Commitments and contingencies Shareholders' equity ......................... 91,956 18,105 (525) -------- ------- ------- Total liabilities and shareholders' equity ... $105,708 $26,639 $25,114 ======== ======= =======
Acquisition Offering Pro Forma Adjustments (2) Pro Forma Adjustments (3) As Adjusted ----------------- ----------- ----------------- ------------ ASSETS Current assets: Cash and cash equivalents ................... $ (10,509) $ 9,148 $ 51,559 $ 60,707 Accounts receivable, trade, net ............. -- 24,219 -- 24,219 Other current assets ........................ -- 6,385 -- 6,385 --------- -------- --------- -------- Total current assets ........................ (10,509) 39,752 51,559 91,311 Funds held in trust for clients Property and equipment, net .................. (5,571) 11,696 -- 11,696 Other assets: Intangibles, net of accumulated amortization ............................... 74,499 155,582 -- 155,582 Deferred financing costs .................... (1,821) 849 -- 849 Deferred taxes .............................. 13,361 13,398 -- 13,398 Other assets ................................ -- 6,143 -- 6,143 --------- -------- --------- -------- Total other assets ......................... 86,039 175,972 -- 175,972 --------- -------- --------- -------- Total assets ................................. $ 69,959 $227,420 $ 51,559 $278,979 ========= ======== ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion ............. $ -- $ 3,802 $ (2,742) $ 1,060 Capitalized lease obligations, current portion .................................... -- 495 (140) 355 Corporate taxes payable ..................... -- 462 -- 462 Accounts payable ............................ -- 7,604 -- 7,604 Accrued expenses ............................ 18,542 21,452 -- 21,452 Accrued compensation and related expenses ................................... -- 3,486 -- 3,486 Unearned revenue, net of related costs ...... -- 252 -- 252 --------- -------- --------- -------- Total current liabilities ................... 18,542 37,553 (2,882) 34,671 Funds held in trust for clients Long-term liabilities: Long term debt, net of current portion ...... 75,000 94,715 (93,792) 923 Capitalized lease obligations, net of current portion ............................ -- 909 (95) 814 Deferred taxes .............................. -- 2,256 -- 2,256 Unearned revenue, net of related costs ...... -- 31 -- 31 Convertible Preferred Stock .................. (6,003) -- -- -- Commitments and contingencies Shareholders' equity ......................... (17,580) 91,956 148,328 240,284 --------- -------- --------- -------- Total liabilities and shareholders' equity ... $ 69,959 $227,420 $ 51,559 $278,979 ========= ======== ========= ========
The accompanying notes are an integral part of these pro forma consolidated financial statements. F-3 NCO GROUP, INC. Pro Forma Consolidated Statement of Income For the Three Months Ended March 31, 1998 (Unaudited) (Amounts in thousands, except per share data)
Historical ----------------------------------------- Pending NCO TRC (4) Acquisitions (5) ---------- --------- ------------------ Revenue ....................... $27,609 $788 $20,002 Operating costs and expenses: Payroll and related expenses .................... 14,144 429 11,778 Selling, general and administrative expenses 8,568 162 6,779 Depreciation and amorti- zation expense .............. 1,155 7 904 ------- ---- ------- Total operating costs and expenses ............... 23,867 598 19,461 ------- ---- ------- Income from operations ........ 3,742 190 541 Other income (expense): Interest and investment income ...................... 232 -- 89 Interest expense ............. (79) -- (704) ------- ---- ------- Total other income (expense) .................. 153 -- (615) ------- ---- ------- Income (loss) before provi- sion for income taxes ........ 3,895 190 (74) Income tax expense (benefit) .................... 1,579 -- (56) ------- ---- ------- Net income .................... $ 2,316 $190 $ (18) ======= ==== ======= Net income per share: Basic ........................ $ 0.17 ======= Diluted ...................... $ 0.17 ======= Weighted average shares outstanding: Basic ........................ 13,240 Diluted ...................... 13,801
Acquisition Offering Pro Forma Adjustments Pro Forma Adjustments (12) As Adjusted --------------------- ----------- ------------------ ----------------- Revenue ....................... $ -- $ 48,399 $ -- $ 48,399 Operating costs and expenses: Payroll and related expenses .................... (1,519) (6) 24,832 -- 24,832 Selling, general and administrative expenses (336) (7) 15,173 -- 15,173 Depreciation and amorti- zation expense .............. (28) (8) 2,094 -- 2,094 ----------- -------- ------ ---------- Total operating costs and expenses ............... (1,827) 42,099 -- 42,099 ----------- -------- ------ ---------- Income from operations ........ 1,827 6,300 -- 6,300 Other income (expense): Interest and investment income ...................... (69) (9) 252 -- 252 Interest expense ............. (1,264) (10) (2,047) 1,945 (102) ----------- -------- ------ ---------- Total other income (expense) .................. (1,333) (1,795) 1,945 150 ----------- -------- ------ ---------- Income (loss) before provi- sion for income taxes ........ 494 4,505 1,945 6,450 Income tax expense (benefit) .................... 673 (11) 2,196 788 2,984 ----------- -------- ------ ---------- Net income .................... $ (179) $ 2,309 $1,157 $ 3,466 =========== ======== ====== ========== Net income per share: Basic ........................ $ 0.17 $ 0.20 ======== ========== Diluted ...................... $ 0.17 $ 0.19 ======== ========== Weighted average shares outstanding: Basic ........................ 13,240 17,452(13) Diluted ...................... 13,801 18,013(13)
The accompanying notes are an integral part of these pro forma consolidated financial statements. F-4 NCO GROUP, INC. Pro Forma Consolidated Statement of Income For the Year Ended December 31, 1997 (Unaudited) (Amounts in thousands, except per share data)
Historical ----------------------------------------------------- 1997 1998 NCO Acquisitions (14) Acquisitions (15) ----------- ------------------- ------------------- Revenue .......................... $ 85,284 $ 8,621 $ 9,555 Operating costs and expenses: Payroll and related expenses ........................ 42,502 5,656 5,789 Selling, general and administrative expenses.......... 27,947 3,731 2,129 Depreciation and amortiza- tion expense .................... 3,369 257 91 Reorganization charge ........... -- -- -- -------- --------- ------- Total operating costs and expenses .................... 73,818 9,644 8,009 -------- --------- ------- Income (loss) from opera- tions ........................... 11,466 (1,023) 1,546 Other income (expense): Interest and investment income .......................... 1,020 14 -- Interest expense ................ (591) (12) -- Other ........................... (41) -- -- -------- --------- ------- Total other income (expense) ...................... 388 2 -- -------- --------- ------- Income before provision for income taxes .................... 11,854 (1,021) 1,546 Income tax expense (benefit) 4,780 -- -- -------- --------- ------- Net income (loss) ................ $ 7,074 $ (1,021) $ 1,546 ======== ========= ======= Net income per share: Basic ........................... $ 0.59 ======== Diluted ......................... $ 0.57 ======== Weighted average shares outstanding: Basic ........................... 11,941 Diluted ......................... 12,560
Pending Acquisitions ------------------------------------------------------------------------------------------- FCA MedSource ----------------- ------------------------------------------------------------------------ Completed Acquisition Historical (16) Historical (17) Acquisitions (18) Adjustments Pro Forma ----------------- ----------------- ------------------- ------------------- ----------- Revenue .......................... $ 62,224 $ 12,458 $10,253 $ -- $ 22,711 Operating costs and expenses: Payroll and related expenses ........................ 37,076 5,665 5,826 -- 11,491 Selling, general and administrative expenses.......... 21,494 6,148 2,842 -- 8,990 Depreciation and amortiza- tion expense .................... 2,522 569 132 355(19) 1,056 Reorganization charge ........... 1,517 -- -- -- -- -------- -------- ------- -------------- -------- Total operating costs and expenses .................... 62,609 12,382 8,800 355 21,537 -------- -------- ------- -------------- -------- Income (loss) from opera- tions ........................... (385) 76 1,453 (355) 1,174 Other income (expense): Interest and investment income .......................... 409 30 45 -- 75 Interest expense ................ (423) (616) (53) (1,446)(20) (2,115) Other ........................... -- -- -- -- -- -------- -------- ------- -------------- -------- Total other income (expense) ...................... (14) (586) (8) (1,446) (2,040) -------- -------- --------- -------------- -------- Income before provision for income taxes .................... (399) (510) 1,445 (1,801) (866) Income tax expense (benefit) 310 (150) 583 (614) (181) -------- -------- -------- -------------- -------- Net income (loss) ................ $ (709) $ (360) $ 862 $ (1,187) $ (685) ======== ======== ======== ============== ======== Net income per share: Basic ........................... Diluted ......................... Weighted average shares out- standing: Basic ........................... Diluted .........................
Acquisition Offering Pro Forma Adjustments Pro Forma Adjustments (27) As Adjusted ------------------- ----------------- ------------------ ----------------- Revenue .......................... $ -- $ 188,395 $ -- $ 188,395 Operating costs and expenses: Payroll and related expenses ........................ (8,199)(21) 94,315 -- 94,315 Selling, general and administrative expenses.......... (1,766)(22) 62,525 -- 62,525 Depreciation and amortiza- tion expense .................... 4,245 (23) 11,540 -- 11,540 Reorganization charge ........... -- 1,517 -- 1,517 ----------- ---------- ------ ---------- Total operating costs and expenses .................... (5,720) 169,897 -- 169,897 ----------- ---------- ------ ---------- Income (loss) from opera- tions ........................... 5,720 18,498 -- 18,498 Other income (expense): Interest and investment income .......................... -- 1,518 -- 1,518 Interest expense ................ (4,644)(24) (7,785) 7,382 (403) Other ........................... -- (41) -- (41) ----------- ---------- ------ ---------- Total other income (expense) ...................... (4,644) (6,308) 7,382 1,074 ----------- ---------- ------ ---------- Income before provision for income taxes .................... 1,076 12,190 7,382 19,572 Income tax expense (benefit) 780 (25) 5,689 2,953 8,642 ----------- ---------- ------ ---------- Net income (loss) ................ $ 296 $ 6,501 $4,429 $ 10,930 =========== ========== ====== ========== Net income per share: Basic ........................... $ 0.51 $ 0.65(29) ========== ========== Diluted ......................... $ 0.49 $ 0.62(29) ========== ========== Weighted average shares outstanding: Basic ........................... 12,732(26) 16,944(28) Diluted ......................... 13,364(26) 17,576(28)
The accompanying notes are an integral part of these pro forma consolidated financial statements. F-5 Notes to Pro Forma Consolidated Financial Statements (Unaudited) To date, all of the Company's acquisitions have been accounted for under the purchase method of accounting with the results of the acquired companies included in the Company's statements of income beginning on the date of acquisition. 1. Includes the adjustments required to convert FCA's historical financial statements to U.S. Generally Accepted Accounting Principles ("GAAP") and gives effect to the conversion from Canadian dollars to U.S. dollars based upon the applicable exchange rate. 2. Gives effect to: (i) the pending acquisition of FCA for approximately $67.6 million in cash, which was assumed to be borrowed against the Company's credit facility, and the recognition of certain acquisition related liabilities; and (ii) the pending acquisition of MedSource for approximately $17.9 million in cash, of which $7.4 million was assumed to be borrowed from the Company's credit facility, and the recognition of certain acquisition related liabilities. The Company expects to recognize goodwill of $56.2 million and $36.3 million for the FCA and MedSource acquisitions, respectively. 3. Gives effect to the issuance of 5.8 million shares of Common Stock at an assumed public offering price of $27.00 per share. The estimated net proceeds of $148.3 million from the Offering, net of the estimated underwriting discount and offering expenses payable by the Company, will be used to repay acquisition related debt of $75.0 million, repay FCA's and MedSource's acquired debt of $4.8 million and $17.1 million, respectively, with the balance added to working capital. In addition, estimated net proceeds includes the exercise of 61,058 stock options resulting in proceeds of $157,920 to the Company. 4. Represents the historical results of operations of TRC from January 1, 1998 to February 5, 1998, the period prior to the acquisition. 5. Represents the combined historical results of operations of the pending acquisitions of FCA and MedSource for the three months ended March 31, 1998 as follows (dollars in thousands): Income (Loss) Net From Income Pending Acquisitions Revenue Operations (Loss) -------------------- --------- --------------- --------- FCA (1) ................... $14,683 $ 442 $ 320 MedSource ................. 5,319 99 (338) ------- ----- ------ $20,002 $ 541 $ (18) ======= ===== ====== (1) Converted from Canadian dollars to U.S. dollars based upon the applicable exchange rate. 6. Reflects the elimination of payroll and related expenses relating to certain redundant collection and administrative personnel costs immediately eliminated at the time of the TRC acquisition or expenses identified during the due diligence process which will be eliminated upon the closing of the Pending Acquisitions. 7. Reflects the elimination of certain rental expenses and related operating costs attributable to facilities which were identified during the due diligence process and will be closed upon the completion of the Pending Acquisitions. 8. Gives effect to: (i) the increase in amortization expense assuming the TRC acquisition and the Pending Acquisitions had been acquired on January 1, 1998; and (ii) the elimination of depreciation and amortization expense related to assets revalued or not acquired. F-6 Notes to Pro Forma Consolidated Financial Statements -- (Continued) (Unaudited) 9. Reflects the elimination of interest income on funds assumed to be used for the purchase of the TRC acquisition and the Pending Acquisitions as if they occurred on January 1, 1998. 10. Reflects interest expense on borrowings related to the Pending Acquisitions as if they occurred on January 1, 1998. 11. Reflects the estimated income tax expense, after giving consideration to non-deductible goodwill expense, as if the TRC acquisition and the Pending Acquisitions occurred on January 1, 1998. 12. Reflects the elimination of interest expense on debt assumed to be repaid with a portion of the proceeds from the Offering as if it had occurred on January 1, 1998. 13. Reflects the issuance of 4.2 million shares of Common Stock at an assumed public offering price of $27.00 per share, net of the estimated underwriting discount and offering expenses payable by the Company, which would be sufficient to repay acquisition related debt of $75.0 million, repay debt of $4.8 million and $17.1 million assumed in connection with the FCA and MedSource acquisitions, respectively, and pay an additional $10.5 million necessary to fund the Pending Acquisitions. 14. Represents the combined historical results of operations of the 1997 Acquisitions for the periods prior to their acquisition by NCO, as follows (dollars in thousands):
Income (Loss) Net Date of From Income 1997 Acquisitions Acquisition Revenue Operations (Loss) ----------------- ------------- --------- -------------- -------------- Tele-Research ......... 1/30/97 $ 296 $ 97 $ 97 CMS A/R ............... 1/31/97 539 53 53 CRWCD ................. 2/2/97 2,006 (7) (8) CAC ................... 10/1/97 1,570 (403) (391) AFS ................... 10/1/97 4,210 (763) (772) ------ --------- --------- $8,621 $(1,023) $(1,021) ====== ========= =========
15. Represents the combined historical results of operations of AFECD and TRC for the year ended December 31, 1997, as follows (dollars in thousands): Income Date of From Net 1998 Acquisitions Acquisition Revenue Operations Income - ------------------- ------------- --------- ------------ --------- AFECD .......... 1/1/98 $1,562 $ 272 $ 272 TRC ............ 2/2/98 7,993 1,274 1,274 ------ ------ ------ $9,555 $1,546 $1,546 ====== ====== ====== 16. Represents the historical results of operations of FCA for the twelve month period ended December 31, 1997, converted from Canadian dollars to U.S. dollars based upon the applicable exchange rate. 17. Represents the historical results of operations of MedSource for the year ended December 31, 1997. F-7 Notes to Pro Forma Consolidated Financial Statements -- (Continued) (Unaudited) 18. Represents the combined results of operations of the four acquisitions completed by MedSource during 1997 (the "MedSource Acquisitions"), for the periods prior to the acquisitions, as follows (dollars in thousands):
Income (Loss) 1997 MedSource Date of From Net Completed Acquisitions Acquisition Revenue Operations Income (Loss) - ------------------------------------------- ------------- --------- ------------ ------------- Healthcare Business Management, Ltd. and ECC of Pittsburgh, Inc. ........... 7/1/97 $ 975 $ (262) $ (180) World Credit, Inc. ..................... 7/1/97 2,865 285 232 MAC/TCS, Inc. .......................... 8/30/97 4,790 852 483 AllStates Credit Services, Inc.......... 10/1/97 1,623 578 327 ------- ------ ------ $10,253 $1,453 $ 862 ======= ====== ======
19. Reflects amortization expense assuming the MedSource Acquisitions occurred on January 1, 1997. 20. Reflects interest expense on acquisition related borrowings as if the MedSource Acquisitions had occurred on January 1, 1997. 21. Reflects the elimination of payroll and related expenses relating to certain redundant collection and administrative personnel costs immediately eliminated at the time of the 1997 Acquisitions and the 1998 Acquisitions and expenses identified during the due diligence process which will be eliminated upon the closing of the Pending Acquisitions. 22. Reflects the elimination of certain rental expenses and related operating costs attributable to facilities which were closed at the time of the 1997 Acquisitions and the 1998 Acquisitions and facilities identified during the due diligence process which will be closed upon the completion of the Pending Acquisitions. 23. Gives effect to: (i) the increase in amortization expense assuming the Acquisitions had been acquired on January 1, 1997; and (ii) the elimination of depreciation and amortization expense related to assets revalued or not acquired. 24. Reflects interest expense on borrowings related to the Acquisitions as if they occurred on January 1, 1997. 25. Reflects the estimated income tax expense, after giving consideration to non-deductible goodwill expense, as if the Acquisitions occurred on January 1, 1997. 26. Gives effect to: (i) the issuance of 517,767 shares of Common Stock and warrants exercisable for 375,000 shares of Common Stock in connection with the acquisition of CRWCD; (ii) the issuance of 1,425,753 shares of Common Stock in the July 1997 Offering at the public offering price of $19.67 per share which, net of the underwriting discount and offering expenses paid by the Company, would be sufficient to repay acquisition related debt of $8.4 million and to fund the acquisitions of AFECD and TRC; and (iii) the issuance of 46,442 shares of Common Stock issued in connection with the acquisition of AFS. 27. Reflects the elimination of interest expense on current and long-term debt assumed to be repaid with a portion of the proceeds from the Offering as if it had occurred on January 1, 1997. 28. Gives effect to the issuance of 4.2 million shares of Common Stock at an assumed public offering price of $27.00 per share as of January 1, 1997, net of the estimated underwriting discount and offering expenses payable by the Company, which would be sufficient to repay acquisition related debt of $75.0 million, repay debt of $4.8 million and $17.1 million recognized in connection with the FCA and MedSource acquisitions, respectively, and pay an additional $10.5 million necessary to fund the Pending Acqusitions. 29. Includes reorganization charges and other costs of $1.9 million and $90,000 for the year ended December 31, 1997 and the three months ended March 31, 1998, respectively. Net income per share - basic, and net income per share - diluted would have been $0.72, and $0.69, respectively, and $0.20 and $0.20, respectively, on a pro forma basis, assuming those charges had not been incurred. F-8 =============================================================================== No dealer, sales representative or any other person has been authorized to give any information or to make any representations in connection with the Offering other than those contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any of the Underwriters. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the shares of Common Stock to which it relates or an offer to, or a solicitation of, any person in any jurisdiction where such offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Company, or that information contained herein is correct as of any time subsequent to the date hereof. -------------------------------------------- TABLE OF CONTENTS -------------------------------------------- Page -------- Prospectus Summary .......................... 3 Risk Factors ................................ 9 Pending and Recent Acquisitions ............. 15 Use of Proceeds ............................. 18 Dividend Policy ............................. 18 Price Range of Common Stock ................. 19 Capitalization .............................. 20 Selected Financial Data ..................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations ................ 23 Business .................................... 31 Management .................................. 40 Principal and Selling Shareholders .......... 42 Underwriting ................................ 44 Legal Matters ............................... 45 Experts ..................................... 45 Additional Information ...................... 45 Incorporation of Certain Documents by Reference ............................. 46 Index to Pro Forma Consolidated Financial Statements ............................... F-1 =============================================================================== =============================================================================== 6,565,000 Shares [GRAPHIC OMITTED] Common Stock ------------ PROSPECTUS ------------ NationsBanc Montgomery Securities LLC BT Alex. Brown Janney Montgomery Scott Inc. The Robinson-Humphrey Company , 1998 =============================================================================== PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution. The following table sets forth the expenses in connection with the issuance and distribution of the securities being registered, all of which are being borne by the Registrant. Securities and Exchange Commission Registration Fee. ......... $ 56,660 National Association of Securities Dealers, Inc. Fee ......... 19,707 Nasdaq Listing Fee ........................................... 17,500 Printing and Engraving Expenses .............................. 100,000 Accounting Fees and Expenses ................................. 125,000 Legal Fees and Expenses ...................................... 100,000 Blue Sky Qualification Fees and Expenses ..................... 10,000 Transfer Agent and Registrar Fees and Expenses ............... 10,000 Miscellaneous ................................................ 161,133 -------- Total ..................................................... $600,000 ======== The foregoing, except for the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. fee, and the Nasdaq Listing fee are estimates. Item 15. Indemnification of Directors and Officers. Sections 1741 through 1750 of Subchapter D, Chapter 17, of the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"), contain provisions for mandatory and discretionary indemnification of a corporation's directors, officers and other personnel, and related matters. Under Section 1741, subject to certain limitations, a corporation has the power to indemnify directors and officers under certain prescribed circumstances against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with an action or proceeding, whether civil, criminal, administrative or investigative, to which any of them is a party by reason of his being a representative, director or officer of the corporation or serving at the request of the corporation as a representative of another corporation, partnership, joint venture, trust or other enterprise, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Under Section 1743, indemnification is mandatory to the extent that the officer or director has been successful on the merits or otherwise in defense of any action or proceeding if the appropriate standards of conduct are met. Section 1742 provides for indemnification in derivative actions except in respect of any claim, issue or matter as to which the person has been adjudged to be liable to the corporation unless and only to the extent that the proper court determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for the expenses that the court deems proper. Section 1744 provides that, unless ordered by a court, any indemnification under Section 1741 or 1742 shall be made by the corporation only as authorized in the specific case upon a determination that the representative met the applicable standard of conduct, and such determination will be made by the board of directors (i) by a majority vote of a quorum of directors not parties to the action or proceeding; (ii) if a quorum is not obtainable, or if obtainable and a majority of disinterested directors so directs, by independent legal counsel; or (iii) by the shareholders. Section 1745 provides that expenses (including attorney's fees) incurred by an officer, director, employee or agent in defending a civil or criminal action or proceeding may be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. II-1 Section 1746 provides generally that, except in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness, the indemnification and advancement of expenses provided by Subchapter 17D of the BCL shall not be deemed exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding that office. Section 1747 grants to a corporation the power to purchase and maintain insurance on behalf of any director or officer against any liability incurred by him or her in his or her capacity as officer or director, whether or not the corporation would have the power to Subchapter 17D of the BCL. Section 1748 and 1749 extend the indemnification and advancement of expenses provisions contained in Subchapter 17D of the BCL to successor corporations in fundamental changes and to representatives serving as fiduciaries of employee benefit plans. Section 1750 provides that the indemnification and advancement of expenses provided by, or granted pursuant to, Subchapter 17D of the BCL, shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs and personal representative of such person. For information regarding provisions under which a director or officer of the Company may be insured or indemnified in any manner against any liability which he or she may incur in his or her capacity as such, reference is made to the Company's Articles of Incorporation and Bylaws, copies of which are filed as Exhibits 3.1 and 3.2, respectively, which provide in general that the Company shall indemnify its officers and directors to the fullest extent authorized by law. Reference is also made to Section 11 of the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement. Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits
Exhibit No. Description - ------------ ------------ 1.1 Form of Underwriting Agreement 2.1(1) Agreement dated March 24, 1998 among the Company, FCA and Fairfax concerning the FCA Tender Offer 4.1(2) Specimen of Common Stock Certificate 5.1 Opinion of Blank Rome Comisky & McCauley LLP 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Arthur Andersen & Co. 23.3 Consent of Blank Rome Comisky & McCauley LLP (included in the opinion filed as Exhibit 5.1 hereto) 24.1 Power of Attorney of directors and officers (included on Page II-4) 27.1 Financial Data Schedules
- ------------ (1) Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 1998. (2) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-11745), as amended, filed with the Securities and Exchange Commission on September 11, 1996. (b) Financial Statement Schedules None required. Item 17. Undertakings. (a) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 15 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such II-2 indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (b) The undersigned hereby undertakes: (1) For purposes of determining any liability under the Securities Act each filing of the Registrant's annual report pursuant to section 13(a) or section 15(d) of the Exchange Act and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (2) that for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the Registration Statement as of the time it was declared effective; and (3) that for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Fort Washington, Pennsylvania, on May 1, 1998. 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 dates indicated.
Signature Title(s) Date - ------------------------ ------------------------------------------------ ----------- /s/ Michael J. Barrist Chairman of the Board, President and Chief May 1, 1998 - ------------------------ Executive Officer (principal executive officer) Michael J. Barrist /s/ Charles C. Piola Executive Vice President and Director May 1, 1998 - ------------------------ Charles C. Piola /s/ Steven L. Winokur Executive Vice President, Finance, Chief May 1, 1998 - ------------------------ Financial Officer and Treasurer (principal Steven L. Winokur financial and accounting officer) /s/ Bernard R. Miller Executive Vice President, Development and May 1, 1998 - ------------------------ Director Bernard R. Miller /s/ Eric S. Siegel Director May 1, 1998 - ------------------------ Eric S. Siegel /s/ Allen F. Wise Director May 1, 1998 - ------------------------ Allen F. Wise
II-4 EXHIBIT INDEX
Exhibit No. Description - ------------ ---------------------------------------------------------------------- 1.1 Form of Underwriting Agreement 2.1(1) Agreement dated March 24, 1998 among the Company, FCA and Fairfax concerning the FCA Tender Offer 4.1(2) Specimen of Common Stock Certificate 5.1 Opinion of Blank Rome Comisky & McCauley LLP 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Arthur Andersen & Co. 23.3 Consent of Blank Rome Comisky & McCauley LLP (included in the opinion filed as Exhibit 5.1 hereto) 24.1 Power of Attorney of directors and officers (included on Page II-4) 27.1 Financial Data Schedules
- ------------ (1) Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 1998. (2) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-11745), as amended, filed with the Securities Exchange Commission on September 11, 1996. EX-1 2 EXHIBIT 1.1 6,565,000 Shares NCO GROUP, INC. Common Stock Underwriting Agreement dated May [___], 1998 Table of Contents
Section 1. Representations and Warranties.................................................................2 A. Representations and Warranties of the Company and the Significant Selling Shareholders................................................2 Compliance with Registration Requirements..................................................2 Offering Materials Furnished to Underwriters...............................................3 Distribution of Offering Material By the Company...........................................3 The Underwriting Agreement.................................................................3 Authorization of the Common Shares.........................................................4 No Applicable Registration or Other Similar Rights.........................................4 No Material Adverse Change.................................................................4 Independent Accountants....................................................................4 Preparation of the Financial Statements....................................................4 Incorporation and Good Standing of the Company and its Subsidiaries........................5 Capitalization and Other Capital Stock Matters.............................................6 Stock Exchange Listing.....................................................................6 Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required.........................................6 No Material Actions or Proceedings.........................................................7 Intellectual Property Rights...............................................................7 All Necessary Permits, etc.................................................................7 Title to Properties........................................................................8 Tax Law Compliance.........................................................................8 Company Not an "Investment Company"........................................................8 Insurance..................................................................................8 No Price Stabilization or Manipulation.....................................................8 Related Party Transactions.................................................................9 No Unlawful Contributions or Other Payments................................................9 Regulatory Compliance......................................................................9 Recent Acquisitions........................................................................9 B. Representations and Warranties of the Selling Shareholders..................................10 The Underwriting Agreement.................................................................10 The Custody Agreement and Power of Attorney................................................10 Title to Common Shares to be Sold; All Authorizations Obtained.............................10 Delivery of the Common Shares to be Sold...................................................11 Non-Contravention; No Further Authorizations or Approvals Required.........................11 No Registration or Other Similar Rights....................................................11 No Further Consents, etc...................................................................11 Disclosure Made by Such Selling Shareholder in the Prospectus..............................12 No Price Stabilization or Manipulation.....................................................12 Confirmation of Company Representations and Warranties.....................................12
- i -
Section 2. Purchase, Sale and Delivery of the Common Shares...............................................12 The Firm Common Shares.....................................................................12 The First Closing Date.....................................................................12 The Optional Common Shares; the Second Closing Date........................................13 Public Offering of the Common Shares.......................................................14 Payment for the Common Shares..............................................................14 Delivery of the Common Shares..............................................................14 Delivery of Prospectus to the Underwriters.................................................15 Section 3. Additional Covenants...........................................................................15 Underwriters' Review of Proposed Amendments and Supplements................................15 Securities Act Compliance..................................................................15 Amendments and Supplements to the Prospectus and Other Securities Act Matters........................................................16 Copies of any Amendments and Supplements to the Prospectus.................................16 Blue Sky Compliance........................................................................16 Use of Proceeds............................................................................16 Transfer Agent.............................................................................17 Earnings Statement.........................................................................17 Periodic Reporting Obligations.............................................................17 Agreement Not To Offer or Sell Additional Securities.......................................17 Future Reports to the Underwriters.........................................................17 Exchange Act Compliance....................................................................17 Covenants of the Selling Shareholders......................................................18 Agreement Not to Offer or Sell Additional Securities.......................................18 Delivery of Forms W-8 and W-9..............................................................18 Section 4. Payment of Expenses............................................................................18 Section 5. Conditions of the Obligations of the Underwriters..............................................19 Accountants' Comfort Letter................................................................20 Compliance with Registration Requirements; No Stop Order; No Objection from NASD..................................................................20 No Material Adverse Change ................................................................21 Opinion of Counsel for the Company.........................................................21 Opinion of Counsel for the Underwriters....................................................21 Officers' Certificate......................................................................21 Bring-down Comfort Letter..................................................................22 Opinion of Counsel for the Selling Shareholders............................................22 Selling Shareholders' Certificate..........................................................22 Selling Shareholders' Documents............................................................22 Lock-Up Agreement from Certain Shareholders of the Company Other Than Selling Shareholders..........................................23 Additional Documents.......................................................................23 -ii-
Section 6. Reimbursement of Underwriters' Expenses....................................................23 Section 7. Effectiveness of this Agreement............................................................23 Section 8. Indemnification............................................................................24 Indemnification of the Underwriters........................................................24 Indemnification of the Company, its Directors and Officers.................................26 Notifications and Other Indemnification Procedures.........................................26 Settlements................................................................................27 Section 9. Contribution...............................................................................28 Section 10. Default of One or More of the Several Underwriter..........................................29 Section 11. Termination of this Agreement..............................................................30 Section 12. Representations and Indemnities to Survive Delivery........................................30 Section 13 Notices....................................................................................31 Section 14. Successors.................................................................................32 Section 15. Partial Unenforceability...................................................................32 Section 16. Governing Law Provisions...................................................................32 Section 17. Failure of One or More of the Selling Shareholders to Sell and Deliver Common Shares......................................................................32 Section 18. General Provisions.........................................................................33
-iii- Underwriting Agreement May [___], 1998 NATIONSBANC MONTGOMERY SECURITIES LLC BT ALEX. BROWN INCORPORATED JANNEY MONTGOMERY SCOTT INC. THE ROBINSON-HUMPHREY COMPANY, LLC c/o NATIONSBANC MONTGOMERY SECURITIES LLC 600 Montgomery Street San Francisco, California 94111 Ladies and Gentlemen: Introductory. NCO Group, Inc., a Pennsylvania corporation (the "Company), proposes to issue and sell to the several underwriters named in Schedule A (the "Underwriters") an aggregate of 5,800,000 shares of its Common Stock, no par value (the "Common Stock"); and the shareholders of the Company named in Schedule B (collectively, the "Selling Shareholders") severally propose to sell to the Underwriters an aggregate of 765,000 shares of Common Stock. The 5,800,000 shares of Common Stock to be sold by the Company and the 765,000 shares of Common Stock to be sold by the Selling Shareholders are collectively called the "Firm Common Shares". In addition, the Company has granted to the Underwriters an option to purchase up to an additional 887,233 shares of Common Stock and certain of the Selling Shareholders have severally granted to the Underwriters an option to purchase up to an additional 97,517 shares of Common Stock, each such Selling Shareholder selling up to the amount set forth opposite such Selling Shareholder's name in Schedule B, all as provided in Section 2. The additional 887,233 shares to be sold by the Company and the additional 97,517 shares to be sold by certain of the Selling Shareholders pursuant to such option are collectively called the "Optional Common Shares". The Firm Common Shares and, if and to the extent such option is exercised, the Optional Common Shares are collectively called the "Common Shares". The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (File No. 333-[___]), which contains a form of prospectus to be used in connection with the public offering and sale of the Common Shares. Such registration statement, as amended, including the financial statements, exhibits and schedules thereto, in the form in which it was declared effective by the Commission under the Securities Act of 1933 and the rules and regulations promulgated thereunder (collectively, the "Securities Act"), including all documents incorporated or deemed to be incorporated by reference therein and any information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act or the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder (collectively, the "Exchange Act"), is called the "Registration Statement". Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b) Registration Statement", and from and after the date and time of filing of the Rule 462(b) Registration Statement the term "Registration Statement" shall include the Rule 462(b) Registration Statement. Such prospectus, in the form first used by the Underwriters to confirm sales of the Common Shares, is called the "Prospectus"; provided, however, if the Company has, with the consent of NationsBanc Montgomery Securities LLC, elected to rely upon Rule 434 under the Securities Act, the term "Prospectus" shall mean the Company's prospectus subject to completion (each, a "preliminary prospectus") dated May ___, 1998 1 (such preliminary prospectus is called the "Rule 434 preliminary prospectus"), together with the applicable term sheet (the "Term Sheet") prepared and filed by the Company with the Commission under Rules 434 and 424(b) under the Securities Act and all references in this Agreement to the date of the Prospectus shall mean the date of the Term Sheet. All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any amendments or supplements to any of the foregoing, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Registration Statement or the Prospectus (and all other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which is or is deemed to be incorporated by reference in the Registration Statement or the Prospectus, as the case may be; and all references in this Agreement to amendments or supplements to the Registration Statement or the Prospectus shall be deemed to mean and include the filing of any document under the Exchange Act which is or is deemed to be incorporated by reference in the Registration Statement or the Prospectus, as the case may be. The Company and each of the Selling Shareholders hereby confirm their respective agreements with the Underwriters as follows: Section 1. Representations and Warranties of the Company and the Selling Shareholders. A. Representations and Warranties of the Company and the Selling Shareholders. Each of the Company and, to the best of their knowledge, each of the Significant Selling Shareholders (as defined in Schedule B hereto) hereby represents, warrants and covenants to each Underwriter as follows: (a) Compliance with Registration Requirements. The Registration Statement and any Rule 462(b) Registration Statement have been declared effective by the Commission under the Securities Act. The Company has complied to the Commission's satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect and no proceedings for such 2 purpose have been instituted or are pending or, to the best knowledge of the Company or any of the Significant Selling Shareholders, are contemplated or threatened by the Commission. Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR (except as may be permitted by Regulation S-T under the Securities Act), was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Common Shares. Each of the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto, at the time it became effective and at all subsequent times, complied and will comply in all material respects with the Securities Act and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Prospectus, as amended or supplemented, as of its date and at all subsequent times, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment thereto, or the Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with information furnished to the Company in writing by the Underwriters expressly for use therein. There are no contracts or other documents required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been described or filed as required. (b) Offering Materials Furnished to Underwriters. Company has delivered to the Underwriters four complete manually signed copies of the Registration Statement and of each consent and certificate of experts filed as a part thereof, and conformed copies of the Registration Statement (without exhibits) and preliminary prospectuses and the Prospectus, as amended or supplemented, in such quantities and at such places as the Underwriters have reasonably requested. (c) Distribution of Offering Material By the Company. The Company has not distributed and will not distribute, prior to the later of the Second Closing Date (as defined below) and the completion of the Underwriters' distribution of the Common Shares, any offering material in connection with the offering and sale of the Common Shares other than a preliminary prospectus, the Prospectus or the Registration Statement. (d) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and public policy and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. 3 (e) Authorization of the Common Shares. The Common Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement and paid for in the manner set forth in this Agreement, will be validly issued, fully paid and nonassessable. (f) No Applicable Registration or Other Similar Rights. There are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement, other than the Selling Shareholders with respect to the Common Shares included in the Registration Statement, except for such rights as have been duly waived. (g) No Material Adverse Change. Except as otherwise disclosed or incorporated by reference in the Prospectus, subsequent to the respective dates as of which information is given in the Prospectus: (i) there has been no material adverse change, or any development that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, considered as one entity (any such change is called a "Material Adverse Change"); (ii) the Company and its subsidiaries, considered as one entity, have not incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company or, except for dividends paid to the Company or other subsidiaries, any of its subsidiaries on any class of capital stock or repurchase or redemption by the Company or any of its subsidiaries of any class of capital stock. (h) Independent Accountants. Coopers & Lybrand L.L.P., who have expressed their opinion with respect to the financial statements of the Company (which term as used in this Agreement includes the related notes thereto) included or incorporated by reference in the Registration Statement and the Prospectus, are independent public or certified public accountants as required by the Securities Act and the Exchange Act. Arthur Andersen LLP, who have expressed their opinion with respect to the financial statements of FCA International Ltd. ("FCA") and MedSource, Inc. ("MedSource") (which term as used in this Agreement includes the related notes thereto) included or incorporated by reference in the Registration Statement and the Prospectus, are independent public or certified public accountants as required by the Securities Act and the Exchange Act. (i) Preparation of the Financial Statements. The financial statements included or incorporated by reference in the Registration Statement and the Prospectus present fairly in all material respects the 4 consolidated financial position of the Company and its subsidiaries as of and at the dates indicated and the results of their operations and cash flows for the periods specified. The financial statements included or incorporated by reference in the Registration Statement and the Prospectus present fairly in all material respects the consolidated financial positions of FCA and MedSource as of and at the dates indicated and the results of their respective operations and cash flows for the periods specified. Such financial statements have been prepared in conformity with generally accepted accounting principles as applied in the United States applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. No other financial statements are required to be included or incorporated by reference in the Registration Statement. The financial data set forth in the Prospectus under the captions "Prospectus Summary--Summary Financial Data", "Selected Financial Data" and "Capitalization" fairly present the information set forth therein on the basis stated in the Registration Statement, except as it relates to pro forma and as adjusted information. The pro forma consolidated financial statements of the Company and its subsidiaries and the related notes thereto included under the caption "Prospectus Summary--Summary Financial Data", "Selected Financial Data", "Capitalization" and elsewhere in the Prospectus and in the Registration Statement have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and have been properly presented on the bases 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 and circumstances referred to therein. (j) Incorporation and Good Standing of the Company and its Subsidiaries. Each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and, in the case of the Company, to enter into and perform its obligations under this Agreement. Each of the Company and each subsidiary is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions where the failure to so qualify or to be in good standing would not result in a Material Adverse Change. All of the issued and outstanding capital stock of each subsidiary has been duly authorized and validly issued, is fully paid and nonassessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance or claim, except that the stock of its subsidiaries is pledged to Mellon Bank Corporation to secure the Company's obligations under the Revolving Credit Agreement (the "Credit Agreement") with Mellon Bank Corporation, as lender, dated March 23, 1998. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than (i) the subsidiaries listed in Exhibit 21.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and (ii) FCA Acquisition Corporation and its subsidiaries, including FCA. 5 (k) Capitalization and Other Capital Stock Matters. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" (other than for subsequent issuances, if any, pursuant to employee benefit plans described in the Prospectus or upon exercise of outstanding options or warrants or conversion of convertible notes described in the Prospectus). The Common Stock (including the Common Shares) conforms in all material respects to the description thereof contained in the Prospectus. All of the issued and outstanding shares of Common Stock (including the shares of Common Stock owned by Selling Shareholders) have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance in all material respects with federal and state securities laws. None of the outstanding shares of Common Stock were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company or any of its subsidiaries other than those described in the Prospectus. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted 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. (l) Stock Exchange Listing. The Common Stock (including the Common Shares) is registered pursuant to Section 12(g) of the Exchange Act and is listed on the Nasdaq National Market, and the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or delisting the Common Stock from the Nasdaq National Market, nor has the Company received any notification that the Commission or the National Association of Securities Dealers, Inc. (the "NASD") is contemplating terminating such registration or listing. (m) Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required. Neither the Company nor any of its subsidiaries is in violation of its articles of s Required incorporation or by-laws or is in default (or, with the giving of notice or lapse of time, would be in default) ("Default") under any indenture, mortgage, loan or credit agreement, note, contract, franchise, lease or other instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound (including, without limitation, the Credit Agreement), or to which any of the property or assets of the Company or any of its subsidiaries is subject (each, an "Existing Instrument"), except for such Defaults as would not, individually or in the aggregate, result in a Material Adverse Change. The Company's execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Prospectus (i) have been duly authorized by all necessary corporate action and will not result in any violation of the provisions of the articles of incorporation or by-laws of the Company or any subsidiary, (ii) will not conflict with or constitute a breach of, or Default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any 6 of its subsidiaries pursuant to, or require the consent of any other part to, any Existing Instrument, except for such conflicts, breaches, Defaults, liens, charges or encumbrances as would not result in a Material Adverse Change and (iii) will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company or any subsidiary. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental or regulatory authority or agency, is required for the Company's execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Prospectus, except such as have been obtained or made by the Company and are in full force and effect under the Securities Act, applicable state securities or blue sky laws and from the NASD. (n) No Materials Actions or Proceedings. There are no legal or governmental actions, suits or proceedings pending or, to the best of the Company's knowledge, threatened (i) against or affecting the Company or any of its subsidiaries, (ii) which has as the subject thereof any officer or director of, or property owned or leased by, the Company or any of its subsidiaries or (iii) relating to environmental or discrimination matters, where in any such case (A) there is a reasonable possibility that such action, suit or proceeding might be determined adversely to the Company or such subsidiary and (B) any such action, suit or proceeding, if so determined adversely, would reasonably be expected to result in a Material Adverse Change or adversely affect the consummation of the transactions contemplated by this Agreement. No material labor dispute with the employees of the Company or any of its subsidiaries exists or, to the best of the Company's knowledge, is threatened or imminent. (o) Intellectual Property Rights. The Company and its subsidiaries own or possess sufficient trademarks, trade names, patent rights, copyrights, licenses, approvals, trade secrets and other similar rights (collectively, "Intellectual Property Rights") reasonably necessary to conduct their businesses as now conducted; and the expected expiration of any of such Intellectual Property Rights would not result in a Material Adverse Change. Neither the Company nor any of its subsidiaries has received any notice of infringement or conflict with asserted Intellectual Property Rights of others, which infringement or conflict, if the subject of an unfavorable decision, would result in a Material Adverse Change. (p) All Necessary Permits, etc. The Company and each subsidiary possess such valid and current certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct their respective businesses except where the failure to obtain or maintain any such certificate, authorization or permit would not, individually or in the aggregate, result in a Material Adverse Change, and neither the Company nor any subsidiary has received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Change. 7 (q) Title to Properties. The Company and each of its subsidiaries have good and marketable title to all the properties and assets reflected as owned in the financial statements referred to in Section 1(A) (i) above (or elsewhere in the Prospectus), in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except such as (i) are reflected in the financial statements or elsewhere in the Prospectus or (ii) do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company or such subsidiary. The real property, improvements, equipment and personal property held under lease by the Company or any subsidiary are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company or such subsidiary. (r) Tax law Compliance. The Company and its subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns (or have properly requested extensions thereof) and have paid all taxes required to be paid by any of them and, if due and payable, any related or similar assessment, fine or penalty levied against any of them (except as may be being contested in good faith and by appropriate proceedings and adequately reserved for in the financial statements of the Company). The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1(A) (i) above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company or any of its subsidiaries has not been finally determined. (s) Company Not an "Investment Company". The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company is not, and after receipt of payment for the Common Shares will not be, an "investment company" within the meaning of Investment Company Act and will conduct its business in a manner so that it will not become subject to the Investment Company Act. (t) Insurance. Each of the Company and its subsidiaries are insured by recognized, financially sound and reputable institutions with policies in such amounts and with such deductibles and covering such risks as are generally deemed adequate and customary for their businesses including, but not limited to, policies covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and earthquakes. The Company has no reason to believe that it or any subsidiary will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change. Neither of the Company nor any subsidiary has been denied any insurance coverage which it has sought or for which it has applied. (u) No Price Stabilization or Manipulation. The Company has not taken and will not take, directly or indirectly, prior to the later of (i) the Second Closing Date and (ii) the Underwriters' distribution of the Common Shares any action designed to or that might be reasonably expected to cause or result in 8 stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Shares. (v) Related Party Transactions. There are no related-party transactions involving the Company or any subsidiary on the one hand, and any other person required to be described in the Prospectus which have not been described or incorporated by reference as required. (w) Exchange Act Compliance. The documents incorporated or deemed to be incorporated by reference in the Prospectus, at the time they were or hereafter are filed with the Commission, complied and will comply in all material respects with the requirements of the Exchange Act, and, when read together with the other information in the Prospectus, at the time the Registration Statement and any amendments thereto become effective and at the First Closing Date and the Second Closing Date, as the case may be, will not contain an 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. (x) No Unlawful Contributions or Other Payments. To the Company's knowledge, neither the Company nor any of its subsidiaries has made any contribution or other payment to any official of, or candidate for, any federal, state or foreign office in violation of any law or of the character required to be disclosed in the Prospectus. (y) Regulatory Compliance. 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, all applicable international laws, rules and regulations and all applicable local, state and federal environmental laws and regulations, except where failure to be so in compliance would not result in a Material Adverse Change. (z) Recent Acquisitions. The FCA Tender Offer (as such term is defined in the Prospectus) has been consummated, and, as a result, the Company, directly or indirectly, owns or controls at least two-thirds of the issued and outstanding capital stock of FCA free and clear of any security interest, mortgage, pledge, lien, encumbrance or to the best of the Company's or any of the Significant Selling Shareholder's knowledge, any pending or threatened claim. The agreements necessary to effect the acquisitions of FCA, MedSource, 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 9 delivered by each of the parties thereto and constitute the valid, legal and binding agreements of each such party. Any certificate signed by an 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 each Underwriter as to the matters set forth therein. B. Representations and Warranties of the Selling Shareholders. Each Selling Shareholder, severally and not jointly, represents, warrants and covenants to each Underwriter as follows: (a) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Shareholder and is a valid and binding agreement of such Selling Shareholder, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and public policy and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (b) The Custody Agreement and Power of Attorney. Each of the (i) Custody Agreement signed by such Selling Shareholder and Michael J. Barrist, as custodian (the "Custodian"), relating to the deposit of the Common Shares to be sold by such Selling Shareholder (the "Custody Agreement") and (ii) Power of Attorney appointing certain individuals named therein as such Selling Shareholder's attorneys-in-fact (each, an "Attorney-in-Fact") to the extent set forth therein relating to the transactions contemplated hereby and by the Prospectus (the "Power of Attorney"), of such Selling Shareholder has been duly authorized, executed and delivered by such Selling Shareholder and is a valid and binding agreement of such Selling Shareholder, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (c) Title to Common Shares to be Sold; All Authorizations Obtained. Such Selling Shareholder has, or has the right to acquire, and on the First Closing Date and the Second Closing Date (as defined below) will have, good and valid title to all of the Common Shares which may be sold by such Selling Shareholder pursuant to this Agreement on such date and the legal right and power, and all authorizations and approvals required by law and under its charter or by-laws, partnership agreement, trust agreement or other organizational documents, as applicable, to enter into this Agreement and its Custody Agreement and Power of Attorney, to sell, transfer and deliver all of the Common Shares which may be sold 10 by such Selling Shareholder pursuant to this Agreement and to comply with its other obligations hereunder and thereunder. (d) Delivery of the Common Shares to be Sold. Delivery of the Common Shares which are sold by such Selling Shareholder pursuant to this Agreement will pass good and valid title to such Common Shares, free and clear of any security interest, mortgage, pledge, lien, encumbrance or other claim. (e) Non-Contravention; No Further Authorizations or Approvals Required. The execution and delivery by such Selling Shareholder of, and the performance by such Selling Shareholder of its obligations under, this Agreement, the Custody Agreement and the Power of Attorney will not contravene or conflict with, result in a breach of, or constitute a Default under, or require the consent of any other party to, the charter or by-laws, partnership agreement, trust agreement or other organizational documents, as applicable, of such Selling Shareholder or any other material agreement or instrument to which such Selling Shareholder is a party or by which it is bound or under which it is entitled to any right or benefit, any provision of applicable law or any judgment, order, decree or regulation applicable to such Selling Shareholder of any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over such Selling Shareholder. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental authority or agency, is required for the consummation by such Selling Shareholder of the transactions contemplated in this Agreement, except such as have been obtained or made and are in full force and effect under the Securities Act, applicable state securities or blue sky laws and from the NASD. (f) No Registration or Other Similar Rights. Such Selling Shareholder does not have any registration or other similar rights to have any equity or debt securities registered for sale by the Company under the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as are described or incorporated by reference in the Prospectus. (g) No Further Consents, etc. Except for the (i) exercise by such Selling Shareholder of certain registration rights pursuant to the Registration Rights Agreement dated as of [___] (which registration rights have been duly exercised pursuant thereto), (ii) consent of such Selling Shareholder to the respective number of Common Shares to be sold by all of the Selling Shareholders pursuant to this Agreement and (iii) waiver by certain other holders of Common Stock of certain registration rights pursuant to such Registration Rights Agreement, no consent, approval or waiver is required under any instrument or agreement to which such Selling Shareholder is a party or by which it is bound or under which it is entitled to any right or benefit, in connection with the offering, sale or purchase by the Underwriters of any of the Common Shares which may be sold by such Selling Shareholder under this Agreement or the consummation by such Selling Shareholder of any of the other transactions contemplated hereby. 11 (h) Disclosure Made by Such Selling Shareholder in the Prospectus. All information furnished by or on behalf of such Selling Shareholder in writing expressly for use in the Registration Statement and Prospectus is, and on the First Closing Date and the Second Closing Date will be, true, correct, and complete in all material respects, and does not, and on the First Closing Date and the Second Closing Date will not, contain any untrue statement of a material fact or omit to state any material fact necessary to make such statements, in light of the circumstances under which they were made, not misleading. Such Selling Shareholder confirms as accurate the number of shares of Common Stock set forth opposite such Selling Shareholder's name in the Prospectus under the caption "Principal and Selling Shareholders" (both prior to and after giving effect to the sale of the Common Shares). (i) No Price Stabilization or Manipulation. Such Selling Shareholder has not taken and will not take, directly or indirectly, prior to the later of (i) the Second Closing Date and (ii) the Underwriters' distribution of the Common Shares 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. (j) Confirmation of Company Representations and Warranties. Such Selling Shareholder is not aware that any of the representations and warranties of the Company contained in Section 1(A) hereof is untrue or inaccurate in any material respect. Any certificate signed by or on behalf of any Selling Shareholder and delivered to the Underwriters or to counsel for the Underwriters shall be deemed to be a representation and warranty by such Selling Shareholder to each Underwriter as to the matters covered thereby. Section 2. Purchase, Sale and Delivery of the Common Shares. The Firm Common Shares. Upon the terms herein set forth, (i) the Company agrees to issue and sell to the several Underwriters an aggregate of 5,800,000 Firm Common Shares and (ii) the Selling Shareholders agree to sell to the several Underwriters an aggregate of 765,000 Firm Common Shares, each Selling Shareholder selling the number of Firm Common Shares set forth opposite such Selling Shareholder'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 Shareholders 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 Shareholders shall be $[___] per share. The First Closing Date. Delivery of certificates for the Firm Common Shares to be purchased by the Underwriters and payment therefor shall be made at the offices of NationsBanc Montgomery Securities LLC, 600 Montgomery Street, San 12 Francisco, California (or such other place as may be agreed to by the Company and NationsBanc Montgomery Securities LLC, as Representative of the Underwriters) at 6:00 a.m. San Francisco time, on [___], or such other time and date not later than 10:30 a.m. San Francisco time , on [___] as the Underwriters 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 Shareholders hereby acknowledge that circumstances under which the Underwriters 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 Shareholders or the Underwriters to recirculate to the public copies of an amended or supplemented Prospectus or a delay as contemplated by the provisions of Section 10. The Optional Common Shares; the Second Closing Date. 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 Company and the Selling Shareholders severally and not jointly hereby grant an option to the Underwriters to purchase, severally and not jointly, up to an aggregate of 887,233 Optional Common Shares from the Company and 97,517 Optional Common Shares from the Selling Shareholders as set forth in Schedule B 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 Underwriters to the Company and the Selling Shareholders, 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 Underwriters 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 Underwriters 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) the Company and each Selling Shareholder agree, severally and not jointly, to sell the number of Optional Common Shares (subject to such adjustments to eliminate fractional shares as the Underwriters 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 Shareholder (or, in the case of the Company, as the number of Optional Common Shares to be sold by the Company as set forth in the paragraph "Introductory" of this Agreement) bears to the total number of Optional Common Shares. The 13 Underwriters may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Company and the Selling Shareholders. Public Offering of the Common Shares. The Underwriters hereby advise the Company and the Selling Shareholders that the Underwriters intend to offer for sale to the public, as described in the Prospectus, their respective portions of the Common Shares as soon after this Agreement has been executed and the Registration Statement has been declared effective as the Underwriters, in their sole judgment, have determined is advisable and practicable. Payment for the Common Shares. Payment for the Common Shares to be sold by the Company 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 Company. Payment for the Common Shares to be sold by the Selling Shareholders 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. It is understood that NationsBanc Montgomery Securities LLC 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. NationsBanc Montgomery Securities LLC, 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 Shareholder 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 Shareholder to the several Underwriters, or otherwise in connection with the performance of such Selling Shareholder's obligations hereunder and (ii) the Custodian is authorized to deduct for such payment any such amounts from the proceeds to such Selling Shareholder hereunder and to hold such amounts for the account of such Selling Shareholder with the Custodian under the Custody Agreement. Delivery of the Common Shares. The Company and the Selling Shareholders 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 Shareholders 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 14 such names and denominations as the Underwriters 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 Underwriters 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. Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m. on the second business day following the date the Common Shares are released by the Underwriters for sale to the public, the Company shall deliver or cause to be delivered copies of the Prospectus in such quantities and at such places as the Underwriters shall request. Section 3. Additional Covenants. A. Covenants of the Company. Covenants of the Company. The Company further covenants and agrees with each Underwriter as follows: (a) Underwriters' Review of Proposed Amendments and Supplements. During such period beginning on the date hereof and ending on the later of the First Closing Date or such date, as in the opinion of counsel for the Underwriters, the Prospectus is no longer required by law to be delivered in connection with sales by an Underwriter or dealer (the "Prospectus Delivery Period"), prior to amending or supplementing the Registration Statement (including any registration statement filed under Rule 462(b) under the Securities Act) or the Prospectus (including any amendment or supplement through incorporation by reference of any report filed under the Exchange Act), the Company shall furnish to the Underwriters for review a copy of each such proposed amendment or supplement, and the Company shall not file any such proposed amendment or supplement to which the Underwriters reasonably object. (b) Securities Act Compliance. After the date of this Agreement, the Company shall promptly advise the Underwriters in writing (i) of the receipt of any comments of, or requests for additional or supplemental information from, the Commission, (ii) of the time and date of any filing of any post-effective amendment to the Registration Statement or any amendment or supplement to any preliminary prospectus or the Prospectus, (iii) of the time and date that any post-effective amendment to the Registration Statement becomes effective and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or of any proceedings to remove, suspend or terminate from listing or quotation the Common Stock from any securities exchange upon which it is listed for trading or included or designated for quotation, or of the threatening or initiation of any proceedings for any of such purposes. 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. Additionally, the Company agrees that it 15 shall comply with the provisions of Rules 424(b), 430A and 434, as applicable, under the Securities Act and will use its reasonable efforts to confirm that any filings made by the Company under such Rule 424(b) were received in a timely manner by the Commission. (c) Amendments and Supplements to the Prospectus and Other Securities Act Matters. If, during the Prospectus Delivery Period, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if in the reasonable opinion of the Underwriters or counsel for the Underwriters it is otherwise necessary to amend or supplement the Prospectus to comply with law, the Company agrees to promptly prepare (subject to Section 3(A)(a) hereof), file with the Commission and furnish at its own expense to the Underwriters and to dealers, amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances under which they were made, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) Copies of any Amendments and Supplements to the Prospectus. The Company agrees to furnish the Underwriters, without charge, during the Prospectus Delivery Period, as many copies of the Prospectus and any amendments and supplements thereto (including any documents incorporated or deemed incorporated by reference therein) as the Underwriters may request. (e) Blue Sky Compliance. The Company shall cooperate with the Underwriters and counsel for the Underwriters to qualify or register the Common Shares for sale under (or obtain exemptions from the application of) the Blue Sky or state securities laws of those jurisdictions designated by the Underwriters, shall comply with such laws and shall continue such qualifications, registrations and exemptions in effect so long as required for the distribution of the Common Shares. The Company shall not be required to qualify as a foreign corporation or to take any action that would subject it to general 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 the Underwriters 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 shall use its best efforts to obtain the withdrawal thereof at the earliest possible moment. (f) Use of Proceeds. The Company shall apply the net proceeds from the sale of the Common Shares sold by it in accordance with the manner described under the caption "Use of Proceeds" in the Prospectus. 16 (g) Transfer Agent. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Common Stock. (h) Earnings Statement. As soon as practicable, the Company will make generally available to its security holders and to the Underwriters an earnings statement (which need not be audited) covering the twelve-month period ending [___], 1999 that satisfies the provisions of the last paragraph of Section 11(a) of the Securities Act. (i) Periodic Reporting Obligations. During the Prospectus Delivery Period the Company shall file, on a timely basis, with the Commission and The Nasdaq Stock Market all reports and documents required to be filed under the Exchange Act. (j) Agreement Not to Offer or Sell Additional Securities. During the period of 90 days following the date of the Prospectus, the Company will not, without the prior written consent of NationsBanc Montgomery Securities LLC (which consent may be withheld at the sole discretion of NationsBanc Montgomery Securities LLC), directly or indirectly, sell, offer, contract or grant any option to sell, pledge, transfer or establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of or transfer, or announce the offering of, or file any registration statement under the Securities Act in respect of, any shares of Common Stock, options or warrants to acquire shares of the Common Stock or securities exchangeable or exercisable for or convertible into shares of Common Stock (other than as contemplated by this Agreement with respect to the Common Shares) 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 or incorporated by reference 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 or incorporated by reference 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 or (e) registration statements on Forms S-4 or S-8, or their successor forms, or pursuant to the issuance of securities pursuant to clause (b) or (d) above. (k) Future Reports to the Underwriters. During the period of five years hereafter the Company will furnish to the NationsBanc Montgomery Securities LLC at 600 Montgomery Street, San Francisco, CA 94111 Attention: James A. Philip (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, shareholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public or certified 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 capital stock. 17 (l) Exchange Act Compliance. During the Prospectus Delivery Period, the Company will file all documents required to be filed with the Commission pursuant to Section 13, 14 or 15 of the Exchange Act in the manner and within the time periods required by the Exchange Act. B. Covenants of the Selling Shareholders Each Selling Shareholder further covenants and agrees with each Underwriter: (a) Agreement Not to Offer or Sell Additional Securities. Such Selling Shareholder will not, without the prior written consent of NationsBanc Montgomery Securities LLC (which consent may be withheld in its sole discretion), directly or indirectly, sell, offer, contract or grant any option to sell (including without limitation any short sale), pledge, transfer, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock, or securities exchangeable or exercisable for or convertible into shares of Common Stock currently or hereafter owned either of record or beneficially (as defined in Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the undersigned, or publicly announce the undersigned's intention to do any of the foregoing, for a period commencing on the date hereof and continuing through the close of trading on the date 90 days after the date of the Prospectus; provided, however, that the provisions of this paragraph shall not preclude the Selling Shareholders from: (a) exercising any warrant or stock option provided, that they are prohibited from selling, offering to sell or otherwise disposing of the securities upon exercise thereof except as provided in this paragraph, (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. (b) Delivery of Forms W-8 and W-9. To deliver to the Underwriters prior to the First Closing Date a properly completed and executed United States Treasury Department Form W-8 (if the Selling Shareholder is a non-United States person) or Form W-9 (if the Selling Shareholder is a United States Person). NationsBanc Montgomery Securities LLC, on behalf of the several Underwriters, may, in its sole discretion, waive in writing the performance by the Company or any Selling Shareholder of any one or more of the foregoing covenants or extend the time for their performance. Section 4. Payment of Expenses. The Company agrees to pay all costs, fees and expenses incurred in connection with the performance of the obligations of the Company and the Selling Shareholders hereunder and in connection with the transactions contemplated hereby, including without limitation (i) all expenses incident to the issuance and delivery of the Common Shares (including 18 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, independent public or certified pubic accountants and other advisors, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement (including financial statements, exhibits, schedules, consents and certificates of experts), each preliminary prospectus and the Prospectus, and all amendments and supplements thereto, and this Agreement, (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, and, if requested by the Underwriters, preparing and printing a "Blue Sky Survey" or memorandum, and any supplements thereto, advising the Underwriters of such qualifications, registrations and exemptions, (vii) the filing fees incident to, and the reasonable fees and expenses of counsel for the Underwriters in connection with (which fees and expenses of counsel shall not exceed $10,000), the NASD's review and approval of the Underwriters' participation in the offering and distribution of the Common Shares, (viii) the fees and expenses associated with including the Common Shares on the Nasdaq National Market, and (ix) all other fees, costs and expenses referred to in Item 14 of Part II of the Registration Statement. Except as provided in this Section 4, Section 6, Section 8 and Section 9 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel. The Company and the Selling Shareholders shall not in any event be liable to any of the Underwriters for the loss of anticipated profit from the transactions covered by this Agreement. The Selling Shareholders further agree with each Underwriter to 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) fees and expenses of counsel and other advisors for such Selling Shareholders, (ii) fees and expenses of the Custodian and (iii) expenses and taxes incident to the sale and delivery of the Common Shares to be sold by such Selling Shareholders to the Underwriters hereunder (which taxes, if any, may be deducted by the Custodian under the provisions of Section 2 of this Agreement). This Section 4 shall not affect or modify any separate, valid agreement relating to the allocation of payment of expenses between the Company, on the one hand, and the Selling Shareholders, on the other hand. Section 5. Conditions of the Obligation of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Common Shares as provided herein on the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date, shall be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Shareholders set forth in Sections 1(A) and 1(B) hereof as of the date hereof and as of the First Closing Date as though then made and, with respect to the Optional Common Shares, as of the Second Closing Date as though then made, to the timely performance by the Company and the Selling Shareholders of their respective covenants and other obligations hereunder, and to each of the following additional conditions: 19 (a) Accountants' Comfort Letter. On the date hereof, the Underwriters shall have received from Coopers & Lybrand L.L.P., independent public or certified public accountants for the Company, a letter dated the date hereof addressed to the Underwriters, in form and substance satisfactory to the Underwriters, containing statements and information of the type ordinarily included in accountant's "comfort letters" to underwriters, delivered according to Statement of Auditing Standards No. 72 (or any successor bulletin), with respect to the audited and unaudited financial statements and certain financial information contained in the Registration Statement and the Prospectus or incorporated by reference therein (and the Underwriters shall have received an additional four conformed copies of such accountants' letter for each of the several Underwriters). On the date hereof, the Underwriters shall have received from Arthur Andersen LLP, independent public or certified public accountants for FCA and MedSource, letters dated the date hereof addressed to the Underwriters, in form and substance satisfactory to the Underwriters, containing statements and information of the type ordinarily included in accountant's "comfort letters" to underwriters, delivered according to Statement of Auditing Standards No. 72 (or any successor bulletin), with respect to the audited and unaudited financial statements and certain financial information of FCA and MedSource contained in the Registration Statement and the Prospectus (and the Underwriters shall have received an additional four conformed copies of such accountants' letters for each of the several Underwriters). (b) Compliance with Registration Requirements; No Stop Order; No Objection from NASD. For the period from and after effectiveness of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date: (i) the Company shall have filed the Prospectus with the Commission (including the information required by Rule 430A under the Securities Act) in the manner and within the time period required by Rule 424(b) under the Securities Act; or the Company shall have filed a post-effective amendment to the Registration Statement containing the information required by such Rule 430A, and such post-effective amendment shall have become effective; or, if the Company elected to rely upon Rule 434 under the Securities Act and obtained the Underwriters' consent thereto, the Company shall have filed a Term Sheet with the Commission in the manner and within the time period required by such Rule 424(b); (ii) no stop order suspending the effectiveness of the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment to the Registration Statement, shall be in effect and no proceedings for such purpose shall have been instituted or threatened by the Commission; and (iii) the NASD shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements. 20 (c) No Material Adverse Change. For the period from and after the date of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date there shall not have occurred any Material Adverse Change. (d) Opinion of Counsel for the Company. On each of the First Closing Date and the Second Closing Date the Underwriters shall have received the favorable opinion of Blank Rome Comisky & McCauley LLP, counsel for the Company, dated as of such Closing Date, the form of which is attached as Exhibit A (and the Underwriters shall have received an additional four conformed copies of such counsel's legal opinion for each of the several Underwriters). (e) Opinion of Counsel for the Underwriters. On each of the First Closing Date and the Second Closing Date the Underwriters shall have received the favorable opinion of Piper & Marbury L.L.P., counsel for the Underwriters, dated as of such Closing Date, with respect to the matters set forth in paragraphs (i), (vi), (viii), (ix), (x), (xi), (xii), and the next-to-last paragraph of Exhibit A (and the Underwriters shall have received an additional four conformed copies of such counsel's legal opinion for each of the several Underwriters). (f) Officers' Certificate. On each of the First Closing Date and the Second Closing Date the Underwriters shall have received a written certificate executed by the Chairman of the Board, Chief Executive Officer and President of the Company and the Chief Financial Officer of the Company, dated as of such Closing Date, to the effect set forth in subsections (b)(ii) of this Section 5, and further to the effect that: (i) for the period from and after the date of this Agreement and prior to such Closing Date, there has not occurred any Material Adverse Change; (ii) the representations, warranties and covenants of the Company set forth in Section 1(A) of this Agreement are true and correct with the same force and effect as though expressly made on and as of such Closing Date; and (iii) the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such Closing Date. 21 (g) Bring-down Comfort Letter. On each of the First Closing Date and the Second Closing Date the Underwriters shall have received from Coopers & Lybrand L.L.P., independent public or certified public accountants for the Company, a letter dated such date, in form and substance satisfactory to the Underwriters, to the effect that they reaffirm the statements made in the letter furnished by them pursuant to subsection (a) of this Section 5, except that the specified date referred to therein for the carrying out of procedures shall be no more than three business days prior to the First Closing Date or Second Closing Date, as the case may be (and the Underwriters shall have received an additional four conformed copies of such accountants' letter for each of the several Underwriters). On each of the First Closing Date and the Second Closing Date the Underwriters shall have received from Arthur Andersen LLP, independent public or certified public accountants for FCA and MedSource, letters dated such date, in form and substance satisfactory to the Underwriters, to the effect that they reaffirm the statements made in the letters furnished by them pursuant to subsection (a) of this Section 5, except that the specified date referred to therein for the carrying out of procedures shall be no more than three business days prior to the First Closing Date or Second Closing Date, as the case may be (and the Underwriters shall have received an additional four conformed copies of such accountants' letter for each of the several Underwriters). (h) Opinion of Counsel for the Selling Shareholders. On each of the First Closing Date and the Second Closing Date the Underwriters shall have received the favorable opinion of Blank Rome Comisky & McCauley LLP, counsel for the Selling Shareholders who are directors, officers or employees of the Company and any family member or related trust of such directors, officers, or employees, and an opinion from counsel to the other Selling Shareholders, each dated as of such Closing Date, the form of which is attached as Exhibit B (and the Underwriters shall have received an additional four conformed copies of such counsels' legal opinion for each of the several Underwriters). (i) Selling Shareholders' Certificate. On each of the First Closing Date and the Second Closing Date the Underwriters shall received a written certificate executed by the Attorney-in-Fact of each Selling Shareholder, dated as of such Closing Date, to the effect that: (ii) the representations, warranties and covenants of such Selling Shareholder set forth in Section 1(B) of this Agreement are true and correct with the same force and effect as though expressly made by such Selling Shareholder on and as of such Closing Date; and (ii) such Selling Shareholder has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such Closing Date. (j) Selling Shareholders' Documents. On the date hereof, the Company and the Selling Shareholders shall have furnished for review by the Underwriters copies of the Powers of Attorney and Custody Agreements executed by each of the Selling Shareholders and such 22 further information, certificates and documents as the Underwriters may reasonably request. (k) Lock-Up Agreement for Certain Shareholders of the Company Other than Selling Shareholders. On the date hereof, the Company shall have furnished to the Underwriters an agreement in the form of Exhibit C hereto from the directors and executive officers of the Company, and such agreement shall be in full force and effect on each of the First Closing Date and the Second Closing Date. (l) Additional Documents. On or before each of the First Closing Date and the Second Closing Date, the Underwriters and counsel for the Underwriters shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the issuance and sale of the Common Shares as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained. If any condition specified in this Section 5 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Underwriters by notice to the Company and the Selling Shareholders at any time on or prior to the First Closing Date and, with respect to the Optional Common Shares, at any time prior to the Second Closing Date, which termination shall be without liability on the part of any party to any other party, except that Section 4, Section 6, Section 8 and Section 9 shall at all times be effective and shall survive such termination. Section 6. Reimbursement of Underwriters' Expenses. If this Agreement is terminated by the Underwriters pursuant to Section 5 or by the Company pursuant to Section 7, [Section 11] or Section 17, or if the sale to the Underwriters of the Common Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company or the Selling Shareholders 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 term or condition of this Agreement by the Underwriters, the Company agrees to reimburse the Underwriters (or such Underwriters as have terminated this Agreement with respect to themselves), upon demand for all out-of-pocket expenses that shall have been reasonably incurred by the Underwriters in connection with the proposed purchase and the offering and sale of the Common Shares, including but not limited to fees and disbursements of counsel, printing expenses, travel expenses, postage, facsimile and telephone charges. Section 7. Effectiveness of this Agreement This Agreement shall not become effective until the later of (i) the execution of this Agreement by the parties hereto and (ii) notification by the Commission to the Company and the Underwriters of the effectiveness of the Registration Statement under the Securities Act. Prior to such effectiveness, this Agreement may be terminated by the Company by notice to the Underwriters and the Selling Shareholders or by the Underwriters by notice to the Company and Selling Shareholders, and any such termination shall be without liability on the part of (a) the Company or the Selling Shareholders to any Underwriter, except that, in the event of termination by the Company, the Company 23 shall be obligated to reimburse the expenses of the Underwriters pursuant to Sections 4 and 6 hereof, (b) of any Underwriter to the Company or the Selling Shareholders, or (c) of any party hereto to any other party except that the provisions of Section 8 and Section 9 shall at all times be effective and shall survive such termination. Section 8. Indemnification (a) Indemnification of the Underwriters. The Company and each of the Selling Shareholders, severally and not jointly, agree to indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act and the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter or such controlling person may become subject, under the Securities 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 the Company), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that in the case of any Selling Shareholder other than a Significant Selling Shareholder the indemnification provided hereunder shall only apply to any omission or alleged omission of a material fact that relates to such Selling Shareholder; or (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that in the case of any Selling Shareholder other than a Significant Selling Shareholder the indemnification provided hereunder shall only apply to any omission or alleged omission of a material fact that relates to such Selling Shareholder; or (iii) in whole or in part upon any inaccuracy in the representations and warranties of the Company or the Selling Shareholders contained herein; or (iv) in whole or in part upon any failure of the Company or the Selling Shareholders to perform their respective obligations hereunder or under law; or (v) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Common Stock or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon any matter covered by clause (i) or (ii) above, provided that the Company shall not be liable under this clause (v) to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence or willful misconduct; and to reimburse each Underwriter and each such controlling person for any and all expenses (including the fees and disbursements of counsel chosen by NationsBanc Montgomery Securities LLC) 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) any such loss, claim, damage, liability, expense or action; provided, however, that the foregoing 24 indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company and the Selling Shareholders by the Underwriters expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); provided, further, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of any Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Common Shares, or any person controlling such Underwriter, if copies of the Prospectus were timely delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Common Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense; and provided, further, that with respect to clause (iii) and clause (iv) above, a Selling Shareholder (other than a Significant Selling Shareholder) shall not be liable for a breach of a representation, warranty or covenant of the Company or another Selling Shareholder. The indemnity agreement set forth in this Section 8(a) shall be in addition to any liabilities that the Company and the Selling Shareholders may otherwise have. The Company and the Selling Shareholders 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 Shareholder for indemnification or contribution under this Section 8 or Section 9, respectively, or otherwise at law or in equity (other than claims based in whole or in part on fraud) exceed the proceeds received by such Selling Shareholder from the Underwriters in the offering. Notwithstanding anything to the contrary in this Section 8, each Underwriter and each person who controls such Underwriter agrees not to assert its rights to indemnity under this Section 8(a) against the Selling Shareholders 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 8 results in a joint or several judgment against the Company and the Selling Shareholders, each Underwriter and each person who controls such Underwriter, agrees that it will not attempt to enforce such judgment against the Selling Shareholders unless and until any part of such judgment shall remain unsatisfied by the Company for more than thirty (30) days. 25 (b) Indemnification of the Company, its Directors and Officers. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, the Selling Shareholders and each person, if any, who controls the Company or any Selling Shareholder within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred, to which the Company, or any such director, officer, Selling Shareholder or controlling person may become subject, under the Securities 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 loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based: (i) upon any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or arises out of or is 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 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 written information furnished to the Company and the Selling Shareholders by the Underwriters expressly for use therein 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 contained in such Preliminary Prospectus was corrected in the amended Preliminary Prospectus or Prospectus (or the Prospectus as amended or supplemented); and to reimburse the Company, or any such director, officer, Selling Shareholder or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer, Selling Shareholder or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. The Company and each of the Selling Shareholders hereby acknowledge that the only information that the Underwriters have furnished to the Company and the Selling Shareholders expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) are the statements set forth (A) as the two paragraphs on the inside front cover page of the Prospectus concerning stabilization and passive market making by the Underwriters and (B) in the table in the first paragraph and as the second paragraph under the caption "Underwriting" in the Prospectus; and the Underwriters represent and warrant that such statements are correct. The indemnity agreement set forth in this Section 8(b) shall be in addition to any liabilities that each Underwriter may otherwise have. (c) Notifications and Other Indemnification Procedures. Promptly after receipt by an indemnified party under this Section 8 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 8, notify the indemnifying party in writing of the 26 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 8 or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, 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 that 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 such indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 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 separate counsel 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 (together with local counsel solely as it relates to matters of local law), approved by the indemnifying party (NationsBanc Montgomery Securities LLC in the case of Section 8(b) and Section 9), representing the indemnified parties who are parties to such action) or (ii) the indemnifying party shall not have employed counsel 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) Settlements. The indemnifying party under this Section 8 shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment, subject to the term and conditions of Section 8. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by Section 8(c) hereof, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or 27 consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by such indemnified party, unless such settlement, compromise or consent includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. Section 9. Contribution. If the indemnification provided for in Section 8 is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party, as incurred, as a result of any losses, claims, damages, liabilities or expenses referred to therein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholders, on the one hand, and the Underwriters, on the other hand, from the offering of the Common Shares pursuant to this Agreement 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 and the Selling Shareholders, on the one hand, and the Underwriters, on the other hand, 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 relative benefits received by the Company and the Selling Shareholders, on the one hand, and the Underwriters, on the other hand, in connection with the offering of the Common Shares pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Common Shares pursuant to this Agreement (before deducting expenses) received by the Company and the Selling Shareholders, and the total underwriting discount received by the Underwriters, in each case as set forth on the front cover page of the Prospectus (or, if Rule 434 under the Securities Act is used, the corresponding location on the Term Sheet) bear to the aggregate initial public offering price of the Common Shares as set forth on such cover. The relative fault of the Company and the Selling Shareholders, on the one hand, and the Underwriters, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact or any such inaccurate or alleged inaccurate representation or warranty relates to information supplied by the Company or the Selling Shareholders, on the one hand, or the Underwriters, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 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 Section 8(c), 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 28 Section 8(c) with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this Section 9; provided, however, that no additional notice shall be required with respect to any action for which notice has been given under Section 8(c) for purposes of indemnification. The Company, the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined 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 this Section 9. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the underwriting commissions received by such Underwriter in connection with the Common Shares underwritten by it and distributed to the public. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9 are several, and not joint, in proportion to their respective underwriting commitments as set forth opposite their names in Schedule A. For purposes of this Section 9, each officer and employee of an Underwriter and each person, if any, who controls an Underwriter within the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company with the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as the Company. Section 10. Default of One or More of the Several Underwriter. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the several Underwriters shall fail or refuse to purchase Common Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase does not exceed 10% of the aggregate number of the Common Shares to be purchased on such date, the other Underwriters shall be obligated, severally, in the proportions that the number of Firm Common Shares set forth opposite their respective names on Schedule A bears to the aggregate number of Firm Common Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as may be specified by the Underwriters with the consent of the non-defaulting Underwriters, to purchase the Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Common Shares and the aggregate number of Common Shares with respect to which such default occurs exceeds 10% of the aggregate number of Common Shares to be purchased on such date, and arrangements satisfactory to the Underwriters and the Company for the purchase of such Common Shares are not made within 48 hours after such default, this Agreement shall terminate without liability of any party to any other party except that the provisions of Section 4, Section 6, Section 8 and Section 9 29 shall at all times be effective and shall survive such termination. In any such case either the Underwriters or the Company shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. As used in this Agreement, the term "Underwriter" shall be deemed to include any person substituted for a defaulting Underwriter under this Section 10. Any action taken under this Section 10 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. Section 11. Termination of this Agreement. Prior to the First Closing Date this Agreement maybe terminated by the Underwriters by notice given to the Company and the Selling Shareholders if at any time (i) trading or quotation in any of the Company's securities shall have been suspended or limited by the Commission or by The Nasdaq Stock Market, or trading in securities generally on either The Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges by the Commission or the NASD; (ii) a general banking moratorium shall have been declared by any of federal, New York, Pennsylvania or California authorities; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective substantial change in United States' or international political, financial or economic conditions, as in the judgment of the Underwriters is material and adverse and makes it impracticable to market the Common Shares in the manner and on the terms described in the Prospectus or to enforce contracts for the sale of securities; (iv) if there shall have occurred any Material Adverse Change; or (v) the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the Underwriters may interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured. Any termination pursuant to this Section 11 shall be without liability on the part of (a) the Company or the Selling Shareholders to any Underwriter, except that the Company and the Selling Shareholders shall be obligated to reimburse the expenses of the Underwriters pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the Company or the Selling Shareholders, or (c) of any party hereto to any other party except that the provisions of Section 8 and Section 9 shall at all times be effective and shall survive such termination. Section 12. Representation and Indemnities to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers, of the Selling Shareholders 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 Shareholders, as 30 the case may be, and will survive delivery of and payment for the Common Shares sold hereunder and any termination of this Agreement. Section 13. Notices. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows: If to the Underwriters: NationsBanc Montgomery Securities LLC 600 Montgomery Street San Francisco, California 94111 Facsimile: 415-249-5558 Attention: Richard A. Smith with a copy to: NationsBanc Montgomery Securities LLC 600 Montgomery Street San Francisco, California 94111 Facsimile: (415) 249-5553 Attention: David A. Baylor, Esq. If to the Company: NCO Group, Inc. 515 Pennsylvania Avenue Fort Washington, Pennsylvania 19034 Facsimile: (215) 793-2908 Attention: Michael J. Barrist, Chairman, President and Chief Executive Officer with a copy to: Blank Rome Comisky & McCauley LLP One Logan Square Philadelphia, Pennsylvania 19103 Facsimile: (215) 569-5555 Attention: Francis E. Dehel, Esquire If to the Selling Shareholders: NCO Group, Inc. 515 Pennsylvania Avenue Fort Washington, Pennsylvania 19034 Facsimile: (215) 793-2908 Attention: Michael J. Barrist, Chairman, President and Chief Executive Officer 31 with a copy to: Blank Rome Comisky & McCauley LLP One Logan Square Philadelphia, Pennsylvania 19103 Facsimile: (215) 569-5555 Attention: Francis E. Dehel, Esquire Any party hereto may change the address for receipt of communications by giving written notice to the others. Section 14. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 10 hereof, and to the benefit of the employees, officers and directors and controlling persons referred to in Section 8 and Section 9, and in each case their respective successors, and personal representatives, and no other person will have any right or obligation 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 15. 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 16. Governing Law Provisions. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE. Section 17. Failure of One or More of the Selling Shareholders to Sell and Deliver Common SHares. If one or more of the Selling Shareholders shall fail to sell and deliver to the Underwriters the Common Shares to be sold and delivered by such Selling Shareholders at the First Closing Date pursuant to this Agreement, then the Underwriters may at their option, by written notice from the Underwriters to the Company and the Selling Shareholders, either (i) terminate this Agreement without any liability on the part of any Underwriter or, except as provided in Sections 4, 6, 8 and 9 hereof, the Company or the Selling Shareholders, or (ii) purchase the shares which the Company and other Selling Shareholders have agreed to sell and deliver in accordance with the terms hereof. If one or more of the Selling Shareholders shall fail to sell and deliver to the Underwriters the Common Shares to be sold and delivered by such Selling Shareholders pursuant to this Agreement at the First Closing Date or the Second Closing Date, then the Underwriters shall have the right, by written 32 notice from the Underwriters to the Company and the Selling Shareholders, to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Section 18. General Provisions. 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 two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. The Table of Contents and the Section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement. Each of the parties hereto acknowledges that it is a sophisticated business person who was adequately represented by counsel during negotiations regarding the provisions hereof, including, without limitation, the indemnification provisions of Section 8 and the contribution provisions of Section 9, and is fully informed regarding said provisions. Each of the parties hereto further acknowledges that the provisions of Sections 8 and 9 hereto fairly allocate the risks in light of the ability of the parties to investigate the Company, its affairs and its business in order to assure that adequate disclosure has been made in the Registration Statement, any preliminary prospectus and the Prospectus (and any amendments and supplements thereto), as required by the Securities Act and the Exchange Act. 33 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to the Company and the Custodian the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms. Very truly yours, NCO GROUP, INC. By:________________________________________ Michael J. Barrist, Chairman, President and Chief Executive Officer SELLING SHAREHOLDERS By:_______________________________________ Michael J. Barrist Acting on behalf of the Selling Shareholders The foregoing Underwriting Agreement is hereby confirmed and accepted by the Underwriters in San Francisco, California as of the date first above written. NATIONSBANC MONTGOMERY SECURITIES LLC BT ALEX. BROWN INCORPORATED JANNEY MONTGOMERY SCOTT INC. THE ROBINSON-HUMPHREY COMPANY, LLC By NATIONSBANC MONTGOMERY SECURITIES LLC By:_____________________________ Richard A. Smith 34 SCHEDULE A Number of Firm Common Shares to be Purchased Underwriters NationsBanc Montgomery Securities LLC ................. [ ] BT Alex. Brown Incorporated ........................... [ ] Janney Montgomery Scott Inc. .......................... [ ] The Robinson-Humphrey Company, LLC .................... [ ] Total........................................... 6,565,000 1 SCHEDULE B
Number of Maximum Number of Selling Shareholder Firm Common Shares Optional Common Shares to be Sold to be Sold Selling Shareholder #1* [address] Attention: [___] [___] [___] Selling Shareholder #2 [address] Attention: [___] [___] [___] Total: 765,000 97,517
* Significant Selling Shareholder 2 EXHIBIT A Opinion of counsel for the Company to be delivered pursuant to Section 5(d) of the Underwriting Agreement. References to the Prospectus in this Exhibit A include any supplements thereto at the Closing Date. (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the Commonwealth of Pennsylvania. (ii) The Company has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under the Underwriting Agreement. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. (iv) Each significant subsidiary (as defined in Rule 405 under the Securities Act) has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and, to the best knowledge of such counsel, is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. (v) All of the issued and outstanding capital stock of each such significant subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance or, to the best knowledge of such counsel, any pending or threatened claim, except for the pledge of such shares to Mellon Bank Corporation to secure obligations under the Credit Agreement. (vi) The authorized, issued and outstanding capital stock of the Company (including the Common Stock) conform to the descriptions thereof set forth or incorporated by reference in the Prospectus. All 1 of the outstanding shares of Common Stock (including the shares of Common Stock owned by the Selling Shareholders) have been duly authorized and validly issued, are fully paid and nonassessable and, to the best of such counsel's knowledge, have been issued in compliance with the registration and qualification requirements of federal and state securities laws. The form of certificate used to evidence the Common Stock is in due and proper form and complies with all applicable requirements of the articles of incorporation and by-laws of the Company and the Pennsylvania Business Corporation Law. 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. (vii) No shareholder of the Company or any other person has any preemptive right, right of first refusal or other similar right to subscribe for or purchase securities of the Company arising (i) by operation of the articles of incorporation or by-laws of the Company or the Pennsylvania Business Corporation Law or (ii) to the best knowledge of such counsel, otherwise. (viii)The Underwriting Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. (ix) Each document filed pursuant to the Exchange Act (other than the financial statements and supporting schedules included therein, as to which no opinion need be rendered) and incorporated or deemed to be incorporated by reference in the Prospectus complied when so filed as to form in all material respects with the Exchange Act; and such counsel has no reason to believe that any of such documents, when they were so filed, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such documents were filed, not misleading. (x) The Common Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to the Underwriting Agreement and, when issued and delivered by the Company pursuant to the Underwriting Agreement against payment of the consideration set forth therein, will be validly issued, fully paid and nonassessable. 2 (xi) The Registration Statement and the Rule 462(b) Registration Statement, if any, has been declared effective by the Commission under the Securities Act. To the best knowledge of such counsel, no stop order suspending the effectiveness of either of the Registration Statement or the Rule 462(b) Registration Statement, if any, has been issued under the Securities Act and no proceedings for such purpose have been instituted or are pending or are contemplated or threatened by the Commission. Any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) under the Securities Act has been made in the manner and within the time period required by such Rule 424(b). (xii) The Registration Statement, including any Rule 462(b) Registration Statement, the Prospectus including any document incorporated by reference therein, and each amendment or supplement to the Registration Statement and the Prospectus including any document incorporated by reference therein, as of their respective effective or issue dates (other than the financial statements and supporting schedules included or incorporated by reference therein or in exhibits to or excluded from the Registration Statement, as to which no opinion need be rendered) comply as to form in all material respects with the applicable requirements of the Securities Act and the Exchange Act. (xiii) The Common Shares have been approved for listing on the Nasdaq National Market. (xiv) The statements (i) in the Prospectus under the captions "Risk Factors--Government Regulation", "Risk Factors--Shares Eligible for Future Sale", "Risk Factors--Anti-Takeover Provisions", "Management's Discussion and Analysis and Results of Operations--Liquidity and Capital Resources", "Business--Regulation", and "Business--Legal Proceedings" and (ii) Item 15 of the Registration Statement, insofar as such statements constitute matters of law, summaries of legal matters, the Company's charter or by-law provisions, documents or legal proceedings, or legal conclusions, has been reviewed by such counsel and fairly present and summarize, in all material respects, the matters referred to therein. (xv) To the best knowledge of such counsel, there are no legal or governmental actions, suits or proceedings pending or threatened which are required to be disclosed in the Registration Statement, other than those disclosed therein. (xvi) To the best knowledge of such counsel, there are no Existing Instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed or incorporated by reference as exhibits thereto; and the descriptions thereof and references thereto are correct in all material respects. 3 (xvii) No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental authority or agency, is required for the Company's execution, delivery and performance of the Underwriting Agreement and consummation of the transactions contemplated thereby and by the Prospectus, except as required under the Securities Act, applicable state securities or blue sky laws and from the NASD. (xviii) The execution and delivery of the Underwriting Agreement by the Company and the performance by the Company of its obligations thereunder (other than performance by the Company of its obligations under the indemnification section of the Underwriting Agreement, as to which no opinion need be rendered) (i) have been duly authorized by all necessary corporate action on the part of the Company; (ii) will not result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary; (iii) will not constitute a breach of, or Default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, (A) the Company's Revolving Credit Agreement, or (B) to the best knowledge of such counsel, any other material Existing Instrument; or (iv) to the best knowledge of such counsel, will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company or any subsidiary. (xix) The Company is not, and after receipt of payment for the Common Shares will not be, an "investment company" within the meaning of Investment Company Act. (xx) Except as disclosed in the Prospectus, to the best knowledge of such counsel, there are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by the Underwriting Agreement, other than the Selling Shareholders, except for such rights as have been duly waived. (xxi) To the best knowledge of such counsel, neither the Company nor any subsidiary is in violation of its articles of incorporation or by-laws or any law, administrative regulation or administrative or court decree applicable to the Company or any subsidiary or is in Default in the performance or observance of any obligation, agreement, covenant or condition contained in any material Existing Instrument, except in each such case for such violations or Defaults as would not, individually or in the aggregate, result in a Material Adverse Change. (xxii) The FCA Tender Offer has been consummated, and, as a result, the Company, directly or indirectly, owns or controls all of the issued and outstanding capital stock of FCA free and clear of any security interest, mortgage, pledge, lien, encumbrance or to the best 4 of the Company's or any of the Significant Selling Shareholder's knowledge, any pending or threatened claim. The agreements necessary to effect the acquisitions of FCA, MedSource, [CSI] 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. In addition, such counsel shall state that they have participated in conferences with officers and other representatives of the Company, representatives of the independent public or certified public accountants for the Company and with representatives of the Underwriters at which the contents of the Registration Statement and the Prospectus, and any supplements or amendments thereto, and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus (other than as specified above), and any supplements or amendments thereto, on the basis of the foregoing, nothing has come to their attention which would lead them to believe that either the Registration Statement or any amendments thereto, at the time the Registration Statement or such amendments became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of its date or at the First Closing Date or the Second Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no belief as to the financial statements or schedules or other financial or statistical data derived therefrom, included or incorporated by reference in the Registration Statement or the Prospectus or any amendments or supplements thereto). In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the Pennsylvania Business Corporation Law or the federal law of the United States, to the extent they deem proper and specified in such opinion, upon the opinion (which shall be dated the First Closing Date or the Second Closing Date, as the case may be, shall be satisfactory in form and substance to the Underwriters, shall expressly state that the Underwriters may rely on such opinion as if it were addressed to them and shall be furnished to the Underwriters) of other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for the Underwriters; provided, however, that such counsel shall further state that they believe that they and the Underwriters are justified in relying upon such opinion of other counsel, and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company and public officials. 5 EXHIBIT B The opinion of such counsel pursuant to Section 5(h) shall be rendered to the Underwriters at the request of the Company and shall so state therein. References to the Prospectus in this Exhibit B include any supplements thereto at the Closing Date. (i) The Underwriting Agreement has been duly authorized, executed and delivered by or on behalf of, and is a valid and binding agreement of, the Selling Shareholders, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. (ii) The execution and delivery by the Selling Shareholders of, and the performance by the Selling Shareholders of their obligations under, the Underwriting Agreement and the Custody Agreements and the Powers of Attorney will not contravene or conflict with, result in a breach of, or constitute a default under, the charter or by-laws, partnership agreement, trust agreement or other organizational documents, as the case may be, of each Selling Shareholder, or, to the best of such counsel's knowledge, violate or contravene any provision of applicable law or regulation, or violate, result in a breach of or constitute a default under the terms of any other agreement or instrument to which each Selling Shareholder is a party or by which it is bound, or any judgment, order or decree applicable to each Selling Shareholder of any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over such Selling Shareholder. (iii) Each Selling Shareholder has good and valid title to all of the Common Shares which may be sold by such Selling Shareholder under the Underwriting Agreement and has the legal right and power, and all authorizations and approvals required under its charter and by-laws, partnership agreement, trust agreement or other organizational documents, as the case may be, to enter into the Underwriting Agreement and its Custody Agreement and its Power of Attorney, to sell, transfer and deliver all of the Common Shares which may sold by such Selling Shareholder under the Underwriting Agreement and to comply with its other obligations under the Underwriting Agreement, its Custody Agreement and its Power of Attorney. (iv) Each of the Custody Agreement and Power of Attorney of each Selling Shareholder has been duly authorized, executed and delivered by such Selling Shareholder and is a valid and binding agreement of such Selling Shareholder, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable 1 law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. (v) Assuming that the Underwriters purchase the Common Shares which are sold by each Selling Shareholder pursuant to the Underwriting Agreement for value, in good faith and without notice of any adverse claim, the delivery of such Common Shares pursuant to the Underwriting Agreement will pass good and valid title to such Common Shares, free and clear of either any security interest, mortgage, pledge, lieu encumbrance or other claim. (vi) To the best of such counsel's knowledge, no consent, approval, authorization or other order of, or registration or filing with, any court or governmental authority or agency, is required for the consummation by each Selling Shareholder of the transactions contemplated in the Underwriting Agreement, except as required under the Securities Act, applicable state securities or blue sky laws, and from the NASD. In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the Pennsylvania Business Corporation Law or the federal law of the United States, to the extent they deem proper and specified in such opinion, upon the opinion (which shall be dated the First Closing Date or the Second Closing Date, as the case may be, shall be satisfactory in form and substance to the Underwriters, shall expressly state that the Underwriters may rely on such opinion as if it were addressed to them and shall be furnished to the Underwriters) of other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for the Underwriters; provided, however, that such counsel shall further state that they believe that they and the Underwriters are justified in relying upon such opinion of other counsel, and (B) as to matters of fact, to the extent they deem proper, on certificates of the Selling Shareholders and public officials 2 EXHIBIT C May ___, 1998 NATIONSBANC MONTGOMERY SECURITIES LLC BT ALEX. BROWN INCORPORATED JANNEY MONTGOMERY SCOTT INC. THE ROBINSON-HUMPHREY COMPANY, LLC c/o NATIONSBANC MONTGOMERY SECURITIES LLC 600 Montgomery Street San Francisco, California 94111 RE: NCO Group, Inc. (the "Company") --------------- Ladies and Gentlemen: The undersigned is an owner of record or beneficially of certain shares of Common Stock of the Company ("Common Stock") or securities convertible into or exchangeable or exercisable for Common Stock. The Company proposes to carry out a public offering of Common Stock (the "Offering") for which you will act as the underwriters. The undersigned recognizes that the Offering will be of benefit to the undersigned and will benefit the Company by, among other things, raising additional capital for its operations. The undersigned acknowledges that you and the other underwriters are relying on the representations and agreements of the undersigned contained in this letter in carrying out the Offering and in entering into underwriting arrangements with the Company with respect to the Offering. In consideration of the foregoing, the undersigned hereby agrees that the undersigned will not, without the prior written consent of NationsBanc Montgomery Securities LLC (which consent may be withheld in its sole discretion), directly or indirectly, sell, offer, contract or grant any option to sell (including without limitation any short sale), pledge, transfer, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock, or securities exchangeable or exercisable for or convertible into shares of Common Stock currently or hereafter owned either of record or beneficially (as defined in Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the undersigned, or publicly announce the undersigned's intention to do any of the foregoing, for a period commencing on the date hereof and continuing through the close of trading on the date 90 days after the date of the Prospectus; provided, however, that the provisions of this paragraph shall not preclude the undersigned from: (a) exercising any warrant or stock option provided that it is prohibited from selling, offering to sell or otherwise disposing of the 1 securities upon exercise thereof except as provided in this paragraph, (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. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock held by the undersigned except in compliance with the foregoing restrictions. With respect to the Offering only, the undersigned waives any registration rights relating to registration under the Securities Act of any Common Stock owned either of record or beneficially by the undersigned, including any rights to receive notice of the Offering. This agreement is irrevocable and will be binding on the undersigned and the respective successors, heirs, personal representatives, and assigns of the undersigned. ________________________________ Printed Name of Holder By:_____________________________ Signature ________________________________ Printed Name of Person Signing (and indicate capacity of person signing if signing as custodian, trustee, or on behalf of an entity) 2 EX-5.1 3 EXHIBIT 5.1 Blank Rome Cominsky & McCauley LLP Counselors at Law One Logan Square Philadelphia, Pennsylvania 19103 215-569-5500 Fax 215-569-5555 May 1, 1998 NCO Group, Inc. 515 Pennsylvania Avenue Fort Washington, PA 19034 Re: NCO Group, Inc. Registration Statement on Form S-3 Gentlemen: We have acted as counsel to NCO Group, Inc. (the "Company") in connection with the Registration Statement on Form S-3 (the "Registration Statement") being filed by the Company with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, relating to: (i) the offer and sale by the Company of 5,800,000 shares of Common Stock, no par value (the "Common Stock"); (ii) the offer and sale by the Selling Shareholders named in the Registration Statement ("Selling Shareholders") of 765,000 shares of Common Stock; and (iii) the offer and sale by the Company and certain Selling Shareholders of up to 887,233 shares and 97,515 shares of Common Stock, respectively, to be purchased at the option of the Underwriters to cover over-allotments, if any. This opinion is furnished pursuant to the requirements of Item 601(b)(5) of Regulation S-K. In rendering this opinion, we have examined only the following documents: (i) the Company's Amended and Restated Articles of Incorporation and Bylaws; (ii) the Company's 1995 Amended and Restated Stock Option Plan and the Company's 1996 Stock Option Plan (collectively, the "Plans") and options to purchase an aggregate of 61,058 shares of Common Stock (the "Stock Options") issued pursuant thereto to employees who are Selling Shareholders; (iii) resolutions adopted by the Board of Directors; (iv) the Company's minute book and stock records books since the date of incorporation of NCO Group, Inc.; and (v) the NCO Group, Inc. May 1, 1998 Page 2 Registration Statement. We have not performed any independent investigation other than the document examination described. We have assumed and relied, as to questions of fact and mixed questions of law and fact, on the truth, completeness, authenticity and due authorization of all certificates, documents and records examined and the genuineness of all signatures. This opinion is limited to the laws of the Commonwealth of Pennsylvania. Based upon and subject to the foregoing, we are of the opinion that: (i) 6,687,233 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) 801,457 shares of Common Stock which are being offered by certain Selling Shareholders pursuant to the Registration Statement, other than the shares issuable pursuant to the Stock Options, are legally issued, fully paid and non-assessable; and (iii) 61,058 shares of Common Stock which are being offered by certain Selling Shareholders pursuant to the Registration Statement upon the exercise of the Stock Options, when acquired by such Selling Shareholders upon exercise of the Stock Options in the manner contemplated by the Plans and the Stock Options, including payment of the applicable exercise price therefor, will be legally issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" in the Prospectus, which is part of the Registration Statement. Sincerely, /s/ Blank Rome Cominsky & McCauley LLP -------------------------------------- BLANK ROME COMINSKY & McCAULEY LLP EX-23.1 4 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of NCO Group, Inc. on Form S-3 of our report dated March 6, 1998, on our audits of the consolidated financial statements of NCO Group, Inc. as of December 31, 1996 and 1997, and for each of the three years in the period ended December 31, 1997, which report is included in the NCO Group Inc.'s Form 10-K for the year ended December 31, 1997. We also consent to the references to our firm under the captions "Selected Financial Data." and "Experts". Coopers & Lybrand L.L.P. Philadelphia, Pennsylvania May 1, 1998 EX-23 5 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of NCO Group, Inc. on Form S-3 of our report dated September 2, 1997, on our audits of the consolidated financial statements of FCA International Ltd. as of June 30, 1997 and 1996, and for each of the three years in the period ended June 30, 1997, which report is included in the NCO Group Inc.'s Form 8-K dated May 1, 1998. We also consent to the reference to our firm under the caption "Experts". ARTHUR ANDERSEN & CO. Montreal Quebec General Partnership May 1, 1998 Chartered Accountants EX-27 6 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 16,087,658 0 14,847,568 431,000 0 32,493,296 10,746,210 2,500,815 105,708,754 10,319,812 0 0 0 80,802,585 11,153,906 105,708,754 27,608,516 27,608,516 0 23,867,101 0 0 153,250 3,894,665 1,578,921 2,315,744 0 0 0 2,315,744 .17 .17
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