<PAGE>
As filed with the Securities and Exchange Commission on May 8, 1998
Registration No. 333-51787
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-3/A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NCO GROUP, INC.
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2858652
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
515 Pennsylvania Avenue
Fort Washington, Pennsylvania 19034
Telephone (215) 793-9300
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Michael J. Barrist, Chairman of the Board,
President and Chief Executive Officer
NCO Group, Inc.
515 Pennsylvania Avenue
Fort Washington, Pennsylvania 19034
Telephone (215) 793-9300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
<TABLE>
<S> <C>
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
</TABLE>
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. / /
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================
Proposed Proposed
maximum maximum Amount of
Title of securities Amount to be offering price aggregate registration
to be registered registered(1) per share (2) offering price(2) fee(3)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Common Stock, no par value . 7,667,855 $ 25.44 $195,070,231 $57,546
========================================================================================================
</TABLE>
(1) Includes 1,000,155 shares which the Underwriters have a right to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Includes $56,660 paid in connection with the initial filing of the
Registration Statement.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED MAY 8, 1998
6,667,700 Shares
[GRAPHIC OMITTED]
Common Stock
Of the 6,667,700 shares of Common Stock offered hereby (the "Offering"),
5,800,000 shares are being sold by NCO Group, Inc. ("NCO" or the "Company") and
867,700 shares are being sold by certain shareholders of the Company (the
"Selling Shareholders"). The Company will not receive any of the proceeds from
the sale of the shares by the Selling Shareholders. See "Principal and Selling
Shareholders."
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "NCOG." On May 8, 1998, the last sale price of the Common
Stock as reported on the Nasdaq National Market was $25-5/8 per share. See
"Price Range of Common Stock."
See "Risk Factors" commencing on page 9 of this Prospectus for a
discussion of certain factors that should be considered by prospective
purchasers of the Common Stock offered hereby.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to Proceeds to
Public Discount (1) Company (2) Selling Shareholders
---------- -------------- ------------- ---------------------
<S> <C> <C> <C> <C>
Per Share ......... $ $ $ $
- -------------------- ---------- -------------- ------------- ---------------------
Total (3) ......... $ $ $ $
</TABLE>
================================================================================
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting offering expenses payable by the Company, estimated
at $600,000.
(3) The Company and certain Selling Shareholders have granted to the
Underwriters a 30-day option to purchase up to an additional 902,638 and
97,517 shares, respectively, of Common Stock at the Price to Public shown
above solely to cover over-allotments, if any. If the Underwriters
exercise this option in full, the total Price to Public, Underwriting
Discount, Proceeds to Company and Proceeds to Selling Shareholders will be
$ , $ , $ , and $ , respectively. See "Principal and Selling
Shareholders" and "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject any order in whole or in part. It is expected
that delivery of the certificates representing the shares will be made against
payment therefor at the office of NationsBanc Montgomery Securities LLC on or
about , 1998.
----------------
NationsBanc Montgomery Securities LLC
BT Alex. Brown
Janney Montgomery Scott Inc.
The Robinson-Humphrey Company
, 1998
<PAGE>
[Pictures dipicting certain of the Company's call centers and the
Company's Computer Center. The Company's logo also appears on this page.]
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS, IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION
M. SEE "UNDERWRITING."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE AND
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITERS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, contained
elsewhere in this Prospectus. Unless otherwise indicated, all references in
this Prospectus to the "Company" or "NCO" mean NCO Group, Inc., a Pennsylvania
corporation and its subsidiaries and predecessors. Unless otherwise indicated,
all information in this Prospectus: (i) assumes no exercise of the
Underwriters' over-allotment option; (ii) gives effect to a 3-for-2 stock split
effected in December 1997; but (iii) does not give effect to the acquisition of
FCA International Ltd. ("FCA") and the pending acquisition of MedSource, Inc.
("MedSource").
Unless otherwise indicated: (i) 1997 pro forma information assumes that
the acquisitions of Goodyear & Associates, Inc. ("Goodyear"), Tele-Research
Center, Inc. ("Tele-Research"), CMS A/R Services ("CMS A/R"), the Collections
Division of CRW Financial, Inc. ("CRWCD"), Credit Acceptance Corporation
("CAC") and ADVANTAGE Financial Services, Inc. ("AFS") (collectively, the "1997
Acquisitions"), the acquisitions of the Collection Division of American
Financial Enterprises, Inc. ("AFECD") and The Response Center ("TRC")
(collectively, the "1998 Acquisitions") and the FCA and MedSource acquisitions
occurred on January 1, 1997; (ii) 1998 pro forma information assumes that the
TRC, FCA and MedSource acquisitions occurred on January 1, 1998; and (iii)
information with respect to MedSource gives pro forma effect to acquisitions
completed by MedSource in 1997 as if such acquisitions had occurred on January
1, 1997.
The Company
NCO is a leading provider of accounts receivable management and other
outsourced services. The Company develops and implements customized management
solutions for clients. The Company provides these services on a national basis
from 22 call centers located in 14 states using advanced workstations and
sophisticated call management systems comprised of predictive dialers,
automated call distribution systems, digital switching and customized computer
software. Through extensive utilization of technology and intensive management
of human resources, the Company has achieved rapid growth in recent years. As a
result of rapid internal growth and selected strategic acquisitions, the
Company's revenue has grown from $7.4 million in 1993 to $188.4 million in 1997
on a pro forma basis. Since April 1994, the Company has completed 13
acquisitions (including FCA) which have enabled it to increase its penetration
of existing markets, establish a presence in certain new markets and realize
significant operating efficiencies. In addition, the Company has leveraged its
infrastructure by offering additional services including customer service call
centers, market research and other outsourced administrative services. The
Company believes that it is currently among the five largest accounts
receivable management companies in the United States.
The Company provides its services principally to clients in the financial
services, healthcare, retail and commercial, education, telecommunications,
utilities and government sectors. The Company has over 8,000 clients, including
Bell Atlantic Corporation, Mellon Bank Corporation, NationsBank Corporation,
Citicorp, MCI Communications Corporation, Federal Express Corporation and
Airborne Freight Corporation. No client accounted for more than 3.6% of the
Company's revenue (no more than 2.8% on a pro forma basis) in 1997. For its
accounts receivable management services, the Company generates substantially
all of its revenue on a contingency fee basis. The Company seeks to be a low
cost provider, and as such its fees typically range from 15% to 35% of the
amount recovered on behalf of the Company's clients. For many of its other
outsourced services, the Company is paid on a fixed fee basis. While NCO's
contracts are relatively short-term, the Company seeks to develop long-term
relationships with its clients and works closely with them to provide quality,
customized solutions.
Increasingly, companies are outsourcing many non-core functions to focus
on revenue generating activities, reduce costs and improve productivity. In
particular, many corporations are recognizing the advantages of outsourcing
accounts receivable management and other services as a result of numerous
factors including: (i) the increasing complexity of such functions; (ii)
changing regulations and increased competition in certain industries; and (iii)
the development of sophisticated call management systems
3
<PAGE>
requiring substantial capital investment, technical capabilities and human
resource commitments. Consequently, industry-wide revenues rose 10.7% to $5.5
billion in 1996 from $5.0 billion in 1995, according to estimates published by
M. Kaulkin & Associates, Inc. ("MKA"), an industry consultant. While
significant economies of scale exist for large accounts receivable management
companies, the industry remains highly fragmented. Based on information
obtained from the American Collectors Association, Inc. ("ACA"), an industry
trade group, there are approximately 6,500 accounts receivable management
companies in operation in the United States, the majority of which are small,
local businesses. Given the financial and competitive constraints facing these
small companies and the limited number of liquidity options for the owners of
such businesses, the Company believes that the industry will continue to
experience consolidation in the future. See "Business -- Industry Background."
The Company strives to be a cost-effective, client service driven provider
of accounts receivable management and other outsourced services to companies
with substantial outsourcing needs. The Company's business strategy encompasses
a number of key elements which management believes are necessary to ensure
quality service and to achieve consistently strong financial performance.
First, the Company focuses on the efficient utilization of its technology and
infrastructure to constantly improve productivity. The Company's infrastructure
enables it to perform large scale accounts receivable management programs cost
effectively and to rapidly and efficiently integrate the Company's
acquisitions. Second, NCO is committed to client service. Management believes
that the Company's emphasis on designing and implementing customized accounts
receivable management programs for its clients provides it with a significant
competitive advantage. Third, the Company seeks to be a low cost provider of
accounts receivable management services by centralizing all administrative
functions and minimizing overhead at all branch locations. Lastly, the Company
is targeting larger clients which offer significant cross-selling opportunities
and have greater outsourcing requirements. See "Business -- Business Strategy."
The Company seeks to continue its rapid expansion through both internal
and external growth. The Company has experienced and expects to continue to
experience strong internal growth by continually striving to increase its
market share, expand its industry-specific market expertise and develop and
offer new value-added outsourced services. In addition, the Company intends to
continue to take advantage of the fragmented nature of the accounts receivable
management industry by making strategic acquisitions. Through selected
acquisitions, the Company will seek to serve new geographic markets, expand its
presence in its existing markets and add complementary services.
The Company's principal executive offices are located at 515 Pennsylvania
Avenue, Fort Washington, Pennsylvania 19034, and its telephone number is (215)
793-9300.
FCA and MedSource Acquisitions
On May 6, 1998, the Company acquired approximately 98.7% of the
outstanding stock of FCA pursuant to a cash tender offer. In addition, on May
4, 1998, the Company entered into a definitive agreement to acquire all of the
outstanding stock of MedSource which is expected to close in the second quarter
of 1998. There can be no assurance that the Company will close the MedSource
acquisition.
FCA International Ltd. In March 1998, the Company entered into an
agreement with FCA pursuant to which NCO made a cash tender offer (the "FCA
Tender Offer") for all of the outstanding common shares of FCA at $9.60 per
share, Canadian (equivalent to $6.77 in U.S. dollars based upon the exchange
rate as of the date of the agreement). The purchase price of approximately
$67.6 million was paid with borrowings under the Company's revolving credit
facility. Pursuant to the FCA Tender Offer, the Company acquired approximately
98.7% of the outstanding stock of FCA. The Company intends to exercise its
statutory rights to acquire the remaining outstanding shares of FCA not
tendered on the same terms as the FCA Tender Offer. However, the remaining
holders of FCA shares may have the right to dissent to such transaction and
demand payment for the fair value of their FCA shares.
Founded in 1926, FCA is the largest accounts receivable management company
in Canada with significant operations in the United States and the United
Kingdom. FCA provides accounts receivable management services principally to
the government, financial, education, telecommunications, utilities,
healthcare, retail and commercial sectors. FCA has undergone a major
reorganization, consolidating 88 branch
4
<PAGE>
offices into 17 branch locations including three new major branches in Mobile,
Alabama, Brantford, Ontario and Vancouver, British Columbia. For the fiscal
year ended June 30, 1997 and the nine months ended March 31, 1998, FCA's
revenues were approximately $62.8 million and $45.0 million, respectively,
based upon the applicable exchange rate. Approximately 45% of FCA's
consolidated revenues in 1997 was derived from U.S. operations, 40% from
Canadian operations and 15% from operations in the United Kingdom. The
acquisition of FCA will give the Company the leading market presence in Canada,
significantly expand its U.S. operations and provide a platform for further
expansion into Europe from the United Kingdom. The Company also expects to
realize substantial cost savings from integrating FCA with its operations.
MedSource Acquisition. On May 4, 1998, the Company entered into a
definitive agreement to acquire all of the outstanding stock of MedSource for
approximately $17.9 million in cash. In connection with the acquisition, the
Company will repay debt of approximately $17.1 million. The closing is subject
to the satisfaction of certain closing conditions, including regulatory
approval and other customary conditions.
Founded in 1997, MedSource provides traditional accounts receivable
management services and pre-delinquency outsourcing services primarily to
hospitals located throughout the United States. Pre-delinquency outsourcing
services include insurance billing and follow-up, insurance claim resolution,
private pay collections, and outsourcing of central business office functions.
Since its inception, MedSource has completed four acquisitions of other
accounts receivable management companies which specialize in providing services
to the healthcare industry. Headquartered in Goodlettsville, Tennessee,
MedSource has additional offices located in Phoenix, Arizona; Springfield,
Missouri; Chicago Heights, Illinois; Waterford, Michigan; Johnstown,
Pennsylvania; and Mount Laurel, New Jersey. For the fiscal year ended December
31, 1997 (on a pro forma basis) and the three months ended March 31, 1998,
MedSource's revenues were approximately $22.7 million and $5.3 million,
respectively. The acquisition of MedSource significantly enhances NCO's market
position as a leading provider of accounts receivable management services to
the healthcare sector.
The Company regularly reviews various strategic acquisition opportunities
and periodically engages in discussions regarding such possible acquisitions.
5
<PAGE>
The Offering
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company ....................... 5,800,000 shares
Common Stock offered by the Selling Shareholders .......... 867,700 shares (1)
Common Stock to be outstanding after the Offering ......... 19,251,834 shares (2)
Use of proceeds ........................................... For repayment of bank debt incurred in con-
nection with the FCA Tender Offer, to
finance the MedSource acquisition, to repay
indebtedness of FCA and MedSource fol-
lowing the completion of such acquisitions
and for working capital and other general
corporate purposes, including other future
acquisitions.
Nasdaq National Market symbol ............................. NCOG
</TABLE>
- -------------
(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
<PAGE>
SUMMARY FINANCIAL DATA
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- -------------- -------------- ------------------------------
Pro Forma As
Actual Adjusted(1)(2)
------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenue ........................... $7,445 $8,578 $ 12,733 $ 30,760 $ 85,284 $ 188,395
Operating costs and expenses:
Payroll and related expenses ..... 4,123 4,558 6,797 14,651 42,502 94,315
Selling, general and
administrative expenses ......... 2,391 2,674 4,042 10,033 27,947 62,525
Depreciation and amortization
expenses ........................ 141 215 348 1,254 3,369 11,540
Reorganization charge ............ -- -- -- -- -- 1,517
------ ------ --------- --------- -------- ---------
Income from operations ............ 790 1,131 1,546 4,822 11,466 18,498
Other income (expense) ............ 11 (45) (180) (575) 388 1,074
------ ------ --------- --------- -------- ---------
Income before provision for
income taxes ..................... 801 1,086 1,366 4,247 11,854 19,572
Income tax expense(4) ............. 320 434 546 1,706 4,780 8,642
------ ------ --------- --------- -------- ---------
Net income(4) ..................... $ 481 $ 652 $ 820 $ 2,541 $ 7,074 $ 10,930
====== ====== ========= ========= ======== =========
Net income per share:
Basic(4) ............................................. $ 0.12 $ 0.34 $ 0.59 $ 0.63
========= ========= ======== =========
Diluted(4) ........................................... $ 0.12 $ 0.34 $ 0.57 $ 0.61
========= ========= ======== =========
Weighted average shares
outstanding:
Basic ................................................ 7,093(5) 7,630(5) 11,941 17,281
Diluted .............................................. 7,093(5) 7,658(5) 12,560 17,913
<CAPTION>
Three Months Ended March 31,
-----------------------------------------
1998
-----------------------------
Pro Forma As
1997 Actual Adjusted(2)(3)
---------- ------------ ---------------
<S> <C> <C> <C>
Statement of Income Data:
Revenue ........................... $18,077 $ 27,609 $ 48,399
Operating costs and expenses:
Payroll and related expenses ..... 9,046 14,144 24,832
Selling, general and
administrative expenses ......... 5,932 8,568 15,173
Depreciation and amortization
expenses ........................ 716 1,155 2,094
Reorganization charge ............ -- -- --
------- -------- --------
Income from operations ............ 2,383 3,742 6,300
Other income (expense) ............ (82) 153 150
------- -------- --------
Income before provision for
income taxes ..................... 2,301 3,895 6,450
Income tax expense(4) ............. 994 1,579 2,984
------- -------- --------
Net income(4) ..................... $ 1,307 $ 2,316 $ 3,466
======= ======== ========
Net income per share:
Basic(4) ....................... $ 0.12 $ 0.17 $ 0.19
======= ======== ========
Diluted(4) ..................... $ 0.12 $ 0.17 $ 0.19
======= ======== ========
Weighted average shares
outstanding:
Basic .......................... 10,656 13,240 17,789
Diluted ........................ 11,230 13,801 18,350
</TABLE>
<TABLE>
<CAPTION>
March 31, 1998
-------------------------------------
Pro Pro Forma As
Actual Forma(6) Adjusted(7)
---------- ---------- -------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ........... $ 16,088 $ 9,148 $ 49,687
Working capital ..................... 22,173 2,199 45,620
Total assets ........................ 105,708 227,420 267,959
Long-term debt, net of current portion 923 94,715 923
Shareholders' equity ................ 91,956 91,956 229,264
</TABLE>
7
<PAGE>
- -----------
(1) Assumes that the 1997 Acquisitions, the 1998 Acquisitions and the FCA and
MedSource acquisitions occurred on January 1, 1997. Gives effect to: (i)
the elimination of payroll and related expenses relating to certain
redundant collection and administrative personnel costs immediately
eliminated at the time of the 1997 Acquisitions and the 1998 Acquisitions
and expenses identified during the due diligence process which will be
eliminated upon the closing of the FCA and MedSource acquisitions; (ii)
the elimination of certain rental expenses and related operating costs
attributable to facilities which were closed at the time of the 1997
Acquisitions and the 1998 Acquisitions and facilities identified during
the due diligence process which will be closed upon the completion of the
FCA and MedSource acquisitions; (iii) the increase in amortization expense
resulting from the acquisitions; (iv) the elimination of depreciation and
amortization expense related to assets revalued or not acquired; (v)
interest expense on borrowings related to the acquisitions; (vi) the
estimated income tax expense, after giving consideration to non-deductible
goodwill expense; (vii) the elimination of interest expense on debt
assumed to be repaid with a portion of the proceeds from the Offering;
(viii) the issuance of 517,767 shares of Common Stock and warrants
exercisable for 375,000 shares of Common Stock in connection with the
acquisition of CRWCD; (ix) the issuance of 1,425,753 shares of Common
Stock in the July 1997 Offering at the public offering price of $19.67 per
share which, net of the underwriting discount and offering expenses paid
by the Company, would be sufficient to repay acquisition related debt of
$8.4 million and to fund the acquisitions of AFECD and TRC; (x) the
issuance of 46,442 shares of Common Stock issued in connection with the
acquisition of AFS; and (xi) the issuance of 4.5 million shares of Common
Stock at an assumed public offering price of $25.00 per share, net of the
estimated underwriting discount and offering expenses payable by the
Company, which would be sufficient to repay acquisition related debt of
$75.0 million, repay debt of $21.9 million recognized in connection with
the FCA and MedSource acquisitions and pay an additional $10.5 million
necessary to fund the FCA and MedSource acquisitions.
(2) Includes reorganization charges and other costs of $1.9 million and $90,000
for the year ended December 31, 1997 and the three months ended March 31,
1998, respectively. Net income per share - basic and net income per share
- diluted would have been $0.70 and $0.68, respectively, and $0.20 and
$0.19, respectively, on a pro forma basis assuming those charges had not
been incurred.
(3) Assumes that the TRC, FCA and MedSource acquisitions occurred on January 1,
1998. Gives effect to: (i) the elimination of payroll and related expenses
relating to certain redundant collection and administrative personnel
costs immediately eliminated at the time of the TRC acquisition and
expenses identified during the due diligence process which will be
eliminated upon the closing of the FCA and MedSource acquisitions; (ii)
the elimination of certain rental expenses and related operating costs
attributable to facilities which were identified during the due diligence
process and will be closed upon the completion of the FCA and MedSource
acquisitions; (iii) the increase in amortization expense resulting from
the TRC, FCA and MedSource acquisitions; (iv) the elimination of
depreciation and amortization expense related to assets revalued or not
acquired; (v) interest expense on borrowings related to the FCA and
MedSource acquisitions; (vi) the estimated income tax expense, after
giving consideration to non-deductible goodwill expense; (vii) the
elimination of interest expense on debt assumed to be repaid with a
portion of the proceeds from the Offering; and (viii) the issuance of 4.5
million shares of Common Stock at an assumed public offering price of
$25.00 per share, net of the estimated underwriting discount and offering
expenses payable by the Company, which would be sufficient to repay
acquisition related debt of $75.0 million, repay debt of $21.9 million
recognized in connection with the FCA and MedSource acquisitions and pay
an additional $10.5 million necessary to fund the FCA and MedSource
acquisitions.
<PAGE>
(4) The Company was taxed as an S Corporation prior to September 3, 1996.
Accordingly, income tax expense and net income have been provided on a pro
forma basis as if the Company had been subject to income taxes in all
periods presented.
(5) Assumes that the Company issued 374,637 shares of Common Stock at $8.67 per
share to fund the distribution of undistributed S Corporation earnings of
$3.2 million through September 3, 1996, the termination date of the
Company's S Corporation status, to existing shareholders of the Company.
(6) Gives effect to: (i) the acquisition of FCA for approximately $67.6 million
in cash, which was borrowed against the Company's credit facility, and the
recognition of certain acquisition related liabilities; and (ii) the
pending acquisition of MedSource for approximately $17.9 million in cash,
of which $7.4 million was assumed to be borrowed against the Company's
credit facility, and the recognition of certain acquisition related
liabilities. The Company expects to recognize goodwill of $56.2 million
and $36.3 million for the FCA and MedSource acquisitions, respectively.
(7) Gives effect to the issuance of 5.8 million shares of Common Stock at an
assumed public offering price of $25.00 per share and the application of
the net proceeds therefrom. See "Use of Proceeds."
8
<PAGE>
RISK FACTORS
Certain statements included in this Prospectus, including, without
limitation, statements regarding the anticipated growth in the amount of
accounts receivable placed for third-party management, the continuation of
trends favoring outsourcing of other administrative functions, the Company's
objective to grow through strategic acquisitions, the Company's ability to
realize operating efficiencies upon the completion of the recent acquisitions
and other acquisitions that may occur in the future, the Company's ability to
expand its service offerings, the anticipated changes in revenues from acquired
companies and trends in the Company's future operating performance, and
statements as to the Company's or management's beliefs, expectations or
opinions are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act") which are intended to be
covered by safe harbors created thereby. The factors discussed below and
elsewhere in this Prospectus could cause actual results and developments to be
materially different from those expressed in or implied by such forward-looking
statements. Accordingly, in addition to the other information contained in
"Pending and Recent Acquisitions," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this
Prospectus, the following factors should be considered carefully in evaluating
an investment in the shares of Common Stock offered by this Prospectus.
Risks Associated with Pending and Recent Acquisitions
The 1998 Acquisitions and the FCA and MedSource acquisitions had combined
revenues of $94.5 million in 1997 compared to the Company's revenue of $85.3
million in 1997. The Company is currently in the process of integrating the
acquisitions of AFS, CAC, and the 1998 Acquisitions. The Company acquired
approximately 98.7% of the outstanding stock of FCA pursuant to the FCA Tender
Offer. There can be no assurance that the Company will successfully consummate
the MedSource acquisition. The integration of these companies could divert
management's attention from the daily operation of the Company, require
additional management, operational and financial resources, and place
significant demands on the Company's management and infrastructure. There can
be no assurance that the recently acquired businesses and the MedSource
acquisition will be successfully integrated with that of the Company, that the
Company will be able to realize operating efficiencies or eliminate redundant
costs, or that their businesses will be operated profitably. Further, there can
be no assurance that clients of the acquired companies will continue to do
business with the Company, or that the Company will be able to retain key
employees of the acquired companies. In addition, there can be no assurance
that the acquired companies will not have additional liabilities or
contingencies that were unanticipated by the Company at the time of the
acquisitions.
Risks Associated with the FCA Acquisition
There are several risks associated with the acquisition of FCA including
the ability to operate FCA's business profitably and the fact that FCA has
significant operations outside of the United States. FCA has had net losses of
$4.4 million, and $1.4 million for its fiscal years ended June 30, 1996 and
1997, respectively. There can be no assurance that the Company will be able to
operate FCA's business profitably following the acquisition of FCA. To date,
all of the Company's operations have been conducted in the United States. FCA
is headquartered in Canada and also has offices in the United Kingdom and, as a
result of such acquisition, a portion of the Company's operations would be
conducted outside the United States. There are a number of risks inherent in
international operations including government controls, regulatory requirements
that may be more onerous than those imposed in the United States, difficulties
in managing international operations and fluctuations in currency exchange
rates. See "Pending and Recent Acquisitions -- FCA International Ltd."
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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
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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
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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.
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The collection of accounts receivable by collection agencies in Canada is
regulated at the provincial and territorial level in substantially the same
fashion as is accomplished by federal and state laws in the United States. The
manner in which the Company carries on the business of collecting accounts is
subject, in all provinces and territories, to established rules of common law
or civil law and statute. Such laws establish rules and procedures governing
the tracing, contacting and dealing with debtors in relation to the collection
of outstanding accounts. These rules and procedures prohibit debt collectors
from engaging in intimidating, misleading and fraudulent behavior when
attempting to recover outstanding debts. In Canada, the Company's collection
operations are subject to licensing requirements and periodic audits by
government agencies and other regulatory bodies. Generally, such licenses are
subject to annual renewal. If the Company engages in other teleservice
activities in Canada, including telemarketing, there are several provincial and
territorial consumer protection laws of more general application. This
legislation defines and prohibits unfair practices by telemarketers, such as,
the use of undue pressure and the use of false, misleading or deceptive
consumer representations.
In addition, accounts receivable management and telemarketing industries
are regulated in the United Kingdom, including a licensing requirement. If the
Company expands its international operations, it may become subject to
additional government controls and regulations in other countries, which may be
more onerous than those in the United States.
Several of the industries served by the Company are also subject to
varying degrees of government regulation. Although compliance with these
regulations is generally the responsibility of the Company's clients, the
Company could be subject to a variety of enforcement or private actions for its
failure or the failure of its clients to comply with such regulations. See
"Business -- Regulation."
Possible Volatility of Stock Price
Numerous factors, including announcements of fluctuations in the Company's
or its competitors' operating results, market conditions for accounts
receivable management, telemarketing industry or business services stocks in
general, the timing and announcement of acquisitions by the Company or its
competitors or government regulatory action, could have a significant impact on
the future price of the Common Stock. In addition, the stock market in recent
years has experienced significant price and volume fluctuations that often have
been unrelated or disproportionate to the operating performance of companies.
These broad fluctuations may adversely affect the market price of the Common
Stock. There can be no assurance that purchasers of Common Stock in this
Offering will be able to resell their Common Stock at prices equal to or
greater than the offering price hereunder.
Shares Eligible for Future Sale
Sales of the Company's Common Stock could adversely affect the market
price of the Company's Common Stock and could impair the Company's future
ability to raise capital through the sale of equity securities. Upon completion
of the Offering, the Company will have 19,251,834 shares of Common Stock
outstanding. Of these shares, all of the 6,667,700 shares sold in the Offering
will be, and the 8,625,000 shares sold in prior public offerings are, available
for resale in the public market without restriction, except for any such shares
purchased by affiliates of the Company. The Company's directors, executive
officers and the Selling Shareholders have agreed, subject to certain
limitations, not to offer, sell or otherwise dispose of any shares of Common
Stock for a period of 90 days after the closing of the Offering without the
prior written consent of NationsBanc Montgomery Securities LLC. Following the
expiration of this 90-day period, such persons will hold an aggregate of
3,718,192 outstanding shares of Common Stock (3,620,675 shares if the
over-allotment option is exercised in full) which may be resold under Rule 144.
Upon completion of the Offering, the Company also will continue to have
outstanding a $900,000 Convertible Note convertible into 63,755 shares of
Common Stock at any time on or before January 22, 2002 and a warrant to
purchase 375,000 shares of Common Stock exercisable at any time on or before
January 31, 2002. The holders of the Convertible Note and the warrants will
continue to be entitled to certain demand and/or piggy-back registration rights
following the completion of the Offering. The earn-out payable in connection
with the TRC acquisition provides, among other things, that the seller may
elect to be paid the earn-out in the form of a convertible note, convertible
into NCO Common Stock at a price equal to $3.00 above NCO's trailing thirty day
average closing per share price. In addition, the Company will have 1,991,601
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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.
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PENDING AND RECENT ACQUISITIONS
Since 1994, the Company has completed 13 strategic acquisitions (including
FCA) which have expanded its client base and geographic presence, increased its
presence in key industries and substantially increased its revenues and
profits. A key element of the Company's growth strategy is to continue to
pursue selected strategic acquisitions to serve new geographic markets or
industries, expand its presence in its existing markets and add complementary
service applications. The Company regularly reviews various strategic
acquisition opportunities and periodically engages in discussions regarding
such possible acquisitions. The following is a summary of the pending MedSource
acquisition, the FCA acquisition, the 1998 Acquisitions and the 1997
Acquisitions.
MedSource, Inc.
The Company has entered into an agreement to acquire all of the
outstanding stock of MedSource for approximately $17.9 million in cash. In
connection with the acquisition, the Company will repay debt of approximately
$17.1 million. The closing is subject to the satisfaction of certain closing
conditions, including regulatory approval and other customary conditions.
Founded in 1997, MedSource provides traditional accounts receivable
management services and pre-delinquency outsourcing services primarily to
hospitals located throughout the United States. Pre-delinquency outsourcing
services include insurance billing and follow-up, insurance claim resolution,
private pay collections, and outsourcing of central business office functions.
Since its inception, MedSource has completed four acquisitions of other
accounts receivable management companies which specialize in providing services
to the healthcare industry. Headquartered in Goodlettsville, Tennessee,
MedSource has additional offices located in Phoenix, Arizona; Springfield,
Missouri; Chicago Heights, Illinois; Waterford, Michigan; Johnstown,
Pennsylvania; and Mount Laurel, New Jersey. For the fiscal year ended December
31, 1997 (on a pro forma basis) and the three months ended March 31, 1998,
MedSource's revenues were approximately $22.7 million and $5.3 million,
respectively. The acquisition of MedSource significantly enhances NCO's market
position as a leading provider of accounts receivable management services to
the healthcare sector.
FCA International Ltd.
In March 1998, the Company entered into an agreement with FCA pursuant to
which NCO made a cash tender offer for all of the outstanding common shares of
FCA at $9.60 per share, Canadian (equivalent to $6.77 in U.S. dollars based
upon the exchange rate as of the date of the agreement). The purchase price of
approximately $67.6 million was paid with borrowings under the Company's
revolving credit facility. Pursuant to the FCA Tender Offer, the Company
acquired approximately 98.7% of the outstanding stock of FCA. The Company
intends to exercise its statutory rights to acquire the remaining outstanding
shares of FCA not tendered on the same terms as the FCA Tender Offer. However,
the remaining holders of FCA shares may have the right to dissent to such
transaction and demand payment for the fair value of their FCA shares.
Founded in 1926, FCA is the largest accounts receivable management company
in Canada with significant operations in the United States and the United
Kingdom. FCA provides accounts receivable management services principally to
the government, financial, education, telecommunications, utilities,
healthcare, retail and commercial sectors. FCA has undergone a major
reorganization, consolidating 88 branch offices into 17 branch locations
including three new major branches in Mobile, Alabama, Brantford, Ontario and
Vancouver, British Columbia. For the fiscal year ended June 30, 1997 and the
nine months ended March 31, 1998, FCA's revenues were approximately $62.8
million and $45.0 million, respectively, based upon the applicable exchange
rate. Approximately 45% of FCA's consolidated revenue in 1997 was derived from
U.S. operations, 40% from Canadian operations and 15% from operations in the
United Kingdom. The acquisition of FCA will give the Company the leading market
presence in Canada, significantly expand its U.S. operations and provide a
platform for further expansion into Europe from the United Kingdom. The Company
also expects to realize substantial cost savings from integrating FCA with its
operations.
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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.
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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.
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USE OF PROCEEDS
The net proceeds from the sale of the 5,800,000 shares of Common Stock
offered by the Company hereby are estimated to be approximately $137.3 million
after deducting the estimated underwriting discount and expenses of the
Offering and based on an assumed public offering price of $25.00 per share. The
Company will not receive any proceeds from the sale of Common Stock by the
Selling Shareholders.
Approximately $67.6 million of the net proceeds will be used to repay debt
under the Company's Credit Agreement with Mellon Bank, N.A. ("Mellon") incurred
in connection with the acquisition of FCA. The Company entered into the Credit
Agreement in July 1995 to obtain working capital and acquisition financing and
to refinance certain existing debt. The Credit Agreement, as amended, provides
a revolving line of credit which permits borrowings of up to $75.0 million at
an interest rate ranging from LIBOR plus 0.75% to LIBOR plus 2.0% (LIBOR was
5.69% at March 31, 1998). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Approximately $17.9 million of the net proceeds will be used to pay the
cash portion of the MedSource acquisition, or the repayment of borrowings under
the Credit Agreement used to finance the MedSource acquisition, which
acquisition is expected to close in the second quarter of 1998. The acquisition
is subject to the satisfaction of certain closing conditions, including
regulatory approval and other customary conditions.
The Company intends to use approximately $21.9 million of the net proceeds
to repay certain outstanding indebtedness of FCA and of MedSource following the
completion of such acquisition.
The Company intends to use the remaining net proceeds of $29.9 million for
working capital and other general corporate purposes, including other possible
future acquisitions. The Company regularly reviews various strategic
acquisition opportunities and periodically engages in discussions regarding
such possible acquisitions. Pending the uses described above, the Company
intends to invest the net proceeds in short-term, investment-grade securities.
DIVIDEND POLICY
The Company does not anticipate paying cash dividends on its Common Stock
in the foreseeable future. In addition, the Company's Credit Agreement
prohibits the Company from paying cash dividends without the lender's prior
consent. The Company currently intends to retain future earnings to finance its
operations and fund the growth of its business. Any payment of future dividends
will be at the discretion of the Board of Directors of the Company and will
depend upon, among other things, the Company's earnings, financial condition,
capital requirements, level of indebtedness, contractual restrictions with
respect to the payment of dividends and other factors that the Company's Board
of Directors deems relevant.
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PRICE RANGE OF COMMON STOCK
The following table sets forth the range of high and low closing sale
prices for the Common Stock as reported on the Nasdaq National Market since the
Company's initial public offering on November 6, 1996. The Common Stock is
traded under the symbol "NCOG". The table has been adjusted to reflect the
3-for-2 stock split paid in December 1997.
High Low
----------- -----------
1996
Fourth Quarter (from November 6) ......... $ 12.96 $ 11.00
1997
First Quarter ............................ 18.92 11.17
Second Quarter ........................... 22.50 12.17
Third Quarter ............................ 26.50 20.58
Fourth Quarter ........................... 28.33 21.00
1998
First Quarter ............................ 29.25 21.87
Second Quarter (through May 8) ........... 28.00 23.75
On May 8, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $25.63 per share. As of April 30, 1998, the
Company's Common Stock was held by approximately 50 holders of record. Based on
information obtained from the Company's transfer agent, the Company believes
that there are approximately 1,000 beneficial owners of its Common Stock.
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CAPITALIZATION
The following table sets forth as of March 31, 1998: (a) the actual
capitalization of the Company; (b) the pro forma capitalization of the Company
giving effect to the FCA and MedSource acquisitions; and (c) the pro forma
capitalization of the Company as adjusted to give effect to: (i) the exercise
of stock options to purchase an aggregate of 61,058 shares of Common Stock
which are being sold by certain Selling Shareholders in the Offering and the
receipt by the Company of the aggregate exercise price of $157,920; and (ii)
the sale by the Company of 5,800,000 shares of Common Stock in the Offering (at
an assumed public offering price of $25.00 per share) and the application of
the net proceeds therefrom as set forth in "Use of Proceeds." This table should
be reviewed in conjunction with the Company's historical and pro forma
financial statements and related notes appearing elsewhere in this Prospectus
or incorporated herein by reference.
<TABLE>
<CAPTION>
March 31, 1998
---------------------------------------------
Pro Forma
Actual Pro Forma(1) As Adjusted(2)
---------- -------------- ---------------
(In thousands)
<S> <C> <C> <C>
Long-term debt, net of current portion ........................ $ 923 $ 94,715 $ 923
Capitalized lease obligations, net of current portion ......... 225 909 814
Deferred taxes and other liabilities .......................... 2,284 2,287 2,287
------- -------- --------
Total long-term liabilities ............................. 3,432 97,911 4,024
Shareholders' equity:
Preferred Stock, no par value, 5,000,000 shares
authorized; no shares issued and outstanding .............. -- -- --
Common Stock, no par value, 37,500,000 shares
authorized;
13,390,651 shares issued and outstanding, actual,
19,251,709 shares issued and outstanding, as
adjusted (3) ........................................... 80,802 80,802 218,110
Unexercised warrants (4) ................................... 875 875 875
Retained earnings .......................................... 10,279 10,279 10,279
------- -------- --------
Total shareholders' equity .............................. 91,956 91,956 229,264
------- -------- --------
Total capitalization .................................... $95,388 $189,867 $233,288
======= ======== ========
</TABLE>
- ------------
(1) Gives effect to: (i) the acquisition of FCA for approximately $67.6 million
in cash, which was borrowed against the Company's credit facility, and the
recognition of certain acquisition related liabilities; and (ii) the
pending acquisition of MedSource, for approximately $17.9 million in cash,
of which $7.4 million was assumed to be borrowed from the Company's credit
facility, and the recognition of certain acquisition related liabilities.
The Company expects to recognize goodwill of $56.2 million and $36.3
million for the FCA and MedSource acquisitions, respectively.
(2) Gives effect to the issuance of 5.8 million shares of Common Stock at an
assumed public offering price of $25.00 per share and the application of
the net proceeds therefrom. See "Use of Proceeds."
(3) Excludes: (i) an aggregate of 2,052,659 shares of Common Stock (1,991,601
shares, pro forma as adjusted) reserved for issuance under the Company's
1995 Stock Option Plan, 1996 Stock Option Plan and 1996 Non-Employee
Director Stock Option Plan; (ii) 63,755 shares of Common Stock reserved
for issuance upon the conversion of the Company's $900,000 Convertible
Note issued as partial consideration for the Goodyear acquisition; and
(iii) 375,000 shares of Common Stock reserved for issuance upon the
exercise of warrants at an exercise price of $18.42 per share issued by
the Company as partial consideration for the CRWCD acquisition.
(4) Reflects 375,000 shares of Common Stock reserved for issuance upon the
exercise of warrants at an exercise price of $18.42 per share issued by
the Company as partial consideration for the CRWCD acquisition.
20
<PAGE>
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.
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
1993 1994 1995 1996
---------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
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
<PAGE>
<CAPTION>
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)
------------- ----------------- ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenue ...................................... $ 85,284 $ 188,395 $ 18,077 $27,609 $48,399
Operating costs and expenses:
Payroll and related expenses ................ 42,502 94,315 9,046 14,144 24,832
Selling, general and administrative
expenses ................................... 27,947 62,525 5,932 8,568 15,173
Depreciation and amortization expenses 3,369 11,540 716 1,155 2,094
Reorganization charge ....................... -- 1,517 -- -- --
--------- --------- -------- -------- -------
Income from operations ....................... 11,466 18,498 2,383 3,742 6,300
Other income (expense) ....................... 388 1,074 (82) 153 150
--------- --------- -------- -------- -------
Income before provision for income taxes 11,854 19,572 2,301 3,895 6,450
Income tax expense (4) ....................... 4,780 8,642 994 1,579 2,984
--------- --------- -------- -------- -------
Net income (4) ............................... $ 7,074 $ 10,930 $ 1,307 $ 2,316 $ 3,466
========= ========= ======== ======== =======
Net income per share:
Basic (4) ................................... $ 0.59 $ 0.63 $ 0.12 $ 0.17 $ 0.19
========= ========= ======== ======== =======
Diluted (4) ................................. $ 0.57 $ 0.61 $ 0.12 $ 0.17 $ 0.19
========= ========= ======== ======== =======
Weighted average shares outstanding:
Basic ....................................... 11,941 17,281 10,656 13,240 17,789
Diluted ..................................... 12,560 17,913 11,230 13,801 18,350
March 31, 1998
---------------------------------------
Pro Pro Forma As
1997 Actual Forma (6) Adjusted (7)
--------- --------- --------- --------------
Balance Sheet Data:
Cash and cash equivalents ................... $ 29,539 $ 16,088 $ 9,148 $49,687
Working capital ............................. 36,440 22,173 2,199 45,620
Total assets ................................ 101,636 105,708 227,420 267,959
Long-term debt, net of current portion ...... 1,437 923 94,715 923
Shareholders' equity ........................ 89,334 91,956 91,956 229,264
</TABLE>
21
<PAGE>
- ------------
(1) Assumes that the 1997 Acquisitions, the 1998 Acquisitions and the FCA and
MedSource acquisitions occurred on January 1, 1997. Gives effect to: (i)
the elimination of payroll and related expenses relating to certain
redundant collection and administrative personnel costs immediately
eliminated at the time of the 1997 Acquisitions and the 1998 Acquisitions
and expenses identified during the due diligence process which will be
eliminated upon the closing of the FCA and MedSource acquisitions; (ii)
the elimination of certain rental expenses and related operating costs
attributable to facilities which were closed at the time of the 1997
Acquisitions and the 1998 Acquisitions and facilities identified during
the due diligence process which will be closed upon the completion of the
FCA and MedSource acquisitions; (iii) the increase in amortization expense
resulting from the acquisitions; (iv) the elimination of depreciation and
amortization expense related to assets revalued or not acquired; (v)
interest expense on borrowings related to the acquisitions; (vi) the
estimated income tax expense, after giving consideration to non-deductible
goodwill expense; (vii) the elimination of interest expense on debt
assumed to be repaid with a portion of the proceeds from the Offering;
(viii) the issuance of 517,767 shares of Common Stock and warrants
exercisable for 375,000 shares of Common Stock in connection with the
acquisition of CRWCD; (ix) the issuance of 1,425,753 shares of Common
Stock in the July 1997 Offering at the public offering price of $19.67 per
share which, net of the underwriting discount and offering expenses paid
by the Company, would be sufficient to repay acquisition related debt of
$8.4 million and to fund the acquisitions of AFECD and TRC; (x) the
issuance of 46,442 shares of Common Stock issued in connection with the
acquisition of AFS; and (xi) the issuance of 4.5 million shares of Common
Stock at an assumed public offering price of $25.00 per share, net of the
estimated underwriting discount and offering expenses payable by the
Company, which would be sufficient to repay acquisition related debt of
$75.0 million, repay debt of $21.9 million recognized in connection with
the FCA and MedSource acquisitions and pay an additional $10.5 million
necessary to fund the FCA and MedSource acquisitions.
(2) Includes reorganization charges and other costs of $1.9 million and $90,000
for the year ended December 31, 1997 and the three months ended March 31,
1998, respectively. Net income per share -- basic and net income per share
-- diluted would have been $0.70 and $0.68, respectively, and $0.20 and
$0.19, respectively, on a pro forma basis assuming those charges had not
been incurred.
(3) Assumes that the TRC, FCA and MedSource acquisitions occurred on January 1,
1998. Gives effect to: (i) the elimination of payroll and related expenses
relating to certain redundant collection and administrative personnel
costs immediately eliminated at the time of the TRC acquisition and
expenses identified during the due diligence process which will be
eliminated upon the closing of the FCA and MedSource acquisitions; (ii)
the elimination of certain rental expenses and related operating costs
attributable to facilities which were identified during the due diligence
process and will be closed upon the completion of the FCA and MedSource
acquisitions; (iii) the increase in amortization expense resulting from
the TRC, FCA and MedSource acquisitions; (iv) the elimination of
depreciation and amortization expense related to assets revalued or not
acquired; (v) interest expense on borrowings related to the FCA and
MedSource acquisitions; (vi) the estimated income tax expense, after
giving consideration to non-deductible goodwill expense; (vii) the
elimination of interest expense on debt assumed to be repaid with a
portion of the proceeds from the Offering; and (viii) the issuance of 4.5
million shares of Common Stock at an assumed public offering price of
$25.00 per share, net of the estimated underwriting discount and offering
expenses payable by the Company, which would be sufficient to repay
acquisition related debt of $75.0 million, repay debt of $21.9 million
recognized in connection with the FCA and MedSource acquisitions and an
additional $10.5 million necessary to fund the FCA and MedSource
acquisitions.
<PAGE>
(4) The Company was taxed as an S Corporation prior to September 3, 1996.
Accordingly, income tax expense and net income have been provided on a pro
forma basis as if the Company had been subject to income taxes in all
periods presented.
(5) Assumes that the Company issued 374,637 shares of Common Stock at $8.67 per
share to fund the distribution of undistributed S Corporation earnings of
$3.2 million through September 3, 1996, the termination date of the
Company's S Corporation status, to existing shareholders of the Company.
(6) Gives effect to: (i) the acquisition of FCA for approximately $67.6 million
in cash, which was borrowed against the Company's credit facility, and the
recognition of certain acquisition related liabilities; and (ii) the
pending acquisition of MedSource for approximately $17.9 million in cash,
of which $7.4 million was assumed to be borrowed against the Company's
credit facility, and the recognition of certain acquisition related
liabilities. The Company expects to recognize goodwill of $56.2 million
and $36.3 million for the FCA and MedSource acquisitions, respectively.
(7) Gives effect to the issuance of 5.8 million shares of Common Stock at an
assumed public offering price of $25.00 per share and the application of
the net proceeds therefrom. See "Use of Proceeds."
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
NCO is a leading provider of accounts receivable management and other
outsourced services such as customer service call centers, market research and
other outsourced administrative services. In 1997, accounts receivable
management services comprised more than 89.6% of the Company's revenue. As a
result of rapid internal growth and selected strategic acquisitions, the
Company's revenue has grown from $7.4 million in 1993 to $188.4 million in 1997
on a pro forma basis.
The Company has historically generated substantially all of its revenue
from the recovery of delinquent accounts receivable on a contingency fee basis.
Contingency fees typically range from 15% to 35% of the amount recovered on
behalf of the Company's clients, but can range from 6% for the management of
accounts placed early in the recovery cycle to 50% for accounts which have been
serviced extensively by the client or by other third-party providers. In
addition, the Company generates revenue from fixed fee services for certain
accounts receivable management and other related services. Revenue is earned
and recognized upon collection of accounts receivable for contingency fee
services and as work is performed for fixed fee services. The Company enters
into contracts with most of its clients which define, among other things, fee
arrangements, scope of services and termination provisions. Clients may usually
terminate such contracts on 30 or 60 days notice. In the event of termination,
however, clients typically do not withdraw accounts referred to the Company
prior to the date of termination, thus providing the Company with an ongoing
stream of revenue from such accounts which diminishes over time.
The Company's costs consist principally of payroll and related costs,
selling, general and administrative costs, and depreciation and amortization.
Payroll and related expenses consist of wages and salaries, commissions,
bonuses and benefits for all employees of the Company, including management and
administrative personnel. As the Company has grown, payroll costs as a
percentage of revenue have gradually declined. Selling, general and
administrative expenses, which include postage, telephone and mailing costs,
and other costs of collections as well as expenses which directly support the
operations of the business including facilities costs, equipment maintenance,
sales and marketing, data processing, professional fees and other management
costs, have remained relatively constant as a percentage of revenue since 1993.
To date, all of the Company's acquisitions have been accounted for under
the purchase method of accounting with the results of the acquired companies
included in the Company's statements of income beginning on the date of
acquisition. In pursuing acquisitions, the Company typically seeks to serve new
geographic markets or industries, expand its presence in its existing markets
and add complementary services. Upon completion of an acquisition, the Company
immediately focuses on achieving operating efficiencies by eliminating
redundant expenses and reducing certain other expenses to levels consistent
with the Company's current operating results. Included elsewhere in this
prospectus are Pro Forma Consolidated Financial Statements which show the
effect of the 1997 Acquisitions, the 1998 Acquisitions, the FCA and MedSource
acquisitions as if the results of each acquired company had been included in
the Company's statements of income for the periods presented.
For the periods shown prior to September 3, 1996, the Company had been
treated for federal and state income tax purposes as an S Corporation. As a
result, the Company's shareholders, rather than the Company, were taxed
directly on the earnings of the Company for federal and certain state income
tax purposes. The Company terminated its status as an S Corporation effective
September 3, 1996 and is now subject to federal and state income taxes at
applicable C Corporation rates. Accordingly, the income tax expense has been
calculated as if the Company were subject to federal and state income taxes for
all prior periods.
23
<PAGE>
Results of Operations
The following table sets forth income statement data on an historical and
pro forma basis as a percentage of revenue:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1995 1996 1997
----------- ----------- ------------------------
Pro
Actual Forma
----------- -----------
<S> <C> <C> <C> <C>
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%
====== ====== ====== ======
<CAPTION>
Three Months Ended March 31,
------------------------------------
1997 1998
----------- ------------------------
Pro
Actual Forma
----------- -----------
<S> <C> <C> <C>
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%
====== ====== ======
</TABLE>
- ------------
(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.
<PAGE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Revenue. Revenue increased $9.5 million or 52.7% to $27.6 million for the
three months ended March 31, 1998 from $18.1 million for the comparable period
in 1997. Of this increase, $3.6 million was attributable to the addition of new
clients and growth in business from existing clients. Revenue attributable to
the Goodyear, Tele-Research and CMS A/R acquisitions completed in January 1997
represented $908,000 of the increase and $1.2 million of the increase was
attributable to the CRWCD acquisition completed in February 1997. In addition,
$2.1 million of the increase was attributable to the AFS and CAC acquisitions
completed in October 1997 and $1.7 million of the increase was attributable to
the AFECD and TRC acquisitions completed in the first quarter of 1998.
Payroll and related expenses. Payroll and related expenses increased $5.1
million to $14.1 million for the three months ended March 31, 1998 from $9.0
million for the comparable period in 1997, and increased as a percentage of
revenue to 51.2% from 50.0%. Payroll and related expenses increased as a
percentage of revenue primarily as a result of the market research division
having a higher payroll cost structure than that of the remainder of the
Company. In addition, there were additional payroll costs attributable to the
start up of a contract with the United States Department of Education (the "DOE
Contract") which required the Company to hire and train a certain number of
collection personnel prior to realizing any revenue under the contract. These
higher costs were partially offset by lower payroll costs in the AFS and CAC
acquisitions and by spreading the cost of management and administrative
personnel over a larger revenue base.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $2.7 million to $8.6 million for the three
months ended March 31, 1998 from $5.9 million for the comparable period in
1997, and decreased as a percentage of revenue to 31.0% from 32.8%. A portion
of the decrease was attributable to the market research division having a lower
selling, general and administrative expense structure than that of the
remainder of the business. In addition, additional operating efficiencies were
obtained by spreading selling, general and administrative expenses over a
larger revenue base.
Depreciation and amortization. Depreciation and amortization increased to
$1.2 million for the three months ended March 31, 1998 from $716,000 for the
comparable period in 1997. Of this increase, $90,000 was
24
<PAGE>
attributable to the CAC and AFS acquisitions, and $120,000 was attributable to
the AFECD and TRC acquisitions. The remaining $274,000 primarily consisted of
depreciation resulting from normal capital expenditures incurred in the
ordinary course of business.
Other income (expense). Interest and investment income increased $139,000
to $232,000 for the three months ended March 31, 1998 from $93,000 for the
comparable period in 1997. This increase was primarily attributable to the
investment of funds remaining from the 1997 Offering, as well as an increase in
operating funds and funds held in trust for clients. Interest expense decreased
to $78,000 for the three months ended March 31, 1998 from $175,000 for the
comparable period in 1997. During the first quarter of 1997, the Company
borrowed $8.4 million on its revolving credit facility to partially finance the
Goodyear, Tele-Research, CMS A/R and CRWCD acquisitions, and issued a $900,000
convertible note payable in connection with the Goodyear acquisition in January
1997. The revolving credit facility was repaid with a portion of the proceeds
from the 1997 Offering. In addition, the $1.0 million convertible note payable
issued in connection with the Management Adjustment Bureau, Inc. ("MAB")
acquisition in September 1996 was converted to Common Stock in connection with
the 1997 Offering.
Income tax expense. Income tax expense increased to $1.6 million, or 40.5%
of income before taxes, for the three months ended March 31, 1998 from
$994,000, or 43.2% of income before taxes, for the comparable period in 1997.
Income taxes were computed after giving effect to non-deductible goodwill
expenses resulting from certain of the acquired companies.
Net income. Net income increased $1.0 million or 77.2% to $2.3 million for
the three months ended March 31, 1998 from $1.3 million for the comparable
period in 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenue. Revenue increased $54.5 million or 177.3% to $85.3 million for
1997 from $30.8 million in 1996. Of this increase in revenue, $8.7 million of
revenue was attributable to the acquisition of MAB completed in September 1996
and $37.1 million of revenue was attributable to the 1997 Acquisitions. The
addition of new clients and growth in business from existing clients
represented $8.7 million of the increase in revenue.
Payroll and related expenses. Payroll and related expenses increased $27.9
million to $42.5 million for 1997 from $14.7 million in 1996, and increased as
a percentage of revenue to 49.8% from 47.6%. Payroll and related expenses
increased as a percentage of revenue primarily as a result of the businesses
acquired in the MAB acquisition and the 1997 Acquisitions which closed in the
first quarter of 1997 having higher cost structures than that of the Company.
This increase was partially offset by spreading the cost of management and
administrative personnel over a larger revenue base. In addition, in the fourth
quarter of 1997 there was $339,000 of additional payroll expense attributable
to the start up of the DOE Contract which required the Company to hire and
train a certain number of collection personnel prior to realizing any revenue
under the contract.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $17.9 million to $27.9 million for 1997 from
$10.0 million in 1996. Selling, general and administrative expenses increased
slightly as a percentage of revenue to 32.8% from 32.6% due to start up costs
attributable to the DOE Contract of $274,000. Also, the business acquired in
the 1997 Acquisitions had a higher cost structure than that of the Company and
the Company has continued to experience increased costs as a result of changes
in business mix which require the increased use of national databases and
credit reporting services. The increases were offset by realizing operating
efficiencies and by spreading selling, general and administrative expenses over
a larger revenue base.
Depreciation and amortization. Depreciation and amortization increased to
$3.4 million for 1997 from $1.3 million in 1996. Of this increase, $1.8 million
was a result of the MAB acquisition and the 1997 Acquisitions. The remaining
$260,000 consisted of amortization of deferred financing charges and
depreciation resulting from capital expenditures incurred in the normal course
of business.
Other income (expense). Interest and investment income increased $778,000
to $1.0 million for 1997 from the comparable period in 1996. This increase was
primarily attributable to the investment of funds remaining from the Company's
public offering completed in July 1997 (the "1997 Offering"), as well as an
increase in
25
<PAGE>
operating funds and funds held in trust for clients. Interest expense decreased
to $591,000 for 1997 from $818,000 in 1996. Although the Company's revolving
credit facility had been repaid with a portion of the net proceeds from the
Company's initial public offering completed in November 1996 (the "IPO"), the
Company borrowed $8.4 million on its revolving credit facility to partially
finance the 1997 Acquisitions which closed in the first quarter of 1997, and
issued a $900,000 convertible note payable in connection with the Goodyear
acquisition in January 1997. The revolving credit facility was repaid with a
portion of the proceeds from the 1997 Offering. In addition, the $1.0 million
convertible note payable issued in connection with the MAB acquisition in
September 1996 was converted to Common Stock in connection with the 1997
Offering. As a result of the disposal of certain fixed assets in the move of
the Company's corporate headquarters in July 1997, the Company incurred a loss
on the disposal of fixed assets in the amount of $41,000.
Income tax expense. Income tax expense for 1997 was $4.8 million or 40.3%
of income before taxes and was computed after giving effect to non-deductible
goodwill expenses resulting from certain of the acquired companies. In 1996,
the Company was an S Corporation until September 3, 1996 and, accordingly,
there was no income tax expense until that time. The income tax expense of $1.7
million for 1996 (assuming the Company was taxed as a C Corporation for the
entire year) was computed utilizing an assumed rate of 40.0% after giving
effect to non-deductible goodwill.
Net income. Net income in 1997 increased to $7.1 million from net income
of $2.5 million in 1996, a 178.4% increase.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue increased $18.0 million or 141.6% to $30.8 million in
1996 from $12.7 million in 1995. Of this increase, $5.0 million was
attributable to the MAB acquisition completed in September 1996, $6.8 million
was attributable to the Trans Union Corporation Collections Division ("TCD")
acquisition completed in January 1996, and $1.3 million was attributable to a
full year of revenue from the Eastern Business Services, Inc. ("Eastern")
acquisition in 1996 versus three months in 1995. Additionally, $4.8 million of
the increase was due to internal growth from the addition of new clients and a
growth in business from existing clients. Of this internal growth, $2.9 million
of the increase was due to a full 12 months of revenue in 1996 from a contract
awarded to the Company by a government agency in April 1995. Revenue from other
related services, which became an area of focus in 1996, increased $1.2 million
to $1.5 million in 1996 from $259,000 in 1995.
Payroll and related expenses. Payroll and related expenses increased $7.9
million to $14.7 million in 1996 from $6.8 million in 1995, but decreased as a
percentage of revenue to 47.6% from 53.4%. The decrease in payroll and related
expenses as a percentage of revenue was primarily the result of spreading the
relatively fixed costs of management and administrative personnel over a larger
revenue base and the increased utilization of "on-line" computer services and
other outside services, as well as eliminating redundant administrative staff
following the TCD and Eastern acquisitions. These efficiencies were offset in
part by higher payroll and related expenses of MAB as a percentage of its
revenue. The effect of MAB was minimized due to only four months of the
operations of MAB being included in the income statements.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $6.0 million to $10.0 million in 1996, from
$4.0 million in 1995, and increased as a percentage of revenue to 32.6% from
31.7%. A large percentage of the increase was due to the increased costs
associated with litigation management services performed by the Company on
behalf of its clients in states where the laws are more conducive to the
utilization of the legal process for recovery of delinquent accounts. In
addition, the Company experienced increased costs as a result of a change in
business mix which required the increased use of national data bases and credit
reporting services. These increases were offset in part by operating
efficiencies resulting from the TCD acquisition.
Depreciation and amortization. Depreciation and amortization increased to
$1.3 million in 1996 from $348,000 in 1995. Of this increase, $605,000 was a
result of the MAB, TCD and Eastern acquisitions. The remaining $301,000
consisted of amortization of deferred financing charges and depreciation
resulting from capital expenditures incurred in the ordinary course of
business.
Other income (expense). Interest expense increased to $818,000 in 1996
from $180,000 in 1995, primarily due to increased borrowings associated with
the acquisitions of MAB, TCD and Eastern. Also included in other income
(expense) for 1995 was a loss from the disposal of assets of $49,000.
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<PAGE>
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.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------
1996
--------------------------------------------------
Mar. 31 Jun. 30 Sept. 30 Dec. 31
----------- ----------- ---------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
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%
<CAPTION>
Quarter Ended
--------------------------------------------------------------------
1997 1998
------------------------------------------------------ ------------
Mar. 31 Jun. 30 Sept. 30 Dec. 31 Mar. 31
------------ ------------ ------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenue .................... $ 18,077 $ 21,162 $ 21,739 $ 24,306 $ 27,609
Income from operations ..... 2,383 3,039 3,112 2,932 3,742
Net income ................. 1,307 1,717 2,082 1,968 2,316
As a percentage of revenue:
Income from operations ..... 13.2% 14.4% 14.3% 12.1% 13.6%
Net income ................. 7.2% 8.1% 9.6% 8.1% 8.4%
</TABLE>
<PAGE>
The Company has experienced and expects to continue to experience
quarterly variations in operating results as a result of many factors,
including the costs and timing of completion and integration of acquisitions,
the timing of clients' accounts receivable management programs, the
commencement of new contracts, the termination of existing contracts, costs to
support growth by acquisition or otherwise, the effect of the change of
business mix on margins and the timing of additional selling, general and
administrative expenses to support new business. In the fourth quarter of 1996,
income from operations and net income as a percentage of revenue were lower
than in prior quarters of 1996 largely as a result of the higher payroll and
related expenses of MAB as compared to the Company's core business. Similarly,
in the first quarter of 1997, the Company's operating and net margins were
adversely affected by the higher cost structures of MAB and the 1997
Acquisitions which closed in the first quarter of 1997 as compared to the
Company's core business. In addition, in connection with certain customers, the
Company could incur costs in periods prior to recognizing revenue under such
contracts. For example, income from operations and net income in the fourth
quarter of 1997 were adversely affected by start-up costs attributable to the
DOE Contract. Without such costs, the income from operations and net income for
the quarter ended December 31, 1997 would have been 14.6% and 9.6%,
respectively. Additionally, the Company's planned operating expenditures are
based on revenue forecasts, and if revenues are below expectations in any given
quarter, operating results would likely be materially adversely affected. While
the effects of seasonality on the Company's business historically have been
obscured by its rapid growth, the Company's business tends to be slower in the
third and fourth quarters of the year due to the summer and holiday seasons.
Liquidity and Capital Resources
In July 1997, the Company completed the 1997 Offering, selling 2,166,000
shares of Common Stock and receiving net proceeds of approximately $40.4
million. In November 1996, the Company completed its IPO, selling 3,750,000
shares of Common Stock and receiving net proceeds of approximately $28.8
million.
The Company's primary sources of cash have historically been cash flow
from operations, bank borrowings and, in 1996 and 1997, the net proceeds from
the IPO and the 1997 Offering, respectively. Cash has been used for
acquisitions, S Corporation distributions to shareholders prior to the IPO,
purchases of equipment and working capital to support the Company's growth.
27
<PAGE>
Cash provided by operating activities was $4.9 million during the three
months ended March 31, 1998, and $1.4 million for the comparable period in
1997. The increase in cash provided by operations was primarily due to the
increase in net income to $2.3 million for the three months ended March 31,
1998 compared to $1.3 million for the comparable period in 1997. In addition
the increase in cash provided by operations was also attributable to the
decrease in other current and long term assets by $728,000 for the three months
ended March 31, 1998 compared to $177,000 for the comparable period in 1997,
and the increase in non-cash charges, primarily depreciation and amortization,
to $1.2 million during the three months ended March 31, 1998 compared to
$716,000 for the comparable period in 1997.
Cash provided by operating activities was $6.7 million in 1997 and $2.8
million in 1996. The increase in cash provided by operations was primarily due
to the increase in net income to $7.0 million in 1997 compared to $3.6 million
in 1996, and the increase in non-cash charges, primarily depreciation and
amortization, to $3.4 million in 1997 compared to $1.3 million in 1996. These
increases were offset by a $3.9 million increase in accounts receivable in 1997
compared to a $1.8 million increase in 1996. Approximately $1.0 million of
accounts payable and accrued expenses in acquired companies were reduced in
order to bring the balances in line with NCO's payment policies.
Cash provided by operating activities was $2.8 million in 1996 and $2.0
million in 1995. The increase in cash provided by operations was primarily due
to the increase in net income to $3.6 million in 1996 compared to $1.4 million
in 1995, and the increase in non-cash charges, primarily depreciation and
amortization, to $1.3 million in 1996 compared to $348,000 in 1995. These
increases were offset by a $1.8 million increase in accounts receivable in 1996
compared to a $572,000 increase in 1995 and a $222,000 increase in accounts
payable and accrued expenses in 1996 compared to an $858,000 increase in 1995.
Cash used in investing activities was $18.2 million during the three
months ended March 31, 1998 compared to $15.9 million for the comparable period
in 1997. The increase was primarily due to the cash portion of the purchase
price paid for the acquisitions of AFECD and TRC in the first quarter of 1998
versus the cash portion of the purchase price paid for the acquisitions of
Goodyear, Tele-Research, CMS A/R, and CRWCD during the first quarter of 1997.
In addition, during the three months ended March 31, 1998, capital expenditures
were $1.1 million compared to $312,000 for the comparable period in 1997.
Cash used in investing activities was $29.2 million in 1997 compared to
$13.3 million for 1996. The increase was primarily due to the 1997 Acquisitions
compared with the acquisitions of TCD and MAB in 1996. The Company financed the
1997 Acquisitions with the proceeds of the 1997 Offering and the IPO,
borrowings under the Credit Agreement, seller financing and working capital.
The 1997 Acquisitions collectively resulted in goodwill of $37.0 million.
Cash used in investing activities was $13.3 million in 1996 compared to
$2.1 million in 1995. The increase was primarily due to the acquisitions of MAB
and TCD in 1996. The Company financed these acquisitions with borrowings under
the Credit Agreement and seller financing. The 1996 acquisitions collectively
resulted in goodwill of $14.0 million.
In addition to equipment financed under operating leases, capital
expenditures were $298,000, $976,000 and $3.4 million in 1995, 1996 and 1997,
respectively.
Cash used in financing activities was $108,000 during the three months
ended March 31, 1998 compared to cash provided by financing activities of $8.2
million for the comparable period in 1997. During the first quarter of 1997,
bank borrowings were the Company's primary source of cash from financing
activities and were used for acquisitions. The Company raised net proceeds of
approximately $40.4 million in the 1997 Offering and used a portion of the
proceeds from the IPO and the 1997 Offering to repay $8.4 million of
outstanding indebtedness under its revolving credit facility.
Cash provided by financing activities was $39.9 million in 1997 compared
to $21.8 million in 1996. Net proceeds of $40.4 million from the 1997 Offering
was the Company's primary source of cash from financing activities which was
used for acquisitions and to repay outstanding indebtedness.
Cash provided by financing activities was $21.8 million in 1996 compared
to $280,000 in 1995. Bank borrowings had been the Company's primary source of
cash from financing activities and were used for acquisitions and, along with
cash provided by operations, for distributions to shareholders. The Company
raised net
28
<PAGE>
proceeds of approximately $28.8 million in the IPO of which $15.0 million was
used to repay outstanding indebtedness under the Credit Agreement and
approximately $3.2 million was used to pay undistributed S Corporation
earnings. Total distributions to shareholders were $4.1 million in 1996 and
$1.1 million in 1995.
In March 1998, the Credit Agreement was amended to, among other things,
increase the Company's revolving credit facility with Mellon to provide for
borrowings up to $75.0 million at an interest rate ranging from LIBOR plus
0.75% to LIBOR plus 2.0% (LIBOR was 5.69% at March 31, 1998). The Company has
the right to permanently reduce the revolving credit facility by up to $25.0
million. There were no outstanding borrowings at December 31, 1996 or 1997 or
March 31, 1998. The revolving credit line is collateralized by substantially
all the assets of the Company and includes certain financial covenants such as
maintaining minimum working capital and net worth requirements and includes
restrictions on, among other things, acquisitions, capital expenditures and
distributions to shareholders.
In March 1998, the Company entered into an agreement with FCA pursuant to
which NCO made a cash tender offer for all of the outstanding common shares of
FCA at $9.60 per share, Canadian (equivalent to $6.77 in U.S. dollars based
upon the exchange rate as of the date of the agreement). The purchase price of
approximately $67.6 million was paid with borrowings under the Credit
Agreement, which borrowings will be repaid from the proceeds of this Offering.
The Company has entered into an agreement to acquire all of the
outstanding stock of MedSource for approximately $17.9 million in cash. The
Company expects to finance this acquisition from the proceeds of this Offering
or borrowings under the Company's revolving credit facility.
The Company intends to use approximately $21.9 million of the net proceeds
of this Offering to repay certain outstanding indebtedness of FCA and of
MedSource following the completion of such acquisition.
The Company believes that funds generated from operations, together with
existing cash, the net proceeds from the Offering and available borrowings
under its Credit Agreement will be sufficient to finance its current operations
and planned capital expenditure requirements and internal growth at least
through the next twelve months. However, the Company could require additional
debt or equity financing if it were to make any other significant acquisitions
for cash.
Year 2000 System Modifications
NCO has implemented a program to evaluate and address the impact of the
year 2000 on its information systems in order to ensure that its network and
software will manage and manipulate data involving the transition of dates from
1999 to 2000 without functional or data abnormality and without inaccurate
results related to such data. This program includes steps to: (a) identify
software that requires date code remediation; (b) establish timelines for
availability of corrective software releases; (c) implement the fix to a test
environment and test the remediated product; (d) integrate the updated software
to NCO's production environment; (e) communicate and work with clients to
implement year 2000 compliant data exchange formats; and (f) provide management
with assurance of a seamless transition to the year 2000. The identification
phase is substantially complete and delivery of the final software updates are
scheduled for the third quarter of 1998. Management expects to complete the
major portion of testing and acceptance procedures in 1998. The Company will
continue to coordinate the year 2000 compliance effort throughout the balance
of 1998 and into 1999 to synchronize data exchange formats with clients.
For the years 1998 and 1999, the Company expects to incur total pre-tax
expenses of approximately $200,000 to $250,000 per year. These costs are
associated with both internal and external staffing resources for the necessary
planning, coordination, remediation, testing, and other expenses to prepare its
systems for the year 2000. However, a portion of these expenses will not be
incremental, but rather represent a redeployment of existing information
technology resources. Management does not expect substantial additional license
fee costs associated directly with year 2000 compliance because the Company's
software vendors are incorporating necessary modifications as part of their
normal system maintenance. The majority of the costs will be incurred through
the modification and testing of electronic data interchange formats with the
Company's clients. The cost of planning and initial remediation incurred
through 1997 has not been significant.
29
<PAGE>
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 establishes standards for reporting financial information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
is required to disclose this information for the first time it publishes its
1998 annual report. Management is in the process of evaluating the segment
disclosures for purposes of reporting under SFAS No. 131. Management has not
determined what impact the adoption of SFAS. No. 131 will have on the
consolidated results of operations, financial condition or cash flows.
Forward Looking Statements
Certain statements included in this Management's Discussion and Analysis
of Financial Condition and Results of Operations, as well as elsewhere in this
Prospectus or in the Company's Annual Report on Form 10-K incorporated herein
by reference, including, without limitation, statements regarding the
anticipated growth in the amount of accounts receivable placed for third-party
management, the continuation of trends favoring outsourcing of other
administrative functions, the Company's objective to grow through strategic
acquisitions and its ability to realize operating efficiencies upon the
completion of recent acquisitions and other acquisitions that may occur in the
future, the Company's ability to expand its service offerings, the anticipated
changes in revenues from acquired companies, trends in the Company's future
operating performance and statements as to the Company's or management's
beliefs, expectations and opinions, are forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, which are intended to cover safe harbors created thereby. The actual
results and developments may be materially different from those expressed in or
implied by such forward-looking statements.
30
<PAGE>
BUSINESS
NCO is a leading provider of accounts receivable management and other
outsourced services. The Company develops and implements customized accounts
receivable management solutions for clients' delinquent and current accounts.
The Company provides these services on a national basis from 22 call centers
located in 14 states using advanced workstations and sophisticated call
management systems comprised of predictive dialers, automated call distribution
systems, digital switching and customized computer software. Through extensive
utilization of its technology and intensive management of human resources, the
Company has achieved rapid growth in recent years. As a result of rapid
internal growth and selected strategic acquisitions, the Company's revenue has
grown from $7.4 million in 1993 to $188.4 million in 1997 on a pro forma basis.
Since April 1994, the Company has completed 13 acquisitions (including FCA)
which have enabled it to increase its penetration of existing markets,
establish a presence in certain new markets, offer additional services and
realize significant operating efficiencies. In addition, the Company has
leveraged its infrastructure by offering additional services including customer
service call centers, market research and other outsourced administrative
services. The Company believes that it is currently among the five largest
accounts receivable management companies in the United States.
The Company provides its services principally to clients in the financial
services, healthcare, retail and commercial, education, telecommunications,
utilities and government sectors. The Company has over 8,000 clients, including
Bell Atlantic Corporation, Mellon Bank Corporation, NationsBank Corporation,
Citicorp, MCI Communications Corporation, Federal Express Corporation and
Airborne Freight Corporation. For its accounts receivable management services,
the Company generates substantially all of its revenue on a contingency fee
basis. For many of its other outsourced services, the Company is paid on a
fixed fee basis. While NCO's contracts are relatively short-term, the Company
seeks to develop long-term relationships with its clients and works closely
with them to provide quality customized solutions.
Industry Background
Increasingly, companies are outsourcing many non-core functions to focus
on revenue generating activities, reduce costs and improve productivity. In
particular, many large corporations are recognizing the advantages of
outsourcing accounts receivable management. This trend is being driven by a
number of industry-specific factors. First, the complexity of accounts
receivable management functions in certain industries has increased
dramatically in recent years. For example, with the increasing popularity of
Health Maintenance Organizations ("HMOs") and Preferred Provider Organizations
("PPOs"), healthcare institutions now face the challenge of billing not only
large insurance companies but also individuals who are required to pay small,
one-time co-payments. Second, changing regulations and increased competition in
certain industries such as utilities and telecommunications have created new
outsourcing opportunities. Third, the ability to implement cost-effective
specialized accounts receivable management, customer support and telemarketing
programs has improved dramatically in recent years with the development of
sophisticated call and information systems. These programs require substantial
capital investment, technical capabilities, human resource commitments and
extensive management supervision.
The emphasis on cost-effective outsourcing solutions, the increasing
sophistication of call center technology and the efficacy of third-party
intervention in the recovery process has resulted in the steady growth of the
accounts receivable management industry. According to estimates published by
MKA, industry-wide revenues rose 10.7% to $5.5 billion in 1996 from $5.0
billion in 1995. The leading market segments within the overall accounts
receivable management market are healthcare, financial services,
telecommunications and utilities which represented approximately 35%, 21%, 12%
and 9%, respectively, or an aggregate of 77%, of total industry referrals in
1996.
The accounts receivable management industry is highly fragmented. Based on
information obtained from the ACA, there are approximately 6,500 accounts
receivable management companies in operation in the United States, the majority
of which are small local businesses. The Company believes that many small
accounts receivable management companies have insufficient capital to expand
and invest in call center technology and sophisticated workstations and are
unable to adequately meet the standards demanded by businesses seeking to
31
<PAGE>
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.
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<PAGE>
Increase Market Penetration. The Company believes that its long-standing
reputation as a quality provider of cost-effective accounts receivable
management services is one of its most significant competitive advantages and
intends to continue to build upon its reputation. The Company continually
strives to increase its share of its clients' accounts receivable management
business and to obtain new clients that have outsourced or are seeking to
outsource these services. The sectors which the Company focuses on include many
large corporations which rely heavily on third-party providers for a
substantial portion of their accounts receivable management needs. In addition,
the Company believes there is significant opportunity for growth in certain
market segments, such as the retail credit card and insurance sectors and
commercial accounts receivable management, in which it can leverage its
accumulated business expertise and call center infrastructure.
Expand Service Offerings. The Company regularly seeks to leverage its
infrastructure by expanding the array of services offered to clients by
cross-selling existing services and by developing new value-added services that
strengthen its long-term relationship with existing clients. For example, the
Company has already begun providing other outsourced administrative services
such as customer service call centers, market research, and telephone-based
auditing. Additionally, through the CMS A/R acquisition, the Company expanded
into early stage accounts receivable management services and expanded into
telephone-based market research through the acquisition of TRC. Substantially
all of these services are presently provided to clients who utilize NCO's
accounts receivable management services; however, in the future, the Company
plans to continue to market these services to both existing and new clients.
Accounts Receivable Management Services
The Company provides a wide range of accounts receivable management
services to its clients utilizing an extensive technological infrastructure.
Although most of the Company's accounts receivable management services to date
have focused on recovery of traditional delinquent accounts, the Company does
engage in the recovery of current receivables and early stage delinquencies
(generally accounts which are 90 days or less past due). The Company generates
substantially all of its revenue from the recovery of delinquent accounts
receivable on a contingency fee basis. In addition, the Company generates
revenue from fixed fees for certain accounts receivable management and other
related services. Contingency fees typically range from 15% to 35% of the
amount recovered on behalf of the Company's clients, but can range from 6% for
the management of accounts placed early in the accounts receivable cycle to 50%
for accounts which have been serviced extensively by the client or by
third-party providers.
Recovery activities typically include the following:
Management Planning. The Company's approach to accounts receivable
management for each client is determined by a number of factors including
account size and demographics, the client's specific requirements and
management's estimate of the collectability of the account. The Company has
developed a library of standard processes for accounts receivable management
which is based upon its accumulated experience. The Company will integrate
these processes with its client's requirements to create a customized recovery
solution. In many instances, the approach will evolve and change as the
relationship with the client develops and both parties evaluate the most
effective means of recovering accounts receivable. The Company's standard
approach, which may be tailored to the specialized requirements of its clients,
defines and controls the steps that will be undertaken by the Company on behalf
of the client and the manner in which data will be reported to the client.
Through its systemized approach to accounts receivable management, the Company
removes most decision making from the recovery staff and ensures uniform,
cost-effective performance.
Once the approach has been defined, the Company electronically or manually
transfers pertinent client data into its information system. Once the client's
records have been established in the Company's system, the Company commences
the recovery process.
Skip Tracing. In cases where the customer's telephone number or address is
unknown, the Company systematically searches the United States Post Office
National Change of Address service, consumer data bases, electronic telephone
directories, credit agency reports, tax assessor and voter registration
records, motor vehicle registrations, military records and other sources. The
geographic expansion of banks, credit card companies, national and regional
telecommunications companies and managed healthcare providers along with the
mobility of consumers has increased the demand for locating the client's
customers. Once the Company has located the customer, the notification process
can begin.
33
<PAGE>
Account Notification. The Company initiates the recovery process by
forwarding an initial letter which is designed to seek payment of the amount
due or open a dialogue with customers who cannot afford to pay at the current
time. This letter also serves as an official notification to each customer of
their rights as required by the FDCPA. The Company continues the recovery
process with a series of mail and telephone notifications. Telephone
representatives remind the customer of their obligation, inform them that their
account has been placed for collection with the Company and begin a dialogue to
develop a payment program.
Credit Reporting. At a client's request, the Company will electronically
report delinquent accounts to one or more of the national credit bureaus where
it will remain for a period of up to seven years. The denial of future credit
often motivates the payment of all past due accounts.
Litigation Management. When account balances are sufficient, the Company
will also coordinate litigation undertaken by a nationwide network of attorneys
that the Company utilizes on a routine basis. Typically, account balances must
be in excess of $1,000 to warrant litigation and the client is asked to advance
legal costs such as filing fees and court costs. Attorneys generally are
compensated on a contingency fee basis. The Company's collection support staff
manages the Company's attorney relationships and facilitates the transfer of
all necessary documentation.
Payment Process. After the Company receives payment from the customer, it
either remits the amount received net of its fee to the client or remits the
entire amount received to the client and bills the client for its services.
Activity Reports. Clients are provided with a system-generated set of
standardized or customized reports that fully describe all account activity and
current status. These reports are typically generated monthly, however, the
information included in the report and the frequency that the reports are
generated can be modified to meet the needs of the client.
Quality Tracking. The Company emphasizes quality control throughout all
phases of the accounts receivable management process. Some clients may specify
an enhanced level of supervisory review and others may request customized
quality reports. Large national credit grantors will typically have exacting
performance standards which require sophisticated capabilities such as
documented complaint tracking and specialized software to track quality metrics
to facilitate the comparison of the Company's performance to that of its peers.
Other Services
The Company selectively provides other related services which complement
its traditional accounts receivable management business and which leverage its
teleservices infrastructure. The Company believes that the following services
will provide additional growth opportunities for the Company.
Market Research. The Company provides full-service custom market research
services to the telecommunications, financial services, utilities, healthcare,
pharmaceutical and consumer products sectors. Its capabilities include problem
conceptualization, program design, data gathering (by telephone, mail, and
focus groups), as well as data tabulation, results analysis and consulting.
Telemarketing. The Company provides telemarketing services for clients,
including lead generation and qualification and the actual booking of
appointments for a client's sales representatives.
Customer Service Call Center. The Company utilizes its communications and
information system infrastructure to supplement or replace the customer service
function of its clients. For example, the Company is currently engaged by a
large regional utility to provide customer service functions for a segment of
the utility's customer base that is delinquent.
Accounts Receivable Outsourcing. The Company complements existing service
lines by offering adjunct billing services to clients as an outsourcing option.
Additionally, the Company can assist healthcare clients in the billing and
management of third party insurance.
Custom Designed Business Applications. The Company has the ability to
provide outsourced administrative and other back-office responsibilities
currently conducted by its clients. For example, the Company has a contract
with United Healthcare Corporation, a national health insurer, to assume all
administrative operations for its COBRA and individual conversion coverage,
including all responsibility for premium billing and payment processing,
customer service call center and policy fulfillment.
34
<PAGE>
Operations
Technology and Infrastructure. Over the past five years, the Company has
made a substantial investment in its call management systems such as predictive
dialers, automated call distribution systems, digital switching and customized
computer software. As a result, the Company believes it is able to address
accounts receivable management activities more reliably and more efficiently
than many other accounts receivable management companies. The Company's systems
also permit network access to enable clients to electronically communicate with
NCO and monitor operational activity on a real-time basis.
NCO provides its accounts receivable management services through the
operation of 22 state-of-the-art call centers which are electronically linked
through a national, wide area network. The Company utilizes two computer
platform systems. One system consists of two Unix-based NCR 4300 computers
which are linked via network servers to 873 workstations and which provide
necessary redundancy (either computer can operate the system in the event of
the failure of the other) and excess capacity for future growth. The other
system consists of three Unix-based Hewlett-Packard computers which are linked
via network servers to 479 workstations. The computers are linked via network
servers to the Company's 1,352 workstations, which consist of personal
computers and terminals that are linked to the microcomputers, but do not
necessarily have separate processors.
The Company utilizes 20 predictive dialer locations with 542 workstations
to address its low balance, high volume accounts. These systems scan the
Company's database and simultaneously initiate calls on all available telephone
lines and determine if a live connection is made. Upon determining that a live
connection has been made, the computer immediately switches the call to an
available representative and instantaneously displays the associated account
record on the representative's workstation. Calls that reach other signals,
such as a busy signal, telephone company intercept or no answer, are tagged for
statistical analysis and placed in priority recall queues or multiple-pass
calling cycles. The system also automates virtually all recordkeeping and
follow-up activities including letter and report generation. The Company's
automated method of operations dramatically improves the productivity of the
Company's collection staff.
The Company employs a 20 person MIS staff led by a Vice President,
Technology/Chief Information Officer. The Company maintains disaster recovery
contingency plans and has implemented procedures to protect the loss of data
against power loss, fire and other casualty. The Company has implemented a
security system to protect the integrity and confidentiality of its computer
system and data and maintains comprehensive business interruption and critical
systems insurance on its telecommunications and computer systems.
Quality Assurance and Client Service. The Company's reputation for quality
service is critical to acquiring and retaining clients. Therefore, the Company
and its clients monitor the Company's representatives for strict compliance
with the clients' specifications and the Company's policies. The Company
regularly measures the quality of its services by capturing and reviewing such
information as the amount of time spent talking with clients' customers, level
of customer complaints and operating performance. In order to provide ongoing
improvement to the Company's telephone representatives' performance and to
assure compliance with the Company's policies and standards, quality assurance
personnel monitor each telephone representative on a frequent basis and provide
ongoing training to the representative based on this review. The Company's
information systems enable it to provide clients with reports on a real-time
basis as to the status of their accounts and clients can choose to network with
the Company's computer system to access such information directly.
The Company maintains a client service department to promptly address
client issues and questions and alert senior executives of potential problems
that require their attention. In addition to addressing specific issues, a team
of client service representatives will contact accounts on a regular basis in
order to establish a close client rapport, determine the client's overall level
of satisfaction and identify practical methods of improving the client's
satisfaction.
35
<PAGE>
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:
<TABLE>
<CAPTION>
Financial Services Healthcare Education
- ------------------------------- ---------------------------------- ----------------------------------
<S> <C> <C>
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
</TABLE>
The Company enters into contracts with most of its clients which define,
among other things, fee arrangements, scope of services and termination
provisions. Clients may usually terminate such contracts on 30 or 60 days
notice. In the event of termination, however, clients typically do not withdraw
accounts referred to the Company prior to the date of termination, thus
providing the Company with an ongoing stream of revenue from such accounts
which diminish over time. Under the terms of the Company's contracts, clients
are not required to place accounts with the Company but do so on a
discretionary basis.
Sales and Marketing
The Company utilizes a focused and highly professional direct selling
effort in which sales representatives personally cultivate relationships with
prospective and existing clients. The Company's sales effort consists of a 31
person direct sales force. Each sales representative is charged with
identifying leads, qualifying prospects and closing sales. When appropriate,
Company operating personnel will join in the sales effort to provide detailed
information and advice regarding the Company's operational capabilities. Sales
and operating personnel also work together to take advantage of potential
cross-selling opportunities. The Company supplements its direct sales effort
with print media and attendance at trade shows.
Many of the Company's prospective clients issue requests-for-proposals
("RFPs") as part of the contract award process. The Company has on staff a
technical writer for the purpose of preparing detailed, professional responses
to RFPs.
Personnel and Training
The Company's success in recruiting, hiring and training a large number of
employees is critical to its ability to provide high quality accounts
receivable management, customer support and teleservices programs to its
clients. The Company seeks to hire personnel with previous experience in
accounts receivable management or as a telephone representative. NCO generally
offers competitive compensation and benefits and offers promotion opportunities
within the Company.
36
<PAGE>
All Company personnel receive a comprehensive training course that
consists of a combination of classroom and practical experience. Prior to
customer contact, new employees receive one week of training in the Company's
operating systems, procedures and telephone techniques and instruction in
applicable federal and state regulatory requirements. Company personnel also
receive a wide variety of continuing professional education consisting of both
classroom and role playing sessions.
As of March 31, 1998, the Company had a total of 1,568 full-time employees
and 704 part-time employees, of which 1,769 were telephone representatives.
None of the Company's employees is represented by a labor union. The Company
believes that its relations with its employees are good.
Competition
The accounts receivable management industry is highly competitive. The
Company competes with approximately 6,500 providers, including large national
corporations such as Outsourcing Solutions Inc., GC Services, Inc., Equifax
Inc. and many regional and local firms. Some of the Company's competitors have
substantially greater resources, offer more diversified services and operate in
broader geographic areas than the Company. In addition, the accounts receivable
management services offered by the Company, in many instances, are performed
in-house. Moreover, many larger clients retain multiple accounts receivable
management and recovery providers which exposes the Company to continuous
competition in order to remain a preferred vendor. The Company believes that
the primary competitive factors in obtaining and retaining clients are the
ability to provide customized solutions to a client's requirements,
personalized service, sophisticated call and information systems, collection
rates and price. The Company also competes with other firms, such as SITEL
Corporation, APAC TeleServices, Inc. and TeleTech Holdings, Inc., in providing
teleservices.
Regulation
The accounts receivable management industry is regulated both at the
federal and state level. The FDCPA regulates any person who regularly collects
or attempts to collect, directly or indirectly, consumer debts owed or asserted
to be owed to another person. The FDCPA establishes specific guidelines and
procedures which debt collectors must follow in communicating with consumer
debtors, including the time, place and manner of such communications. Further,
it prohibits harassment or abuse by debt collectors, including the threat of
violence or criminal prosecution, obscene language or repeated telephone calls
made with the intent to abuse or harass. The FDCPA also places restrictions on
communications with individuals other than consumer debtors in connection with
the collection of any consumer debt and sets forth specific procedures to be
followed when communicating with such third parties for purposes of obtaining
location information about the consumer. Additionally, the FDCPA contains
various notice and disclosure requirements and prohibits unfair or misleading
representations by debt collectors. The Company is also subject to the Fair
Credit Reporting Act which regulates the consumer credit reporting industry and
which may impose liability on the Company to the extent that the adverse credit
information reported on a consumer to a credit bureau is false or inaccurate.
The accounts receivable management business is also subject to state
regulation. Some states require that the Company be licensed as a debt
collection company. Management believes that the Company currently holds
applicable licenses from all states where required.
With respect to the other teleservices offered by the Company, including
telemarketing, the federal Telemarketing and Consumer Fraud and Abuse
Prevention Act of 1994 (the "TCFAPA") broadly authorizes the Federal Trade
Commission (the "FTC") to issue regulations prohibiting misrepresentations in
telemarketing sales. The FTC's telemarketing sales rules prohibit
misrepresentations of the cost, terms, restrictions, performance or duration of
products or services offered by telephone solicitation and specifically address
other perceived telemarketing abuses in the offering of prizes and the sale of
business opportunities or investments. The federal Telephone Consumer
Protection Act of 1991 (the "TCPA") limits the hours during which telemarketers
may call consumers and prohibits the use of automated telephone dialing
equipment to call certain telephone numbers. A number of states also regulate
telemarketing. For example, some states have enacted restrictions similar to
the federal TCPA. From time to time, Congress and the states consider
legislation that would further regulate the Company's telemarketing operations
and the Company cannot predict whether additional legislation will be enacted
and, if enacted, what effect it would have on the telemarketing industry and
the Company's business.
37
<PAGE>
The collection of accounts receivable by collection agencies in Canada is
regulated at the provincial and territorial level in substantially the same
fashion as is accomplished by federal and state laws in the United States. The
manner in which the Company carries on the business of collecting accounts is
subject, in all provinces and territories, to established rules of common law
or civil law and statute. Such laws establish rules and procedures governing
the tracing, contacting and dealing with debtors in relation to the collection
of outstanding accounts. These rules and procedures prohibit debt collectors
from engaging in intimidating, misleading and fraudulent behaviour when
attempting to recover outstanding debts. In Canada, the Company's collection
operations are subject to licensing requirements and periodic audits by
government agencies and other regulatory bodies. Generally, such licenses are
subject to annual renewal. Management believes that the Company holds all
necessary licenses in those provinces and territories that require them.
If the Company engages in other teleservice activities in Canada,
including telemarketing, there are several provincial and territorial consumer
protection laws of more general application. This legislation defines and
prohibits unfair practices by telemarketers, such as the use of undue pressure
and the use of false, misleading or deceptive consumer representations.
In addition, accounts receivable management and telemarketing industries
are regulated in the United Kingdom, including a licensing requirement. If the
Company expands its international operation, it may become subject to
additional government control and regulation in other countries, which may be
more onerous than those in the United States.
Several of the industries served by the Company are also subject to
varying degrees of government regulation. Although compliance with these
regulations is generally the responsibility of the Company's clients, the
Company could be subject to a variety of enforcement or private actions for its
failure or the failure of its clients to comply with such regulations.
The Company devotes significant and continuous efforts, through training
of personnel and monitoring of compliance, to ensure that it is in compliance
with all federal and state regulatory requirements. The Company believes that
it is in material compliance with all such regulatory requirements.
38
<PAGE>
Facilities
The Company currently operates 22 leased facilities. The chart below
summarizes the Company's current call center facilities:
Approximate
Location of Facility Square Footage
- ----------------------- ---------------
Fort Washington, PA 82,000
San Diego, CA 3,200
Aurora, CO 4,800
Honolulu, HI 2,900
Hutchinson, KS 900
Wichita, KS 10,000
New Orleans, LA 6,900
Odenton, MD 13,400
Jackson, MI 10,800
Charlotte, NC 15,000
Buffalo, NY 30,000
Cleveland, OH 7,000
Dayton, OH 13,100
Tulsa, OK 13,900
Fort Washington, PA 12,300
Pittsburgh, PA 3,600
Philadelphia, PA 4,700
Philadelphia, PA 5,700
Philadelphia, PA 3,200
Upper Darby, PA 11,000
Columbia, SC 10,500
Bristol, TN 4,000
The leases of these facilities expire between 1998 and 2010, and most
contain renewal options. The Company believes that these facilities are
adequate for its current operations, but additional facilities may be required
to support growth. The Company believes that suitable additional or alternative
space will be available as needed on commercially reasonable terms. In
addition, the Company leases sales offices in Little Rock, Arkansas; Tucson,
Arizona; Boston, Massachusetts; Las Vegas, Nevada; Jericho, New York; McAllen
and Stafford, Texas.
Legal Proceedings
The Company is involved in legal proceedings from time to time in the
ordinary course of its business. Management believes that none of these legal
proceedings will have a materially adverse effect on the financial condition or
results of operations of the Company.
39
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees
The following table sets forth certain information concerning the
Company's directors, executive officers and key employees:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------- ----- ------------------------------------------------
<S> <C> <C>
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
</TABLE>
- ------------
(1) Member of Audit and Compensation Committees.
Michael J. Barrist has served as Chairman of the Board, President and
Chief Executive Officer of the Company since purchasing the Company in 1986.
Mr. Barrist was employed by U.S. Healthcare, Inc. from 1984 to 1986, most
recently as Vice President of Operations, and was employed by Gross & Company,
a certified public accounting firm, from 1980 through 1984. Mr. Barrist is a
certified public accountant.
Charles C. Piola, Jr. joined the Company in 1986 as Executive Vice
President, Sales and Marketing and has served as a director since that time.
Prior to joining the Company, Mr. Piola was the Regional Sales Manager for
Trans World Systems from 1983 to 1986 and IC Systems from 1979 to 1981, both
accounts receivable management companies.
Bernard R. Miller joined the Company as Senior Vice President of
Development in 1994 when NCO acquired certain assets of B. Richard Miller, Inc.
("BRM"), a Philadelphia-based accounts receivable management company owned
principally by Mr. Miller. Mr. Miller became a director in 1996 and an
Executive Vice President in September 1997. Prior to joining the Company, Mr.
Miller served as President and Chief Executive Officer of BRM since founding it
in 1980.
Steven L. Winokur joined the Company in December 1995 as Vice President,
Finance, Chief Financial Officer and Treasurer and became Executive Vice
President in September 1997. Prior to joining the Company, Mr. Winokur acted as
a part-time consultant to the Company since 1986. From February 1992 to
December 1995, Mr. Winokur was the principal of Winokur & Associates, a
certified public accounting firm. From March 1981 to February 1992, Mr. Winokur
was a partner with Gross & Company, a certified public accounting firm, where
he most recently served as Administrative Partner. Mr. Winokur is a certified
public accountant.
40
<PAGE>
Joseph C. McGowan joined the Company in 1990 as Vice President, Operations
and became Executive Vice President and Chief Operating Officer in September
1997. Prior to joining the Company, Mr. McGowan was Assistant Manager of the
Collections Department at Philadelphia Gas Works, a public utility, since 1975.
Patrick M. Baldasare joined the Company as President and Chief Executive
Officer of NCO Teleservices, Inc. (Market Research Division) in February 1996
when the Company acquired certain assets of TRC. Mr. Baldasare has served as
Chief Executive Officer and President of TRC since its founding in 1987. From
1983 through 1987, Mr. Baldasare served as President of Valley Forge
Information Service, the market research division of Burlington Industries.
Steven L. Leckerman joined the Company in September 1995 as Senior Vice
President, Collection Operations. From 1982 to September 1995, Mr. Leckerman
was employed by Allied Bond Corporation, a division of Union Corporation, an
accounts receivable management company, where he served as manager of dialer
and special projects.
Stephen W. Elliott joined the Company in May 1996 as Senior Vice
President, Technology and Chief Information Officer and provided consulting
services to the Company since May 1995. Prior to joining NCO, Mr. Elliott was
employed by Electronic Data Systems, a computer services company, since 1986,
most recently as Senior Account Manager.
Eric S. Siegel was appointed to the Board of Directors of the Company in
December 1996. Mr. Siegel has been president of Siegel Management Company, a
management consulting firm, since 1983. Mr. Siegel also is an adjunct faculty
member at the Wharton School of the University of Pennsylvania and is co-author
of The Ernst & Young Business Plan Guide.
Allen F. Wise was appointed to the Board of Directors of the Company in
December 1996. Mr. Wise has been a director and Chief Executive Officer of
Coventry Corporation, a managed care company, since October 1996. Prior
thereto, he was Executive Vice President of United Healthcare Corporation since
October 1994, President of Wise Health Systems, a healthcare management
company, from September 1993 to October 1994, Chief Executive Officer of
Keystone Health Plan and Chief Operating Officer of Independence Blue Cross
from September 1991 to September 1993 and Vice President of U.S. Healthcare,
Inc. from April 1985 to September 1991. Mr. Wise is also a director of
Transition Systems Inc.
41
<PAGE>
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.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Owned
Prior to the Offering After the Offering
------------------------ Shares Being -----------------------
Name of Beneficial Owner Number Percent Offered Number Percent
- ---------------------------------------- ------------ --------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Annette H. Barrist (1) ................. 253,288 1.9% 38,000 215,288 1.1%
Joshua Gindin, Esq. and Michael J.
Barrist, Trustees, U/A/T dated
10/16/96, Annette H. Barrist,
Settlor ............................... 76,744 * 11,500 65,244 *
Michael J. Barrist (2)(3) .............. 2,632,690 19.6 394,032 2,238,658 11.6
Joshua Gindin, Esq. and Steven
Winokur, CPA, Trustees, U/A/T
dated 9/6/96, Michael J. Barrist
and Natalie Barrist, Settlors ......... 179,160 1.3 27,000 152,160 *
The Dayton Foundation .................. 10,384 * 10,384 -- --
Joshua Gindin (4) ...................... 374,949 2.8 56,500 318,449 1.6
Stephen W. Elliott (5) ................. 30,364 * 9,500 20,864 *
William C. Fischer (5) ................. 2,500 * 2,500 -- --
Mark Macrone (5) ....................... 44,172 * 7,500 36,672 *
Joseph C. McGowan (5) .................. 45,728 * 17,050 28,678 *
Bernard R. Miller (6) .................. 231,340 1.7 31,000 200,340 1.0
Michael G. Noah (5) .................... 10,000 * 7,000 3,000 *
Charles C. Piola, Jr. (2)(7) ........... 1,193,573 8.9 178,500 1,015,073 5.3
Joshua Gindin, Esq., Trustee U/A/T
dated 9/6/96, Charles C. Piola,
Jr. and June Piola, Settlors .......... 179,160 1.3 27,000 152,160 *
PNC Bancorp, Inc.(8) ................... 1,068,401 8.0 -- 1,068,401 5.5
Provident Investment Counsel,
Inc. (9) .............................. 665,796 5.0 -- 665,796 3.5
Eric S. Siegel (10) .................... 19,586 * -- 19,586 *
Steven L. Winokur (11) ................. 222,709 1.7 42,008 180,701 *
Allen F. Wise (12) ..................... 6,500 * -- 6,500 *
Wright State University Foundation 36,058 * 36,058 -- --
APT Holdings Corporation (13) .......... 102,668 * 102,668 -- --
All directors and executive officers
as a group (7 persons) (14) ........... 4,352,126 32.1 662,590 3,689,536 19.1
</TABLE>
- ------------
*Less than one percent.
(1) Excludes 78,619 shares held in trust for the benefit of members of Mrs.
Barrist's family, as to which Mrs. Barrist disclaims beneficial ownership.
Mrs. Barrist is the mother of Michael J. Barrist. In the event that the
Underwriters over-allotment option is exercised in full, Mrs. Barrist
would sell an additional 5,700 shares and would beneficially own 1.0% of
the outstanding Common Stock.
(2) The address of such person is c/o NCO Group, Inc., 515 Pennsylvania
Avenue, Fort Washington, Pennsylvania 19034.
42
<PAGE>
(3) Includes: (i) 253,288 shares of Common Stock owned by Mrs. Annette Barrist
(including 38,000 shares being sold by her in the Offering) which Mr.
Barrist has the sole right to vote pursuant to an irrevocable proxy; (ii)
77,119 shares held in trust for the benefit of members of Mrs. Annette
Barrist's or Mr. Barrist's family (including 11,500 shares being sold by
such trust) for which Mr. Barrist is a co-trustee; and (iii) 7,500 shares
issuable upon the exercise of options which are exercisable within 60 days
after April 30, 1998. Excludes 179,160 shares held in trust for the
benefit of Mr. Barrist's child, as to which Mr. Barrist disclaims
beneficial ownership. Mrs. Annette Barrist is the mother of Michael J.
Barrist. In the event that the Underwriters' over-allotment option is
exercised in full, Mr. Barrist would sell an additional 63,117 shares
(including 5,700 shares being sold by Mrs. Barrist) and would beneficially
own 10.8% of the outstanding Common Stock after the Offering.
(4) Represents: (i) 179,160 shares held in trust for the benefit of Mr.
Barrist's child (including 27,000 shares being sold by such trust) for
which Mr. Gindin is a co-trustee; (ii) 179,160 shares held in trust for
the benefit of Mr. Piola's children (including 27,000 shares being sold by
such trust) for which Mr. Gindin is trustee; and (iii) 16,629 shares
issuable upon the exercise of options which are exercisable within 60 days
after April 30, 1998.
(5) Represents shares issuable upon the exercise of options which are
exercisable within 60 days after April 30, 1998. Such person will exercise
options to acquire all of the shares being sold by him in the Offering.
(6) Includes 30,000 shares issuable upon the exercise of options which are
exercisable within 60 days after April 30, 1998. In the event that the
Underwriters' over-allotment option is exercised in full, Mr. Miller would
sell an additional 4,650 shares and would beneficially own less than 1% of
the outstanding Common Stock after the Offering.
(7) Includes 5,000 shares issuable upon the exercise of options which are
exercisable within 60 days after April 30, 1998. Excludes 179,160 shares
held in trust for the benefit of Mr. Piola's children, as to which Mr.
Piola disclaims beneficial ownership. In the event that the Underwriters'
over-allotment option is exercised in full, Mr. Piola would sell an
additional 29,750 shares and would beneficially own 4.9% of the
outstanding Common Stock after the Offering.
(8) Based upon a Schedule 13D, dated February 13, 1998, provided to the
Company. The address of PNC Bancorp, Inc. is One PNC Plaza, 249 Fifth
Avenue, Pittsburgh, PA 15265.
(9) Based upon a Schedule 13D, dated February 10, 1998, provided to the
Company. The address of Provident Investment Counsel, Inc. is 300 N. Lake
Avenue, Suite 1001, Pasadena, CA 91101.
(10) Includes 17,586 shares issuable upon the exercise of options which are
exercisable within 60 days after April 30, 1998.
(11) Represents: (i) 179,160 shares held in trust for the benefit of Mr.
Barrist's child (including 27,000 shares being sold by such trust) for
which Mr. Winokur is a co-trustee; (ii) 43,249 shares issuable upon the
exercise of options which are exercisable within 60 days after April 30,
1998; and (iii) 300 shares held in custody for the benefit of Mr.
Winokur's children for which Mr. Winokur is custodian. Mr. Winokur will
exercise options to acquire all of the shares being sold by him in the
Offering.
(12) Represents shares issuable upon the exercise of options which are
exercisable within 60 days after April 30, 1998.
(13) Represents shares issued upon the exercise of warrants originally issued
to Mellon Bank, N.A. and subsequently assigned to APT Holdings
Corporation, an affiliate.
(14) Includes: (i) 253,288 shares of Common Stock owned by Mrs. Barrist
(including 38,000 shares being sold by her in the Offering) which Mr.
Barrist has the sole right to vote pursuant to an irrevocable proxy; (ii)
77,119 shares held in trust for the benefit of members of Mrs. Annette
Barrist's or Mr. Barrist's family (including 11,500 shares being sold by
such trust) for which Mr. Barrist is a co-trustee; (iii) 179,160 shares
held in trust for the benefit of Mr. Barrist's child (including 27,000
shares being sold by such trust in this Offering) for which Mr. Winokur is
a co-trustee; (iv) an aggregate of 155,563 shares issuable upon exercise
of options which are exercisable within 60 days after April 30, 1998; and
(v) 300 shares held in custody for the benefit of Mr. Winokur's minor
children for which Mr. Winokur is custodian. Excludes 179,160 shares held
in trust for the benefit of Mr. Piola's children. In the event that the
Underwriters' over-allotment option is exercised in full, the directors
and executive officers as a group would sell an additional 97,517 shares
and would beneficially own 17.7% of the outstanding Common Stock after the
Offering.
43
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions in the underwriting agreement (the
"Underwriting Agreement"), by and among the Company, the Selling Shareholders
and the Underwriters, to purchase from the Company and the Selling Shareholders
the number of shares of Common Stock indicated below opposite their respective
names, at the public offering price less the underwriting discount set forth on
the cover page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent and
that the Underwriters are committed to purchase all of the shares of Common
Stock, if they purchase any.
Number of
Underwriter Shares
- ------------------------------------------------- ----------
NationsBanc Montgomery Securities LLC .........
BT Alex. Brown Incorporated ...................
Janney Montgomery Scott Inc ...................
The Robinson-Humphrey Company, LLC ............
---------
Total ...................................... 6,667,700
=========
The Underwriters have advised the Company and the Selling Shareholders
that the Underwriters propose to offer the Common Stock to the public on the
terms set forth on the cover page of this Prospectus. The Underwriters may
allow selected dealers a concession of not more than $ per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After the public offering, the
public offering price and other selling terms may be changed by the
Underwriters. The Common Stock is offered subject to receipt and acceptance by
the Underwriters, and to certain other conditions, including the right to
reject orders in whole or in part.
The Company and certain of the Selling Shareholders have granted an option
to the Underwriters, exercisable during the 30-day period after the date of
this Prospectus, to purchase up to a maximum of 1,000,155 additional shares of
Common Stock to cover over-allotments, if any, at the same price per share as
the initial shares to be purchased by the Underwriters. To the extent that the
Underwriters exercise such over-allotment option, the Underwriters will be
committed, subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with the Offering.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
The Company, the Selling Shareholders and the Company's executive officers
and directors who are also shareholders of the Company and who, immediately
following the Offering (assuming no exercise of the Underwriters'
over-allotment option) collectively will own an aggregate of 3,718,192
outstanding shares of Common Stock, have agreed that for a period of 90 days
after the effective date of the Offering they will not, without the prior
written consent of NationsBanc Montgomery Securities LLC, directly or
indirectly, offer for sale, sell, solicit an offer to sell, contract or grant
an option to sell, pledge, transfer, establish an open put equivalent position
or otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock or securities exchangeable or exercisable or
convertible into shares of Common Stock held by them. The Company has also
agreed not to issue, offer, sell, grant options to purchase or otherwise
dispose of any of the Company's equity securities or any other securities
convertible into or exchangeable with its Common Stock for a period of 90 days
after the effective date of the Offering without the prior written consent of
NationsBanc Montgomery Securities LLC, subject to limited exceptions and grants
and exercises of stock options. In evaluating any request for a waiver of the
90-day lock-up period, the Underwriters will consider, in accordance with their
customary practice, all relevant facts and circumstances at the time of the
request, including, without limitation, the recent trading market for the
Common Stock, the size of the request and, with respect to a request by the
Company to issue additional equity securities, the purpose of such an issuance.
44
<PAGE>
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the Underwriters are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Underwriters may
reduce that short position by purchasing Common Stock in the open market. The
Underwriters may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase shares of Common Stock in
the open market to reduce the Underwriters' short position or to stabilize the
price of the Common Stock, they may reclaim the amount of the selling
concession from the selling group members who sold those shares as part of the
Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security. Neither the Company nor any of the
Underwriters makes any representation or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
The public offering price of the Common Stock will be determined by
negotiations among the Underwriters and the Company, and will be based largely
upon the market price for the Common Stock as reported on the Nasdaq National
Market.
Affiliates of the Underwriters may utilize the Company's accounts
receivable management services in the ordinary course of business.
LEGAL MATTERS
An opinion will be rendered by the law firm of Blank Rome Comisky &
McCauley LLP, Philadelphia, Pennsylvania, to the effect that the shares of
Common Stock offered by the Company hereby, when issued and paid for as
contemplated in this Prospectus, will be, and the shares of Common Stock
offered by the Selling Shareholders hereby are, legally issued, fully paid and
non-assessable. Certain legal matters will be passed upon for the Underwriters
by Piper & Marbury L.L.P., Baltimore, Maryland.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1997 and
1996 and the Company's consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1997 incorporated by reference in this Prospectus and in the Registration
Statement, have been incorporated herein in reliance on the report of Coopers &
Lybrand, L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing.
The consolidated financial statements of FCA at June 30, 1996 and 1997 and
FCA's consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended June 30, 1997 incorporated by
reference in this Prospectus and in the Registration Statement have been
audited by Arthur Andersen & Co., independent accountants, as set forth in
their report, and are incorporated by reference herein in reliance upon such
report given upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-3 under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus, filed as part of
45
<PAGE>
the Registration Statement, does not contain all of the information included in
the Registration Statement and the exhibits and schedules thereto, certain
portions of which have been omitted in accordance with the rules and
regulations of the Securities and Exchange Commission. For further information
with respect to the Company and the Common Stock offered hereby, reference is
hereby made to the Registration Statement, including the exhibits and schedules
filed therewith. Statements contained in this Prospectus as to the contents of
any contract, agreement or other document referred to herein are not
necessarily complete and in each such instance, reference is made to the copy
of such contract, agreement or other document filed as an exhibit to the
Registration Statement for a more complete description of the matters involved,
and each such statement shall be deemed qualified in its entirety by such
reference.
The Company is subject to the information requirements of the Exchange
Act, and in accordance therewith, files reports and other information with the
Securities and Exchange Commission. So long as the Company is subject to
periodic reporting requirements of the Exchange Act, it will continue to
furnish the reports and other information required thereby to the Securities
and Exchange Commission. The Company will furnish to its shareholders annual
reports containing financial statements audited by its independent accountants
and will make available copies of quarterly reports for the first three
quarters of each fiscal year containing unaudited financial information.
The Registration Statement, including the exhibits and schedules thereto,
and any reports and information filed by the Company may be inspected without
charge and copied at the offices of the Securities and Exchange Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; 7
World Trade Center, 13th Floor, New York, New York 10048; and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials may be obtained at the prescribed rates from the Commission's Public
Reference Section at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. The Commission maintains a Web Site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of such
Web Site is http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference: (i) the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, as amended by Form 10-K/A filed April 30,
1998; (ii) the Company's Current Reports on Form 8-K filed February 24, 1998,
February 25, 1998, April 22, 1998 and May 4, 1998; (iii) the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998; and (iv)
the Company's Registration Statement on Form 8-A filed October 29, 1996
registering the Company's Common Stock under Section 12(g) of the Exchange Act.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date hereof
and prior to the termination of the offering of the Common Stock registered
hereby shall be deemed to be incorporated by reference into this Prospectus and
to be a part hereof from the date of filing such documents. Any statements
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is, or is deemed to be, incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus. The Company will provide
without charge to each person to whom this Prospectus is delivered, upon a
written request of such person, a copy of any or all of the foregoing documents
incorporated by reference into this Prospectus (other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
such documents). Requests for such copies should be delivered to Steven L.
Winokur, Executive Vice President, Finance, Chief Financial Officer and
Treasurer, 515 Pennsylvania Avenue, Fort Washington, Pennsylvania 19034.
46
<PAGE>
INDEX TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
NCO Group, Inc.
<TABLE>
<S> <C>
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
</TABLE>
F-1
<PAGE>
Pro Forma Consolidated Financial Statements
Basis of Presentation
The Pro Forma Consolidated Balance Sheet as of March 31, 1998 and the Pro
Forma Consolidated Statements of Income for the three months ended March 31,
1998 and the year ended December 31, 1997 are based on the historical financial
statements of NCO Group, Inc. ("NCO" or the "Company"), Tele-Research Center,
Inc. ("Tele-Research"), CMS A/R Services ("CMS A/R"), the Collection Division
of CRW Financial, Inc. ("CRWCD"), Credit Acceptance Corporation ("CAC"),
ADVANTAGE Financial Services, Inc. ("AFS"), the Collection Division of American
Financial Enterprises, Inc. ("AFECD"), The Response Center ("TRC"), FCA
International Ltd. ("FCA"), and MedSource, Inc. ("MedSource") (collectively,
the "Acquisitions").
The Pro Forma Consolidated Balance Sheet as of March 31, 1998 has been
prepared assuming the FCA and MedSource acquisitions occurred on March 31,
1998. The Pro Forma Consolidated Statement of Income for the three months ended
March 31, 1998 has been prepared assuming the TRC, FCA and MedSource
acquisitions occurred on January 1, 1998. The Pro Forma Consolidated Statement
of Income for the year ended December 31, 1997 has been prepared assuming the
Tele-Research, CMS A/R, CRWCD, CAC, and AFS acquisitions (collectively, the
"1997 Acquisitions"), the AFECD and the TRC acquisitions (collectively, the
"1998 Acquisitions"), and the FCA and MedSource acquisitions, occurred on
January 1, 1997.
The Pro Forma Consolidated Balance Sheet and Statements of Income do not
purport to represent what NCO's actual financial position or results of
operations would have been had the acquisitions occurred as of such dates, or
to project NCO's financial position or results of operations for any period or
date, nor does it give effect to any matters other than those described in the
notes thereto. In addition, the allocations of purchase price to the assets and
liabilities of FCA and MedSource are preliminary and the final allocations may
differ from the amounts reflected herein. The unaudited Pro Forma Consolidated
Balance Sheet and Statements of Income should be read in conjunction with the
Company's consolidated financial statements and notes thereto and the
historical financial statements of FCA, all of which are incorporated herein by
reference.
F-2
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Balance Sheet
March 31, 1998
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Historical
----------------------------------
NCO FCA (1) MedSource
---------- --------- -----------
<S> <C> <C> <C>
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
======== ======= =======
<PAGE>
<CAPTION>
Acquisition Offering Pro Forma
Adjustments (2) Pro Forma Adjustments (3) As Adjusted
----------------- ----------- ----------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................... $ (10,509) $ 9,148 $ 40,539 $ 49,687
Accounts receivable, trade, net ............. -- 24,219 -- 24,219
Other current assets ........................ -- 6,385 -- 6,385
--------- -------- --------- --------
Total current assets ........................ (10,509) 39,752 40,539 80,291
Funds held in trust for clients
Property and equipment, net .................. (5,571) 11,696 -- 11,696
Other assets:
Intangibles, net of accumulated
amortization ............................... 74,499 155,582 -- 155,582
Deferred financing costs .................... (1,821) 849 -- 849
Deferred taxes .............................. 13,361 13,398 -- 13,398
Other assets ................................ -- 6,143 -- 6,143
--------- -------- --------- --------
Total other assets ......................... 86,039 175,972 -- 175,972
--------- -------- --------- --------
Total assets ................................. $ 69,959 $227,420 $ 40,539 $267,959
========= ======== ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Long-term debt, current portion ............. $ -- $ 3,802 $ (2,742) $ 1,060
Capitalized lease obligations, current
portion .................................... -- 495 (140) 355
Corporate taxes payable ..................... -- 462 -- 462
Accounts payable ............................ -- 7,604 -- 7,604
Accrued expenses ............................ 18,542 21,452 -- 21,452
Accrued compensation and related
expenses ................................... -- 3,486 -- 3,486
Unearned revenue, net of related costs ...... -- 252 -- 252
--------- -------- --------- --------
Total current liabilities ................... 18,542 37,553 (2,882) 34,671
Funds held in trust for clients
Long-term liabilities:
Long term debt, net of current portion ...... 75,000 94,715 (93,792) 923
Capitalized lease obligations, net of
current portion ............................ -- 909 (95) 814
Deferred taxes .............................. -- 2,256 -- 2,256
Unearned revenue, net of related costs ...... -- 31 -- 31
Convertible Preferred Stock .................. (6,003) -- -- --
Commitments and contingencies
Shareholders' equity ......................... (17,580) 91,956 137,308 229,264
--------- -------- --------- --------
Total liabilities and shareholders' equity ... $ 69,959 $227,420 $ 40,539 $267,959
========= ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-3
<PAGE>
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)
<TABLE>
<CAPTION>
Historical
-----------------------------------------------
NCO TRC (4) FCA (5) MedSource
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue ....................... $27,609 $788 $14,683 $5,319
Operating costs and
expenses:
Payroll and related
expenses .................... 14,144 429 8,641 3,137
Selling, general and
administrative expenses 8,568 162 5,001 1,778
Depreciation and amorti-
zation expense .............. 1,155 7 599 305
------- ---- ------- ------
Total operating costs
and expenses ............... 23,867 598 14,241 5,220
------- ---- ------- ------
Income from operations ........ 3,742 190 442 99
Other income (expense):
Interest and investment
income ...................... 232 -- 79 10
Interest expense ............. (79) -- (102) (602)
------- ---- ------- ------
Total other income
(expense) .................. 153 -- (23) (592)
------- ---- ------- ------
Income (loss) before provi-
sion for income taxes ........ 3,895 190 419 (493)
Income tax expense
(benefit) .................... 1,579 -- 99 (155)
------- ---- ------- ------
Net income .................... $ 2,316 $190 $ 320 $ (338)
======= ==== ======= ======
Net income per share:
Basic ........................ $ 0.17
=======
Diluted ...................... $ 0.17
=======
Weighted average shares
outstanding:
Basic ........................ 13,240
Diluted ...................... 13,801
<PAGE>
<CAPTION>
Acquisition Offering Pro Forma
Adjustments Pro Forma Adjustments (12) As Adjusted
--------------------- ----------- ------------------ ----------------
<S> <C> <C> <C> <C>
Revenue ....................... $ -- $ 48,399 $ -- $ 48,399
Operating costs and
expenses:
Payroll and related
expenses .................... (1,519) (6) 24,832 -- 24,832
Selling, general and
administrative expenses (336) (7) 15,173 -- 15,173
Depreciation and amorti-
zation expense .............. 28 (8) 2,094 -- 2,094
----------- -------- ------ ----------
Total operating costs
and expenses ............... (1,827) 42,099 -- 42,099
----------- -------- ------ ----------
Income from operations ........ 1,827 6,300 -- 6,300
Other income (expense):
Interest and investment
income ...................... (69) (9) 252 -- 252
Interest expense ............. (1,264) (10) (2,047) 1,945 (102)
----------- -------- ------ ----------
Total other income
(expense) .................. (1,333) (1,795) 1,945 150
----------- -------- ------ ----------
Income (loss) before provi-
sion for income taxes ........ 494 4,505 1,945 6,450
Income tax expense
(benefit) .................... 673 (11) 2,196 788 2,984
----------- -------- ------ ----------
Net income .................... $ (179) $ 2,309 $1,157 $ 3,466
=========== ======== ====== ==========
Net income per share:
Basic ........................ $ 0.17 $ 0.19(29)
======== =============
Diluted ...................... $ 0.17 $ 0.19(29)
======== =============
Weighted average shares
outstanding:
Basic ........................ 13,240 17,789(13)
Diluted ...................... 13,801 18,350(13)
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-4
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Statement of Income
For the Year Ended December 31, 1997
(Unaudited)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Historical
-------------------------------------------------------------------
1997 1998
NCO Acquisitions (14) Acquisitions (15) FCA (16)
----------- ------------------- ------------------- ------------
<S> <C> <C> <C> <C>
Revenue .......................... $ 85,284 $ 8,621 $ 9,555 $ 62,224
Operating costs and
expenses:
Payroll and related
expenses ........................ 42,502 5,656 5,789 37,076
Selling, general and
administrative expenses.......... 27,947 3,731 2,129 21,494
Depreciation and amortiza-
tion expense .................... 3,369 257 91 2,522
Reorganization charge ........... -- -- -- 1,517
-------- --------- ------- --------
Total operating costs
and expenses .................... 73,818 9,644 8,009 62,609
-------- --------- ------- --------
Income (loss) from opera-
tions ........................... 11,466 (1,023) 1,546 (385)
Other income (expense):
Interest and investment
income .......................... 1,020 14 -- 409
Interest expense ................ (591) (12) -- (423)
Other ........................... (41) -- -- --
-------- --------- ------- --------
Total other income
(expense) ...................... 388 2 -- (14)
-------- --------- ------- --------
Income before provision for
income taxes .................... 11,854 (1,021) 1,546 (399)
Income tax expense (benefit) 4,780 -- -- 310
-------- --------- ------- --------
Net income (loss) ................ $ 7,074 $ (1,021) $ 1,546 $ (709)
======== ========= ======= ========
Net income per share:
Basic ........................... $ 0.59
========
Diluted ......................... $ 0.57
========
Weighted average shares out-
standing:
Basic ........................... 11,941
Diluted ......................... 12,560
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MedSource
------------------------------------------------------------------------
Completed Acquisition Acquisition
Historical (17) Acquisitions (18) Adjustments Pro Forma Adjustments
----------------- ------------------- ------------------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
Revenue .......................... $ 12,458 $10,253 $ -- $ 22,711 $ --
Operating costs and
expenses:
Payroll and related
expenses ........................ 5,665 5,826 -- 11,491 (8,199)(21)
Selling, general and
administrative expenses.......... 6,148 2,842 -- 8,990 (1,766)(22)
Depreciation and amortiza-
tion expense .................... 569 132 355(19) 1,056 4,245 (23)
Reorganization charge ........... -- -- -- -- --
-------- ------- -------------- -------- -----------
Total operating costs
and expenses .................... 12,382 8,800 355 21,537 (5,720)
-------- ------- -------------- -------- -----------
Income (loss) from opera-
tions ........................... 76 1,453 (355) 1,174 5,720
Other income (expense):
Interest and investment
income .......................... 30 45 -- 75
Interest expense ................ (616) (53) (1,446)(20) (2,115) (4,644)(24)
Other ........................... -- -- -- -- --
-------- ------- -------------- -------- -----------
Total other income
(expense) ...................... (586) (8) (1,446) (2,040) (4,644)
-------- --------- -------------- -------- -----------
Income before provision for
income taxes .................... (510) 1,445 (1,801) (866) 1,076
Income tax expense (benefit) (150) 583 (614) (181) 780 (25)
-------- -------- -------------- -------- -----------
Net income (loss) ................ $ (360) $ 862 $ (1,187) $ (685) $ 296
======== ======== ============== ======== ===========
Net income per share:
Basic ...........................
Diluted .........................
Weighted average shares out-
standing:
Basic ...........................
Diluted .........................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Offering Pro Forma
Pro Forma Adjustments (27) As Adjusted
----------------- ------------------ ----------------
<S> <C> <C> <C>
Revenue .......................... $ 188,395 $ -- $ 188,395
Operating costs and
expenses:
Payroll and related
expenses ........................ 94,315 -- 94,315
Selling, general and
administrative expenses.......... 62,525 -- 62,525
Depreciation and amortiza-
tion expense .................... 11,540 -- 11,540
Reorganization charge ........... 1,517 -- 1,517
---------- ------ ----------
Total operating costs
and expenses .................... 169,897 -- 169,897
---------- ------ ----------
Income (loss) from opera-
tions ........................... 18,498 -- 18,498
Other income (expense):
Interest and investment
income .......................... 1,518 -- 1,518
Interest expense ................ (7,785) 7,382 (403)
Other ........................... (41) -- (41)
---------- ------ ----------
Total other income
(expense) ...................... (6,308) 7,382 1,074
---------- ------ ----------
Income before provision for
income taxes .................... 12,190 7,382 19,572
Income tax expense (benefit) 5,689 2,953 8,642
---------- ------ ----------
Net income (loss) ................ $ 6,501 $4,429 $ 10,930
========== ====== ==========
Net income per share:
Basic ........................... $ 0.51 $ 0.63(29)
========== =============
Diluted ......................... $ 0.49 $ 0.61(29)
========== =============
Weighted average shares out-
standing:
Basic ........................... 12,732(26) 17,281(28)
Diluted ......................... 13,364(26) 17,913(28)
</TABLE>
The accompanying notes are an integral part of these pro
forma consolidated financial statements.
F-5
<PAGE>
Notes to Pro Forma Consolidated
Financial Statements
(Unaudited)
To date, all of the Company's acquisitions have been accounted for under
the purchase method of accounting with the results of the acquired companies
included in the Company's statements of income beginning on the date of
acquisition.
1. Includes the adjustments required to convert FCA's historical financial
statements to U.S. Generally Accepted Accounting Principles ("GAAP") and
gives effect to the conversion from Canadian dollars to U.S. dollars,
based upon the applicable exchange rate.
2. Gives effect to: (i) the acquisition of FCA for approximately $67.6 million
in cash, which was borrowed against the Company's credit facility, and the
recognition of certain acquisition related liabilities; and (ii) the
pending acquisition of MedSource for approximately $17.9 million in cash,
of which $7.4 million was assumed to be borrowed from the Company's credit
facility, and the recognition of certain acquisition related liabilities.
The Company expects to recognize goodwill of $56.2 million and $36.3
million for the FCA and MedSource acquisitions, respectively.
3. Gives effect to the issuance of 5.8 million shares of Common Stock at an
assumed public offering price of $25.00 per share. The estimated net
proceeds of $137.3 million from the Offering, net of the estimated
underwriting discount and offering expenses payable by the Company, will
be used to repay acquisition related debt of $75.0 million, repay FCA's
and MedSource's acquired debt of $4.8 million and $17.1 million,
respectively, with the balance added to working capital. In addition,
estimated net proceeds includes the exercise of 61,058 stock options
resulting in proceeds of $157,920 to the Company.
4. Represents the historical results of operations of TRC from January 1, 1998
to February 5, 1998, the period prior to the acquisition.
5. Includes the adjustments required to convert FCA's historical results of
operations for the three month period ended March 31, 1998 to U.S. GAAP
and gives effect to the conversion from Canadian dollars to U.S. dollars,
based on the applicable exchange rate.
6. Reflects the elimination of payroll and related expenses relating to
certain redundant collection and administrative personnel costs
immediately eliminated at the time of the TRC acquisition and expenses
identified during the due diligence process which will be eliminated upon
the closing of the FCA and MedSource acquisitions.
7. Reflects the elimination of certain rental expenses and related operating
costs attributable to facilities which were identified during the due
diligence process and will be closed upon the completion of the FCA and
MedSource acquisitions.
8. Gives effect to: (i) the increase in amortization expense assuming the TRC,
FCA and MedSource acquisitions had been acquired on January 1, 1998; and
(ii) the elimination of depreciation and amortization expense related to
assets revalued or not acquired.
F-6
<PAGE>
Notes to Pro Forma Consolidated
Financial Statements -- (Continued)
(Unaudited)
9. Reflects the elimination of interest income on funds assumed to be used for
the purchase of the TRC, FCA and MedSource acquisitions as if they
occurred on January 1, 1998.
10. Reflects interest expense on borrowings related to the FCA and MedSource
acquisitions as if they occurred on January 1, 1998.
11. Reflects the estimated income tax expense, after giving consideration to
non-deductible goodwill expense, as if the TRC, FCA and MedSource
acquisitions occurred on January 1, 1998.
12. Reflects the elimination of interest expense on debt assumed to be repaid
with a portion of the proceeds from the Offering as if it had occurred on
January 1, 1998.
13. Reflects the issuance of 4.5 million shares of Common Stock at an assumed
public offering price of $25.00 per share, net of the estimated
underwriting discount and offering expenses payable by the Company, which
would be sufficient to repay acquisition related debt of $75.0 million,
repay debt of $4.8 million and $17.1 million assumed in connection with
the FCA and MedSource acquisitions, respectively, and pay an additional
$10.5 million necessary to fund the FCA and MedSource acquisitions.
14. Represents the combined historical results of operations of the 1997
Acquisitions for the periods prior to their acquisition by NCO, as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Income
(Loss) Net
Date of From Income
1997 Acquisitions Acquisition Revenue Operations (Loss)
- -------------------------- ------------- --------- -------------- --------------
<S> <C> <C> <C> <C>
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)
====== ========= =========
</TABLE>
15. Represents the combined historical results of operations of AFECD and TRC
for the year ended December 31, 1997, as follows (dollars in thousands):
Income
Date of From Net
1998 Acquisitions Acquisition Revenue Operations Income
- ------------------- ------------- --------- ------------ ---------
AFECD .......... 1/1/98 $1,562 $ 272 $ 272
TRC ............ 2/2/98 7,993 1,274 1,274
------ ------ ------
$9,555 $1,546 $1,546
====== ====== ======
16. Includes the adjustments required to convert FCA's historical results of
operations for the twelve month period ended December 31, 1997 to U.S.
GAAP and gives effect to the conversion from Canadian dollars to U.S.
dollars, based on the applicable exchange rate.
17. Represents the historical results of operations of MedSource for the year
ended December 31, 1997.
F-7
<PAGE>
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):
<TABLE>
<CAPTION>
Income (Loss)
1997 MedSource Date of From Net
Completed Acquisitions Acquisition Revenue Operations Income (Loss)
- -------------------------------------------- ------------- --------- -------------- --------------
<S> <C> <C> <C> <C>
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
======= ====== ======
</TABLE>
19. Reflects amortization expense assuming the MedSource Acquisitions occurred
on January 1, 1997.
20. Reflects interest expense on acquisition related borrowings as if the
MedSource Acquisitions had occurred on January 1, 1997.
21. Reflects the elimination of payroll and related expenses relating to
certain redundant collection and administrative personnel costs
immediately eliminated at the time of the 1997 Acquisitions and the 1998
Acquisitions and expenses identified during the due diligence process
which will be eliminated upon the closing of the FCA and MedSource
acquisitions.
22. Reflects the elimination of certain rental expenses and related operating
costs attributable to facilities which were closed at the time of the 1997
Acquisitions and the 1998 Acquisitions and facilities identified during
the due diligence process which will be closed upon the completion of the
FCA and MedSource acquisitions.
23. Gives effect to: (i) the increase in amortization expense assuming the
Acquisitions had been acquired on January 1, 1997; and (ii) the
elimination of depreciation and amortization expense related to assets
revalued or not acquired.
24. Reflects interest expense on borrowings related to the Acquisitions as if
they occurred on January 1, 1997.
25. Reflects the estimated income tax expense, after giving consideration to
non-deductible goodwill expense, as if the Acquisitions occurred on
January 1, 1997.
26. Gives effect to: (i) the issuance of 517,767 shares of Common Stock and
warrants exercisable for 375,000 shares of Common Stock in connection with
the acquisition of CRWCD; (ii) the issuance of 1,425,753 shares of Common
Stock in the July 1997 Offering at the public offering price of $19.67 per
share which, net of the underwriting discount and offering expenses paid
by the Company, would be sufficient to repay acquisition related debt of
$8.4 million and to fund the acquisitions of AFECD and TRC; and (iii) the
issuance of 46,442 shares of Common Stock issued in connection with the
acquisition of AFS.
27. Reflects the elimination of interest expense on current and long-term debt
assumed to be repaid with a portion of the proceeds from the Offering as
if it had occurred on January 1, 1997.
<PAGE>
28. Gives effect to the issuance of 4.5 million shares of Common Stock at an
assumed public offering price of $25.00 per share as of January 1, 1997,
net of the estimated underwriting discount and offering expenses payable
by the Company, which would be sufficient to repay acquisition related
debt of $75.0 million, repay debt of $4.8 million and $17.1 million
recognized in connection with the FCA and MedSource acquisitions,
respectively, and pay an additional $10.5 million necessary to fund the
FCA and MedSource acquisitions.
29. Includes reorganization charges and other costs of $1.9 million and $90,000
for the year ended December 31, 1997 and the three months ended March 31,
1998 respectively. Net income per share - basic and net income per share -
diluted would have been $0.70 and $0.68, respectively, and $0.20 and
$0.19, respectively, on a pro forma basis assuming those charges had not
been incurred.
F-8
<PAGE>
[Map depicting Company's call centers and sales offices in the
United States, Canada and the United Kingdom.]
<PAGE>
================================================================================
No dealer, sales representative or any other person has been authorized
to give any information or to make any representations in connection with the
Offering other than those contained in this Prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the shares of Common Stock to which it relates or an offer to, or a
solicitation of, any person in any jurisdiction where such offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
there has been no change in the affairs of the Company, or that information
contained herein is correct as of any time subsequent to the date hereof.
---------------------------------------------------------
TABLE OF CONTENTS
---------------------------------------------------------
Page
---------
Prospectus Summary .......................... 3
Risk Factors ................................ 9
Pending and Recent Acquisitions ............. 15
Use of Proceeds ............................. 18
Dividend Policy ............................. 18
Price Range of Common Stock ................. 19
Capitalization .............................. 20
Selected Financial Data ..................... 21
Management's Discussion and
Analysis of Financial Condition
and Results of Operations ................ 23
Business .................................... 31
Management .................................. 40
Principal and Selling Shareholders .......... 42
Underwriting ................................ 44
Legal Matters ............................... 45
Experts ..................................... 45
Additional Information ...................... 45
Incorporation of Certain Documents
by Reference ............................. 46
Index to Pro Forma Consolidated
Financial Statements ..................... F-1
================================================================================
================================================================================
6,667,700 Shares
[GRAPHIC OMITTED]
Common Stock
-----------------------------------
PROSPECTUS
-----------------------------------
NationsBanc Montgomery
Securities LLC
BT Alex. Brown
Janney Montgomery Scott Inc.
The Robinson-Humphrey Company
, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses in connection with the
issuance and distribution of the securities being registered, all of which are
being borne by the Registrant.
Securities and Exchange Commission Registration Fee. ......... $ 57,546
National Association of Securities Dealers, Inc. Fee ......... 19,707
Nasdaq Listing Fee ........................................... 17,500
Printing and Engraving Expenses .............................. 100,000
Accounting Fees and Expenses ................................. 125,000
Legal Fees and Expenses ...................................... 100,000
Blue Sky Qualification Fees and Expenses ..................... 10,000
Transfer Agent and Registrar Fees and Expenses ............... 10,000
Miscellaneous ................................................ 160,247
--------
Total ..................................................... $600,000
========
The foregoing, except for the Securities and Exchange Commission
registration fee, the National Association of Securities Dealers, Inc. fee, and
the Nasdaq Listing fee are estimates.
Item 15. Indemnification of Directors and Officers.
Sections 1741 through 1750 of Subchapter D, Chapter 17, of the
Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"), contain
provisions for mandatory and discretionary indemnification of a corporation's
directors, officers and other personnel, and related matters.
Under Section 1741, subject to certain limitations, a corporation has the
power to indemnify directors and officers under certain prescribed
circumstances against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred in connection
with an action or proceeding, whether civil, criminal, administrative or
investigative, to which any of them is a party by reason of his being a
representative, director or officer of the corporation or serving at the
request of the corporation as a representative of another corporation,
partnership, joint venture, trust or other enterprise, if he acted in good
faith and in a manner he reasonably believed to be in, or not opposed to, the
best interests of the corporation and, with respect to any criminal proceeding,
had no reasonable cause to believe his conduct was unlawful. Under Section
1743, indemnification is mandatory to the extent that the officer or director
has been successful on the merits or otherwise in defense of any action or
proceeding if the appropriate standards of conduct are met.
Section 1742 provides for indemnification in derivative actions except in
respect of any claim, issue or matter as to which the person has been adjudged
to be liable to the corporation unless and only to the extent that the proper
court determines upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for the expenses that the court deems proper.
Section 1744 provides that, unless ordered by a court, any indemnification
under Section 1741 or 1742 shall be made by the corporation only as authorized
in the specific case upon a determination that the representative met the
applicable standard of conduct, and such determination will be made by the
board of directors (i) by a majority vote of a quorum of directors not parties
to the action or proceeding; (ii) if a quorum is not obtainable, or if
obtainable and a majority of disinterested directors so directs, by independent
legal counsel; or (iii) by the shareholders.
Section 1745 provides that expenses (including attorney's fees) incurred
by an officer, director, employee or agent in defending a civil or criminal
action or proceeding may be paid by the corporation in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by or
on behalf of such person to repay such amount if it shall ultimately be
determined that he or she is not entitled to be indemnified by the corporation.
II-1
<PAGE>
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
<TABLE>
<CAPTION>
Exhibit
No. Description
- ----------------------- ------------------------------------------------------------------------------------
<S> <C>
*1.1 Form of Underwriting Agreement
*2.1(1) Agreement dated March 24, 1998 among the Company, FCA and Fairfax
concerning the FCA Tender Offer
2.2 Stock Purchase Agreement dated May 4, 1998 among the Company, MedSource,
Whitney Subordinated Debt Fund, L.P., Whitney Equity Partners, L.P.,
C.B. Hellman, Jr., Mark Gorman, John O'Hara and HealthCare Business Management, Ltd.
4.1(2) Specimen of Common Stock Certificate
5.1 Opinion of Blank Rome Comisky & McCauley LLP
*23.1 Consent of Coopers & Lybrand L.L.P.
*23.2 Consent of Arthur Andersen & Co.
23.3 Consent of Blank Rome Comisky & McCauley LLP (included in the opinion
filed as Exhibit 5.1 hereto)
*24.1 Power of Attorney of directors and officers.
*27.1 Financial Data Schedules
</TABLE>
- ------------
* Previously filed.
(1) Incorporated by reference to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on May 4, 1998.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-11745), as amended, filed with the Securities and
Exchange Commission on September 11, 1996.
II-2
<PAGE>
(b) Financial Statement Schedules
None required.
Item 17. Undertakings.
(a) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions described in Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(b) The undersigned hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
each filing of the Registrant's annual report pursuant to section 13(a) or
section 15(d) of the Exchange Act and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the Exchange
Act) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(2) that for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective; and
(3) that for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Fort Washington, Pennsylvania, on May 7, 1998.
NCO GROUP, INC.
By: /s/ Michael J. Barrist
-------------------------------------
Michael J. Barrist,
Chairman of the Board, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
- ---------------------------- ------------------------------------------------ ------------
<S> <C> <C>
/s/ Michael J. Barrist Chairman of the Board, President and Chief May 7, 1998
- ---------------------------- Executive Officer (principal executive officer)
Michael J. Barrist
* Executive Vice President and Director May 7, 1998
- ----------------------------
Charles C. Piola
* Executive Vice President, Finance, Chief May 7, 1998
- ---------------------------- Financial Officer and Treasurer (principal
Steven L. Winokur financial and accounting officer)
* Executive Vice President, Development and May 7, 1998
- ---------------------------- Director
Bernard R. Miller
* Director May 7, 1998
- ----------------------------
Eric S. Siegel
* Director May 7, 1998
- ----------------------------
Allen F. Wise
</TABLE>
*By: /s/ Michael J. Barrist
- -------------------------------------
Michael J. Barrist,
Power-of-Attorney
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ----------------------- ------------------------------------------------------------------------------------
<S> <C>
*1.1 Form of Underwriting Agreement
*2.1(1) Agreement dated March 24, 1998 among the Company, FCA and Fairfax
concerning the FCA Tender Offer
2.2 Stock Purchase Agreement dated May 4, 1998 among the Company, MedSource,
Whitney Subordinated Debt Fund, L.P., Whitney Equity Partners, L.P.,
C.B. Hellman, Jr., Mark Gorman, John O'Hara and HealthCare Business Management, Ltd.
4.1(2) Specimen of Common Stock Certificate
5.1 Opinion of Blank Rome Comisky & McCauley LLP
*23.1 Consent of Coopers & Lybrand L.L.P.
*23.2 Consent of Arthur Andersen & Co.
23.3 Consent of Blank Rome Comisky & McCauley LLP (included in the opinion
filed as Exhibit 5.1 hereto)
*24.1 Power of Attorney of directors and officers.
*27.1 Financial Data Schedules
</TABLE>
- ------------
* Previously filed
(1) Incorporated by reference to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on May 4, 1998.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-11745), as amended, filed with the Securities
Exchange Commission on September 11, 1996.
<PAGE>
STOCK PURCHASE AGREEMENT
among
NCO GROUP, INC.
MEDSOURCE, INC.
WHITNEY SUBORDINATED DEBT FUND, L.P.
WHITNEY EQUITY PARTNERS, L.P.
C.B. HELLMANN, JR.
MARK GORMAN
JOHN O'HARA
and
HEALTHCARE BUSINESS MANAGEMENT, LTD.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1: DEFINED TERMS...............................................................................1
SECTION 2: SALE AND PURCHASE OF CAPITAL STOCK...........................................................6
2.1 Stock Delivery.........................................................................6
2.2 Closing; Purchase...........................................................................6
2.3 Purchase Price..............................................................................6
2.4 Closing Balance Sheet.......................................................................6
2.5 Post Closing Adjustment.....................................................................7
SECTION 3: REPRESENTATIONS, WARRANTIES AND COVENANTS OF COMPANY..........................................8
3.1 Due Incorporation and Qualification; Subsidiaries..........................................8
3.2 Capital Stock; Options.....................................................................8
3.3 Authority to Execute and Perform Agreement.................................................9
3.4 Financial Statements......................................................................10
3.5 No Adverse Change.........................................................................10
3.6 Tax Matters...............................................................................10
3.7 Compliance with Laws......................................................................10
3.8 Permits...................................................................................11
3.9 No Breach.................................................................................11
3.10 Consents.................................................................................11
3.11 Judgments and Proceedings................................................................11
3.12 Employee Relations.......................................................................12
3.13 Contracts................................................................................13
3.14 Real Property............................................................................13
3.15 Books of Account and Reports.............................................................13
3.16 Accounts Receivable......................................................................14
3.17 Tangible Property........................................................................14
3.18 Intangible Property......................................................................14
3.19 Title....................................................................................14
3.20 Liabilities..............................................................................14
3.21 Suppliers and Customers..................................................................15
3.22 Employee Benefit Plans...................................................................15
3.23 Insurance................................................................................16
3.24 Software.................................................................................17
3.25 Operations Prior to and Including the Closing............................................17
3.26 Questionable Payments....................................................................19
3.27 No Broker................................................................................19
3.28 Full Disclosure...........................................................................19
3.29 Representations and Warranties on Closing Date...........................................19
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SECTION 4: REPRESENTATIONS, WARRANTIES AND COVENANTS OF CMJ.............................................19
4.1 Ownership..................................................................................20
4.2 No Other Agreements........................................................................20
4.3 Actions and Proceedings....................................................................20
4.4 No Breach..................................................................................20
4.5 Consents...................................................................................20
4.6 No Broker..................................................................................20
4.7 Questionable Payments......................................................................20
4.8 Representations and Warranties on Closing Date.............................................21
SECTION 5: REPRESENTATIONS, WARRANTIES AND COVENANTS OF WHITNEY:........................................21
5.1 Ownership..................................................................................21
5.2 No Other Agreements........................................................................21
5.3 Actions and Proceedings....................................................................21
5.4 Authority to Execute and Perform Agreement.................................................21
5.5 No Breach..................................................................................22
5.6 Consents...................................................................................22
5.7 No Broker..................................................................................22
5.8 Representations and Warranties on Closing Date.............................................22
SECTION 6: REPRESENTATION, WARRANTIES AND COVENANTS OF HBM:.............................................22
6.1 Ownership..................................................................................22
6.2 Authority to Execute and Perform Agreement.................................................22
6.3 No Other Agreements........................................................................23
6.4 Actions and Proceedings....................................................................23
6.5 No Breach..................................................................................23
6.6 Consents...................................................................................23
6.7 No Broker..................................................................................23
6.8 Representations and Warranties on Closing Date.............................................23
SECTION 7: REPRESENTATIONS, WARRANTIES AND COVENANTS OF NCO............................................23
7.1 Due Incorporation and Qualification........................................................23
7.2 Authority to Execute and Perform Agreement.................................................24
7.3 No Breach..................................................................................24
7.4 Consents...................................................................................24
7.5 No Broker..................................................................................24
7.6 SEC Reports................................................................................24
7.7 Full Disclosure............................................................................24
7.8 Representations and Warranties on Closing Date.............................................25
SECTION 8: CERTAIN OBLIGATIONS OF THE COMPANY PENDING CLOSING..........................................25
8.1 Conduct of Business........................................................................25
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
8.2 Preservation of Business..................................................................26
8.3 Insurance.................................................................................27
8.4 Access to Business........................................................................27
8.5 Proceedings...............................................................................27
8.6 Continued Effectiveness of Representations and Warranties of Corporation..................28
8.7 No Shopping...............................................................................28
8.8 Material Consents.........................................................................28
SECTION 9: CERTAIN OBLIGATIONS OF NCO PENDING CLOSING..................................................28
9.1 Material Consents.........................................................................28
SECTION 10. CONDITIONS TO CLOSING......................................................................29
10.1 Mutual Conditions........................................................................29
10.2 Conditions to Obligations of NCO.........................................................29
10.2.1 Performance of Agreements......................................................29
10.2.2 No Breach of Representations...................................................29
10.2.3 Delivery of Certificate........................................................30
10.2.4 No Material Adverse Change....................................................30
10.2.5 Proceedings...................................................................30
10.2.6 Approval of Counsel to NCO....................................................30
10.2.8 Deliverables..................................................................30
10.2.8.1 Instruments of Transfer......................................................30
10.2.8.2 Receipts...........................................................30
10.2.8.3 Consents...........................................................30
10.2.8.4 Good Standing......................................................30
10.2.8.5 Incumbency Certificate.............................................31
10.2.8.6 Certified Resolutions..............................................31
10.2.8.7 Opinion of Counsel.................................................31
10.2.8.9 Other Documents....................................................31
10.2.9 Employment Agreements..........................................................31
10.2.10 Rights to Acquire MedSource Stock.............................................31
10.3 Conditions to Obligations of the Seller..................................................31
10.3.4 Deliveries....................................................................32
10.3.4.1 Closing Date Payment Amount.........................................32
10.3.4.2 Good Standing......................................................32
10.3.4.3 Certified Resolutions..............................................32
10.3.4.4 Incumbency Certificate.............................................32
10.3.4.5 Opinion of Counsel.................................................32
10.3.4.6 Other Documents.............................................................32
10.3.5 Employment Agreements..........................................................32
10.3.6 Contribution of Certain Funds..................................................32
10.3.7 Availability of Certain Discretionary Funds....................................32
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 11: RESTRICTIVE COVENANTS OF CMJ AND WHITNEY...................................................32
11.1 Certain Acknowledgments...............................................................32
11.1.1 NCO Business.................................................................32
11.1.2 Competitive Nature of Business...............................................33
11.1.3 Access to Information........................................................33
11.1.4 Basis for Covenants..........................................................33
11.2 Nondisclosure Covenants...............................................................33
11.3 Noncompetition and Noninterference Covenants..........................................33
11.3.1 .............................................................................34
(1) Solicitation Restrictions............................................34
(2) Competing Business Restrictions......................................34
(1) Competing Business Restrictions......................................34
(2) Noninterference......................................................34
11.4 Nonsolicitation.......................................................................34
11.5 Certain Exclusions....................................................................34
11.6 Enforcement of Covenants..............................................................35
11.7 Scope of Covenants....................................................................35
SECTION 12: INDEMNIFICATION...........................................................................35
12.1 The Company's, CMJ's, HBM's and Whitney's Indemnification................................35
12.1.1 Misrepresentations............................................................36
12.1.2 Nonperformance................................................................36
12.1.3 MedSource Name.................................................................36
12.1.4 Proceedings...................................................................36
12.1.5 Office Reorganization.........................................36
12.2 CMJ's Indemnification.....................................................................36
12.3 Whitney's Indemnification.................................................................36
12.4 HBM's Indemnification.....................................................................36
12.5 NCO's Indemnification....................................................................37
12.5.1 Misrepresentations............................................................37
12.5.2 Nonperformance................................................................37
12.6 Indemnification Procedures...............................................................37
12.6.1 Notice........................................................................37
12.6.2 Defense.......................................................................37
12.7 Payments.................................................................................38
12.8 Setoff and Holdback......................................................................38
12.9 Certain Qualifications....................................................................38
12.10 Exclusive Remedy.........................................................................39
SECTION 13: TERMINATION AND WAIVER.....................................................................40
13.1 Termination..............................................................................40
13.2 Effect of Termination....................................................................41
13.3 Extension; Waiver........................................................................41
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 14: OTHER PROVISIONS...........................................................................41
14.1 Fees and Expenses........................................................................41
14.2 Publicity................................................................................41
14.3 Notice...................................................................................41
14.4 Survival of Representations..............................................................43
14.5 Interpretation of Representations........................................................43
14.6 Reliance by NCO..........................................................................44
14.7 Entire Understanding.....................................................................44
14.8 Parties in Interest......................................................................44
14.9 Waivers..................................................................................44
14.10 Severability............................................................................44
14.11 Counterparts............................................................................44
14.12 Section Headings........................................................................44
14.13 References..............................................................................44
14.14 Controlling Law.........................................................................45
14.15 Jurisdiction and Process................................................................45
14.16 No Third-Party Beneficiaries............................................................45
14.17 Further Assurances.......................................................................45
14.18 Schedules................................................................................45
14.19 Certain Matters Relating to Employees....................................................45
14.20 Covenant Relating to Tax Returns................................................46
</TABLE>
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STOCK PURCHASE AGREEMENT
------------------------
This Agreement is made this 4th day of May, 1998, by and among NCO
Group, Inc., a Pennsylvania corporation ("NCO"), MedSource, Inc., a Delaware
corporation (the "Company"), C.B. Hellmann, Jr. ("Chip"), Mark Gorman ("Mark")
and John O'Hara ("John") (Chip, Mark and John collectively hereinafter referred
to as "CMJ"), Whitney Subordinated Debt Fund L.P., a Delaware limited
partnership ("Whitney Fund") and Whitney Equity Partners, L.P., a Delaware
limited partnership ("Whitney Partners") (Whitney Fund and Whitney Partners
hereinafter together referred to as "Whitney") and HealthCare Business
Management, Ltd., a Delaware corporation ("HBM" together with CMJ and Whitney,
the "Seller").
RECITALS
--------
WHEREAS, Seller owns of record and beneficially all of the issued and
outstanding capital stock of the Company;
WHEREAS, Seller desires to sell all such issued and outstanding capital
stock of the Company, and NCO desires to acquire all of the outstanding capital
stock of the Company, pursuant to the terms of this Agreement.
NOW, THEREFORE, intending to be legally bound hereby and in
consideration of the mutual agreements set forth herein, the parties hereto
agree as follows:
SECTION 1: DEFINED TERMS
As used in this Agreement, unless otherwise defined herein or unless
the context otherwise requires, the following terms shall have the following
meanings:
1.1 "Accounts Receivable" means (a) any right to payment for
goods sold, leased or licensed or for services rendered, whether or not it has
been earned by performance, whether billed or unbilled, and whether or not it is
evidenced by any Contract, (b) any note receivable, or (c) any other receivable
or right to payment of any nature.
1.2 "Asset" means any real, personal, mixed, tangible or
intangible property of any nature, including, but not limited to, (a) Cash
Assets, (b) Accounts Receivable, (c) other current assets of any nature
including, but not limited to, unbilled revenue, prepayments, deposits and
escrows, (d) Tangible Property, (e) Real Property, (f) Software, (g)
Intangibles, (h) Contract Rights, (i) claims, causes of action and other legal
rights and remedies of any nature, and (j) good will.
1.3 "Business" means the accounts receivable management and
collection business conducted by the Company and the Company's Subsidiaries
through the date of Closing Date.
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1.4 "Cash Asset" means any cash on hand, cash in bank or other
accounts, readily marketable securities, and other cash-equivalent liquid assets
of any nature.
1.5 "Change in Control Payment" means an aggregate amount equal
to $800,000 payable $400,000 to Chip and $400,000 to Paul Weitzel.
1.6 "Closing Date Company Obligations" means the aggregate of
the following: (i) the amount that would be required to satisfy in full as of
the Closing Date all long-term debt (including the current portion of long-term
debt) of the Company, including, without limitation, the principal, accrued
interest, fees and penalties, if any, that would be due and owing with respect
to the satisfaction of such debt; (ii) the Change in Control Payment and (iii)
the Dividend Payment.
1.7 "Code" means the Internal Revenue Code of 1986, as amended.
1.8 "Consent" means any consent, approval, order or
authorization of, or any declaration, filing or registration with, or any
application or report to, or any waiver by, or any other action (whether similar
or dissimilar to any of the foregoing) of, by or with, any Person which is
necessary in order to take a specified action or actions in a specified manner
and/or to achieve a specified result or to avoid the occurrence of a default or
breach which if not obtained could reasonably be expected to have a Material
Adverse Effect.
1.9 "Contract" means any written or oral contract, agreement,
instrument, order, arrangement, commitment or understanding of any nature
whatsoever.
1.10 "Contract Right" means, with respect to any Person, any
right, power or remedy of any nature of such Person under any Contract
including, but not limited to, rights to receive property or services or
otherwise derive benefits from the payment, satisfaction or performance of
another party's obligations, rights to demand that another party accept property
or services or take any other actions, and rights to pursue or exercise remedies
or options.
1.11 "Dividend Payment" means an amount equal to the dividends
payable on the MedSource Preferred Stock which have accrued but as of the
Closing Date have not been paid.
1.12 "Documents" means and includes any document, agreement,
instrument, certificate, notice, Consent, affidavit, correspondence (by letter,
telegram, telex or otherwise), written statement, schedule or exhibit
whatsoever.
1.13 "Employee Benefit Plan" means any employee benefit plan as
defined in Section 3(3) of ERISA, or any other plan, trust agreement, program,
policy or arrangement for or regarding bonuses, commissions, incentive
compensation, severance, hospitalization, vacation, deferred compensation,
pensions, profit sharing, retirement, payroll savings, stock options, stock
purchases, stock awards, stock ownership, equity compensation, phantom stock,
stock appreciation rights, medical/dental expense payment or reimbursement,
disability income or protection, sick pay, group
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insurance, self insurance, death benefits, employee welfare or fringe benefits
of any nature, including without limitation, those benefiting retirees or former
employees.
1.14 "Encumbrance" means any lien, security interest, pledge,
mortgage, judgment, easement, leasehold, assessment, covenant, restriction,
reservation, conditional sale, prior assignment, or other encumbrance, claim,
burden or charge of any nature.
1.15 "Environmental Laws" means all Laws relating to pollution,
protection of the environment, health, safety, or the exposure of persons to
Hazardous Substances, including, without limitation, Laws relating to emissions,
discharges, releases or threatened releases into the environment (including,
without limitation, ambient air, surface water, ground water or land) of any
Hazardous Substances identified or regulated under any such Environmental Laws.
1.16 "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
1.17 "Escrow Amount" means $250,000; provided, however, such
amount shall be increased up to $750,000 on a dollar-for-dollar basis for each
dollar in excess of $250,000 that the Tangible Net Worth of the Company as of
March 31, 1998 is reported to be less than $4,606,000, in a due diligence report
delivered within 30 days after the date of this Agreement to NCO by Coopers and
Lybrand based upon its review of the Company's books and records.
1.18 "GAAP" means generally accepted accounting principles
under United States accounting rules and regulations, as in effect from time to
time, consistently applied.
1.19 "Hazardous Substances" means any substance, waste,
contaminant, pollutant or material that has been determined by any Law or any
United States federal government authority, or any state or local government
authority having jurisdiction over Real Property owned, leased, used or occupied
by Company, to be capable of posing a risk of injury or damage to health,
safety, property or the environment, including, but not limited to, (a) all
substances, wastes, contaminants, pollutants and materials defined or designated
as hazardous, dangerous or toxic pursuant to any Law of the state in which such
Real Property is located or any United States Law, and (b) urea-formaldehyde,
polychlorinated byphenyls, asbestos or asbestos-containing materials, nuclear or
radioactive fuel or waste, radon, explosives, known carcinogens, petroleum,
petroleum products, or any other waste, material, substance, pollutant or
contaminant that might cause any injury to human health or safety or to the
environment or might subject the owner, operator, possessor or occupier of such
Real Property to any claims, causes of action, costs damages, penalties,
expenses, demands or liabilities, however defined, under any applicable Law.
1.20 "Insurance Policy" means any public liability, product
liability, general liability, comprehensive, property damage, vehicle, life,
hospital, medical, dental, disability, workers' compensation, key man, fidelity
bond, theft, forgery, errors and omissions, directors' and officers' liability,
owner's title, or other insurance policy or binder of any nature.
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1.21 "Intangible Property " means any name, corporate name,
fictitious name, trademark, trademark application, service mark, service mark
application, trade name, brand name, product name, slogan, trade secret
(including, without limitation, recipes, formula and ingredients), know-how,
patent, patent application, copyright, copyright application, design, logo,
formula, invention, product right or other intangible asset of any nature,
whether in use, under development or design, or inactive.
1.22 "Judgment" means any order, writ, injunction, fine,
citation, award, decree or other judgment of any nature of any foreign, federal,
state or local court, governmental body, administrative agency, regulatory
authority or arbitration tribunal.
1.23 "Knowledge" or "Know" or the like with reference to the
Company means that none of the executive officers, including the Vice President
of Operations and General Manager -Nashville Business Unit, or directors of the
Company have any actual Knowledge or actual belief that the statement qualified
by Knowledge is incorrect, with reference to any other Person that is an entity
means that none of the executive officers or directors of such Person have any
actual Knowledge or actual belief that the statement qualified by Knowledge is
incorrect and with reference to a Person that is a natural person means that
such person does not have actual Knowledge or actual belief that the statement
qualified by Knowledge is incorrect.
1.24 "Law" means any provision of any foreign, federal, state
or local law, statute, ordinance, order, charter, constitution, treaty, rule or
regulation, guideline, or consent order, decree or agreement, including without
limitation, common law.
1.25 "Liabilities" means any debt, liability or obligation of
any nature, whether secured, unsecured, recourse, nonrecourse, liquidated,
unliquidated, accrued, absolute, fixed, contingent, ascertained, unascertained,
known, unknown or otherwise.
1.26 "Material Adverse Effect" means any change or effect that
would be materially adverse to the condition (financial or otherwise), results
of operations, Business, Assets of the Business, Liabilities, or business
prospects of the Company and its Subsidiaries taken as a whole.
1.27 "MedSource Common Stock" means the common stock of
MedSource, par value $.01 per share.
1.28 "MedSource Preferred Stock" means the Company's 8% Series
A Cumulative Convertible Preferred Stock, $.01 par value, and the Company's
Series C Convertible Preferred Stock, $.01 par value.
1.29 "MedSource Stock" means the MedSource Common Stock and
MedSource Preferred Stock.
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1.30 "Permit" means any license, permit, approval, certificate,
consent, waiver, order, authorization, registration, right or privilege of any
nature, granted, issued, approved or allowed by any foreign, federal, state or
local governmental body, administrative agency or regulatory authority or any
Person acting on behalf of any such body, agency or authority.
1.31 "Person" means any individual, sole proprietorship, joint
venture, partnership, corporation, limited liability company or partnership,
association, cooperative, trust, estate, governmental body, administrative
agency, regulatory authority or other entity of any nature.
1.32 "Proceeding" means any claim, demand, suit, action,
litigation, investigation, arbitration, audit, hearing or other legal proceeding
of any nature, or any formal demand which might lead to any of the foregoing.
1.33 "Real Property" means any real estate, land, building,
condominium, town house, structure, improvement or other real property of any
nature, all shares of stock or other ownership interests in cooperative or
condominium associations or any other corporation owning real estate,
partnership interests in partnerships, membership interests in limited liability
companies or other forms of ownership interest through which interests in real
estate are held, and all appurtenant and ancillary rights thereto, including,
but not limited to, easements, covenants, water rights, sewer rights and utility
rights.
1.34 "Software" means any computer program, operating system,
applications system, firmware or software of any nature, whether operational,
under development or inactive, including, but not limited to, all object code,
source code, technical manuals, user manuals and other documentation therefor,
whether in machine-readable form, programming language or any other language or
symbols, and whether stored, encoded, recorded or written on disk, tape, film,
memory device, paper or other media of any nature.
1.35 "Subsidiary" means any Person in which a majority of the
total direct or indirect equity or ownership interest is owned, of record or
beneficially, by another Person or a direct or indirect Subsidiary of such other
Person.
1.36 "Tangible Net Worth" means the tangible net worth of the
Company determined by subtracting from the total assets of the Company the
following: (i) intangible assets (including goodwill, deferred financing
acquisition costs and deferred loan costs); and (ii) current liabilities
(including accounts payable, accrued expenses, accrued compensation and trust
payable but excluding current portion of long-term debt and any interest to be
paid as a Closing Date Company Obligation) and adding to the result any cost or
expense of the Company incurred after the date hereof relating to the closure of
offices or the termination of employees which closure or termination is
consistent with NCO's plan to restructure the Company's operations after the
Closing Date as communicated to Company by NCO in writing, provided, however, no
cost or expense for which an indemnification obligation exists pursuant to
Section 12.1.5 shall be added to the result.
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1.37 "Tangible Property" means any furniture, fixtures,
leasehold improvements, vehicles, office equipment, computer equipment, other
equipment, machinery, tools, forms, supplies or other tangible personal property
of any nature.
1.38 "Tax" means (a) any foreign, federal, state or local
income, earnings, profits, gross receipts, franchise, capital stock, net worth,
sales, use, occupancy, general property, real property, personal property,
intangible property, realty transfer, fuel, excise, payroll, withholding,
unemployment compensation, social security or other tax of any nature, (b) any
foreign, federal, state or local organization fee, qualification fee, annual
report fee, filing fee, occupation fee, assessment, sewer rent or other fee or
charge of any nature, and (c) any deficiency, interest or penalty imposed with
respect to any of the foregoing.
SECTION 2: SALE AND PURCHASE OF CAPITAL STOCK.
2.1 Stock Delivery. On the Closing Date (as hereinafter
defined), subject to and upon the terms and conditions contained herein, Seller
will sell, transfer, convey, assign and deliver to NCO, and NCO will purchase
and acquire from the Seller, all right, title and interest in and to the shares
of MedSource Stock owned by Seller (including with respect to the shares of
MedSource Preferred Stock all shares of the MedSource Common Stock and shares of
the Company's 8% Series B Cumulative Redeemable Preferred Stock into which the
MedSource Preferred Stock may be converted prior to the Closing Date). Seller
shall deliver all certificates representing the MedSource Stock (and any
securities into which the MedSource Stock has been converted), duly endorsed for
transfer to NCO, on the Closing Date.
2.2 Closing; Purchase. Unless this Agreement shall have been
terminated and the transactions herein contemplated shall have been abandoned
pursuant to the provisions of Section 13, the closing (the "Closing") of this
Agreement shall take place (a) at 10:00 a.m. (local time) on the later of (i)
the date on which all conditions to the respective obligations of the parties
set forth in Section 10 hereof shall have been satisfied or waived, or (ii) the
earlier of the date which is five days after NCO completes the public offering
of its common stock with respect to which NCO is currently preparing a
registration statement or July 15, 1998 or (b) at such other time and date as
NCO, CMJ and Whitney shall agree (such date and time on and at which the Closing
occurs being referred to herein as the "Closing Date"). The Closing shall take
place at the offices of Blank Rome Comisky & McCauley, Philadelphia,
Pennsylvania, or at such other location as NCO, CMJ and Whitney shall agree.
2.3 Purchase Price. In consideration of the sale, transfer,
conveyance and delivery of the MedSource Stock, and in reliance upon the
representations and warranties made herein by Company, CMJ, Whitney and HBM, NCO
shall, in full payment thereof, pay to Seller a total purchase price equal to
$35,000,000 (the "Base Purchase Price"), reduced by the amount of the Closing
Date Company Obligations (as so reduced, the "Closing Date Payment Amount") and
further adjusted by the amount of the Post-Closing Adjustment (as defined in
Section 2.5), if any (as so reduced and adjusted, the "Purchase Price".) The
Purchase Price shall be allocated among the Seller as set forth
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in Schedule 2.3. The Closing Date Payment Amount, less the Escrow Amount shall
be paid to Seller (as set forth on Schedule 2.3) in cash by bank or certified
check or by wire transfer on the Closing Date. On the Closing Date, NCO shall
deliver to the Escrow Agent pursuant to, and in accordance with the terms of an
Escrow Agreement substantially in the form attached hereto as Exhibit "A" (the
"Escrow Agreement") the Escrow Amount. The Escrow Amount shall be held in an
escrow account (the "Escrow Account") and distributed in accordance with the
terms of the Escrow Agreement.
2.4 Closing Balance Sheet. (a) Seller will deliver to NCO as soon as
reasonably practicable but in no event later than forty-five (45) business days
after Closing, an unaudited balance sheet of the Company as of the Closing Date
(the "Closing Balance Sheet"), together with the related statement of income for
the year-to-date period ended on the date of the Closing Balance Sheet. The
Closing Balance Sheet and related statement of income shall have been prepared
in accordance with GAAP consistently applied by the Company in accordance with
past practice for the financial statements described in Section 3.4 hereto. The
Closing Balance Sheet shall include accruals for all obligations of the Company
and its Subsidiaries including , if applicable, for federal, state and local
taxes (including income taxes) as well as accruals, if applicable, for payroll
taxes, employee benefits, workers' compensation insurance premiums and deposits,
sick pay and "comp" time, fees and expenses of the Company pursuant to Section
14.1 in all cases as if there had been a closing of the books on the date of the
Closing Balance Sheet. The Company shall give the representatives of the Seller
reasonable access to the Company's books and records for the purpose of
preparing the Closing Balance Sheet and shall allow the Company's Chief
Financial Officer and appropriate NCO accounting personnel to assist the Seller
to prepare the Closing Balance Sheet.
(b) NCO shall, within 20 days after delivery to NCO by Seller
of the Closing Balance Sheet, notify Seller in writing if it disputes the
accuracy of the Closing Balance Sheet. Such notice shall specify in reasonable
detail the nature of the dispute. If no such notice is received by Seller, NCO
shall be deemed to have accepted the accuracy of the Closing Balance Sheet. If
such notice is given to Seller, then during the 20-day period following the
receipt of such notice by Seller, Seller and NCO shall attempt to resolve such
dispute and to determine the accuracy of the Closing Balance Sheet. If at the
end of the 20-day period, Seller and NCO shall have failed to reach a written
agreement with respect to such dispute, the matter shall be referred to a Big
Six Certified Public Accounting Firm agreeable to both Seller and NCO (the
"Arbitrator"), which shall act as an arbitrator and shall issue its report as to
the Closing Balance Sheet within forty-five (45) days after such dispute is
referred to the Arbitrator. Each of the parties hereto shall bear all costs and
expenses incurred by such party in connection with such arbitration, except that
the fees and expenses of the Arbitrator hereunder shall be borne equally by
Seller and NCO. This provision for arbitration shall be specifically enforceable
by the parties and the decision of the Arbitrator in accordance with the
provisions hereof shall be final and binding and there shall be no right of
appeal therefrom. The Closing Balance Sheet prepared by Seller if not disputed
by NCO, or, if disputed by NCO, the Closing Balance Sheet with respect to which
a written agreement is reached to settle the dispute or, if no written agreement
is reached, the Closing Balance Sheet with respect to which a report is
issued by the Arbitrator shall be the Closing Balance Sheet utilized the
determine the Post-Closing Adjustment as provided in Section 2.5.
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2.5 Post Closing Adjustment. If the Tangible Net Worth of the Company
as reflected on the Closing Balance Sheet is less than $4,606,000 the amount of
such difference shall be the Post Closing Adjustment which shall be payable by
Seller (in the proportions set forth on Schedule 2.3) to NCO. If the Tangible
Net Worth of the Company as reflected on the Closing Balance Sheet is greater
than $4,606,000 the amount of such difference shall be the Post Closing
Adjustment which shall be payable by NCO to Seller (in the proportions set forth
by Schedule 2.3). If any Post Closing Adjustment is required, the adjustment
shall be made on the date on which NCO accepts the accuracy of the Closing
Balance Sheet or the date upon which any dispute concerning the closing Balance
Sheet is resolved. The amount of any Post Closing Adjustment payable by NCO
shall be paid to Sellers (in the proportion set forth on Schedule 2.3 hereto) by
wire transfer in immediately available funds to an account or accounts
designated by Sellers. The amount of any Post Closing Adjustment payable by
Seller shall be paid to NCO by Seller (in the proportions set forth on Schedule
2.3 hereto) by wire transfer in immediately available funds to an account or
accounts designated by NCO. The funds in the Escrow Account shall be utilized to
pay the Post Closing Adjustment. Seller shall deliver a letter to the Escrow
Agent (with a copy to NCO) instructing the Escrow Agent to release to NCO the
funds held in the Escrow Account necessary to pay the Post Closing Adjustment
and the amount paid by the Escrow Agent shall be credited against the
Post-Closing Adjustment payable by Seller to NCO. The balance of any funds held
in the Escrow Account after payment of such Post Closing Adjustment shall be
distributed to Sellers (in the proportions set forth on Schedule 2.3). If the
funds in the Escrow Account are not sufficient to pay the total Post Closing
Adjustment payable to NCO, Seller shall pay on the date that the Post Closing
Adjustment is determined the difference between the Post Closing Adjustment and
the funds in the Escrow Account by wire transfer in immediately available funds
to an account designated by NCO (in the proportions set forth on Schedule 2.3).
SECTION 3: REPRESENTATIONS, WARRANTIES AND COVENANTS OF COMPANY.
Knowing that NCO relies thereon, the Company represents, warrants and covenants
to NCO on the date hereof and on and as of the Closing Date as follows:
3.1 Due Incorporation and Qualification; Subsidiaries. The Company and
each Subsidiary of the Company is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation.
The Company and each Subsidiary of the Company has the full power and authority
to own, lease and operate the Assets of the Business which it leases and
operates and, to carry on its Business as and where such Business is now
conducted. The Company has the full power and authority to enter into and
perform this Agreement and to consummate the transactions contemplated hereby
upon the terms and conditions herein provided. The Company or its Subsidiaries
is duly qualified as a foreign corporation in good standing under the Laws of
the jurisdictions set forth in Schedule 3.1. There is no other jurisdiction in
which the nature of the Business or location of the Assets requires such
licensing or qualification, except where the failure to be so qualified would
not have, and could not be reasonably expected to have a Material Adverse
Effect. Except as set forth on Schedule 3.1, the Company has no Subsidiaries nor
owns, directly or indirectly, any equity interest in or has control of, alone or
in combination with others, any Person.
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Schedule 3.1 sets forth the names and titles of the Company's and its
Subsidiaries directors and officers, and all names under which and addresses at
which the Company and its Subsidiaries have done business at any time since
January, 1993.
3.2 Capital Stock; Options. The Company is authorized to issue (i)
10,000,000 shares of MedSource Common Stock, 2,905,000 shares of which are
issued and outstanding on the date hereof and are owned of record and
beneficially by CMJ and HBM free and clear of any Encumbrance (ii) 150,000
shares of the 8% Series A Cumulative Convertible Preferred Stock, $.01 par
value, 138,400 shares of which are issued and outstanding on the date hereof and
are owned of record and beneficially by Whitney Partners, (iii) 150,000 shares
of 8% Series B Cumulative Redeemable Preferred Stock, $0.01 par value, none of
which are issued, and (iv) 50,000 shares of Series C Convertible Preferred
Stock, $.01 par value, 46,100 shares of which are owned of record and
beneficially by Whitney Fund. No other class of capital stock of the Company is
authorized, issued or outstanding. All of the issued and outstanding shares of
the MedSource Common Stock and MedSource Preferred Stock are duly authorized and
are legally and validly issued, fully paid and nonassessable. Except as set
forth on Schedule 3.2, there are no outstanding subscriptions, rights, options,
warrants, calls, commitments or agreements to which the Company is a party or by
which it is bound or may be bound which relate to the issuance or sale of shares
of its capital stock and neither Company nor Seller is a party to or bound by
any agreement relating to the sale or other disposition of any shares of the
Company's capital stock. Except as set forth on Schedule 3.2, there is no
liability for dividends declared or accumulated but unpaid with respect to any
of the MedSource Common Stock or MedSource Preferred Stock. Except as set forth
in Schedule 3.2, no bonds, debentures, notes or other indebtedness of the
Company having the right to vote (or convertible into or exercisable for
securities having the right to vote) on any matters on which stockholders may
vote is issued or outstanding. Except as set forth in Schedule 3.2, there are no
obligations, contingent or otherwise, of the Company to (i) repurchase, redeem
or otherwise acquire any shares of the MedSource Common Stock, MedSource
Preferred Stock or other capital stock of the Company, or (ii) provide funds to,
or make any investment in (in the form of a loan, capital contribution or
otherwise), or provide any guarantee with respect to the material obligations
of, any Person. Except as set forth on Schedule 3.2, there are no agreements,
arrangements or commitments of any character (contingent or otherwise) pursuant
to which any person is or may be entitled to receive any payment based on
revenues or earnings, or calculated in accordance therewith, of the Company or
any Subsidiary of the Company. Except as set forth in Schedule 3.2, there are no
voting trusts, proxies or other agreements or understandings to which any of the
Company or Seller is a party or by which any of the Company or Seller is bound
with respect to the voting of any shares of capital stock or other equity
interests of the Company. Schedule 3.2 includes an accurate and complete list of
the authorized, issued and outstanding shares of stock of each Subsidiary of the
Company and the names of all of the directors and officers of each Subsidiary of
the Company. The Company is the legal and beneficial owner of, and has good and
valid title to, all of the outstanding capital stock of each Subsidiary of the
Company, free and clear of any Encumbrances. Except for the shares of capital
stock listed on Schedule 3.2, there are no other issued or outstanding shares of
capital stock of any Subsidiary of the Company. All of the issued and
outstanding shares of capital stock of each Subsidiary of the Company have been
duly authorized and validly issued, and are fully
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paid and nonassessable, with no liability attaching to the ownership thereof.
Except as set forth on Schedule 3.2, there are no outstanding options, puts,
calls, warrants, subscriptions, stock appreciation rights, phantom stock, or
other Contracts or Contract Rights relating to the offering, sale, issuance,
redemption or disposition of any shares of capital stock or other securities in
any Subsidiary of the Company.
3.3 Authority to Execute and Perform Agreement. The Company has the
full legal right and power and all authority and approvals required to enter
into, execute, deliver and perform this Agreement and its obligations hereunder.
The execution, delivery and performance of this Agreement (and all other
Documents required to effect the transaction contemplated) and the consummation
of the transactions contemplated herein have been duly authorized by the
Company's Board of Directors and shareholders. This Agreement, and each Document
contemplated by this Agreement, is and will be the valid and legally binding
obligation of the Company enforceable in accordance with its terms, except as
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of creditors' rights
in general, or by general principles of equity.
3.4 Financial Statements. Schedule 3.4 contains the financial
statements and notes thereto of the Company (including balance sheets and
related statements of income, retained earnings and cash flows) at and for the
fiscal years ended December 31, 1997 and 1996. All such statements, including
the footnotes thereto, were audited by Arthur Andersen LLP, independent
certified public accountants. Schedule 3.4 also sets forth the Company's
financial statements (including unaudited balance sheets and the related
statements of income, retained earnings and cash flows) at and for the three
months ended March 31, 1998. The foregoing financial statements of the Company
are hereinafter collectively referred to as the "Financial Statements". The
Financial Statements are true and correct in all material respects, and fairly
present the financial position of the Company as at such dates and the results
of its operations and the changes in its retained earnings and its financial
position for the periods then ended in accordance with generally accepted
accounting principles consistently applied throughout the periods indicated. The
Financial Statements are not affected by transactions or accounts with
affiliated companies, if any.
3.5 No Adverse Change. Since the date of the latest Financial
Statements there has occurred no event that, individually or when taken together
with all other events, has had or reasonably could be expected to have a
Material Adverse Effect. The Company does not know of any such event which is
impending.
3.6 Tax Matters. The Company and each Subsidiary of the Company has
duly and timely filed with the appropriate governmental agencies all Tax and
other returns required to be filed by it, all of which have been accurately
prepared in all material respects. All Taxes due, owing and payable, or which
may be due, owing and payable, have been fully paid or duly provided for in the
Financial Statements or, with respect to tax periods after the date of the
Financial Statements are reflected in the books and records of the Company. No
claim for Taxes due is being contested by the Company or any Subsidiary of the
Company. Adequate provision has been made in the Financial Statements for all
liabilities of the Company for Taxes not required to be paid prior to the
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due dates therefor or if liabilities for Taxes have arisen after the date of the
latest Financial Statements such liabilities are reflected in the books and
records of the Company. Except as set forth on Schedule 3.6, The Company's
federal and state income tax returns have never been audited by the IRS or any
state tax authority. The Company has received no notice from the IRS or any
state tax authority of any deficiency or other adjustment which has not been
satisfied, and the Company has no Knowledge that such a notice may be sent. To
the Company's Knowledge, no state of facts exists or has existed which would
constitute grounds for the assessment of any further liability for Taxes. There
are no agreements, waivers, or other arrangements providing for an extension of
time with respect to the assessment of any Tax against the Company or any
Subsidiary of the Company, nor are there any actions, suits or claims now
pending (or, to the Company's Knowledge, threatened) against the Company in
respect of any Tax. Copies of the Company's Subsidiaries' federal and state
income tax returns for each of the periods set forth on a schedule previously
delivered to NCO have been or will be provided to NCO.
3.7 Compliance with Laws. Except as set forth in Schedule 3.7, the
Company and its Subsidiaries have complied with all Laws relating to the
Business or operations of the Company and the Company's Subsidiaries, except
where the failure to comply with such Laws could not reasonably be expected to
have a Material Adverse Effect. Schedule 3.7 sets forth a true, complete and
accurate description of all inspections and reports with respect to the Company
or its Subsidiaries made by federal, state and local governmental agencies,
authorities and other Persons since July 1997 regarding any Laws applicable to
the Company's Business or the Assets of the Business, together with a
description of all recommendations of, actions taken by, submission of
information to, and fines and penalties imposed by, all such governmental
agencies and authorities. Except as set forth in Schedule 3.7, neither the
Company nor any of its Subsidiaries has received notice of any alleged violation
of or claim under any such Laws, and there is no basis for a violation thereof
which may occur in the future (either upon notice, lapse of time, or both), and
no investigation, charge, claim or other action under any such Laws is pending
or threatened.
3.8 Permits. The Company and its Subsidiaries hold as of the date of
signing this Agreement all Permits which are necessary and material for the
conduct of the Business as heretofore conducted. A true, correct and complete
list of all of the Company's and its Subsidiaries' Permits is set forth in
Schedule 3.8, and all such Permits are in full force and effect, no violations
which have not been remedied have been recorded in respect of any Permit. Except
as set forth in Schedule 3.8, neither the Company nor any Subsidiary is in
default, nor has received any notice of any claim of default, with respect to
any such Permit or of any notice of any other claim or Proceeding (or threatened
Proceeding) relating to any such Permit.
3.9 No Breach. Except as set forth in Schedule 3.9, the consummation
of the transactions herein contemplated including, without limitation, the
execution and delivery of this Agreement and the documents required to effect
the transactions herein contemplated, do not and will not (1) constitute a
violation of or default under (either immediately or upon notice, lapse of time
or both), conflict with or result in a breach of (a) the Certificate of
Incorporation or Bylaws of the Company, (b) the terms of any Contract to which
the Company or any Subsidiary of the Company
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is a party or any of the Assets of the Business are or may be bound, (c) any
Judgment, or (d) any Laws; or (2) result in the creation or imposition of any
Encumbrance on any of the Assets of the Business or give to any Person any
interest or right in any of the Assets of the Business; or (3) accelerate the
maturity of or otherwise modify any Liability of the Company or any Subsidiary
of the Company; or (4) result in the breach of any of the terms and conditions
of, constitute a default under or otherwise cause any impairment of, any
Contract, or Permits which, if not cured, could reasonably be expected to have a
Material Adverse Effect.
3.10 Consents. Except as set forth in Schedule 3.10, no Consent is
required in connection with the execution, delivery and performance by the
Company of this Agreement or the consummation of the transactions contemplated
hereby.
3.11 Judgments and Proceedings. Except as set forth in Schedule 3.11,
there is no outstanding Judgment against the Company or any Subsidiary of the
Company or against or affecting any of the Assets or operations or prospects of
the Business. Except as set forth in Schedule 3.11, there is no Proceeding
pending, or to the Company's Knowledge, threatened, against the Company or any
Subsidiary of the Company or against or affecting the Business, its Assets or
operations, and the Company does not know or have reasonable grounds to know of
any basis for any such Proceeding. True and correct copies of all complaints,
pleadings, motions and other papers filed in connection with the Proceedings
listed in Schedule 3.11 have been or will be within ten days after the date
hereof delivered to NCO. Schedule 3.11 also includes a true and correct list of
all open workmen's compensation claims. Except as set forth in Schedule 3.11,
there are no Proceedings pending or, to the Company's Knowledge, threatened, or
any contingent liability, which would give rise to any right of indemnification
on the part of any officer, director, employee or agent of the Company or any
Subsidiary of the Company, or heirs, executors or administrators thereof against
the Company or any Subsidiary of the Company or any successor. Except as set
forth in Schedule 3.11, no breach of contract, tort or other claim (whether
arising from the operations of the Business or otherwise) has been asserted or,
to the Company's Knowledge, no event has occurred which could reasonably be
expected to give rise to such a claim.
3.12 Employee Relations. Neither the Company nor any Subsidiary of the
Company is a party to any collective bargaining agreement or any other Contract
with any union or organization or any other representatives of the Company or
any Subsidiary of the Company. Except as set forth in Schedule 3.12, neither the
Company nor any Subsidiary of the Company is a party to any written or oral
employment agreement with any of its officers, directors, employees,
consultants, agents, or other Persons which is not terminable by the Company or
its Subsidiaries at will without penalty or cost to the Company or its
Subsidiaries. True and correct copies of all agreements disclosed in Schedule
3.12 (or summaries of oral agreements so disclosed) have been or will be
delivered to NCO. To the Company's Knowledge, except as set forth in Schedule
3.12, (1) no grievance or claim which could reasonably be expected to have a
Material Adverse Effect is pending and no claim therefor has been asserted, (2)
no claim has been asserted under any written or oral employment agreement and
(3) no collective bargaining agreement is currently being negotiated by the
Company or any Subsidiary of the Company. Neither the Company nor any Subsidiary
of the Company has
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any present or, to the Knowledge of the Company, threatened labor disturbances
or any pending arbitration, unfair labor practice, grievance, or other
Proceeding of any kind with respect to its employees and has had no such labor
disturbance, Proceeding or litigation for the past eighteen months or which
remains unresolved on the date hereof. The Company does not Know of any present
or threatened walkout, strike or any similar occurrence which could reasonably
be expected to have a Material Adverse Effect. Except as set forth on Schedule
3.12 during the past five years, no union attempts to organize or represent the
employees of the Company or any Subsidiary of the Company have been made, nor
are any such attempts to the Knowledge of the Company now threatened, nor has
the Company or any Subsidiary of the Company been notified by any labor
organization or other entity that it is soliciting or intends to solicit the
employees of the Company or its Subsidiaries to select a bargaining agent, nor
is any such solicitation being made or, to the Company's Knowledge, contemplated
by any labor union. Schedule 3.12 is a true and correct list of all personnel
employed by the Company and its Subsidiaries as of the date hereof and their
respective salaries, wages and rates of compensation, which Schedule will be
updated at Closing. Upon termination of the employment of any said employees,
neither the Company nor any Subsidiary of the Company will by reason of anything
done prior to the Closing Date be liable to any of said employees for severance
pay or any other payments, except as and to the extent set forth in Schedule
3.12. Except as disclosed in Schedule 3.12, no employee of the Company or any
Subsidiary of the Company has indicated to the Company an intention to terminate
employment with the Company or its Subsidiaries.
3.13 Contracts. Set forth on Schedule 3.13 is an accurate and complete
list of all Contracts which involve future obligations of $100,000 or more.
Except as set forth on Schedule 4.13, with respect to each of the Contracts,
neither the Company nor any Subsidiary of the Company is in default thereunder
nor would be in default thereunder with the passage of time, the giving of
notice or both. Except as set forth on Schedule 3.13, to the Knowledge of the
Company, none of the other parties to any Contract is in default thereunder or
would be in default thereunder with the passage of time, the giving of notice or
both. Except as set forth on Schedule 3.13, neither the Company nor any
Subsidiary of the Company has given or received any notice of default or notice
of termination with respect to any Contract, and each Contract is in full force
and effect in accordance with its terms. The Contracts listed on Schedule 3.13
include all the Contracts necessary and sufficient to operate the Business.
Except as set forth on Schedule 3.13, there are no currently outstanding
proposals or offers submitted by the Company or any Subsidiary of the Company to
any customer, prospect, supplier or other Person with respect to the Business
which, if accepted, would result in a legally binding Contract involving an
amount or commitment exceeding $50,000 in any single case or an aggregate amount
or commitment exceeding $250,000 in the aggregate.
3.14 Real Property. Neither the Company nor any Subsidiary of the
Company owns any Real Property. Schedule 3.14 is a detailed list of all Real
Property leased by the Company or any Subsidiary of the Company showing
location, rental cost and landlord. All Real Property under lease to or
otherwise used by the Company or any Subsidiary of the Company are sufficient
for the current operations of the Business. No Real Property under lease, nor
the occupancy, maintenance or use thereof, is in violation of, or breach or
default under, any Contract or Law, where such default
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or breach could reasonably be expected to have a Material Adverse Effect, and no
notice from any lessor, governmental body or other Person has been received by
the Company or any Subsidiary of the Company claiming any violation of, or
breach or default under, any Contract or Law, or requiring or calling attention
to the need for any work, repairs, construction, alteration or installations.
Except as disclosed in Schedule 3.18, neither the Company nor any Subsidiary of
the Company has placed or caused to be placed, and the Company has no Knowledge
that there were or are, any Hazardous Substances on or under any of such Real
Property under lease.
3.15 Books of Account and Reports. The Company's and its Subsidiaries'
books of account accurately reflect in all material respects all of their items
of income and expense, and all of their Assets, Liabilities and accruals are and
have been prepared and maintained in form and substance adequate for preparing
financial statements in accordance with generally accepted accounting principles
consistently applied which are capable of being audited. The Company and each
Subsidiary of the Company has filed all reports required by all Laws to be
filed, and it has duly paid or accrued on its books of account all applicable
duties and charges due or assessed against it pursuant to such reports. The
Company has delivered to NCO true, correct and complete copies of the
Certificate of Incorporation and Bylaws of the Company, and all amendments
thereto. The minute books of the Company contain complete and accurate records
of all official meetings and other official corporate action of its shareholders
and Board of Directors. Schedule 3.15 contains a complete and accurate list
showing the name and location of each bank or other institution in which the
Company and its Subsidiaries has any account or safe deposit box and the names
of all Persons authorized to draw thereon or have access thereto.
3.16 Accounts Receivable. All Accounts Receivable of the Company or
any Subsidiary of the Company arose in the ordinary course of business and are
proper and valid accounts receivable and are fully collectible through the use
of ordinary collection procedures in the full aggregate face amount thereof less
any allowances for bad debt loss set forth in the latest Financial Statement or
thereafter accrued on the books of the Company consistent with past practice.
There are no refunds, discounts, rights of setoff or assignment affecting any
such Accounts Receivable.
3.17 Tangible Property. Except as set forth on Schedule 3.17, the
Company and its Subsidiaries have good and valid title to all of their Tangible
Property free and clear of any Encumbrances. All of such Tangible Property is
located at facilities used in the Business, and the Company or its Subsidiaries
has the full and unqualified right to require the immediate return of any of its
Tangible Property which is not located at the facilities used in the Business.
All such Tangible Property is in good condition, ordinary wear and tear
excepted, and is sufficient for the operation of the Business as presently
conducted.
3.18 Intangible Property. All Intangible Property material to the
Business, owned, used, registered in the name of or licensed to the Company or
any Subsidiary of the Company are listed on Schedule 3.18. Except as disclosed
in Schedule 3.18, the rights of the Company or any Subsidiary of the Company in
the Intangible Property set forth in Schedule 3.18 are free and clear of any
claims of infringement or Encumbrance. Except as disclosed on Schedule 3.18,
neither the
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Company nor any Subsidiary of the Company has any notice of any adversely held
Intangible Property of any other Person or notice of any claim of any other
Person relating to any of the Intangible Property set forth in Schedule 3.18,
and the Company does not Know of any basis for any such charge or claim. Neither
the Company nor any Subsidiary of the Company has misappropriated the trade
secrets or property rights of any Person and none of the Intangible Property
infringes upon or violates the rights of any Person. Except for the Company's
interface with Columbia/HCA, neither the Company nor any Subsidiary of the
Company has licensed any Person to use technical know-how or other proprietary
rights of the Company or any Subsidiary of the Company, nor is the Company or
any Subsidiary of the Company obligated to pay any royalties, licensing fees or
similar payments to any Person.
3.19 Title. Except as set forth on Schedule 3.19, each of the Company
and the Company's Subsidiaries owns outright and has good, valid and marketable
title to all of its Assets, free and clear of all Encumbrances. There are no
outstanding options or commitments to which the Company or any Subsidiary of the
Company is a party which relate to the Assets used in the Business or the sale
by them of such Assets.
3.20 Liabilities. As of the date of the latest Financial Statements,
the Company and the Company's Subsidiaries did not have any Liabilities, which
were not fully and adequately reflected in such Financial Statements in
accordance with GAAP or on a Schedule hereto. Except as set forth in Schedule
3.20, the Company and the Company's Subsidiaries do not have any Liabilities,
other than (1) Liabilities fully and adequately reflected in the latest
Financial Statements in accordance with GAAP and (2) those incurred since the
date of the latest Financial Statements in the ordinary course of business
consistent with past practices. The Company does not have any Knowledge of any
circumstances, bases (either with notice, lapse of time or both), conditions,
events or arrangements which may hereafter give rise to any Liabilities of the
Company or any Subsidiary of the Company except in the ordinary course of
business consistent with past practices. Except as set forth in Schedule 3.20
and except to the extent specifically reflected or reserved against in the
latest Financial Statements or elsewhere in this Agreement, neither the Company
nor any Subsidiary of the Company is directly or indirectly liable, by guarantee
or otherwise, upon or with respect to, or obligated to guarantee or assume, any
Liability of any Person, except endorsements made in the ordinary course of
business in connection with the deposit of items for collection.
3.21 Suppliers and Customers. Set forth on Schedule 3.21 is a list of
the ten largest customers (measured by volume of placements) of the Business
(the "Ten Largest Customers"). Except as set forth on Schedule 3.21, none of the
Ten Largest Customers has given notice or otherwise indicated to the Company or
any Subsidiary of the Company that it will or intends to terminate its
relationship with the Company or any Subsidiary of the Company. To the Knowledge
of the Company, the relationship of the Company and the Company's Subsidiaries
with customers and suppliers of the Business are currently on a good and normal
basis. To the Knowledge of the Company, the purchase of the MedSource Stock
contemplated by this Agreement will not adversely affect relations with any of
the Ten Largest Customers. All funds collected on behalf of customers
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by the Company or the Company's Subsidiaries have been properly remitted to
customers or are properly reflected on the financial statements of the Company
and its Subsidiaries.
3.22 Employee Benefit Plans. Except as set forth in Schedule 3.22, the
Company and its Subsidiaries have not established, maintained or contributed to
any Employee Benefit Plans and the Company and its Subsidiaries have not
proposed any Employee Benefit Plans which the Company will and its Subsidiaries
establish, maintain, or to which the Company and its Subsidiaries will
contribute, and the Company has not proposed any changes to any Employee Benefit
Plans now in effect (all of the preceding referred to collectively hereinafter
as "the Company's Employee Benefit Plans"). True and correct copies and
descriptions of all of the Company's Employee Benefit Plans, all employees
affected or covered by the Company's Employee Benefit Plans and all Liabilities
thereunder are attached to Schedule 3.22, which Schedule will be updated on the
Closing Date. If permitted and/or required by applicable Law, the Company and
its Subsidiaries have properly submitted all of the Company's Employee Benefit
Plans in good faith to meet the applicable requirements of ERISA and/or the Code
to the IRS for its approval within the time prescribed therefor under applicable
federal regulations. Favorable letters of determination of such tax-qualified
status from the IRS are attached to Schedule 3.22. With respect to the Company's
Employee Benefit Plans, the Company and its Subsidiaries will have made, on or
prior to the Closing Date, all payments required to be made by each of them on
or prior to the Closing Date and will have accrued (in accordance with generally
accepted accounting principles consistently applied) as of the Closing Date all
payments due but not yet payable as of the Closing Date, so there will not have
been, nor will there be, any Accumulated Funding Deficiencies (as defined in
ERISA or the Code) or waivers of such deficiencies. The Company and its
Subsidiaries have or will have furnished NCO with a true and correct copy of the
most current Form 5500 and any other form or filing required to be submitted to
any governmental agency with regard to any of the Company's Employee Benefit
Plans and the most current actuarial report with regard to any of the Company's
Employee Benefit Plans. All of the Company's Employee Benefit Plans are, and
have been, operated in full compliance with their provisions and with all
applicable Laws including, without limitation, ERISA and the Code and the
regulations and rulings thereunder. The Company, its Subsidiaries and all
fiduciaries of the Company's Employee Benefit Plans have complied with the
provisions of the Company's Employee Benefit Plans and with all applicable Laws
including, without limitation, ERISA and the Code and the regulations and
rulings thereunder. There have been no Reportable Events (as defined in ERISA),
no events described in Sections 4062, 4063 or 4064 of ERISA, and no termination
or partial termination (including any termination or partial termination
attributable to this sale) of any of the Company's Employee Benefit Plans. There
would be no Liability of the Company or its Subsidiaries under Title IV of ERISA
if any of the Company's Employee Benefit Plans were terminated as of the Closing
Date. The Company and its Subsidiaries have not incurred, and will not incur,
any withdrawal liability, nor does the Company and its Subsidiaries have any
contingent withdrawal liability, under ERISA to any Multiemployer Plan (as
defined in ERISA or the Code). The Company and its Subsidiaries have not
incurred, and will not incur, any Liability to the Pension Benefit Guaranty
Corporation (or any successor thereto). Except as set forth in Schedule 3.22,
neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment (including,
without limitation,
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severance, unemployment compensation, golden parachute or otherwise) becoming
due from the Company or its Subsidiaries under any of the Company's Employee
Benefit Plans, (ii) increase any benefits otherwise payable under any of the
Company's Employee Benefit Plans, or (iii) result in the acceleration of the
time of payment or vesting of any such benefits to any extent. There are no
pending actions, claims or lawsuits which have been asserted or instituted
against any of the Company's Employee Benefit Plans, the assets of any of the
trusts under such plans, the plan sponsor, the plan administrator or against any
fiduciary of any of the Company's Employee Benefit Plans (other than routine
benefit claims) nor does the Company have Knowledge of facts which could form
the basis for any such action, claim or lawsuit. There are no investigations or
audits of any of the Company's Employee Benefit Plans, any trusts under such
plans, the plan sponsors, the plan administrator or any fiduciary of any of the
Company's Employee Benefit Plans which have been threatened or instituted nor
does the Company or CMJ have Knowledge of facts which could form the basis for
any such investigation or audit. Except as disclosed in Schedule 3.22, no event
has occurred which will result in Liability to the Company or its Subsidiaries
in connection with any Employee Benefit Plan established, maintained, or
contributed to (currently or previously) by the Company, its Subsidiaries or by
any other entity which, together with the Company or its Subsidiaries,
constitute elements of either (i) a controlled group of corporations (within the
meaning of Section 414(b) of the Code), (ii) a group of trades or businesses
under common control (within the meaning of Sections 414(c) of the Code or 4001
of ERISA), (iii) an affiliated service group (within the meaning of Section
414(m) of the Code), or (iv) another arrangement covered by Section 414(o) of
the Code.
3.23 Insurance. Schedule 3.23 sets forth all Insurance Policies held
by or on behalf of the Company and the Company's Subsidiaries, specifying the
insurer, the policy number (or covering note number with respect to binders),
the risks covered, the premium, the deductibles and the amount of coverage
provided and describing each pending claim thereunder of more than $10,000. All
such Insurance Policies are enforceable and in full force and effect. Neither
the Company nor any subsidiary of the Company is in default with respect to any
provision contained in any such Insurance Policy nor has the Company or any
Subsidiary of the Company failed to give any notice or present any claim under
any such Insurance Policy in due and timely fashion. Except for claims set forth
on Schedule 3.23, there are no outstanding unpaid claims under any such
Insurance Policy. Neither the Company nor any Subsidiary of the Company has
received a notice of cancellation, non-renewal or audit of any such Insurance
Policy. The Company does not have Knowledge of any inaccuracy in any application
for such Insurance Policies, any failure to pay premiums when due or any similar
state of facts which might form the basis for termination of any such insurance.
All Insurance Policies (1) are "occurrence" policies with insurance companies
which are financially sound and responsible, (2) are sufficient for compliance
by the Company with all requirements of the Law and all Contracts to which the
Company is a party, (3) insure against risks of the kind customarily insured
against and in amounts customarily carried by insureds similarly situated, and
(4) provide adequate insurance coverage for the conduct of the Business. The
Company will continue to maintain such insurance coverage in full force and
effect through the Closing Date, and such coverage will not be affected by the
consummation of the transactions contemplated by this Agreement.
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3.24 Software. Schedule 3.24 is an accurate and complete list and
description of all Software owned, used or under development by the Company or
any Subsidiary of the Company. Except as set forth in Schedule 3.24, the Company
has good and marketable title to all of its Software, free and clear of any
Encumbrances. With respect to all of the Company's and its Subsidiaries'
Software which has been developed by or for the Company, (1) the Company
maintains machine-readable, master-reproducible copies, source code listings,
technical documentation and user manuals (as amended from time to time by
technical notes) for the most current releases or versions thereof and for all
earlier releases or versions thereof currently being used by any customer, (2)
in each case, the machine readable copy conforms to the corresponding source
code listing, (3) such Software can be maintained and modified by competent
programmers familiar with such language, hardware and operating systems, and (4)
each version of the Software (excluding pilot and other test releases and
Software under development) operates in accordance with the user manual (as
amended from time to time by technical notes) therefor without operating defects
other than those typically handled by the Company's support personnel. None of
such Software, or their respective past or current uses, has violated or
infringed upon or is violating or infringing upon any patent, copyright, trade
secret or other proprietary right of any Person, and to the Knowledge of the
Company, no Person is violating or infringing upon any of such Software. None of
such Software is owned by or registered in the name of any shareholder,
director, officer, employee, salesman, agent, representative or contractor of
the Company or any Subsidiary of the Company, nor does any such Person have any
interest therein or right thereto.
3.25 Operations Prior to and Including the Closing. Except as set
forth in Schedule 3.25, from the date of the latest Financial Statements,
through the date hereof, neither the Company nor any Subsidiary of the Company
has, and on the Closing Date neither the Company nor any Subsidiary of the
Company will have, without the prior written consent of NCO:
(1) amended its Certificate of Incorporation or Bylaws or
merged with or into or consolidated with any other Person, or changed or agreed
to change in any manner the rights of its outstanding capital stock or the
character of its Business;
(2) declared, set aside or paid any dividend or other
distribution in respect of the capital stock of the Company (except for
dividends accrued with respect to the MedSource Preferred Stock); redeemed or
acquired any of such stock; issued or sold, or issued options or rights to
subscribe to, or entered into any Contracts to issue or sell, any shares of its
capital stock; or subdivided or in any way reclassified any shares of its
capital stock;
(3) entered into or amended any employment agreements, entered
into any Contracts with any labor union or association representing any
employee, or entered into or amended any Employee Benefit Plans;
(4) settled any dispute involving payment of any amount in
excess of $10,000 or waived any right of material value to its Business;
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(5) made any change in its accounting methods, practices,
policies or principles;
(6) changed any of its business policies, including, without
limitation, advertising, marketing, pricing, purchasing, production, personnel,
sales, returns, budget or acqui-
sition policies;
(7) made any wage or salary increase or bonus, or increase in
any other direct or indirect compensation, for or to any officer, director,
employee, consultant or agent of the Company or any Subsidiary of the Company,
or any accrual for or commitment or agreement to make or pay the same, or loaned
or advanced any funds to any Person;
(8) except in the ordinary course of business, entered into
any lease or sublease (as lessor or lessee), abandoned or made any other
disposition of any Assets of the Business involving more than $25,000 in the
aggregate, granted or suffered any Encumbrances on any of its Assets having a
value in excess of $25,000 in the aggregate, or amended any Contracts to which
it is a party or by which it is bound or its Assets are bound or pursuant to
which it agrees to indemnify any party or to refrain from competing with any
party;
(9) except in the ordinary course of business consistent with
past practices, incurred or assumed any Liabilities;
(10) except for Tangible Property acquired in the ordinary
course of business, made any acquisition of all or any part of the Assets or
capital stock or business of any other Person;
(11) entered into any other Contract or transaction which is
material to the Business;
(12) made any capital expenditure or commitment for any
property, plant or equipment in excess of $10,000 individually or $25,000 in the
aggregate;
(13) disposed of, leased or encumbered, or pledged or granted
a security interest in any Assets, or increased any of the indebtedness of the
Company or any Subsidiary of the Company, other than in the normal and ordinary
course of business consistent with past practices;
(14) paid, discharged or satisfied any Liabilities other than
by payment, discharge or satisfaction in the ordinary course of business
consistent with past practices;
(15) incurred any damage, destruction or loss, whether or not
covered by insurance, adversely affecting the Company or any Subsidiary of the
Company; or
(16) made any Contract to do any of the actions referred to in
paragraphs (1) through (15) above.
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3.26 Questionable Payments. Neither the Company or any Subsidiary of
the Company, or to the Knowledge of the Company, any directors, officers,
consultants, agents, employees or other persons associated with or active on
behalf of the Company or its Subsidiaries, has (1) used any corporate funds for
unlawful contributions, gifts, entertainment or other unlawful expenses relating
to political activity, (2) made any direct or indirect unlawful payments to
foreign or domestic government officials or employees from corporate funds, (3)
violated any provision of the Foreign Corrupt Practices Act of 1977, (4)
established or maintained any unlawful or unrecorded fund of corporate monies or
other assets, (5) made any false or fictitious entries on the books and records
of the Company or its Subsidiaries, (6) made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment of any nature, or (7) made
any material favor or gift which is not deductible for Federal income tax
purposes.
3.27 No Broker. No broker, finder, agent or similar intermediary has
acted for or on behalf of the Company in connection with this Agreement or the
transactions contemplated hereby, and no broker, finder, agent or similar
intermediary is entitled to any broker's fee, finder's fee, or similar fee or
commission in connection therewith based on any agreement, arrangement or
understanding with the Company or any action taken by the Company.
3.28 Full Disclosure. All Documents delivered by or on behalf of the
Company in connection with this Agreement and the transactions contemplated
hereby are true and complete in all material respects; all such Documents are
authentic; and all Contracts included hereunder are valid, subsisting and
binding on the parties thereto in accordance with their terms. There is no fact
which the Company has not disclosed to NCO in writing which had a Material
Adverse Effect, or so far as the Company can now foresee, could reasonably be
expected to have a Material Adverse Effect or could affect the ability of the
Company to perform this Agreement.
3.29 Representations and Warranties on Closing Date. The
representations and warranties contained in this Section 3 shall be true and
complete on and as of the Closing Date with the same force and effect as though
such representations and warranties had been made on and as of the Closing Date.
SECTION 4: REPRESENTATIONS, WARRANTIES AND COVENANTS OF CMJ:
Knowing that NCO relies thereon, CMJ, jointly and severally,
represents, warrants and covenants to NCO on the date hereof and on and as of
the Closing Date as follows:
4.1 Ownership. CMJ owns beneficially and of record the number of
shares of MedSource Common Stock set forth on Schedule 4.1, and has the
unrestricted right, power and authority to sell, transfer and deliver the
MedSource Common Stock as provided in this Agreement. Except as set forth on
Schedule 4.1, upon delivery and payment for the MedSource Common Stock as
provided herein, there shall be vested in NCO good and valid title to the
MedSource Common Stock, free and clear of any Encumbrance.
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4.2 No Other Agreements. Other than pursuant to this Agreement, CMJ
has no legal obligation, absolute or contingent, to any other person or firm to
sell any of the MedSource Common Stock or to enter into any agreement with
respect thereto. This Agreement, and each Document contemplated by this
Agreement, is and will be the valid and legally binding obligation of CMJ
enforceable in accordance with its terms, except as enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights in general, or by general
principles of equity.
4.3 Actions and Proceedings. There are no outstanding orders,
judgments, injunctions, awards or decrees or any court, arbitrator or
governmental regulatory body against CMJ with respect to any of the MedSource
Common Stock. There are no claims, actions, suits or proceedings, pending or to
CMJ's Knowledge, threatened, against CMJ relating to the MedSource Common Stock
that if determined adversely to CMJ could reasonably be expected to materially
and adversely affect the ability of CMJ to consummate the transactions
contemplated hereby.
4.4 No Breach. The consummation of the transactions herein
contemplated including, without limitation, the execution and delivery of this
Agreement and the documents required to effect the transactions herein
contemplated, do not and will not (1) constitute a violation of or default under
(either immediately or upon notice, lapse of time or both), conflict with or
result in a breach of (a) the terms of any Contract to which CMJ is a party, (b)
any Judgment affecting CMJ as a stockholder of the Company, or (c) any Laws
affecting CMJ as a stockholder of the Company.
4.5 Consents. No Consent is required in connection with the execution,
delivery and performance by CMJ of this Agreement or the consummation by CMJ of
the transactions contemplated hereby.
4.6 No Broker. No broker, finder, agent or similar intermediary has
acted for or on behalf of CMJ in connection with this Agreement or the
transactions contemplated hereby, and no broker, finder, agent or similar
intermediary is entitled to any broker's fee, finder's fee, or similar fee or
commission in connection therewith based on any agreement, arrangement or
understanding with CMJ.
4.7 Questionable Payments. CMJ has not (1) used any corporate funds of
the Company or its Subsidiaries for unlawful contributions, gifts, entertainment
or other unlawful expenses relating to political activity, (2) made any direct
or indirect unlawful payments to foreign or domestic government officials or
employees from corporate funds of the Company or its Subsidiaries, (3) violated
any provision of the Foreign Corrupt Practices Act of 1977, (4) established or
maintained any unlawful or unrecorded fund of corporate monies or other assets,
(5) made any false or fictitious entries on the books and records of the Company
or its Subsidiaries, (6) made any bribe, rebate, payoff, influence payment,
kickback or other unlawful payment of any nature, or (7) made any material favor
or gift with funds of the Company or its Subsidiaries which is not deductible
for Federal income tax purposes.
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4.8 Representations and Warranties on Closing Date. The
representations and warranties contained in this Section 4 shall be true and
complete on and as of the Closing Date with the same force and effect as though
such representations and warranties had been made on and as of the Closing Date.
SECTION 5: REPRESENTATIONS, WARRANTIES AND COVENANTS OF WHITNEY:
Knowing that NCO relies thereon, Whitney, jointly and severally,
represents, warrants and covenants to NCO on the date hereof and on and as of
the Closing Date as follows:
5.1 Ownership. Whitney owns beneficially and of record all of the
outstanding shares of MedSource Preferred Stock and has the unrestricted right,
power and authority to sell, transfer and deliver the MedSource Preferred Stock
as provided in this Agreement. Except as set forth on Schedule 5.1, upon
delivery and payment for the MedSource Preferred Stock as provided herein, there
shall be vested in NCO good and valid title to the MedSource Preferred Stock,
free and clear of any Encumbrance.
5.2 No Other Agreements. Other than pursuant to this Agreement, Whitney
has no legal obligation, absolute or contingent, to any other person or firm to
sell any of the MedSource Preferred Stock or to enter into any agreement with
respect thereto.
5.3 Actions and Proceedings. There are no outstanding orders,
judgments, injunctions, awards or decrees or any court, arbitrator or
governmental regulatory body against Whitney with respect to any of the
MedSource Preferred Stock. There are no claims, actions, suits or proceedings,
pending or to Whitney's Knowledge, threatened, against Whitney relating to the
MedSource Preferred Stock that if determined adversely to Whitney could
reasonably be expected to materially and adversely affect the ability of Whitney
to consummate the transactions contemplated hereby.
5.4 Authority to Execute and Perform Agreement. Whitney has the full
legal right and power and all authority and approvals required to enter into,
execute, deliver and perform this Agreement and its obligations hereunder. The
execution, delivery and performance of this Agreement (and all other Documents
required to effect the transaction contemplated) and the consummation of the
transactions contemplated herein have been duly authorized by all required
partnership action of Whitney. This Agreement, and each Document contemplated by
this Agreement, is and will be the valid and legally binding obligation of
Whitney enforceable in accordance with its terms, except as enforcement thereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights in general, or by
general principles of equity.
5.5 No Breach. The consummation of the transactions herein contemplated
including, without limitation, the execution and delivery of this Agreement and
the documents required to effect the transactions herein contemplated, do not
and will not (1) constitute a violation of or default
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under (either immediately or upon notice, lapse of time or both), conflict with
or result in a breach of (a) the partnership agreements of Whitney, (b) the
terms of any Contract to which Whitney is a party, (c) any Judgment affecting
Whitney as a stockholder of the Company, or (d) any Laws affecting Whitney as a
stockholder of the Company.
5.6 Consents. No Consent is required in connection with the execution,
delivery and performance by Whitney of this Agreement or the consummation by
Whitney of the transactions contemplated hereby.
5.7 No Broker. No broker, finder, agent or similar intermediary has
acted for or on behalf of Whitney in connection with this Agreement or the
transactions contemplated hereby, and no broker, finder, agent or similar
intermediary is entitled to any broker's fee, finder's fee, or similar fee or
commission in connection therewith based on any agreement, arrangement or
understanding with Whitney.
5.8 Representations and Warranties on Closing Date. The representations
and warranties contained in this Section 4 shall be true and complete on and as
of the Closing Date with the same force and effect as though such
representations and warranties had been made on and as of the Closing Date.
SECTION 6: REPRESENTATION, WARRANTIES AND COVENANTS OF HBM:
Knowing that NCO relies thereon, HBM represents, warrants and covenants
to NCO on the date hereof and on and as of the Closing Date as follows:
6.1 Ownership. HBM owns beneficially and of record 197,000 shares of
MedSource Common Stock and has the unrestricted right, power and authority to
sell, transfer and deliver such shares of the MedSource Common Stock as provided
in this Agreement. Except as set forth on Schedule 6.1, upon delivery and
payment for such shares of MedSource Common Stock as provided herein, there
shall be vested in NCO good and valid title to such shares of MedSource Common
Stock, free and clear of any Encumbrance.
6.2 Authority to Execute and Perform Agreement. HBM has the full legal
right and power and all authority and approvals required to enter into, execute,
deliver and perform this Agreement and its obligations hereunder. The execution,
delivery and performance of this Agreement (and all other Documents required to
effect the transaction contemplated) and the consummation of the transactions
contemplated herein have been duly authorized by all required corporate action
of HBM. This Agreement, and each Document contemplated by this Agreement, is and
will be the valid and legally binding obligation of HBM enforceable in
accordance with its terms, except as enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights in general, or by general
principles of equity.
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6.3 No Other Agreements. Other than pursuant to this Agreement, HBM has
no legal obligation, absolute or contingent, to any other person or firm to sell
any shares of MedSource Common Stock or to enter into any agreement with respect
thereto.
6.4 Actions and Proceedings. There are no outstanding orders,
judgments, injunctions, awards or decrees or any court, arbitrator or
governmental regulatory body against HBM with respect to any of the MedSource
Common Stock. There are no claims, actions, suits or proceedings, pending or to
HBM's Knowledge, threatened, against HBM relating to the MedSource Common Stock
that if determined adversely to HBM could reasonably be expected to materially
and adversely affect the ability of HBM to consummate the transactions
contemplated hereby.
6.5 No Breach. The consummation of the transactions herein contemplated
including, without limitation, the execution and delivery of this Agreement and
the documents required to effect the transactions herein contemplated, do not
and will not (1) constitute a violation of or default under (either immediately
or upon notice, lapse of time or both), conflict with or result in a breach of
(a) the Certificate of Incorporation or Bylaws of HBM, (b) the terms of any
Contract to which HBM is a party, (c) any Judgment affecting HBM as a
stockholder of the Company, or (d) any Laws affecting HBM as a stockholder of
the Company.
6.6 Consents. No Consent is required in connection with the execution,
delivery and performance by HBM of this Agreement or the consummation by HBM of
the transactions contemplated hereby.
6.7 No Broker. No broker, finder, agent or similar intermediary has
acted for or on behalf of HBM in connection with this Agreement or the
transactions contemplated hereby, and no broker, finder, agent or similar
intermediary is entitled to any broker's fee, finder's fee, or similar fee or
commission in connection therewith based on any agreement, arrangement or
understanding with HBM.
6.8 Representations and Warranties on Closing Date. The representations
and warranties contained in this Section 5 shall be true and complete on and as
of the Closing Date with the same force and effect as though such
representations and warranties had been made on and as of the Closing Date.
SECTION 7: REPRESENTATIONS, WARRANTIES AND COVENANTS OF NCO.
Knowing that the Company and Seller rely thereon, NCO represents,
warrants and covenants to the Company, and Seller on the date hereof and on and
as of the Closing Date as follows:
7.1 Due Incorporation and Qualification. NCO is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. NCO has the full power and authority to own,
lease and operate its assets, to carry on its Business as and where
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such business is now conducted and, to enter into and perform this Agreement and
to consummate the transactions contemplated hereby upon the terms and conditions
herein provided.
7.2 Authority to Execute and Perform Agreement. NCO has the full legal
right and power and all authority and approvals required to enter into, execute,
deliver and perform this Agreement and its obligations hereunder. The execution,
delivery and performance of this Agreement (and all other Documents required to
effect the transaction contemplated) and the consummation of the transactions
contemplated herein have been duly authorized by NCO's Board of Directors. This
Agreement, and each Document contemplated by this Agreement, is and will be the
valid and legally binding obligation of NCO enforceable in accordance with its
terms, except as enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors rights in general or by general principles of equity.
7.3 No Breach. Except as set forth in Schedule 6.3, the consummation of
the transactions herein contemplated including, without limitation, the
execution and delivery of this Agreement and the documents required to effect
the transactions herein contemplated, do not and will not (1) constitute a
violation of or default under (either immediately or upon notice, lapse of time
or both), conflict with or result in a breach of (a) the Articles of
Incorporation or Bylaws of NCO, (b) the terms of any Contract to which NCO is a
party or any of the Assets are or may be bound, (c) any Judgment, or (d) any
Laws.
7.4 Consents. Except as set forth in Schedule 6.4, no Consent is
required in connection with the execution, delivery and performance by NCO of
this Agreement or the consummation of the transactions contemplated hereby.
7.5 No Broker. No broker, finder, agent or similar intermediary has
acted for or on behalf of NCO in connection with this Agreement or the
transactions contemplated hereby, and no broker, finder, agent or similar
intermediary is entitled to any broker's fee, finder's fee, or similar fee or
commission in connection therewith based on any agreement, arrangement or
understanding with NCO or any action taken by NCO.
7.6 SEC Reports. The periodic reports (including reports on Form 10-K,
Form 10-Q and Form 8-K) and proxy statements filed by NCO with the Securities
and Exchange Commission (the "SEC Reports") do not or did not, on the date of
filing or the date as of which information is set forth therein, contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The financial
statements of NCO including any related schedules and/or notes) included in the
SEC Reports have been prepared in accordance with GAAP consistently applied
(except as may be indicated in the notes thereto) throughout the periods
involved and fairly present the financial position, results of operations and
cash flows as of the dates and for the periods indicated therein. Since the date
of the latest financial statement included in the SEC Requests, there has
occurred no change of effect that, individually or when taken together with all
other changes or effects, would be materially adverse to the condition
(financial or otherwise),
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results of operations, business, assets, liabilities or prospects of NCO and it
Subsidiaries taken as a whole.
7.7 Full Disclosure. All Documents delivered by or on behalf of NCO in
connection with this Agreement and the transactions contemplated hereby are true
and complete in all material respects; all such Documents are authentic. There
is no fact which NCO has not disclosed to te Company in writing which materially
adversely affects, or so far as NCO can now foresee, will materially adversely
affect, NCO's business or condition (financial or other) or the ability of NCO
to perform this Agreement.
7.8 Representations and Warranties on Closing Date. The representations
and warranties contained in this Section 7 shall be true and complete on and as
of the Closing Date with the same force and effect as though such
representations and warranties had been made on and as of the Closing Date.
SECTION 8: CERTAIN OBLIGATIONS OF THE COMPANY PENDING CLOSING.
8.1 Conduct of Business. From the date hereof through the Closing Date,
the Company and its Subsidiaries shall conduct, and Seller shall cause the
Company and its Subsidiaries to conduct, the Business in the ordinary course
consistent with past practices and, without the prior written consent of NCO,
shall not change any business policies (including, without limitation,
advertising, marketing, pricing, purchasing, personnel, sales, returns, budget
or product acquisition policies). Without limiting in any way the generality of
the foregoing, from the date of this Agreement until the Closing Date, neither
the Company nor its Subsidiaries will do, and Seller will not cause or permit
the Company or its Subsidiaries to do, any of the following:
8.1.1 Issue any additional capital stock or other security;
declare, set aside or pay any dividend or make any other distribution in respect
to the capital of the Company (except for dividends accrued with respect to the
MedSource Preferred Stock); directly or indirectly redeem, purchase or otherwise
acquire any shares of its capital stock; or issue to any Person any options,
warrants or other rights to acquire any securities of the Company or any
Subsidiary of the Company including, but not limited to, any stock options.
8.1.2 Participate in any merger, consolidation, division or
reorganization.
8.1.3 Engage in any new type of business.
8.1.4 Acquire the business or any bulk assets of any Person.
8.1.5 Completely or partially liquidate or dissolve.
8.1.6 Amend its Certificate of Incorporation or Bylaws.
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8.1.7 Except with the express prior written approval of NCO:
8.1.7.1 conduct the Business in any manner other than
the usual, regular and ordinary manner consistent with past practices or make
any change in its methods of management or operations;
8.1.7.2 enter into any new oral or written employment
agreements or commitments to officers, directors, employees or consultants
(including, but not limited to, any commitment to pay retirement or other
benefits);
8.1.7.3 pay, promise to pay or enter into any
Contracts to pay any bonus or special increased compensation (including, but not
limited to, fringe benefits) to any officer, director, employee or consultant
other than in accordance with its presently existing compensation arrangements;
8.1.7.4 (i) create or incur any Liabilities except in
the ordinary course of business consistent with past practices, (ii) enter into
or terminate any lease of Real Property, except in the ordinary course of
business consistent with past practices, (iii) create any Subsidiary, (iv) make
any investment in any Person other than in certificates of deposit and other
cash equivalents, (v) release or create or incur any claim, mortgage, lien or
other security interest, (vi) lend any money or assets to any Person or (vii)
pay, discharge or satisfy any Liability except in the ordinary course of
business consistent with past practices;
8.1.7.5 make any capital expenditure in excess of
$10,000 for any single item or $20,000 in the aggregate, or enter into any
lease, as lessee, of equipment as to which the annual lease charge is at a rate
in excess of $10,000;
8.1.7.6 sell, abandon or otherwise dispose of any
material Asset (including, without limitation, machinery, equipment, parts,
supplies and trademarks), other than in the ordinary course of business
consistent with past practices, or cancel or waive any claim or right of
substantial value; or
8.1.7.7 enter into any Contracts to do or take any of
the actions prohibited by this Section 8.1.
8.1.8 Intentionally take or omit to take any action which
would render any representation and/or warranty contained in Section 3 herein
inaccurate as of the Closing Date.
8.2 Preservation of Business. From the date hereof through the Closing
Date, the Company and each subsidiary of the Company shall, and Seller shall
cause the Company and its Subsidiaries to:
8.2.1 use its best efforts to preserve its business
organizations intact;
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8.2.2 maintain its books, accounts and records in the usual,
regular and ordinary manner on a basis consistent with prior years and in
accordance with generally accepted accounting principles;
8.2.3 use its best efforts to keep available the services of
its present officers, employees, consultants and agents, and maintain its
present suppliers and customers, and preserve its goodwill;
8.2.4 use its best efforts to cause all of the conditions
precedent to Closing that are within its control to be satisfied as soon as
practicable after the date hereof;
8.2.5 maintain its corporate existence and good standing in
its state of incorporation and its corporate powers and qualification as a
foreign corporation in all jurisdictions where it is presently so qualified,
except where the failure to qualify would not have a Material Adverse Effect,
observe all applicable Laws in the conduct of its Business, duly and timely file
all reports and returns to be filed with any governmental entity, promptly pay
all Taxes when due, and keep full and accurate records of all transactions
entered into and conducted;
8.2.6 promptly, by appropriate notice, keep NCO informed of
all material events and occurrences relevant to the Company or its operations
occurring other than in the ordinary course of business. The Company will notify
NCO of any changes which should be made in any of the information set forth on
any of the Schedules hereto.
8.2.7 maintain the Assets of the Business in good working
condition, perform all maintenance and repairs, and maintain in full force and
effect continuing Contracts for services or facilities necessary to the
Business;
8.2.8 perform all obligations under all Contracts and accrue
and pay, as applicable and when due, all payments due under such Contracts.
8.3 Insurance. From the date hereof through the Closing Date, the
Company and its Subsidiaries shall maintain, and shall cause the Company and its
Subsidiaries to maintain, in force (including necessary renewals thereof) the
Insurance Policies listed on any Schedule hereto, except to the extent that they
may be replaced with substantially equivalent policies appropriate to insure the
Business or the Assets used in the Business at the same or lower rates or at
rates reasonably approved by NCO.
8.4 Access to Business. From the date hereof through the Closing Date,
the Company shall and Seller shall cause the Company to allow, during normal
business hours, the employees, attorneys, accountants, and other representatives
of NCO free and full access to the files, books and records of the Company and
its Subsidiaries, including, without limitation, title documents, leases,
insurance policies, minute books, stockholders' lists, accounts, financial
statements, auditor's working papers and all other data. The Company shall also
furnish to NCO or its authorized
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representatives additional financial, tax and operating data (including, without
limitation, quarterly financial statements) and other information and documents
which, in the reasonable opinion of NCO, are required for NCO to make a
reasonable investigation of the Business. The employees of NCO may interview and
meet with management and other employees of the Company and its Subsidiaries and
shall have access to the operating properties of the Company and its
Subsidiaries during normal business hours.
8.5 Proceedings. The Company shall promptly notify NCO of any
Proceedings which, after the date hereof, are threatened or commenced against
the Company or any Subsidiary of the Company, against any officer, director,
employee, consultant or agent with respect to the affairs of the Company or any
Subsidiary of the Company, which if adversely determined could reasonably be
expected to have a Material Adverse Effect.
8.6 Continued Effectiveness of Representations and Warranties of
Corporation. From the date hereof through the Closing Date, the Company and its
Subsidiaries will conduct, and Seller will cause the Company and its
Subsidiaries to conduct, the Business in such a manner so that the
representations and warranties contained in Section 3 herein shall continue to
be true and correct on and as of the Closing Date as if made on and as of the
Closing Date, and NCO shall promptly be given notice of any event, condition or
circumstance occurring from the date hereof through the Closing Date which would
cause any of such representations and warranties to become untrue in any
respect.
8.7 No Shopping. The Company shall not, nor shall any Seller allow the
Company to, directly or indirectly, through any director, officer, employee,
agent or otherwise, solicit, initiate or encourage submission of proposals or
offers from any Person relating, directly or indirectly, to any acquisition of
all or substantially all of the assets or capital stock of the Company or any
Subsidiary of the Company or participate in any negotiation regarding, or
furnish to any other Person any information with respect to, or otherwise
cooperate in any way with, or assist or participate in, facilitate or encourage,
any effort or attempt by any other Person to or seek, directly or indirectly, to
acquire all or substantially all of the assets or capital stock of the Company
or any Subsidiary of the Company. The Company and Seller shall promptly notify
NCO if any such proposal or offer, or any inquiry or contact with any Person
with respect thereto, is made.
8.8 Material Consents. Between the date of this Agreement and the
Closing Date, the Company shall in good faith use commercially reasonable
efforts to (a) obtain all Consents required to be obtained by the Company from
all governmental regulatory authorities (which shall include the filing of all
applications and the furnishing of all information as may be required by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 the "HSR Act"), lenders,
lessors, vendors, customers, and other Persons necessary to permit the
transactions contemplated by this Agreement to be consummated, pursuant to any
Law, any Permit held by the Company or any loan agreement, lease or other
material Contract to which the Company or any Subsidiary of the Company is a
party or by which the Company or any Subsidiary of the Company is bound, (b)
give the notices and make
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the filings described on Schedule 3.10 and (c) request and obtain estoppel
certificates from all lenders and lessors as reasonably requested by NCO.
SECTION 9: CERTAIN OBLIGATIONS OF NCO PENDING CLOSING
9.1 Material Consents. Between the date of this Agreement and the
Closing Date, NCO shall in good faith use commercially reasonable efforts to
obtain all Consents required to be obtained by NCO from any governmental
regulatory authorities (which shall include the filing of all applications and
the furnishing of all information required by the HSR Act), and lenders and NCO
shall in good faith cooperate with the Company in its efforts to obtain any
required Consent or Permits set forth in Schedule 3.10, provided, however, that
NCO shall not (i) be required to assume, guaranty or act as surety for the
Liabilities of any Person, (ii) breach or violate any Contract to which NCO or
any of its Subsidiaries is a party or by which any of them are bound or (iii)
consent to the amendment of any Contract or Permit which NCO determines in its
sole discretion would be adverse to the Company, any Subsidiary of the Company
or NCO.
SECTION 10. CONDITIONS TO CLOSING.
10.1 Mutual Conditions. The respective obligations of each party to
complete the transactions contemplated by this Agreement shall be subject to the
satisfaction, at or prior to the Closing Date, of the following conditions (any
of which may be waived in writing by NCO on one hand and Seller on the other
hand):
10.1.1 No Action or Proceeding. No Proceeding shall be pending
or threatened by any public authority or person before any court, agency or
administrative body which creates a substantial likelihood that the consummation
of this Agreement or the transactions contemplated hereby will be restrained,
enjoined or otherwise prevented or that any material damages will be recovered
or other material relief obtained as a result of the transactions contemplated
hereby or as a result of any agreement entered into in connection with, or as a
condition precedent to, the consummation of the transactions contemplated
hereby.
10.1.2 Compliance with Law. No provision of any applicable Law
and no Judgment shall prohibit the Closing. There shall have been obtained any
and all Permits and Consents of any governmental body or agency which NCO or
Seller may reasonably deem necessary so that consummation of the transactions
contemplated by this Agreement will be in compliance in all material respects
with Law.
10.1.3 Hart-Scott-Rodino Requirements. The waiting periods (as
such may be extended by the governmental agencies involved) applicable to the
consummation of the transactions contemplated hereby under the provisions of the
HSR Act and the rules thereunder shall have expired or have been terminated by
the appropriate governmental agency.
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10.2 Conditions to Obligations of NCO. The obligations of NCO to
consummate the other transactions contemplated hereby shall be subject to the
satisfaction, at or prior to the Closing Date, of the following conditions (any
of which may be waived by NCO):
10.2.1 Performance of Agreements. Each of the agreements of
the Company and Seller to be performed at or prior to the Closing Date pursuant
to the terms hereof shall have been duly performed in all material respects.
10.2.2 No Breach of Representations. The representations and
warranties of the Company, CMJ, Whitney and HBM set forth in this Agreement
shall be true and correct as of the date of this Agreement and as of the Closing
Date as though made on and as of the Closing Date, except to the extent that
such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties shall be true and correct on and
as of such earlier date).
10.2.3 Delivery of Certificate. NCO shall have been furnished
with a certificate, executed by the Chief Executive Officer of the Company,
dated the Closing Date, certifying in such detail as NCO may reasonably request,
as to the fulfillment with respect to the Company of the conditions set forth in
the immediately preceding clauses 9.2.1 and 9.2.2.
10.2.4 No Material Adverse Change. There shall have occurred
no event , individually or together with all other events, giving rise to a
Material Adverse Effect from the date of the latest Financial Statements.
10.2.5 Proceedings. No Proceeding shall have been instituted
or threatened to restrain or prevent the carrying out of the transactions
contemplated hereby or to seek damages in connection with such transactions
which could reasonably be expected to have a Material Adverse Effect.
10.2.6 Approval of Counsel to NCO. All actions and proceedings
hereunder and all Documents required to be delivered by the Company or Seller
hereunder or in connection with the consummation of the transactions
contemplated hereby, and all other related matters, shall have been approved by
Blank Rome Comisky & McCauley LLP, counsel to NCO, as to their form and
substance.
10.2.7 Licenses. NCO shall have obtained, or obtained the
transfer of, any licenses and other regulatory approvals necessary to allow NCO
to operate the Business.
10.2.8 Deliverables. The Company and/or Seller shall have
delivered to NCO, on or before the Closing Date, the following, which shall be
in form and substance reasonably acceptable to NCO's counsel:
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10.2.8.1 Instruments of Transfer. All documents and
instruments of transfer for the shares of MedSource Stock owned by Seller,
including, without limitation, original endorsed stock certificates for such
MedSource Stock (and any securities into which such MedSource Stock may have
been converted) and fully executed originals of any necessary instruments of
assignment.
10.2.8.2 Receipts. Receipts acknowledging NCO's
payment to Seller of the Base Purchase Price;
10.2.8.3 Consents. The original signed copies of all
Consents listed on Schedule 3.10 except for such Consents which the failure to
obtain could not reasonably be expected to have a Material Adverse Effect;
10.2.8.4 Good Standing. Good standing certificates
for the Company and the Company's Subsidiaries, dated no earlier than ten (10)
days before the Closing Date, from the State of incorporation and from each
other jurisdiction in which the Company or its Subsidiaries is qualified or
registered to do business as a foreign corporation;
10.2.8.5 Incumbency Certificate. A certificate of
Secretary of the Company as to the incumbency and signatures of the officers of
the Company executing this Agreement;
10.2.8.6 Certified Resolutions. Copies of the
resolutions duly adopted by the board of directors of the Company, authorizing
the Company to execute, deliver and perform this Agreement and to consummate the
transactions contemplated by this Agreement, certified by the secretary the
Company as in full force and effect, without modification or rescission, on and
as of the Closing Date;
10.2.8.7 Opinion of Counsel. An opinion of counsel to
the Company addressed to NCO and dated the Closing Date, in form reasonably
acceptable to NCO;
10.2.8.8 Minute Books. All of the original minute
books and stock books of the Company; and
10.2.8.9 Other Documents. All other agreements,
certificates, instruments, opinions and documents reasonably requested by NCO in
order to fully consummate the transactions contemplated by this Agreement.
10.2.9 Employment Agreements. Chip, Mark and John shall each
have executed and delivered to NCO an Employment Agreement substantially in the
form attached hereto as Exhibit "B".
10.2.10 Rights to Acquire MedSource Stock. All options,
warrants, and other rights to acquire MedSource Stock shall have been terminated
effective as of the Closing Date without any Liability to the Company.
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10.3 Conditions to Obligations of the Seller. The obligations of the
Seller to consummate the transactions contemplated hereby shall be subject to
the satisfaction, at or prior to the Closing Date, of the following conditions
(any of which may be waived by the Seller):
10.3.1 Each of the agreements of NCO to be performed at or
prior to the Closing Date pursuant to the terms hereof shall have been duly
performed, in all material respects.
10.3.2 The representations and warranties of NCO set forth in
this Agreement shall be true and correct in all respects as of the date of this
Agreement and as of the Closing Date as though made on and as of the Closing
Date, except to the extent that such representations and warranties expressly
relate to an earlier date (in which case such representations and warranties
shall be true and correct on and as of such earlier date).
10.3.3 The Company shall have been furnished with a
certificate, executed by duly authorized officers of NCO, dated the Closing
Date, certifying in such detail as the Company may reasonably request as to the
fulfillment of the conditions set forth in the immediately preceding clauses
9.3.1 and 9.3.2.
10.3.4 Deliveries. At the Closing, NCO shall have delivered to
the Seller, on or before the Closing Date, the following, which shall be in form
and substance acceptable to the Seller:
10.3.4.1 Closing Date Payment Amount. The Closing
Date Payment Amount, less the Escrow Amount which shall have been delivered to
the Escrow Agent.
10.3.4.2 Good Standing. Good standing certificates
for NCO dated no earlier than ten (10) days before the Closing Date, from the
Commonwealth of Pennsylvania.
10.3.4.3 Certified Resolutions. Copies of the
resolutions duly adopted by the board of directors of NCO, authorizing NCO to
execute, deliver and perform this Agreement and to consummate the transactions
contemplated by this Agreement, certified by the Secretary of NCO as in full
force and effect, without modification or rescission, on and as of the Closing
Date.
10.3.4.4 Incumbency Certificate. A certificate of the
Secretary of NCO as to the incumbency and signatures of the officers of NCO
executing this Agreement.
10.3.4.5 Opinion of Counsel. An opinion of counsel to
NCO, addressed to the Seller and dated the Closing Date, in form acceptable to
the Seller.
10.3.4.6 Other Documents. All other agreements,
certificates, instruments, opinions and documents reasonably requested by the
Seller in order to fully consummate the transactions contemplated by this
Agreement.
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10.3.5 Employment Agreements. NCO shall have executed and
delivered to each of Chip, Mark and John an Employment Agreement substantially
in the form attached hereto as Exhibit B.
10.3.6 Contribution of Certain Funds. Simultaneously with the
completion of the transactions contemplated by this Agreement, NCO shall
contribute to the Company sufficient funds for the Company to pay as of the
Closing Date the Closing Date Company Obligations and shall cause the Company to
make such payments on the Closing Date.
10.3.7 Availability of Certain Discretionary Funds. NCO shall
have contributed to the Company $500,000 for use as a discretionary employee
bonus pool to be distributed to the employees of the Company in the discretion
of Chip.
SECTION 11: RESTRICTIVE COVENANTS OF CMJ AND WHITNEY
11.1 Certain Acknowledgments. Each of CMJ and Whitney expressly
acknowledge that:
11.1.1 NCO Business. The accounts receivable collection
business conducted by the Company and any of its Subsidiaries (after Closing
referred to as the "NCO Companies") involve the provision of accounts receivable
collection business services using proprietary and confidential systems and
information.
11.1.2 Competitive Nature of Business. The business of the
Company and any of its Subsidiaries is highly competitive, is marketed
throughout the United States and requires long sales "lead times" often
exceeding one year. The NCO Companies expend substantial time and money, on an
ongoing basis, to train their employees, maintain and expand their customer
base, and improve and develop their products and services.
11.1.3 Access to Information. During the period that CMJ and
Whitney were Shareholders of the Company, CMJ and Whitney have had access to
proprietary and confidential property, knowledge and information of the Business
of the Company and any of its Subsidiaries which, after Closing, shall be
proprietary and confidential property, knowledge and information of the NCO
Companies; such property, knowledge and information must be kept in strict
confidence to protect NCO's Business and maintain the NCO Companies' competitive
positions in the marketplace; and such property, knowledge and information would
be useful to competitors of the NCO Companies for indefinite periods of time.
11.1.4 Basis for Covenants. The covenants of Sections 11.2,
11.3 and 11.4 (the "Covenants") are a material part of this Agreement and are an
integral part of the obligations of the Sellers hereunder; the Covenants are
supported by good and adequate consideration; and the Covenants are reasonable
and necessary to protect the legitimate business interests of the NCO Companies.
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11.2 Nondisclosure Covenants. At all times after the Closing Date
for the respective periods of time which coincide with the CMJ Noncompetition
Term with respect to CMJ and the Whitney Noncompetition Term and Whitney
Noninterference Term with respect to Whitney, except with NCO's prior written
consent, none of CMJ or Whitney shall, directly or indirectly, in any capacity,
communicate, publish or otherwise disclose to any Person, or use for the benefit
of any Person, any confidential or proprietary property, knowledge or
information of the Company or any of its Subsidiaries, no matter when or how
such knowledge or information was obtained, including without limitation (a) any
information concerning the conduct and details of the Business; (b) the identity
of customers and prospects for which proposals have been submitted as of the
Closing Date ("Prospect"), their specific requirements, and the names, addresses
and telephone numbers of individual contacts at customers and prospects; (c)
prices, renewal dates and other detailed terms of customer and supplier
Contracts and proposals; (d) pricing policies, marketing and sales strategies,
methods of delivering products and services, and products and service
development projects and strategies; (e) employment and payroll records; (f)
forecasts, budgets and other nonpublic financial information; and (g) expansion
plans, management policies, methods of operation, and other business strategies
and policies.
11.3 Noncompetition and Noninterference Covenants.
11.3.1 During the period beginning on the Closing Date and
ending on the fifth anniversary (the "CMJ Noncompetition Term") of the Closing
Date, except with NCO's prior written consent, CMJ shall not, directly or
indirectly, in any capacity, at any location worldwide:
(1) Solicitation Restrictions. Solicit any Person who
was a customer, Prospect, supplier, employee, salesman, agent or representative
of, or a consultant to, the Company or any of its Subsidiaries, in any manner
which interferes with such Person's relationship with the NCO Companies, or in
an effort to obtain any such Person as a customer, employee, salesman, agent or
representative of, or a consultant to, any other Person that conducts a business
competitive with the Business.
(2) Competing Business Restrictions. Establish, own,
manage, operate, finance or control, or participate in the establishment,
ownership, management, operation, financing or control of, or be a director,
officer, employee, salesman, agent or representative of, or be a consultant to,
any Person that conducts a business competitive with all or any part of the
Business.
11.3.2 Except with NCO's prior written consent, neither
Whitney, nor any person, corporation, firm, partnership or other entity related
to them, and over which they exercise voting, operating or management control
shall, directly or indirectly, in any capacity, at any location worldwide:
(1) Competing Business Restrictions. During the
period beginning on the Closing Date of this Agreement and ending on the first
anniversary (the "Whitney Noncompetition Term") of the Closing Date, establish,
own, manage, operate, finance or control, or participate in the
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establishment, ownership, management, operation, financing or control of, or be
a director, officer, employee, salesman, agent or representative of, or be a
consultant to, any Person that conducts a business competitive with all or any
part of the Business.
(2) Noninterference. For the period of two years
following the Whitney Noncompetition Term (the "Whitney Noninterference Term"),
solicit for employment as salesman, agent, representative or consultant, any
employee of the NCO Companies previously employed by the Company or any of its
Subsidiaries in any management or supervisory capacity or direct any of its
affiliates to state any disparaging information regarding the NCO Companies to
any of the Company's or its Subsidiaries' customers, business prospects or
suppliers.
11.4 Nonsolicitation. During the period beginning on the Closing Date
and ending at the end of the CMJ Noncompetition Term or the Whitney
Noncompetition Term and the Whitney Noninterference Term, as the case may be,
neither CMJ nor Whitney shall solicit any employee of the Company or any of its
Subsidiaries who becomes an employee of the NCO Companies on the Closing Date to
become employees or independent contractors of CMJ or Whitney or any of their
affiliates.
11.5 Certain Exclusions. Confidential and proprietary property,
knowledge and information of the NCO Companies shall not include any information
that is now known by or readily available to the general public, nor shall it
include any information that in the future becomes known by or readily available
to the general public other than as a result of any breach of the Covenants of
this Agreement. The ownership by any of CMJ or Whitney of not more than five
percent (5%) of the outstanding securities of any public company shall not, by
itself, constitute a breach of the Covenants of Section 11.3, even if such
public company competes with the NCO Companies.
11.6 Enforcement of Covenants. Each of CMJ and Whitney expressly
acknowledges that it would be extremely difficult to measure the damages that
might result from any breach of the Covenants, and that any breach of the
Covenants will result in irreparable injury to the NCO Companies for which money
damages could not adequately compensate. If a breach of the Covenants occurs,
then the NCO Companies shall be entitled, in addition to all other rights and
remedies that they may have at law or in equity, to have an injunction issued by
any competent court enjoining and restraining CMJ and Whitney and all other
Persons involved therein from continuing such breach. The existence of any claim
or cause of action that any of CMJ or Whitney or any such other Person may have
against any member of the NCO Companies shall not constitute a defense or bar to
the enforcement of any of the Covenants. If the NCO Companies must resort to
litigation to enforce any of the Covenants that has a fixed term, then such term
shall be extended for a period of time equal to the period during which a breach
of such Covenant was occurring, beginning on the date of a final court order
(without further right of appeal) holding that such a breach occurred or, if
later, the last day of the original fixed term of such Covenant.
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11.7 Scope of Covenants. If any Covenant, or any part thereof, or
the application thereof, is construed to be invalid, illegal or unenforceable,
then the other Covenants, or the other portions of such Covenant, or the
application thereof, shall not be affected thereby and shall be enforceable
without regard thereto. If any of the Covenants is determined to be
unenforceable because of its scope, duration, geographical area or other factor,
then the court making such determination shall have the power to reduce or limit
such scope, duration, area or other factor, and such Covenant shall then be
enforceable in its reduced or limited form.
SECTION 12: INDEMNIFICATION
12.1 The Company's, CMJ's, HBM's and Whitney's Indemnification.
Subject to the limitations set forth in Section 12.9, if the transactions
contemplated by this Agreement are not consummated, the Company, and Chip, Mark,
John and HBM (collectively the "CMJ/HBM Group"), jointly and severally with each
other but severally with Whitney Fund and Whitney Partners (collectively the
"Whitney Group"), and Whitney Partners and Whitney Fund, jointly and severally
with each other but severally with the CMJ/HBM Group, or if the transactions
contemplated by this Agreement are consummated, Chip, Mark, John and HBM,
jointly and severally with each other but severally with the Whitney Group, and
Whitney Fund and Whitney Partners, jointly and severally with each other but
severally with the CMJ/HBM Group, shall defend, indemnify and hold harmless NCO
and its Subsidiaries and their successors and assigns, and its directors,
officers, employees, agents and representatives, from and against any and all
actions, suits, claims, demands, debts, liabilities, obligations, losses,
damages, costs and expenses, including without limitation reasonable attorney's
fees and court costs (collectively "Claims"), arising out of or caused by,
directly or indirectly, any or all of the following:
12.1.1 Misrepresentations. Any misrepresentation, breach or
failure of any warranty or representation made by the Company in or pursuant to
this Agreement.
12.1.2 Nonperformance. Any failure or refusal by the Company
to satisfy or perform in all material respects any covenant, term or condition
of this Agreement required to be satisfied or performed by the Company.
12.1.3 MedSource Name. The claims by MediRisk, Inc. and its
subsidiary MedSource, Inc. relating to the use by the Company or any Subsidiary
of the Company of the name "MedSource."
12.1.4 Proceedings. Any Proceeding against NCO or any
Subsidiary of NCO by any Person arising out of the foregoing.
12.1.5 Office Reorganization. Any labor and employment related
claims of employees or government agencies arising from or relating to the
reorganization of the Company's Waterford, Michigan office, including, but not
limited to, claims relating to the termination or layoff of any employee, the
closure or partial closure of the office, or the termination of any benefits;
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provided, however, no indemnification obligation shall arise with respect to (i)
the cost and expense of severance and other termination benefits consistent with
the Company's or NCO's regular practices or programs in connection with
severance and termination benefits; (ii) claims for workers' compensation or
unemployment insurance compensation; (iii) contract claims arising out of
certain employees' employment; (iv) accrued compensation, including vacation;
(v) COBRA rights or benefits, (vi) claims under Title VII of the Civil Rights
Act of 1964, as amended, (vii) claims under the Age Discrimination in Employment
Act of 1967, as amended; (viii) claims under the Americans With Disabilities
Act, as amended; (ix) claims under the Family and Medical Leave Act of 1993; (x)
claims under the Worker Adjustment Retraining & Notification Act or (xi) claims
under the Fair Labor Standards Act, as amended.
12.2 CMJ's Indemnification. CMJ shall indemnify and hold harmless NCO
and its successors and assigns, and its directors, officers, employees, agents
and representatives from and against any and all actions, suits, claims,
demands, debts, liabilities, obligations, losses, damages, costs and expenses,
including without limitation reasonable attorney's fees and court costs, arising
out of or caused by, directly or indirectly by any misrepresentation, breach or
failure of any warranty or representation made by CMJ in or pursuant to this
Agreement or any failure or refusal by CMJ to satisfy or perform in all material
respects any covenant, term or condition of this Agreement required to be
satisfied or performed by CMJ.
12.3 Whitney's Indemnification. Whitney shall indemnify and hold
harmless NCO and its successors and assigns, and its directors, officers,
employees, agents and representatives from and against any and all actions,
suits, claims, demands, debts, liabilities, obligations, losses, damages, costs
and expenses, including without limitation reasonable attorney's fees and court
costs, arising out of or caused by, directly or indirectly by any
misrepresentation, breach or failure of any warranty or representation made by
Whitney in or pursuant to this Agreement or any failure or refusal by Whitney to
satisfy or perform in all material respects any covenant, term or condition of
this Agreement required to be satisfied or performed by Whitney.
12.4 HBM's Indemnification. HBM shall indemnify and hold harmless NCO
and its successors and assigns, and its directors, officers, employees, agents
and representatives from and against any and all actions, suits, claims,
demands, debts, liabilities, obligations, losses, damages, costs and expenses,
including without limitation reasonable attorney's fees and court costs, arising
out of or caused by, directly or indirectly by any misrepresentation, breach or
failure of any warranty or representation made by HBM in or pursuant to this
Agreement or any failure or refusal by HBM to satisfy or perform in all material
respects any covenant, term or condition of this Agreement required to be
satisfied or performed by HBM.
12.5 NCO's Indemnification. NCO shall indemnify and hold harmless the
Seller and its successors and assigns, and its directors, officers, employees,
agents and representatives from and against any and all actions, suits, claims,
demands, debts, liabilities, obligations, losses, damages, costs and expenses,
including without limitation reasonable attorney's fees and court costs, arising
out of or caused by, directly or indirectly, any or all of the following:
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12.5.1 Misrepresentations. Any misrepresentation, breach or
failure of any warranty or representation made by NCO in or pursuant to this
Agreement.
12.5.2 Nonperformance. Any failure or refusal by NCO to
satisfy or perform in all material respects any covenant, term or condition of
this Agreement required to be satisfied or performed by NCO.
12.6 Indemnification Procedures. With respect to each event,
occurrence or matter ("Indemnification Matter") as to which any Person (the
"Indemnitee") is entitled to indemnification from any other Person (the
"Indemnitor") pursuant to this Section 12:
12.6.1 Notice. Within ten (10) days after the Indemnitee
receives written documents underlying the Indemnification Matter or, if the
Indemnification Matter does not involve a third-party action, suit, claim or
demand, promptly after the Indemnitee first has actual knowledge of the
Indemnification Matter, the Indemnitee shall give notice to the Indemnitor of
the nature of the Indemnification Matter and the amount demanded or claimed in
connection therewith ("Indemnification Notice"), together with copies of any
such written documents.
12.6.2 Defense. If a third-party action, suit, claim or demand
is involved, then, upon receipt of the Indemnification Notice, the Indemnitor
shall, at its expense and through counsel of its choice, promptly assume and
have sole control over the litigation, defense or settlement (the "Defense") of
the Indemnification Matter, except that (a) the Indemnitee may, at its option
and expense and through counsel of its choice, participate in (but not control)
the Defense; (b) if the Indemnitee reasonably believes that the handling of the
Defense by the Indemnitor may have a material adverse affect on the Indemnitee,
its business or financial condition, or its relationship with any customer,
prospect, supplier, employee, salesman, consultant, agent or representative,
then the Indemnitee may, at its option and expense and through counsel of its
choice, assume control of the Defense, provided that the Indemnitor shall be
entitled to participate in the Defense at its expense and through counsel of its
choice; (c) except with respect to a Judgment or settlement which involve no
more than the payment of money damages, the Indemnitor shall not consent to any
Judgment, or agree to any settlement, without the Indemnitee's prior written
consent; and (d) if the Indemnitor does not promptly assume control over the
Defense or, after doing so, does not continue to prosecute the Defense in good
faith, the Indemnitee may, at its option and through counsel of its choice, but
at the Indemnitor's expense, assume control over the Defense. In any event, the
Indemnitor and the Indemnitee shall fully cooperate with each other in
connection with the Defense, including without limitation by furnishing all
available documentary or other evidence as is reasonably requested by the other.
12.7 Payments. All amounts owed by the Indemnitor to the Indemnitee
(if any) shall be paid in full within fifteen (15) business days after a final
Judgment (without further right of appeal) determining the amount owed is
rendered, or after a final settlement or agreement as to the amount owed is
executed; provided, however, if the Indemnitor is the CMJ/HBM Group and the
Whitney Group pursuant to Section 12.1, payment of the amount owed to NCO by
such Indemnitor may be
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deferred (i) until such Indemnitor receives a letter from NCO stating that, in
its reasonable judgment after review with its counsel, the Indemnification
Matter for which the amount is owed is not a matter for which the Company or NCO
can obtain a recovery from an insurance carrier or from a third party pursuant
to a right of NCO, the Company or a Subsidiary of the Company to indemnification
pursuant to the terms of any agreement to which the Company or a Subsidiary of
the Company is a party, or (ii) if NCO believes that a right of the Company, a
Subsidiary of the Company or NCO to an insurance recovery or to indemnification
for such Indemnification Matter does exist pursuant to the terms of an insurance
policy or pursuant to such agreement, until 90 days after such Indemnitor
receives a letter from NCO stating that NCO, the Company or a Subsidiary of the
Company has used reasonable efforts to seek recovery for such Indemnification
Matter pursuant to the terms of such insurance policy or such indemnification
right (it being understood that NCO or the Company shall not be obligated to
institute any Proceeding to effect such recovery) and no payment with respect to
such Indemnification Matter has been made within 30 days after NCO, the Company
or a Subsidiary of the Company first seeks such recovery. During such 90 day
period and thereafter NCO shall cooperate with the Indemnitor and permit the
Indemnitor to take all action in the name and on behalf of the Company to pursue
such indemnification from a third party or collect under any insurance policy
(it being understood that any such recovery shall be for the account of the
Indemnitor to the extent the Indemnitor has paid all amounts payable by the
Indemnitor to the Indemnitee pursuant to this Section).
12.8 Setoff and Holdback. In addition to all other rights and remedies
that the Indemnitee may have, the Indemnitee shall have the right to setoff,
against any amounts due to the Indemnitor, whether due under this Agreement, any
of the other Contracts contemplated by this Agreement or otherwise, any sums for
which the Indemnitee is entitled to payment under Section 12.7. The Indemnitee's
rights to indemnification under this Section 12 shall not be in any manner
limited by or to this right of setoff.
12.9 Certain Qualifications. Notwithstanding anything to the contrary
contained herein, the obligations of Chip, Mark, John, HBM and Whitney Fund and
Whitney Partners to indemnify NCO pursuant to Section 12.1 shall be subject to
the following:
12.9.1 Except as set forth in Section 12.9.4, unless and until
the aggregate amount of Claims by NCO for indemnification under Section 12.1
exceed $100,000, Chip, Mark, John, HBM, Whitney Fund and Whitney Partners shall
have no obligation to indemnify NCO under this Section 12.1 and the obligation
to indemnify NCO upon the Claims of NCO exceeding $100,000 shall be only with
respect to amounts which exceed $100,000.
12.9.2 Except as set forth in Section 12.9.4, Chip, Mark,
John, HBM, Whitney Fund and Whitney Partners shall have no obligation to
indemnify NCO under Section 12.1 with respect to any Indemnification Matter
unless the Indemnification Notice with respect to such Indemnification Matter is
given to Chip, Mark, John, HBM, Whitney Fund and Whitney Partners prior to the
date which is eighteen months after the Closing Date.
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12.9.3 Except as set forth in Section 12.9.4, the aggregate
maximum liability of Chip, Mark, John, HBM, Whitney Fund and Whitney Partners
under Section 12.1 with respect to all Indemnification Matters shall be
$1,000,000, of which the maximum liability of the CMJ/HBM Group shall be
$610,000 and the maximum liability of the Whitney Group shall be $390,000.
12.9.4 The obligations of Chip, Mark, John, HBM, Whitney Fund
and Whitney Partners to indemnify NCO pursuant to Section 12.1 (i) shall not be
subject to the limitations set forth in Sections 12.9.2 and 12.9.3 with respect
to any Indemnification Matter arising out of or caused by, directly or
indirectly, any misrepresentation, breach of failure of any warranty or
representation made by the Company in Section 3.6 (relating to Tax Matters),
(ii) shall not be subject to the limitation set forth in Section 12.9.1 and
Section 12.9.3 with respect to the matter set forth in Section 12.1.5 and (iii)
shall not be subject to the limitations set forth in Section 12.9.1, Section
12.9.2 and Section 12.9.3 with respect to the matter set forth in Section
12.1.3.
12.9.5 With respect to each Indemnification Matter for which
amounts become payable to NCO pursuant to the indemnification obligations set
forth in Section 12.1, 61% of the amount shall be paid by the CMJ/HBM Group and
39% of the amount shall be paid by the Whitney Group. In no event shall the
amount payable by the CMJ/HBM Group on the one hand or the Whitney Group on the
other hand, for indemnification obligations pursuant to Section 12.1 be greater
than the amounts calculable using the foregoing respective percentages whether
or not one of such groups shall have paid the amounts payable with respect to
the indemnification obligations under Section 12.1.
12.10 Exclusive Remedy. NCO and Seller hereby agree that with respect
to any breach, violation or non-fulfillment of or default in the performance of
any representation, warranty or covenant of this agreement for which a right to
claim indemnification is provided in this Section 12, a claim or an action under
and pursuant to the terms, conditions and limitations of this Section 12 shall
be the sole and exclusive right and remedy of NCO and Seller, and that neither
NCO nor Seller shall have any other claim, cause of action, right, or remedy for
such breach, violation, non-fulfillment or default based upon this Agreement,
any provision of any federal or state securities or other statute, law, rule or
regulation or based upon any other cause of action arising at law or in equity;
provided, however, that if for any reason a court of competent jurisdiction
shall refuse to enforce this provision, and shall permit NCO or Seller to assert
any action based other than upon the right to claim indemnification as provided
in this Section 12, NCO and Seller agree that the amount of such other claim
shall be subject to and limited by the provisions of this Section 12. The
provisions of this Section 12 shall not preclude the prosecution of any action
or proceeding based on fraud that if found to exist would be sufficient to give
rise to the right of rescission with respect to the transactions contemplated
hereby.
SECTION 13: TERMINATION AND WAIVER.
13.1 Termination. This Agreement may be terminated at any time prior
to the Closing Date:
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13.1.1 by mutual written consent of NCO, CMJ and Whitney;
13.1.2 by either NCO on the one hand or CMJ and Whitney on the
other hand:
13.1.2.1 if the Closing shall not have occurred on or
before July 31,1998, unless the failure to consummate the transactions
contemplated by this Agreement is the result of a willful and material breach of
this Agreement by the party seeking to terminate this Agreement; provided,
however, that the passage of such period shall be tolled for any part thereof
(but not exceeding 60 days in the aggregate) during which any party shall be
subject to a nonfinal order, decree, ruling or action restraining, enjoining or
otherwise prohibiting the consummation of the transactions contemplated by this
Agreement;
13.1.2.2 if any court of competent jurisdiction or
other governmental entity shall have issued an order, decree or ruling or taken
any other action permanently enjoining, restraining or otherwise prohibiting the
transactions contemplated by this Agreement and such order, decree, ruling or
other action shall have become final and nonappealable;
13.1.2.3 in the event of a breach by the other party
of any representation, warranty, covenant or other agreement contained in this
Agreement which (A) results in the failure of a condition set forth in Section
10 and (B) cannot be or has not been cured within 30 days after the giving of
written notice to the breaching party of such breach (a "Material Breach")
(provided that the terminating party is not then in Material Breach of any
representation, warranty, covenant or other agreement contained in this
Agreement).
13.1.3 by NCO if NCO notifies Seller within 30 days after the
date of this Agreement that it has received a report from Coopers and Lybrand
which either (i) reflects that the Tangible Net Worth as of March 31,1998 is
reasonably expected to be less than $3,856,000, or (ii) reflects that the
annualized cash flow of the Company and its Subsidiaries for the three months
ended March 31, 1998 on a proforma basis after giving effect to certain cost
savings agreed to by NCO and the Seller is reasonably expected to be less than
$4,700,000; and
13.1.4 by NCO if within 10 days after Seller and Company
deliver to NCO all of the Schedules and other documents required to be delivered
by Seller or Company pursuant to this Agreement, NCO notifies Seller that the
Schedules set forth information of a material nature affecting the financial
condition or operations of the Company and its Subsidiaries taken as a whole,
the Business or the Assets used in the Business which if NCO had known such
information as of the date hereof NCO would not have entered into this
Agreement.
13.1.5 by NCO if NCO has not obtained a consent from its
senior lender to the transactions contemplated by this Agreement within 30 days
after the date of this Agreement.
13.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 13.1, this Agreement shall forthwith become
void and have no effect, without any liability
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or obligation on the part of any party, other than the provisions of Sections
14.1 and 14.2, and except to the extent that such termination results from the
willful and material breach by a party of any of its representations,
warranties, covenants or other agreements set forth in this Agreement.
13.3 Extension; Waiver. At any time prior to the Closing Date, the
parties may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained in this Agreement or in any document
delivered pursuant to this Agreement or (c) waive compliance with any of the
agreements or conditions contained in this Agreement.
SECTION 14: OTHER PROVISIONS
14.1 Fees and Expenses. NCO shall pay all of the fees and expenses
incurred by it (including any fees payable pursuant to the HSR Act) and the
Company shall pay all of the fees and expenses incurred by Seller, in
negotiating and preparing this Agreement (and all other Contracts executed in
connection herewith or therewith) and in consummating the transactions
contemplated by this Agreement.
14.2 Publicity. All voluntary public announcements concerning the
transactions contemplated by this Agreement shall be mutually acceptable to both
NCO and the Company. Unless required by Law, neither the Company or NCO shall
make any public announcement or issue any press release concerning the
transactions contemplated by this Agreement without the prior written consent of
the other party. With respect to any announcement that any of the parties is
required by Law to issue, such party shall, to the extent possible under the
circumstances, review the necessity for the contents of the announcement with
the other party and the other party's counsel before issuing the announcement.
14.3 Notice. All notices, consents or other communications required or
permitted to be given under this Agreement shall be in writing and shall be
deemed to have been duly given (a) when delivered personally, (b) three business
days after being mailed by first class certified mail, return receipt requested,
postage prepaid, or (c) one business day after being sent by a reputable
overnight delivery service, postage or delivery charges prepaid, to the parties
at their respective addresses as follows:
If to Whitney Partners:
177 Board Street
15th Floor
Stamford, CT 06901
Attention: Jeffrey R. Jay, M.D. and Daniel J. O'Brien
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With a copy to:
David Scherl, Esquire
Morrison Cohen Singer & Weinstein, LLP
750 Lexington Avenue
New York, NY 10022
If to Whitney Fund:
177 Board Street
15th Floor
Stamford, CT 06901
Attention: Jeffrey R. Jay, M.D. and Daniel J. O'Brien
With a copy to:
David Scherl, Esquire
Morrison Cohen Singer & Weinstein, LLP
750 Lexington Avenue
New York, NY 10022
If to Chip:
C. B. Hellman, Jr.
8301 Glidewell Road
Cross Plains, TN 37049
With a copy to:
Mark Manner, Esquire
Harwell Howard Hyne Gabbert & Manner, P.C.
1800 First American Center
315 Deaderick Street
Nashville, TN 37238
If to John:
John J. O'Hara, Jr.
7236 Birch Bark Drive
Nashville, TN 37221
With a copy to:
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Mark Manner, Esquire
Harwell Howard Hyne Gabbert & Manner, P.C.
1800 First American Center
315 Deaderick Street
Nashville, TN 37238
If to Mark:
Mark Gorman
2031 Maple Lane
Franklin, TN 37067
With a copy to:
Mark Manner, Esquire
Harwell Howard Hyne Gabbert & Manner, P.C.
1800 First American Center
315 Deaderick Street
Nashville, TN 37238
If to NCO:
515 Pennsylvania Avenue
Fort Washington, PA 19034
Attn: Michael Barrist
With a copy to:
Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, PA 19103
Attn.: Sol Genauer, Esquire
Notices may also be given by prepaid telegram or facsimile and shall be
effective on the date transmitted if confirmed within 24 hours thereafter by a
signed original sent in the manner provided in the preceding sentence. Any party
may change its address for notice and the address to which copies must be sent
by giving notice of the new addresses to the other parties in accordance with
this Section 14.3, except that any such change of address notice shall not be
effective unless and until received.
14.4 Survival of Representations. All representations and warranties
made in this Agreement or pursuant hereto shall survive the date of this
Agreement, the Closing Date and the
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consummation of the transactions contemplated by this Agreement for a period of
eighteen months after the Closing Date.
14.5 Interpretation of Representations. Each representation and
warranty made in this Agreement or pursuant hereto is independent of all other
representations and warranties made by the same parties, whether or not covering
related or similar matters, and must be independently and separately satisfied.
Exceptions or qualifications to any such representation or warranty shall not be
construed as exceptions or qualifications to any other representation or
warranty.
14.6 Reliance by NCO. Notwithstanding the right of NCO to investigate
the Business, the Assets of the Business and financial condition of the Company
and its Subsidiaries, and notwithstanding any knowledge determined or
determinable by NCO as a result of such investigation, NCO has the unqualified
right to rely upon, and has relied upon, each of the representations and
warranties made by the Company, CMJ, HBM and Whitney, in this Agreement or
pursuant hereto.
14.7 Entire Understanding. This Agreement, together with the Exhibits
and Schedules hereto, states the entire understanding among the parties with
respect to the subject matter hereof, and supersedes all prior oral and written
communications and agreements, and all contemporaneous oral communications and
agreements, with respect to the subject matter hereof, except for any
confidentiality agreement among the parties which shall remain in full force and
effect. No amendment or modification of this Agreement shall be effective unless
in writing and signed by the party against whom enforcement is sought.
14.8 Parties in Interest. None of the parties may assign this
Agreement or any rights or obligations under this Agreement without the prior
written consent of the other parties, except NCO may assign any or all of its
rights under Section 11 of this Agreement to any Person who acquires or obtains
control of all or substantially all of the Assets of NCO or the Company or any
Subsidiary of the Company. This Agreement shall bind, benefit, and be
enforceable by and against the parties hereto, and their respective successors
and consented-to assigns.
14.9 Waivers. Except as otherwise expressly provided herein, no waiver
with respect to this Agreement shall be enforceable unless in writing and signed
by the party against whom enforcement is sought. Except as otherwise expressly
provided herein, no failure to exercise, delay in exercising, or single or
partial exercise of any right, power or remedy by any party, and no course of
dealing between or among any of the parties, shall constitute a waiver of, or
shall preclude any other or further exercise of, any right, power or remedy.
14.10 Severability. If any provision of this Agreement is construed to
be invalid, illegal or unenforceable, then the remaining provisions hereof shall
not be affected thereby and shall be enforceable without regard thereto.
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14.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original
hereof, and it shall not be necessary in making proof of this Agreement to
produce or account for more than one counterpart hereof.
14.12 Section Headings. The section and subsection headings in this
Agreement are used solely for convenience of reference, do not constitute a part
of this Agreement, and shall not affect its interpretation.
14.13 References. All words used in this Agreement shall be construed
to be of such number and gender as the context requires or permits. Unless a
particular context clearly requires otherwise, the words "hereof" and
"hereunder" and similar references refer to this Agreement in its entirety and
not to any specific section or subsection of this Agreement.
14.14 Controlling Law. THIS AGREEMENT IS MADE UNDER, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF
PENNSYLVANIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED SOLELY THEREIN,
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
14.15 Jurisdiction and Process. In any action between or among any of
the parties, whether arising out of this Agreement or otherwise, (a) each of the
parties irrevocably consents to the exclusive jurisdiction and venue of the
federal and state courts located in the Commonwealth of Pennsylvania; (b) if any
such action is commenced in a state court, then, subject to applicable law, no
party shall object to the removal of such action to any federal court located in
the Commonwealth of Pennsylvania; (c) each of the parties irrevocably waives the
right to trial by jury; (d) each of the parties irrevocably consents to service
of process by first class certified mail, return receipt requested, postage
prepaid, to the address at which such party is to receive notice in accordance
with Section .
14.16 No Third-Party Beneficiaries. No provision of this Agreement is
intended to or shall be construed to grant or confer any right to enforce this
Agreement, or any remedy for breach of this Agreement, to or upon any Person
other than the parties hereto, including, but not limited to, any customer,
prospect, supplier, employee, contractor, salesman, agent or representative of
the Company or Seller.
14.17 Further Assurances. At any time and from time to time after the
Closing Date, at NCO's request and without further consideration, but at the
expense of NCO, the Seller will promptly execute and deliver all such further
Documents or perform such acts as NCO may reasonably request in order to more
fully consummate the transactions contemplated herein and in order to more
effectively vest, transfer, confirm, protect and defend the right, title and
interest of NCO in the MedSource Stock and to assist NCO in exercising its
rights and privileges with respect thereto.
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14.18 Schedules. NCO and Seller acknowledge that all of the Schedules
and Exhibits and other information required to be delivered pursuant to this
Agreement by the Company or Seller or NCO as of the date of this Agreement have
not been delivered. The parties shall deliver such Schedules, Exhibits and other
information within 15 days after the date of this Agreement. Any information
included in any Schedule to this Agreement in response to the disclosure
required or permitted in such Schedule shall be deemed to be included in any
other Schedule to this Agreement if (i) it is apparent from the face of the
disclosure made in the first Schedule that such disclosure is also responsive to
the disclosure required in the other Schedule, and (ii) the disclosure in the
first Schedule contains all information which would be required to be disclosed
with respect to such matter in the other Schedule.
14.19 Certain Matters Relating to Employees. For a period of eighteen
months after the date hereof, NCO shall cause the Company to continue in effect
its insurance for employment related matters. NCO shall provide NCO's severance
program benefits to each employee of the Company and its Subsidiaries who may be
terminated within 180 days after the Closing Date as a result of any
reorganization of the Company and its Subsidiaries resulting from NCO's
acquisition of the MedSource Stock. In addition, NCO shall afford to the
Company's employees at the Company's Michigan office at the time of any closing,
consolidation or combination of such office the opportunity to accept employment
with NCO's outsource employee provider that staffs NCO's Jackson, Michigan
office. NCO shall use its reasonable efforts to effect any closing,
consolidation or combination of the Company's Michigan Office in a commercially
reasonably manner.
14.20 Covenant Relating to Tax Returns. NCO agrees not to file any
amended tax return with respect to a Tax return filed by the Company for any Tax
period ending on or before the Closing Date, unless required by an agency or
political subdivision of any federal, state, local or foreign government. NCO
further agrees not to settle or compromise any Tax arising with respect to a Tax
return filed by the Company for any period ending on or before the Closing Date
which would have the effect of increasing Seller's liability to NCO under
Section 12 without the consent of Seller, which consent shall not be
unreasonably withheld or delayed. NCO shall keep Seller duly informed of any
proceeding in connection with the foregoing.
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IN WITNESS WHEREOF, NCO, the Company, Whitney and HBM have caused this
Stock Purchase Agreement to be executed by their respective duly authorized
officers and CMJ and HBM have executed this Agreement, all as of the day and
year first above written.
ATTEST: NCO GROUP, INC.
By: /s/ Joshua Gindin By: /s/ Michael J. Barrist
------------------- ------------------------------------------
Name: Michael J. Barrist
Secretary Title: Chairman and Chief Executive Officer
[CORPORATE SEAL]
ATTEST: MEDSOURCE, INC.
By: By: /s/ Paul E. Weitzel, Jr.
------------------- ------------------------------------------
Name: Paul E. Weitzel, Jr.
Secretary Title: Chairman and Chief Executive Officer
[CORPORATE SEAL]
/s/ C.B. Hellmann, Jr.
------------------------------------------
C.B. Hellmann, Jr.
/s/ Mark Gorman
------------------------------------------
Mark Gorman
/s/ John O'Hara
-----------------------------------------
John O'Hara
49
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WHITNEY SUBORDINATED DEBT FUND, L.P.
By: /s/ D. J. O'Brien
---------------------------------
Name: D.J. O'Brien
Title:
WHITNEY EQUITY PARTNERS, L.P.
By: /s/ D. J. O'Brien
---------------------------------
Name: D. J. O'Brien
Title:
HEALTHCARE BUSINESS MANAGEMENT, LTD.
By: /s/ W. Gary Myers By: /s/ W. Gary Myers
-------------------------- --------------------------------
[Name] Name: W. Gary Myers
Secretary Title: Chief Executive Officer
[CORPORATE SEAL]
50
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Blank Rome Cominsky & McCauley LLP
Counselors at Law
One Logan Square
Philadelphia, Pennsylvania 19103
215-569-5500
Fax 215-569-5555
May 7, 1998
NCO Group, Inc.
515 Pennsylvania Avenue
Fort Washington, PA 19034
Re: NCO Group, Inc.
Registration Statement
on Form S-3
Gentlemen:
We have acted as counsel to NCO Group, Inc. (the "Company") in
connection with the Registration Statement on Form S-3 (the "Registration
Statement") being filed by the Company with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended, relating to: (i)
the offer and sale by the Company of 5,800,000 shares of Common Stock, no par
value (the "Common Stock"); (ii) the offer and sale by the Selling Shareholders
named in the Registration Statement ("Selling Shareholders") of 867,700 shares
of Common Stock; and (iii) the offer and sale by the Company and certain Selling
Shareholders of up to 902,638 shares and 97,517 shares of Common Stock,
respectively, to be purchased at the option of the Underwriters to cover
over-allotments, if any. This opinion is furnished pursuant to the requirements
of Item 601(b)(5) of Regulation S-K and replaces our opinion dated May 1, 1998.
In rendering this opinion, we have examined only the following
documents: (i) the Company's Amended and Restated Articles of Incorporation and
Bylaws; (ii) the Company's 1995 Amended and Restated Stock Option Plan and the
Company's 1996 Stock Option Plan (collectively, the "Plans") and options to
purchase an aggregate of 61,058 shares of Common Stock (the "Stock Options")
issued pursuant thereto to employees who are Selling Shareholders; (iii)
resolutions adopted by the Board of Directors; (iv) the Company's minute book
and stock records books since the date of incorporation of NCO Group, Inc.; and
(v) the
<PAGE>
NCO Group, Inc.
May 7, 1998
Page 2
Registration Statement. We have not performed any independent investigation
other than the document examination described. We have assumed and relied, as to
questions of fact and mixed questions of law and fact, on the truth,
completeness, authenticity and due authorization of all certificates, documents
and records examined and the genuineness of all signatures. This opinion is
limited to the laws of the Commonwealth of Pennsylvania.
Based upon and subject to the foregoing, we are of the opinion that:
(i) 6,702,638 shares of Common Stock which are being offered by the Company
pursuant to the Registration Statement, when sold in the manner and for the
consideration contemplated by the Registration Statement, will be legally
issued, fully paid and non-assessable; (ii) 904,159 shares of Common Stock which
are being offered by certain Selling Shareholders pursuant to the Registration
Statement, other than the shares issuable pursuant to the Stock Options, are
legally issued, fully paid and non-assessable; and (iii) 61,058 shares of Common
Stock which are being offered by certain Selling Shareholders pursuant to the
Registration Statement upon the exercise of the Stock Options, when acquired by
such Selling Shareholders upon exercise of the Stock Options in the manner
contemplated by the Plans and the Stock Options, including payment of the
applicable exercise price therefor, will be legally issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus, which is part of the Registration Statement.
Sincerely,
/s/ Blank Rome Cominsky & McCauley LLP
--------------------------------------
BLANK ROME COMINSKY & McCAULEY LLP
