<PAGE>
As filed with the Securities and Exchange Commission on May 4, 1998
Registration No. 333-
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NCO GROUP, INC.
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2858652
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
515 Pennsylvania Avenue
Fort Washington, Pennsylvania 19034
Telephone (215) 793-9300
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Michael J. Barrist, Chairman of the Board,
President and Chief Executive Officer
NCO Group, Inc.
515 Pennsylvania Avenue
Fort Washington, Pennsylvania 19034
Telephone (215) 793-9300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Francis E. Dehel, Esquire Lawrence R. Seidman, Esquire
Blank Rome Comisky & McCauley LLP Piper & Marbury L.L.P.
One Logan Square 36 South Charles Street
Philadelphia, Pennsylvania 19103 Baltimore, Maryland 21201
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
<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
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value...... 7,549,750 $ 25.44 $192,065,640 $56,660
</TABLE>
===============================================================================
(1) Includes 984,750 shares which the Underwriters have a right to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
Calculated in accordance with Rule 457(c) based upon the average of the high
and low prices for the Common Stock on April 30, 1998, as reported on the
Nasdaq National Market System.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
===============================================================================
<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 4, 1998
6,565,000 Shares
[GRAPHIC OMITTED]
Common Stock
Of the 6,565,000 shares of Common Stock offered hereby (the "Offering"),
5,800,000 shares are being sold by NCO Group, Inc. ("NCO" or the "Company") and
765,000 shares are being sold by certain shareholders of the Company (the
"Selling Shareholders"). The Company will not receive any of the proceeds from
the sale of the shares by the Selling Shareholders. See "Principal and Selling
Shareholders."
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "NCOG." On May 1, 1998, the last sale price of the Common
Stock as reported on the Nasdaq National Market was $27 5/16 per share. See
"Price Range of Common Stock."
See "Risk Factors" commencing on page 9 of this Prospectus for a
discussion of certain factors that should be considered by prospective
purchasers of the Common Stock offered hereby.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
===============================================================================
<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 887,233 and
97,517 shares, respectively, of Common Stock at the Price to Public shown
above solely to cover over-allotments, if any. If the Underwriters exercise
this option in full, the total Price to Public, Underwriting Discount,
Proceeds to Company and Proceeds to Selling Shareholders will be $ ,
$ , $ , and $ , respectively. See "Principal and Selling
Shareholders" and "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein when, as and if delivered to and accepted by the Underwriters and subject
to their right to reject any order in whole or in part. It is expected that
delivery of the certificates representing the shares will be made against
payment therefor at the office of NationsBanc Montgomery Securities LLC on or
about , 1998.
----------------
NationsBanc Montgomery Securities LLC
BT Alex. Brown
Janney Montgomery Scott Inc.
The Robinson-Humphrey Company
, 1998
<PAGE>
[Pictures depicting certain of the Company's call centers and the Company's
Computer Center. The Company's logo also appears on this page.]
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS, IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION
M. SEE "UNDERWRITING."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE AND
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITERS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<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 pending acquisitions of FCA
International Ltd. ("FCA") and MedSource, Inc. ("MedSource") (collectively, the
"Pending Acquisitions").
Unless otherwise indicated: (i) 1997 pro forma information assumes that the
acquisitions of Goodyear & Associates, Inc. ("Goodyear"), Tele-Research Center,
Inc. ("Tele-Research"), CMS A/R Services ("CMS A/R"), the Collections Division
of CRW Financial, Inc. ("CRWCD"), Credit Acceptance Corporation ("CAC") and
ADVANTAGE Financial Services, Inc. ("AFS") (collectively, the "1997
Acquisitions"), the acquisitions of the Collection Division of American
Financial Enterprises, Inc. ("AFECD") and The Response Center ("TRC")
(collectively, the "1998 Acquisitions") and the Pending Acquisitions occurred on
January 1, 1997; (ii) 1998 pro forma information assumes that the TRC
acquisition and the Pending Acquisitions occurred on January 1, 1998; and (iii)
information with respect to MedSource gives pro forma effect to acquisitions
completed by MedSource in 1997 as if such acquisitions had occurred on January
1, 1997.
The Company
NCO is a leading provider of accounts receivable management and other
outsourced services. The Company develops and implements customized management
solutions for clients. The Company provides these services on a national basis
from 22 call centers located in 14 states using advanced workstations and
sophisticated call management systems comprised of predictive dialers, automated
call distribution systems, digital switching and customized computer software.
Through extensive utilization of technology and intensive management of human
resources, the Company has achieved rapid growth in recent years. As a result of
rapid internal growth and selected strategic acquisitions, the Company's revenue
has grown from $7.4 million in 1993 to $188.4 million in 1997 on a pro forma
basis. Since April 1994, the Company has completed 12 acquisitions which have
enabled it to increase its penetration of existing markets, establish a presence
in certain new markets and realize significant operating efficiencies. In
addition, the Company has leveraged its infrastructure by offering additional
services including customer service call centers, market research and other
outsourced administrative services. The Company believes that it is currently
among the five largest accounts receivable management companies in the United
States.
The Company provides its services principally to clients in the financial
services, healthcare, retail and commercial, education, telecommunications,
utilities and government sectors. The Company has over 8,000 clients, including
Bell Atlantic Corporation, Mellon Bank Corporation, NationsBank Corporation,
Citicorp, MCI Communications Corporation, Federal Express Corporation and
Airborne Freight Corporation. No client accounted for more than 3.6% of the
Company's revenue (no more than 2.8% on a pro forma basis) in 1997. For its
accounts receivable management services, the Company generates substantially all
of its revenue on a contingency fee basis. The Company seeks to be a low cost
provider, and as such its fees typically range from 15% to 35% of the amount
recovered on behalf of the Company's clients. For many of its other outsourced
services, the Company is paid on a fixed fee basis. While NCO's contracts are
relatively short-term, the Company seeks to develop long-term relationships with
its clients and works closely with them to provide quality, customized
solutions.
Increasingly, companies are outsourcing many non-core functions to focus on
revenue generating activities, reduce costs and improve productivity. In
particular, many corporations are recognizing the advantages of outsourcing
accounts receivable management and other services as a result of numerous
factors including: (i) the increasing complexity of such functions; (ii)
changing regulations and increased competition in certain industries; and (iii)
the development of sophisticated call management systems
3
<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.
Pending Acquisitions
The Company has an outstanding tender offer to acquire all of the
outstanding stock of FCA which is expected to close in May 1998. In addition,
on May 4, 1998 the Company entered into a definitive agreement to acquire all of
the outstanding stock of MedSource which is expected to close in the second
quarter of 1998. There can be no assurance that the Company will close any of
the Pending Acquisitions.
FCA International Ltd. In March 1998, the Company entered into an agreement
with FCA pursuant to which NCO is making a cash tender offer (the "FCA Tender
Offer") for all of the outstanding common shares of FCA at $9.60 per share,
Canadian (equivalent to $6.77 in U.S. dollars based upon the exchange rate as of
the date of the agreement). The purchase price of approximately $67.6 million
will be paid with borrowings under the Company's revolving credit facility. The
FCA Tender Offer is conditioned upon the tender of two-thirds of the outstanding
FCA common shares, on a fully-diluted basis, and the satisfaction of certain
conditions, including regulatory approvals. The FCA Tender Offer will expire on
May 6, 1998 unless withdrawn or extended. FCA's Board of Directors has approved
the agreement and recommended that shareholders tender their common shares into
the offer. Pursuant to the agreement, Fairfax Financial Holdings Limited
("Fairfax") has agreed, subject to certain conditions, to tender to the bid, the
common shares of FCA owned or controlled by it. Fairfax currently owns or
controls approximately 27% of the
4
<PAGE>
common shares of FCA outstanding on a fully-diluted basis. If at least
two-thirds of the outstanding shares of FCA common stock, on a fully-diluted
basis, are tendered and the other conditions to closing have been satisfied or
waived, the Company will be required to purchase the shares so tendered and may
have to pursue other means, including calling a special meeting of FCA
shareholders to approve an amalgamation, merger or other transaction, in order
to complete the acquisition of the outstanding FCA shares not tendered. In such
event, the remaining holders of FCA shares may have the right to dissent to such
transaction and demand payment for the fair value of their FCA shares.
Founded in 1926, FCA is the largest accounts receivable management company
in Canada with significant operations in the United States and the United
Kingdom. FCA provides accounts receivable management services principally to the
government, financial, education, telecommunications, utilities, healthcare,
retail and commercial sectors. FCA has undergone a major reorganization,
consolidating 88 branch offices into 17 branch locations including three new
major branches in Mobile, Alabama, Brantford, Ontario and Vancouver, British
Columbia. For the fiscal year ended June 30, 1997 and the nine months ended
March 31, 1998, FCA's revenues were approximately $62.8 million and $45.0
million, respectively. Approximately 45% of FCA's consolidated revenues in 1997
was derived from U.S. operations, 40% from Canadian operations and 15% from
operations in the United Kingdom. The acquisition of FCA will give the Company
the leading market presence in Canada, significantly expand its U.S. operations
and provide a platform for further expansion into Europe from the United
Kingdom. The Company also expects to realize substantial cost savings from
integrating FCA with its operations.
MedSource Acquisition. On May 4, 1998, the Company entered into a
definitive agreement to acquire all of the outstanding stock of MedSource for
approximately $17.9 million in cash. In connection with the acquisition, the
Company will repay debt of $17.1 million. The closing is subject to the
satisfaction of certain closing conditions, including regulatory approval and
other customary conditions.
Founded in 1997, MedSource provides traditional accounts receivable
management services and pre-delinquency outsourcing services primarily to
hospitals located throughout the United States. Pre-delinquency outsourcing
services include insurance billing and follow-up, insurance claim resolution,
private pay collections, and outsourcing of central business office functions.
Since its inception, MedSource has completed four acquisitions of other accounts
receivable management companies which specialize in providing services to the
healthcare industry. Headquartered in Goodlettsville, Tennessee, MedSource has
additional offices located in Phoenix, Arizona; Springfield, Missouri; Chicago
Heights, Illinois; Waterford, Michigan; Johnstown, Pennsylvania; and Mount
Laurel, New Jersey. For the fiscal year ended December 31, 1997, on a pro forma
basis, and the three months ended March 31, 1998, MedSource's revenues were
approximately $22.7 million and $5.3 million, respectively. The acquisition of
MedSource significantly enhances NCO's market position as a leading provider of
accounts receivable management services to the healthcare sector.
The Company regularly reviews various strategic acquisition opportunities
and periodically engages in discussions regarding such possible acquisitions.
5
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock offered by the Company ....................... 5,800,000 shares
Common Stock offered by the Selling Shareholders .......... 765,000 shares (1)
Common Stock to be outstanding after the Offering ......... 19,251,834 shares (2)
Use of proceeds ........................................... For repayment of bank debt to be incurred
in connection with the FCA Tender Offer, to
finance the MedSource acquisition, to repay
indebtedness of FCA and MedSource fol-
lowing the completion of the Pending Acquisitions
and for working capital and other general
corporate purposes, including other future
acquisitions.
Nasdaq National Market symbol ............................. NCOG
</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 $ 0.65
========= ========= ======== =========
Diluted(4) ........................................... $ 0.12 $ 0.34 $ 0.57 $ 0.62
========= ========= ======== =========
Weighted average shares
outstanding:
Basic ................................................ 7,093(5) 7,630(5) 11,941 16,944
Diluted .............................................. 7,093(5) 7,658(5) 12,560 17,576
Three Months Ended March 31,
---------------------------------------
1998
---------------------------
Pro Forma As
1997 Actual Adjusted(2)(3)
---------- ------------ --------------
Statement of Income Data:
Revenue ........................... $18,077 $ 27,609 $ 48,399
Operating costs and expenses:
Payroll and related expenses ..... 9,046 14,144 24,832
Selling, general and
administrative expenses ......... 5,932 8,568 15,173
Depreciation and amortization
expenses ........................ 716 1,155 2,094
Reorganization charge ............ -- -- --
------- -------- --------
Income from operations ............ 2,383 3,742 6,300
Other income (expense) ............ (82) 153 150
------- -------- --------
Income before provision for
income taxes ..................... 2,301 3,895 6,450
Income tax expense(4) ............. 994 1,579 2,984
------- -------- --------
Net income(4) ..................... $ 1,307 $ 2,316 $ 3,466
======= ======== ========
Net income per share:
Basic(4) ....................... $ 0.12 $ 0.17 $ 0.20
======= ======== ========
Diluted(4) ..................... $ 0.12 $ 0.17 $ 0.19
======= ======== ========
Weighted average shares
outstanding:
Basic .......................... 10,656 13,240 17,452
Diluted ........................ 11,230 13,801 18,013
</TABLE>
<PAGE>
<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 $ 60,707
Working capital . 22,173 2,199 56,640
Total assets . 105,708 227,420 278,979
Long-term debt, net of current portion . 923 94,715 923
Shareholders' equity . 91,956 91,956 240,284
</TABLE>
7
<PAGE>
- -----------
(1) Assumes that the 1997 Acquisitions, the 1998 Acquisitions and the Pending
Acquisitions occurred on January 1, 1997. Gives effect to: (i) the
elimination of payroll and related expenses relating to certain redundant
collection and administrative personnel costs immediately eliminated at the
time of the 1997 Acquisitions and the 1998 Acquisitions and expenses
identified during the due diligence process which will be eliminated upon
the closing of the Pending Acquisitions; (ii) the elimination of certain
rental expenses and related operating costs attributable to facilities which
were closed at the time of the 1997 Acquisitions and the 1998 Acquisitions
and facilities identified during the due diligence process which will be
closed upon the completion of the Pending Acquisitions; (iii) the increase
in amortization expense resulting from the acquisitions; (iv) the
elimination of depreciation and amortization expense related to assets
revalued or not acquired; (v) interest expense on borrowings related to the
acquisitions; (vi) the estimated income tax expense, after giving
consideration to non-deductible goodwill expense; (vii) the elimination of
interest expense on debt assumed to be repaid with a portion of the proceeds
from the Offering; (viii) the issuance of 517,767 shares of Common Stock and
warrants exercisable for 375,000 shares of Common Stock in connection with
the acquisition of CRWCD; (ix) the issuance of 1,425,753 shares of Common
Stock in the July 1997 Offering at the public offering price of $19.67 per
share which, net of the underwriting discount and offering expenses paid by
the Company, would be sufficient to repay acquisition related debt of $8.4
million and to fund the acquisitions of AFECD and TRC; (x) the issuance
of 46,442 shares of Common Stock issued in connection with the acquisition
of AFS; and (xi) the issuance of 4.2 million shares of Common Stock at an
assumed public offering price of $27.00 per share, net of the estimated
underwriting discount and offering expenses payable by the Company, which
would be sufficient to repay acquisition related debt of $75.0 million,
repay debt of $21.9 million recognized in connection with the Pending
Acquisitions and pay an additional $10.5 million necessary to fund the
Pending Acquisitions.
(2) Includes reorganization charges and other costs of $1.9 million and $90,000
for the year ended December 31, 1997, and the three months ended March
31, 1998, respectively. Net income per share - basic, and net income per
share - diluted would have been $0.72 and $0.69, respectively, and $0.20 and
$0.20, respectively, on a pro forma basis, assuming those charges had not
been incurred.
(3) Assumes that the TRC acquisition and the Pending Acquisitions occurred on
January 1, 1998. Gives effect to: (i) the elimination of payroll and related
expenses relating to certain redundant collection and administrative
personnel costs immediately eliminated at the time of the TRC acquisition
and expenses identified during the due diligence process which will be
eliminated upon the closing of the Pending Acquisitions; (ii) the
elimination of certain rental expenses and related operating costs
attributable to facilities which were identified during the due diligence
process and will be closed upon the completion of the Pending
Acquisitions; (iii) the increase in amortization expense resulting from the
TRC acquisition and the Pending Acquisitions; (iv) the elimination of
depreciation and amortization expense related to assets revalued or not
acquired; (v) interest expense on borrowings related to the Pending
Acquisitions; (vi) the estimated income tax expense, after giving
consideration to non-deductible goodwill expense; (vii) the elimination of
interest expense on debt assumed to be repaid with a portion of the proceeds
from the Offering; and (viii) the issuance of 4.2 million shares of Common
Stock at an assumed public offering price of $27.00 per share, net of the
estimated underwriting discount and offering expenses payable by the
Company, which would be sufficient to repay acquisition related debt of
$75.0 million, repay debt of $21.9 million recognized in connection with the
Pending Acquisitions and pay an additional $10.5 million necessary to fund
the Pending Acquisitions.
(4) The Company was taxed as an S Corporation prior to September 3, 1996.
Accordingly, income tax expense and net income have been provided on a pro
forma basis as if the Company had been subject to income taxes in all
periods presented.
(5) Assumes that the Company issued 374,637 shares of Common Stock at $8.67 per
share to fund the distribution of undistributed S Corporation earnings of
$3.2 million through September 3, 1996, the termination date of the
Company's S Corporation status, to existing shareholders of the Company.
(6) Gives effect to: (i) the pending acquisition of FCA for approximately $67.6
million in cash, which was assumed to be borrowed against the Company's
credit facility, and the recognition of certain acquisition related
liabilities; and (ii) the pending acquisition of MedSource for approximately
$17.9 million in cash, of which $7.4 million was assumed to be borrowed
against the Company's credit facility, and the recognition of certain
acquisition related liabilities. The Company expects to recognize goodwill
of $56.2 million and $36.3 million for the FCA and MedSource acquisitions,
respectively.
(7) Gives effect to the issuance of 5.8 million shares of Common Stock at an
assumed public offering price of $27.00 per share and the application of the
net proceeds therefrom. See "Use of Proceeds."
8
<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,
Pending Acquisitions, and other acquisitions that may occur in the future, the
Company's ability to expand its service offerings, the anticipated changes in
revenues from acquired companies and trends in the Company's future operating
performance, and statements as to the Company's or management's beliefs,
expectations or opinions are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E
of the Securities Exchange Act of 1934 (the "Exchange Act") which are intended
to be covered by safe harbors created thereby. The factors discussed below and
elsewhere in this Prospectus could cause actual results and developments to be
materially different from those expressed in or implied by such forward-looking
statements. Accordingly, in addition to the other information contained in
"Pending and Recent Acquisitions," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Prospectus,
the following factors should be considered carefully in evaluating an investment
in the shares of Common Stock offered by this Prospectus.
Risks Associated with Recent and Pending Acquisitions
The 1998 Acquisitions and the Pending Acquisitions had combined revenues of
$94.5 million in 1997 compared to the Company's revenue of $85.3 million in
1997. The Company is currently in the process of integrating the acquisitions of
AFS, CAC, and the 1998 Acquisitions. There can be no assurance that the Company
will successfully consummate the FCA Tender Offer or the MedSource acquisition.
In the event that the Company completes these acquisitions, the integration of
such companies could divert management's attention from the daily operation of
the Company, require additional management, operational and financial resources,
and place significant demands on the Company's management and infrastructure.
There can be no assurance that the recently acquired businesses and the Pending
Acquisitions, will be successfully integrated with that of the Company, that the
Company will be able to realize operating efficiencies or eliminate redundant
costs, or that their businesses will be operated profitably. Further, there can
be no assurance that clients of the acquired companies will continue to do
business with the Company, or that the Company will be able to retain key
employees of the acquired companies. In addition, there can be no assurance that
the acquired companies will not have additional liabilities or contingencies
that were unanticipated by the Company at the time of the acquisitions.
Risks Associated with the FCA Acquisition
There are several risks associated with the acquisition of FCA including
the ability to complete the acquisition of any outstanding shares of FCA not
purchased by the Company in the FCA Tender Offer, the ability to operate FCA's
business profitably and the fact that FCA has significant operations outside of
the United States. With respect to the FCA Tender Offer, if at least two-thirds
of the outstanding shares of FCA common stock, on a fully-diluted basis, are
tendered and the other conditions to closing have been satisfied or waived, the
Company will be required to purchase the shares so tendered and may have to
pursue other means, including calling a special meeting of FCA shareholders to
approve an amalgamation, merger or other transaction, in order to complete the
acquisition of any outstanding FCA shares not tendered. In such event, the
remaining holders of FCA shares may have the right to dissent to such
transaction and demand payment for the fair value of their FCA shares. As a
result, the Company may incur additional delays and costs in completing the
acquisition of all of the outstanding shares of FCA common stock. FCA has had
net losses of $4.4 million, and $1.4 million for its fiscal years ended June 30,
1996 and 1997, respectively. There can be no assurance that the Company will be
able to operate FCA's business profitably following the acquisition of FCA. To
date, all of the Company's operations have been conducted in the United States.
FCA is headquartered in Canada and also has offices in the United Kingdom and,
as a result of such acquisition, a portion of the Company's operations would be
conducted outside the United States. There are a number of risks inherent in
international operations including government controls, regulatory requirements
that may be more onerous than those imposed in the United States, difficulties
in managing international operations and fluctuations in currency exchange
rates. See "Recent and Pending Acquisitions -- FCA International Ltd."
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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 6,565,000 shares sold in the Offering will be, and
the 8,625,000 shares sold in prior public offerings are, available for resale in
the public market without restriction, except for any such shares purchased by
affiliates of the Company. The Company's directors, executive officers and the
Selling Shareholders have agreed, subject to certain limitations, not to offer,
sell or otherwise dispose of any shares of Common Stock for a period of 90 days
after the closing of the Offering without the prior written consent of
NationsBanc Montgomery Securities LLC. Following the expiration of this 90-day
period, such persons will hold an aggregate of 3,723,099 outstanding shares of
Common Stock (3,625,582 shares if the over-allotment option is exercised in
full) which may be resold under Rule 144. Upon completion of the Offering, the
Company also will continue to have outstanding a $900,000 Convertible Note
convertible into 63,755 shares of Common Stock at any time on or before January
22, 2002 and a warrant to purchase 375,000 shares of Common Stock exercisable at
any time on or before January 31, 2002. The holders of the Convertible Note and
the warrants will continue to be entitled to certain demand and/or piggy-back
registration rights following the completion of the Offering. The earn-out
payable in connection with the TRC acquisition provides, among other things,
that the seller may elect to be paid the earn-out in the form of a convertible
note, convertible into NCO Common Stock at a price equal to $3.00 above NCO's
trailing thirty day average closing per share price. In addition, the Company
will have 1,991,601
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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 12 strategic acquisitions which have
expanded its client base and geographic presence, increased its presence in key
industries and substantially increased its revenues and profits. A key element
of the Company's growth strategy is to continue to pursue selected strategic
acquisitions to serve new geographic markets or industries, expand its presence
in its existing markets and add complementary service applications. The Company
regularly reviews various strategic acquisition opportunities and periodically
engages in discussions regarding such possible acquisitions. The following is a
summary of the Pending Acquisitions, the 1998 Acquisitions and the 1997
Acquisitions.
FCA International Ltd.
In March 1998, the Company entered into an agreement with FCA pursuant to
which NCO is making a cash tender offer for all of the outstanding common shares
of FCA at $9.60 per share, Canadian (equivalent to $6.77 in U.S. dollars based
upon the exchange rate as of the date of the agreement). The purchase price is
valued at approximately $67.6 million.
The FCA Tender Offer is conditioned upon the tender of two-thirds of the
outstanding FCA common shares, on a fully diluted basis, and the satisfaction of
certain conditions, including regulatory approvals. The FCA Tender Offer will
expire on May 6, 1998 unless withdrawn or extended. FCA's Board of Directors
approved the agreement and has recommended that shareholders tender their common
shares into the offer. Pursuant to the agreement, Fairfax has agreed, subject to
certain conditions, to tender to the bid, the common shares of FCA owned or
controlled by it. Fairfax currently owns or controls approximately 27% of the
common shares of FCA outstanding on a fully-diluted basis. If at least
two-thirds of the outstanding shares of FCA common stock, on a fully-diluted
basis, are tendered and the other conditions to closing have been satisfied or
waived, the Company will be required to purchase the shares so tendered and may
have to pursue other means, including calling a special meeting of FCA
shareholders to approve an amalgamation, merger or other transaction, in order
to complete the acquisition of the outstanding FCA shares not tendered. In such
event, the remaining holders of FCA shares may have the right to dissent to such
transaction and demand payment for the fair value of their FCA shares.
Founded in 1926, FCA is the largest accounts receivable management company
in Canada with significant operations in the United States and the United
Kingdom. FCA provides accounts receivable management services principally to the
government, financial, education, telecommunications, utilities, healthcare,
retail and commercial sectors. FCA has undergone a major reorganization,
consolidating 88 branch offices into 17 branch locations including three new
major branches in Mobile, Alabama, Brantford, Ontario and Vancouver, British
Columbia. For the fiscal year ended June 30, 1997 and the nine months ended
March 31, 1998, FCA's revenues were approximately $62.8 million and $45.0
million, respectively. Approximately 45% of FCA's consolidated revenue in 1997
was derived from U.S. operations, 40% from Canadian operations and 15% from
operations in the United Kingdom. The acquisition of FCA will give the Company
the leading market presence in Canada, significantly expand its U.S. operations
and provide a platform for further expansion into Europe from the United
Kingdom. The Company also expects to realize substantial cost savings from
integrating FCA with its operations.
MedSource, Inc.
The Company has entered into an agreement to acquire all of the outstanding
stock of MedSource for approximately $17.9 million in cash. In connection with
the acquisition, the Company will repay debt of approximately $17.1 million. The
closing is subject to the satisfaction of certain closing conditions, including
regulatory approval and other customary conditions.
Founded in 1997, MedSource provides traditional accounts receivable
management services and pre-delinquency outsourcing services primarily to
hospitals located throughout the United States. Pre-delinquency outsourcing
services include insurance billing and follow-up, insurance claim resolution,
private pay collections, and outsourcing of central business office functions.
Since its inception, MedSource has completed four acquisitions of other accounts
receivable management companies which specialize in providing services to the
healthcare industry. Headquartered in Goodlettsville, Tennessee, MedSource has
additional offices located in Phoenix,
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Arizona; Springfield, Missouri; Chicago Heights, Illinois; Waterford, Michigan;
Johnstown, Pennsylvania; and Mount Laurel, New Jersey. For the fiscal year ended
December 31, 1997, on a pro forma basis, and the three months ended March 31,
1998, MedSource's revenues were approximately $22.7 million and $5.3 million,
respectively. The acquisition of MedSource significantly enhances NCO's market
position as a leading provider of accounts receivable management services to the
healthcare sector.
The Response Center
On February 6, 1998, the Company purchased certain assets of TRC, which was
an operating division of TeleSpectrum Worldwide, Inc., for $15.0 million in cash
plus a performance based earn-out. TRC provided full-service custom market
research services to the telecommunications, financial services, utilities,
healthcare, pharmaceutical and consumer products sectors. Its capabilities
included problem conceptualization, program design, data gathering (by
telephone, mail, and focus groups), as well as data tabulation, results analysis
and consulting. TRC, with offices in Upper Darby, Pennsylvania, and
Philadelphia, Pennsylvania, had revenues of approximately $8.0 million for the
year ended December 31, 1997.
Collection Division of American Financial Enterprises, Inc.
On January 1, 1998, the Company purchased certain assets of AFECD for $1.7
million in cash. AFECD, an accounts receivable management company, expanded
NCO's penetration into the governmental and insurance sectors. AFECD's revenues
for the year ended December 31, 1997 were approximately $1.7 million.
ADVANTAGE Financial Services, Inc.
On October 1, 1997, the Company purchased all of the outstanding stock of
AFS for $2.9 million in cash, a $1.0 million Note and 46,442 shares of the
Company's Common Stock. The Note bears interest payable monthly at a rate of
8.0% per annum with one-half of the principal paid in April 1998 and the balance
due in January 1999. The acquisition was valued at approximately $5.0 million.
AFS, an accounts receivable management company with offices in Dayton, Ohio and
Bristol, Tennessee, allowed NCO further penetration into the medical,
telecommunications and commercial sectors. AFS's revenues for the year ended
December 31, 1996 were approximately $5.1 million.
Credit Acceptance Corporation
On October 1, 1997, the Company purchased all of the outstanding stock of
CAC for $1.8 million in cash. CAC, an accounts receivable management company
located in Pittsburgh, Pennsylvania, allowed NCO further penetration into the
healthcare sector. CAC's revenues for the year ended December 31, 1996 were
approximately $2.3 million.
Collection Division of CRW Financial, Inc.
On February 2, 1997, NCO purchased substantially all of the assets of CRWCD
for $3.8 million in cash, 517,767 shares of Common Stock and warrants to
purchase 375,000 shares of Common Stock at an exercise price of $18.42 per
share. The purchase price was valued at approximately $12.8 million. CRWCD
provided accounts receivable management services principally to the
telecommunications, education, financial, government and utility sectors
throughout the United States. In addition, CRWCD had a commercial collections
division. CRWCD's revenues for the year ended December 31, 1996 were
approximately $25.9 million.
CMS A/R Services
On January 31, 1997, NCO purchased substantially all of the assets of CMS
A/R for $5.1 million in cash. CMS A/R, located in Jackson, Michigan, specialized
in providing a wide range of accounts receivable management and administrative
services to the utility sector, including traditional recovery of delinquent
accounts, outsourced administrative services, early stage accounts receivable
management and database management services. CMS A/R's revenues for the year
ended December 31, 1996 were approximately $6.8 million.
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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 $148.3 million
after deducting the estimated underwriting discount and expenses of the Offering
and based on an assumed public offering price of $27.00 per share. The Company
will not receive any proceeds from the sale of Common Stock by the Selling
Shareholders.
Approximately $67.6 million of the net proceeds will be used to repay debt
under the Company's Credit Agreement with Mellon Bank, N.A. ("Mellon") expected
to be incurred in connection with the FCA Tender Offer. The Company entered into
the Credit Agreement in July 1995 to obtain working capital and acquisition
financing and to refinance certain existing debt. The Credit Agreement, as
amended, provides a revolving line of credit which permits borrowings of up to
$75.0 million at an interest rate ranging from LIBOR plus 0.75% to LIBOR plus
2.0% (LIBOR was 5.69% at March 31, 1998). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Approximately $17.9 million of the net proceeds will be used to pay the
cash portion of the MedSource acquisition, or the repayment of borrowings under
the Credit Agreement used to finance the MedSource Acquisition, which
acquisition is expected to close in the second quarter of 1998. The acquisition
is subject to the satisfaction of certain closing conditions, including
regulatory approval and other customary conditions.
The Company intends to use approximately $21.9 million of the net proceeds
to repay certain outstanding indebtedness of the Pending Acquisitions following
the completion of such acquisitions.
The Company intends to use the remaining net proceeds of $40.9 million for
working capital and other general corporate purposes, including other possible
future acquisitions. The Company regularly reviews various strategic acquisition
opportunities and periodically engages in discussions regarding such possible
acquisitions. Pending the uses described above, the Company intends to invest
its net proceeds in short-term, investment-grade securities.
DIVIDEND POLICY
The Company does not anticipate paying cash dividends on its Common Stock
in the foreseeable future. In addition, the Company's Credit Agreement prohibits
the Company from paying cash dividends without the lender's prior consent. The
Company currently intends to retain future earnings to finance its operations
and fund the growth of its business. Any payment of future dividends will be at
the discretion of the Board of Directors of the Company and will depend upon,
among other things, the Company's earnings, financial condition, capital
requirements, level of indebtedness, contractual restrictions with respect to
the payment of dividends and other factors that the Company's Board of Directors
deems relevant.
18
<PAGE>
PRICE RANGE OF COMMON STOCK
The following table sets forth the range of high and low closing sale
prices for the Common Stock as reported on the Nasdaq National Market since the
Company's initial public offering on November 6, 1996. The Common Stock is
traded under the symbol "NCOG". The table has been adjusted to reflect the
3-for-2 stock split paid in December 1997.
High Low
----------- -----------
1996
Fourth Quarter (from November 6) .......... $12.96 $11.00
1997
First Quarter ............................. 18.92 11.17
Second Quarter ............................ 22.50 12.17
Third Quarter ............................. 26.50 20.58
Fourth Quarter ............................ 28.33 21.00
1998
First Quarter ............................. 29.25 21.87
Second Quarter (through May 1) ............ 28.00 23.75
On May 1, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $27.31 per share. As of April 30, 1998, the Company's
Common Stock was held by approximately 50 holders of record. Based on
information obtained from the Company's transfer agent, the Company believes
that there are approximately 1,000 beneficial owners of its Common Stock.
19
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1998: (a) the actual
capitalization of the Company; (b) the pro forma capitalization of the Company
giving effect to the Pending Acquisitions; and (c) the pro forma capitalization
of the Company as adjusted to give effect to: (i) the exercise of stock options
to purchase an aggregate of 61,058 shares of Common Stock which are being sold
by certain Selling Shareholders in the Offering and the receipt by the Company
of the aggregate exercise price of $157,920; and (ii) the sale by the Company of
5,800,000 shares of Common Stock in the Offering (at an assumed public offering
price of $27.00 per share) and the application of the net proceeds therefrom as
set forth in "Use of Proceeds." This table should be reviewed in conjunction
with the Company's historical and pro forma financial statements and related
notes appearing elsewhere in this Prospectus or incorporated herein by
reference.
<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 80,802 229,130
Unexercised warrants (4) ................................... 875 875 875
Retained earnings .......................................... 10,279 10,279 10,279
------- -------- --------
Total shareholders' equity .............................. 91,956 91,956 240,284
------- -------- --------
Total capitalization .................................... $95,388 $189,867 $244,308
======= ======== ========
</TABLE>
(1) Gives effect to: (i) the pending acquisition of FCA for approximately
$67.6 million in cash, which was assumed to be borrowed against the Company's
credit facility, and the recognition of certain acquisition related liabilities;
and (ii) the pending acquisition of MedSource, for approximately $17.9 million
in cash, of which $7.4 million was assumed to be borrowed from the Company's
credit facility, and the recognition of certain acquisition related liabilities.
The Company expects to recognize goodwill of $56.2 million and $36.3 million for
the FCA and MedSource acquisitions, respectively.
(2) Gives effect to the issuance of 5.8 million shares of Common Stock at
an assumed public offering price of $27.00 per share and the application of the
net proceeds therefrom. See "Use of Proceeds."
(3) Excludes: (i) an aggregate of 2,052,659 shares of Common Stock
(1,991,601 shares, pro forma as adjusted) reserved for issuance under the
Company's 1995 Stock Option Plan, 1996 Stock Option Plan and 1996 Non-Employee
Director Stock Option Plan; (ii) 63,755 shares of Common Stock reserved for
issuance upon the conversion of the Company's $900,000 Convertible Note issued
as partial consideration for the Goodyear acquisition; and (iii) 375,000 shares
of Common Stock reserved for issuance upon the exercise of warrants at an
exercise price of $18.42 per share issued by the Company as partial
consideration for the CRWCD acquisition.
(4) Reflects 375,000 shares of Common Stock reserved for issuance upon the
exercise of warrants at an exercise price of $18.42 per share issued by the
Company as partial consideration for the CRWCD acquisition.
20
<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
</TABLE>
21
<PAGE>
<TABLE>
<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 $ 0.65 $ 0.12 $ 0.17 $ 0.20
========= ========= ======== ======== ========
Diluted (4) ................................. $ 0.57 $ 0.62 $ 0.12 $ 0.17 $ 0.19
========= ========= ======== ======== ========
Weighted average shares outstanding:
Basic ....................................... 11,941 16,944 10,656 13,240 17,452
Diluted ..................................... 12,560 17,576 11,230 13,801 18,013
March 31, 1998
----------------------------------------------
Pro Pro Forma As
1997 Actual Forma (6) Adjusted (7)
--------- --------- ------------- ----------------
Balance Sheet Data:
Cash and cash equivalents ................... $ 29,539 $ 16,088 $ 9,148 $60,707
Working capital ............................. 36,440 22,173 2,199 56,640
Total assets ................................ 101,636 105,708 227,420 278,979
Long-term debt, net of current portion . 1,437 923 94,715 923
Shareholders' equity ........................ 89,334 91,956 91,956 240,284
</TABLE>
22
<PAGE>
- ------------
(1) Assumes that the 1997 Acquisitions, the 1998 Acquisitions and the Pending
Acquisitions occurred on January 1, 1997. Gives effect to: (i) the
elimination of payroll and related expenses relating to certain redundant
collection and administrative personnel costs immediately eliminated at the
time of the 1997 Acquisitions and the 1998 Acquisitions and expenses
identified during the due diligence process which will be eliminated upon
the closing of the Pending Acquisitions; (ii) the elimination of certain
rental expenses and related operating costs attributable to facilities which
were closed at the time of the 1997 Acquisitions and the 1998 Acquisitions
and facilities identified during the due diligence process which will be
closed upon the completion of the Pending Acquisitions; (iii) the increase
in amortization expense resulting from the acquisitions; (iv) the
elimination of depreciation and amortization expense related to assets
revalued or not acquired; (v) interest expense on borrowings related to the
acquisitions; (vi) the estimated income tax expense, after giving
consideration to non-deductible goodwill expense; (vii) the elimination of
interest expense on debt assumed to be repaid with a portion of the proceeds
from the Offering; (viii) the issuance of 517,767 shares of Common Stock and
warrants exercisable for 375,000 shares of Common Stock in connection with
the acquisition of CRWCD; (ix) the issuance of 1,425,753 shares of Common
Stock in the July 1997 Offering at the public offering price of $19.67 per
share which, net of the underwriting discount and offering expenses paid by
the Company, would be sufficient to repay acquisition related debt of $8.4
million and to fund the acquisitions of AFECD and TRC; (x) the issuance
of 46,442 shares of Common Stock issued in connection with the acquisition
of AFS; and (xi) the issuance of 4.2 million shares of Common Stock at an
assumed public offering price of $27.00 per share, net of the estimated
underwriting discount and offering expenses payable by the Company, which
would be sufficient to repay acquisition related debt of $75.0 million,
repay debt of $21.9 million recognized in connection with the Pending
Acquisitions and pay an additional $10.5 million necessary to fund the
Pending Acquisitions.
(2) Includes reorganization charges and other costs of $1.9 million and $90,000
for the year ended December 31, 1997, and the three months ended March
31, 1998, respectively. Net income per share -- basic, and net income per
share -- diluted would have been $0.72 and $0.69, respectively, and $0.20
and $0.20, respectively, on a pro forma basis, assuming those charges had
not been incurred.
(3) Assumes that the TRC acquisition and the Pending Acquisitions occurred on
January 1, 1998. Gives effect to: (i) the elimination of payroll and related
expenses relating to certain redundant collection and administrative
personnel costs immediately eliminated at the time of the TRC acquisition
and expenses identified during the due diligence process which will be
eliminated upon the closing of the Pending Acquisitions; (ii) the
elimination of certain rental expenses and related operating costs
attributable to facilities which were identified during the due diligence
process and will be closed upon the completion of the Pending Acquisitions;
(iii) the increase in amortization expense resulting from the TRC
acquisition and the Pending Acquisitions; (iv) the elimination of
depreciation and amortization expense related to assets revalued or not
acquired; (v) interest expense on borrowings related to the Pending
Acquisitions; (vi) the estimated income tax expense, after giving
consideration to non-deductible goodwill expense; (vii) the elimination of
interest expense on debt assumed to be repaid with a portion of the proceeds
from the Offering; and (viii) the issuance of 4.2 million shares of Common
Stock at an assumed public offering price of $27.00 per share, net of the
estimated underwriting discount and offering expenses payable by the
Company, which would be sufficient to repay acquisition related debt of
$75.0 million, repay debt of $21.9 million recognized in connection with the
Pending Acquisitions and pay an additional $10.5 million necessary to fund
the Pending Acquisitions.
(4) The Company was taxed as an S Corporation prior to September 3, 1996.
Accordingly, income tax expense and net income have been provided on a pro
forma basis as if the Company had been subject to income taxes in all
periods presented.
(5) Assumes that the Company issued 374,637 shares of Common Stock at $8.67 per
share to fund the distribution of undistributed S Corporation earnings of
$3.2 million through September 3, 1996, the termination date of the
Company's S Corporation status, to existing shareholders of the Company.
(6) Gives effect to: (i) the pending acquisition of FCA for approximately $67.6
million in cash, which was assumed to be borrowed against the Company's
credit facility, and the recognition of certain acquisition related
liabilities; and (ii) the pending acquisition of MedSource for approximately
$17.9 million in cash, of which $7.4 million was assumed to be borrowed
against the Company's credit facility, and the recognition of certain
acquisition related liabilities. The Company expects to recognize goodwill
of $56.2 million and $36.3 million for the FCA and MedSource acquisitions,
respectively.
(7) Gives effect to the issuance of 5.8 million shares of Common Stock at an
assumed public offering price of $27.00 per share and the application of the
net proceeds therefrom. See "Use of Proceeds."
23
<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 and the Pending Acquisitions as if the
results of each acquired company had been included in the Company's statements
of income for the periods presented.
For the periods shown prior to September 3, 1996, the Company had been
treated for federal and state income tax purposes as an S Corporation. As a
result, the Company's shareholders, rather than the Company, were taxed directly
on the earnings of the Company for federal and certain state income tax
purposes. The Company terminated its status as an S Corporation effective
September 3, 1996 and is now subject to federal and state income taxes at
applicable C Corporation rates. Accordingly, the income tax expense has been
calculated as if the Company were subject to federal and state income taxes for
all prior periods.
24
<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%
====== ====== ====== ======
Three Months Ended March 31,
-------------------------------------
1997 1998
----------- ------------------------
Pro
Actual Forma
----------- -----------
Revenue ....................................... 100.0% 100.0% 100.0%
Operating costs and expenses:
Payroll and related expenses ................. 50.0 51.2 51.3
Selling, general and administrative
expenses .................................... 32.8 31.0 31.4
Depreciation and amortization expenses. . 4.0 4.2 4.3
Reorganization charge ........................ -- -- --
------ ------ ------
Total operating costs and expenses. ......... 86.8 86.4 87.0
------ ------ ------
Income from operations ........................ 13.2 13.6 13.0
Other income (expense) ........................ ( 0.5) 0.6 (3.7)
------ ------ ------
Income before income tax expense .............. 12.7 14.2 9.3
Income tax expense (1) ........................ 5.5 5.7 4.5
------ ------ ------
Net income .................................... 7.2% 8.5% 4.8%
====== ====== ======
</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.
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.
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $2.7 million to $8.6 million for the three
months ended March 31, 1998 from $5.9 million for the comparable period in 1997,
and decreased as a percentage of revenue to 31.0% from 32.8%. A portion of the
decrease was attributable to the market research division having a lower
selling, general and administrative expense structure than that of the remainder
of the business. In addition, additional operating efficiencies were obtained by
spreading selling, general and administrative expenses over a larger revenue
base.
Depreciation and amortization. Depreciation and amortization increased
to $1.2 million for the three months ended March 31, 1998 from $716,000 for the
comparable period in 1997. Of this increase, $90,000 was
25
<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
26
<PAGE>
from the Company's public offering completed in July 1997 (the "1997 Offering"),
as well as an increase in operating funds and funds held in trust for clients.
Interest expense decreased to $591,000 for 1997 from $818,000 in 1996. Although
the Company's revolving credit facility had been repaid with a portion of the
net proceeds from the Company's initial public offering completed in November
1996 (the "IPO"), the Company borrowed $8.4 million on its revolving credit
facility to partially finance the 1997 Acquisitions which closed in the first
quarter of 1997, and issued a $900,000 convertible note payable in connection
with the Goodyear acquisition in January 1997. The revolving credit facility was
repaid with a portion of the proceeds from the 1997 Offering. In addition, the
$1.0 million convertible note payable issued in connection with the MAB
acquisition in September 1996 was converted to Common Stock in connection with
the 1997 Offering. As a result of the disposal of certain fixed assets in the
move of the Company's corporate headquarters in July 1997, the Company incurred
a loss on the disposal of fixed assets in the amount of $41,000.
Income tax expense. Income tax expense for 1997 was $4.8 million or 40.3%
of income before taxes and was computed after giving effect to non-deductible
goodwill expenses resulting from certain of the acquired companies. In 1996, the
Company was an S Corporation until September 3, 1996 and, accordingly, there was
no income tax expense until that time. The income tax expense of $1.7 million
for 1996 (assuming the Company was taxed as a C Corporation for the entire year)
was computed utilizing an assumed rate of 40.0% after giving effect to
non-deductible goodwill.
Net income. Net income in 1997 increased to $7.1 million from net income of
$2.5 million in 1996, a 178.4% increase.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue increased $18.0 million or 141.6% to $30.8 million in 1996
from $12.7 million in 1995. Of this increase, $5.0 million was attributable to
the MAB acquisition completed in September 1996, $6.8 million was attributable
to the Trans Union Corporation Collections Division ("TCD") acquisition
completed in January 1996, and $1.3 million was attributable to a full year of
revenue from the Eastern Business Services, Inc. ("Eastern") acquisition in 1996
versus three months in 1995. Additionally, $4.8 million of the increase was due
to internal growth from the addition of new clients and a growth in business
from existing clients. Of this internal growth, $2.9 million of the increase was
due to a full 12 months of revenue in 1996 from a contract awarded to the
Company by a government agency in April 1995. Revenue from other related
services, which became an area of focus in 1996, increased $1.2 million to $1.5
million in 1996 from $259,000 in 1995.
Payroll and related expenses. Payroll and related expenses increased $7.9
million to $14.7 million in 1996 from $6.8 million in 1995, but decreased as a
percentage of revenue to 47.6% from 53.4%. The decrease in payroll and related
expenses as a percentage of revenue was primarily the result of spreading the
relatively fixed costs of management and administrative personnel over a larger
revenue base and the increased utilization of "on-line" computer services and
other outside services, as well as eliminating redundant administrative staff
following the TCD and Eastern acquisitions. These efficiencies were offset in
part by higher payroll and related expenses of MAB as a percentage of its
revenue. The effect of MAB was minimized due to only four months of the
operations of MAB being included in the income statements.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $6.0 million to $10.0 million in 1996, from
$4.0 million in 1995, and increased as a percentage of revenue to 32.6% from
31.7%. A large percentage of the increase was due to the increased costs
associated with litigation management services performed by the Company on
behalf of its clients in states where the laws are more conducive to the
utilization of the legal process for recovery of delinquent accounts. In
addition, the Company experienced increased costs as a result of a change in
business mix which required the increased use of national data bases and credit
reporting services. These increases were offset in part by operating
efficiencies resulting from the TCD acquisition.
Depreciation and amortization. Depreciation and amortization increased to
$1.3 million in 1996 from $348,000 in 1995. Of this increase, $605,000 was a
result of the MAB, TCD and Eastern acquisitions. The remaining $301,000
consisted of amortization of deferred financing charges and depreciation
resulting from capital expenditures incurred in the ordinary course of business.
27
<PAGE>
Other income (expense). Interest expense increased to $818,000 in 1996 from
$180,000 in 1995, primarily due to increased borrowings associated with the
acquisitions of MAB, TCD and Eastern. Also included in other income (expense)
for 1995 was a loss from the disposal of assets of $49,000.
Income tax expense. Income tax expense of $1.7 million and $546,000 in 1996
and 1995, respectively (assuming the Company was taxed as a C Corporation for
each of the respective years), was computed using an assumed tax rate of 40.0%
after giving effect to non-deductible goodwill from certain of the acquired
companies.
Net income. Net income increased to $2.5 million in 1996 from $820,000 in
1995, a 210.0% increase.
Quarterly Results
The following table sets forth selected actual historical financial data
for the calendar quarters of 1996 and 1997, and for the first calendar quarter
of 1998. This quarterly information is unaudited but has been prepared on a
basis consistent with the Company's audited financial statements incorporated by
reference herein and, in the Company's opinion, includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information for the quarters presented. The operating
results for any quarter are not necessarily indicative of results for any future
period.
<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%
--------------------------------------------------------------------
1997 1998
------------------------------------------------------ ------------
Mar. 31 Jun. 30 Sept. 30 Dec. 31 Mar. 31
------------ ------------ ------------ ------------ ------------
(dollars in thousands)
Revenue .................... $ 18,077 $ 21,162 $ 21,739 $ 24,306 $ 27,609
Income from operations ..... 2,383 3,039 3,112 2,932 3,742
Net income ................. 1,307 1,717 2,082 1,968 2,317
As a percentage of revenue:
Income from operations ..... 13.2% 14.4% 14.3% 12.1% 13.6%
Net income ................. 7.2% 8.1% 9.6% 8.1% 8.4%
</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 costs and timing of completion and integration of acquisitions,
the effect of the change of business mix on margins and the timing of additional
selling, general and administrative expenses to support new business. In the
fourth quarter of 1996, income from operations and net income as a percentage of
revenue were lower than in prior quarters of 1996 largely as a result of the
higher payroll and related expenses of MAB as compared to the Company's core
business. Similarly, in the first quarter of 1997, the Company's operating and
net margins were adversely affected by the higher cost structures of MAB and the
1997 Acquisitions which closed in the first quarter of 1997 as compared to the
Company's core business. In addition, in connection with certain customers, the
Company could incur costs in periods prior to recognizing revenue under such
contracts. For example, income from operations and net income in the fourth
quarter of 1997 were adversely affected by start-up costs attributable to the
DOE Contract. Without such costs, the income from operations and net income for
the quarter ended December 31, 1997 would have been 14.6% and 9.6%,
respectively. Additionally, the Company's planned operating expenditures are
based on revenue forecasts, and if revenues are below expectations in any given
quarter, operating results would likely be materially adversely affected. While
the effects of seasonality on the Company's business historically have been
obscured by its rapid growth, the Company's business tends to be slower in the
third and fourth quarters of the year due to the summer and holiday seasons.
Liquidity and Capital Resources
In July 1997, the Company completed the 1997 Offering, selling 2,166,000
shares of Common Stock and receiving net proceeds of approximately $40.4
million. In November 1996, the Company completed its IPO, selling 3,750,000
shares of Common Stock and receiving net proceeds of approximately $28.8
million.
The Company's primary sources of cash have historically been cash flow from
operations, bank borrowings and, in 1996 and 1997, the net proceeds from the IPO
and the 1997 Offering, respectively. Cash has been used for acquisitions, S
Corporation distributions to shareholders prior to the IPO, purchases of
equipment and working capital to support the Company's growth.
28
<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 the CRWCD during the first quarter of 1997. In
addition, during the three months ended March 31, 1998, capital expenditures
were $1.1 million compared to $312,000 for the comparable period in 1997.
Cash used in investing activities was $29.2 million in 1997 compared to
$13.3 million for 1996. The increase was primarily due to the 1997 Acquisitions
compared with the acquisitions of TCD and MAB in 1996. The Company financed the
1997 Acquisitions with the proceeds of the 1997 Offering and the IPO, borrowings
under the Credit Agreement, seller financing and working capital. The 1997
Acquisitions collectively resulted in goodwill of $37.0 million.
Cash used in investing activities was $13.3 million in 1996 compared to
$2.1 million in 1995. The increase was primarily due to the acquisitions of MAB
and TCD in 1996. The Company financed these acquisitions with borrowings under
the Credit Agreement and seller financing. The 1996 acquisitions collectively
resulted in goodwill of $14.0 million.
In addition to equipment financed under operating leases, capital
expenditures were $298,000, $976,000 and $3.4 million in 1995, 1996 and 1997,
respectively.
Cash used in financing activities was $108,000 during the three months
ended March 31, 1998 compared to cash provided by financing activities of $8.2
million for the comparable period in 1997. During the first quarter of 1997,
bank borrowings were the Company's primary source of cash from financing
activities and were used for acquisitions. The Company raised net proceeds of
approximately $40.4 million in the 1997 Offering and used a portion of the
proceeds from the IPO and the 1997 Offering to repay $8.4 million of outstanding
indebtedness under its revolving credit facility.
29
<PAGE>
Cash provided by financing activities was $39.9 million in 1997 compared to
$21.8 million in 1996. Net proceeds of $40.4 million from the 1997 Offering was
the Company's primary source of cash from financing activities which was used
for acquisitions and to repay outstanding indebtedness.
Cash provided by financing activities was $21.8 million in 1996 compared to
$280,000 in 1995. Bank borrowings had been the Company's primary source of cash
from financing activities and were used for acquisitions and, along with cash
provided by operations, for distributions to shareholders. The Company raised
net proceeds of approximately $28.8 million in the IPO of which $15.0 million
was used to repay outstanding indebtedness under the Credit Agreement and
approximately $3.2 million was used to pay undistributed S Corporation earnings.
Total distributions to shareholders were $4.1 million in 1996 and $1.1 million
in 1995.
In March 1998, the Credit Agreement was amended to, among other things,
increase the Company's revolving credit facility with Mellon to provide for
borrowings up to $75.0 million at an interest rate ranging from LIBOR plus 0.75%
to LIBOR plus 2.0% (LIBOR was 5.69% at March 31, 1998). The Company has the
right to permanently reduce the revolving credit facility by up to $25.0
million. There were no outstanding borrowings at December 31, 1996 or 1997 or
March 31, 1998. The revolving credit line is collateralized by substantially all
the assets of the Company and includes certain financial covenants such as
maintaining minimum working capital and net worth requirements and includes
restrictions on, among other things, acquisitions, capital expenditures and
distributions to shareholders.
In March 1998, the Company entered into an agreement with FCA pursuant to
which NCO is making a cash tender offer for all of the outstanding common shares
of FCA at $9.60 per share, Canadian (equivalent to $6.77 in U.S. dollars based
upon the exchange rate as of the date of the agreement). The purchase price is
valued at approximately $67.6 million. The Company expects to finance the FCA
Tender Offer with borrowings under the Credit Agreement which borrowings will be
repaid from the proceeds of this Offering.
The Company has entered into an agreement to acquire all of the outstanding
stock of MedSource for approximately $17.9 million in cash. The Company expects
to finance this acquisition from the proceeds of this Offering or borrowings
under the Company's revolving credit facility.
The Company intends to use approximately $21.9 million of the net proceeds
of this Offering to repay certain outstanding indebtedness of the Pending
Acquisitions following the completion of these acquisitions.
The Company believes that funds generated from operations, together with
existing cash, the net proceeds from the Offering and available borrowings under
its Credit Agreement will be sufficient to finance its current operations and
planned capital expenditure requirements and internal growth at least through
the next twelve months. However, the Company could require additional debt or
equity financing if it were to make any other significant acquisitions for cash.
Year 2000 System Modifications
NCO has implemented a program to evaluate and address the impact of the
year 2000 on its information systems in order to ensure that its network and
software will manage and manipulate data involving the transition of dates from
1999 to 2000 without functional or data abnormality and without inaccurate
results related to such data. This program includes steps to: (a) identify
software that requires date code remediation; (b) establish timelines for
availability of corrective software releases; (c) implement the fix to a test
environment and test the remediated product; (d) integrate the updated software
to NCO's production environment; (e) communicate and work with clients to
implement year 2000 compliant data exchange formats; and (f) provide management
with assurance of a seamless transition to the year 2000. The identification
phase is substantially complete and delivery of the final software updates are
scheduled for the third quarter of 1998. Management expects to complete the
major portion of testing and acceptance procedures in 1998. The Company will
continue to coordinate the year 2000 compliance effort throughout the balance of
1998 and into 1999 to synchronize data exchange formats with clients.
For the years 1998 and 1999, the Company expects to incur total pre-tax
expenses of approximately $200,000 to $250,000 per year. These costs are
associated with both internal and external staffing resources for the necessary
planning, coordination, remediation, testing, and other expenses to prepare its
systems for the year 2000. However, a portion of these expenses will not be
incremental, but rather represent a redeployment of
30
<PAGE>
existing information technology resources. Management does not expect
substantial additional license fee costs associated directly with year 2000
compliance because the Company's software vendors are incorporating necessary
modifications as part of their normal system maintenance. The majority of the
costs will be incurred through the modification and testing of electronic data
interchange formats with the Company's clients. The cost of planning and initial
remediation incurred through 1997 has not been significant.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for reporting financial information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company is
required to disclose this information for the first time it publishes its 1998
annual report. Management is in the process of evaluating the segment
disclosures for purposes of reporting under SFAS No. 131. Management has not
determined what impact the adoption of SFAS. No. 131 will have on the
consolidated results of operations, financial condition or cash flows.
Forward Looking Statements
Certain statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, as well as elsewhere in this
Prospectus or in the Company's Annual Report on Form 10-K incorporated herein by
reference, including, without limitation, statements regarding the anticipated
growth in the amount of accounts receivable placed for third-party management,
the continuation of trends favoring outsourcing of other administrative
functions, the Company's objective to grow through strategic acquisitions and
its ability to realize operating efficiencies upon the completion of recent
acquisitions and other acquisitions that may occur in the future, the Company's
ability to expand its service offerings, the anticipated changes in revenues
from acquired companies, trends in the Company's future operating performance
and statements as to the Company's or management's beliefs, expectations and
opinions, are forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act, which are intended to
cover safe harbors created thereby. The actual results and developments may be
materially different from those expressed in or implied by such forward-looking
statements.
31
<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 12 acquisitions which have enabled it to
increase its penetration of existing markets, establish a presence in certain
new markets, offer additional services and realize significant operating
efficiencies. In addition, the Company has leveraged its infrastructure by
offering additional services including customer service call centers, market
research and other outsourced administrative services. The Company believes that
it is currently among the five largest accounts receivable management companies
in the United States.
The Company provides its services principally to clients in the financial
services, healthcare, retail and commercial, education, telecommunications,
utilities and government sectors. The Company has over 8,000 clients, including
Bell Atlantic Corporation, Mellon Bank Corporation, NationsBank Corporation,
Citicorp, MCI Communications Corporation, Federal Express Corporation and
Airborne Freight Corporation. For its accounts receivable management services,
the Company generates substantially all of its revenue on a contingency fee
basis. For many of its other outsourced services, the Company is paid on a fixed
fee basis. While NCO's contracts are relatively short-term, the Company seeks to
develop long-term relationships with its clients and works closely with them to
provide quality customized solutions.
Industry Background
Increasingly, companies are outsourcing many non-core functions to focus on
revenue generating activities, reduce costs and improve productivity. In
particular, many large corporations are recognizing the advantages of
outsourcing accounts receivable management. This trend is being driven by a
number of industry-specific factors. First, the complexity of accounts
receivable management functions in certain industries has increased dramatically
in recent years. For example, with the increasing popularity of Health
Maintenance Organizations ("HMOs") and Preferred Provider Organizations
("PPOs"), healthcare institutions now face the challenge of billing not only
large insurance companies but also individuals who are required to pay small,
one-time co-payments. Second, changing regulations and increased competition in
certain industries such as utilities and telecommunications have created new
outsourcing opportunities. Third, the ability to implement cost-effective
specialized accounts receivable management, customer support and telemarketing
programs has improved dramatically in recent years with the development of
sophisticated call and information systems. These programs require substantial
capital investment, technical capabilities, human resource commitments and
extensive management supervision.
The emphasis on cost-effective outsourcing solutions, the increasing
sophistication of call center technology and the efficacy of third-party
intervention in the recovery process has resulted in the steady growth of the
accounts receivable management industry. According to estimates published by
MKA, industry-wide revenues rose 10.7% to $5.5 billion in 1996 from $5.0 billion
in 1995. The leading market segments within the overall accounts receivable
management market are healthcare, financial services, telecommunications and
utilities which represented approximately 35%, 21%, 12% and 9%, respectively, or
an aggregate of 77%, of total industry referrals in 1996.
The accounts receivable management industry is highly fragmented. Based on
information obtained from the ACA, there are approximately 6,500 accounts
receivable management companies in operation in the United States, the majority
of which are small local businesses. The Company believes that many small
accounts receivable management companies have insufficient capital to expand and
invest in call center technology and sophisticated workstations and are unable
to adequately meet the standards demanded by businesses seeking to
32
<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.
33
<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.
34
<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.
35
<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.
36
<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.
37
<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.
38
<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.
Upon consummation of the FCA acquisition, management believes that the Company
will hold all necessary licenses in those provinces and territories that require
them.
If the Company engages in other teleservice activities in Canada, including
telemarketing, there are several provincial and territorial consumer protection
laws of more general application. This legislation defines and prohibits unfair
practices by telemarketers, such as the use of undue pressure and the use of
false, misleading or deceptive consumer representations.
In addition, accounts receivable management and telemarketing industries
are regulated in the United Kingdom, including a licensing requirement. If the
Company expands its international operation, it may become subject to additional
government control and regulation in other countries, which may be more onerous
than those in the United States.
Several of the industries served by the Company are also subject to varying
degrees of government regulation. Although compliance with these regulations is
generally the responsibility of the Company's clients, the Company could be
subject to a variety of enforcement or private actions for its failure or the
failure of its clients to comply with such regulations.
The Company devotes significant and continuous efforts, through training of
personnel and monitoring of compliance, to ensure that it is in compliance with
all federal and state regulatory requirements. The Company believes that it is
in material compliance with all such regulatory requirements.
39
<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.
40
<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.
41
<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.
42
<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 19.6 394,000 2,238,690 11.6
Joshua Gindin, Esq. and Steven
Winokur, CPA, Trustees, U/A/T
dated 9/6/96, Michael J. Barrist
and Natalie Barrist, Settlors ......... 179,160 1.3 27,000 152,160 *
The Dayton Foundation .................. 10,384 * 10,384 -- --
Joshua Gindin (4) ...................... 374,949 2.8 56,500 318,449 1.6
Stephen W. Elliott (5) ................. 30,364 * 9,500 20,864 *
William C. Fischer (5) ................. 2,500 * 2,500 -- --
Mark Macrone (5) ....................... 44,172 * 7,500 36,672 *
Joseph C. McGowan (5) .................. 45,728 * 17,050 28,678 *
Bernard R. Miller (6) .................. 236,216 1.8 31,000 205,216 1.1
Michael G. Noah (5) .................... 10,000 * 7,000 3,000 *
Charles C. Piola, Jr. (2)(7) ........... 1,193,573 8.9 178,500 1,015,073 5.3
Joshua Gindin, Esq., Trustee U/A/T
dated 9/6/96, Charles C. Piola,
Jr. and June Piola, Settlors .......... 179,160 1.3 27,000 152,160 *
PNC Bancorp, Inc.(8) ................... 1,068,401 8.0 -- 1,068,401 5.5
Provident Investment Counsel,
Inc. (9) .............................. 665,796 5.0 -- 665,796 3.5
Eric S. Siegel (10) .................... 19,586 * -- 19,586 *
Steven L. Winokur (11) ................. 222,709 1.7 42,008 180,701 *
Allen F. Wise (12) ..................... 6,500 * -- 6,500 *
Wright State University Foundation 36,058 * 36,058 -- --
All directors and executive officers
as a group (7 persons) (13) ........... 4,357,002 32.2 662,558 3,694,444 19.1
</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.
43
<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.
(7) Includes 5,000 shares issuable upon the exercise of options which are
exercisable within 60 days after April 30, 1998. Excludes 179,160 shares
held in trust for the benefit of Mr. Piola's children, as to which Mr.
Piola disclaims beneficial ownership. In the event that the Underwriters'
over-allotment option is exercised in full, Mr. Piola would sell an
additional 29,750 shares and would beneficially own 4.9% of the outstanding
Common Stock after the Offering.
(8) Based upon a Schedule 13D, dated February 13, 1998, provided to the
Company. The address of PNC Bancorp, Inc. is One PNC Plaza, 249 Fifth
Avenue, Pittsburgh, PA 15265.
(9) Based upon a Schedule 13D, dated February 10, 1998, provided to the
Company. The address of Provident Investment Counsel, Inc. is 300 N. Lake
Avenue, Suite 1001, Pasadena, CA 91101.
(10) Includes 17,586 shares issuable upon the exercise of options which are
exercisable within 60 days after April 30, 1998.
(11) Represents: (i) 179,160 shares held in trust for the benefit of Mr.
Barrist's child (including 27,000 shares being sold by such trust) for
which Mr. Winokur is a co-trustee; (ii) 43,249 shares issuable upon the
exercise of options which are exercisable within 60 days after April 30,
1998; and (iii) 300 shares held in custody for the benefit of Mr. Winokur's
children for which Mr. Winokur is custodian. Mr. Winokur will exercise
options to acquire all of the shares being sold by him in the Offering.
(12) Represents shares issuable upon the exercise of options which are
exercisable within 60 days after April 30, 1998.
(13) Includes: (i) 253,288 shares of Common Stock owned by Mrs. Barrist
(including 38,000 shares being sold by her in the Offering) which Mr.
Barrist has the sole right to vote pursuant to an irrevocable proxy; (ii)
77,119 shares held in trust for the benefit of members of Mrs. Annette
Barrist's or Mr. Barrist's family (including 11,500 shares being sold by
such trust) for which Mr. Barrist is a co-trustee; (iii) 179,160 shares
held in trust for the benefit of Mr. Barrist's child (including 27,000
shares being sold by such trust in this Offering) for which Mr. Winokur is
a co-trustee; (iv) an aggregate of 155,563 shares issuable upon exercise of
options which are exercisable within 60 days after April 30, 1998; and (v)
300 shares held in custody for the benefit of Mr. Winokur's minor children
for which Mr. Winokur is custodian. Excludes 179,160 shares held in trust
for the benefit of Mr. Piola's children. In the event that the
Underwriters' over-allotment option is exercised in full, the directors and
executive officers as a group would sell an additional 97,517 shares and
would beneficially own 17.8% of the outstanding Common Stock after the
Offering.
44
<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 .................................................. 6,565,000
=========
The Underwriters have advised the Company and the Selling Shareholders that
the Underwriters propose to offer the Common Stock to the public on the terms
set forth on the cover page of this Prospectus. The Underwriters may allow
selected dealers a concession of not more than $ per share; and the Underwriters
may allow, and such dealers may reallow, a concession of not more than $ per
share to certain other dealers. After the public offering, the public offering
price and other selling terms may be changed by the Underwriters. The Common
Stock is offered subject to receipt and acceptance by the Underwriters, and to
certain other conditions, including the right to reject orders in whole or in
part.
The Company and certain of the Selling Shareholders have granted an option
to the Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of 984,750 additional shares of Common
Stock to cover over-allotments, if any, at the same price per share as the
initial shares to be purchased by the Underwriters. To the extent that the
Underwriters exercise such over-allotment option, the Underwriters will be
committed, subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with the Offering.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
The Company, the Selling Shareholders and the Company's executive officers
and directors who are also shareholders of the Company and who, immediately
following the Offering (assuming no exercise of the Underwriters' over-allotment
option) collectively will own an aggregate of 3,723,099 outstanding shares of
Common Stock, have agreed that for a period of 90 days after the effective date
of the Offering they will not, without the prior written consent of NationsBanc
Montgomery Securities LLC, directly or indirectly, offer for sale, sell, solicit
an offer to sell, contract or grant an option to sell, pledge, transfer,
establish an open put equivalent position or otherwise dispose of any shares of
Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable or exercisable or convertible into shares of Common
Stock held by them. The Company has also agreed not to issue, offer, sell, grant
options to purchase or otherwise dispose of any of the Company's equity
securities or any other securities convertible into or exchangeable with its
Common Stock for a period of 90 days after the effective date of the Offering
without the prior written consent of NationsBanc Montgomery Securities LLC,
subject to limited exceptions and grants and exercises of stock options. In
evaluating any request for a waiver of the 90-day lock-up period, the
Underwriters will consider, in accordance with their customary practice, all
relevant facts and circumstances at the time of the request, including, without
limitation, the recent trading market for the Common Stock, the size of the
request and, with respect to a request by the Company to issue additional equity
securities, the purpose of such an issuance.
45
<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
46
<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.
47
<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 (collectively, the "Pending
Acquisitions") occurred on March 31, 1998. The Pro Forma Consolidated Statement
of Income for the three months ended March 31, 1998 has been prepared assuming
the TRC acquisition and the Pending Acquisitions occurred on January 1, 1998.
The Pro Forma Consolidated Statement of Income for the year ended December 31,
1997 has been prepared assuming the Tele-Research, CMS A/R, CRWCD, CAC, and AFS
acquisitions (collectively, the "1997 Acquisitions"), the AFECD and TRC
acquisitions (collectively, the "1998 Acquisitions"), and the Pending
Acquisitions, occurred on January 1, 1997.
The Pro Forma Consolidated Balance Sheet and Statements of Income do not
purport to represent what NCO's actual financial position or results of
operations would have been had the acquisitions occurred as of such dates, or to
project NCO's financial position or results of operations for any period or
date, nor does it give effect to any matters other than those described in the
notes thereto. In addition, the allocations of purchase price to the assets and
liabilities of FCA and MedSource are preliminary and the final allocations may
differ from the amounts reflected herein. The unaudited Pro Forma Consolidated
Balance Sheet and Statements of Income should be read in conjunction with the
Company's consolidated financial statements and notes thereto and the historical
financial statements of FCA and MedSource, all of which are incorporated herein
by reference.
F-2
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Balance Sheet
March 31, 1998
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Historical
----------------------------------
Pending Acquisitions
----------------------
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
======== ======= =======
</TABLE>
<PAGE>
<TABLE>
<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 $ 51,559 $ 60,707
Accounts receivable, trade, net ............. -- 24,219 -- 24,219
Other current assets ........................ -- 6,385 -- 6,385
--------- -------- --------- --------
Total current assets ........................ (10,509) 39,752 51,559 91,311
Funds held in trust for clients
Property and equipment, net .................. (5,571) 11,696 -- 11,696
Other assets:
Intangibles, net of accumulated
amortization ............................... 74,499 155,582 -- 155,582
Deferred financing costs .................... (1,821) 849 -- 849
Deferred taxes .............................. 13,361 13,398 -- 13,398
Other assets ................................ -- 6,143 -- 6,143
--------- -------- --------- --------
Total other assets ......................... 86,039 175,972 -- 175,972
--------- -------- --------- --------
Total assets ................................. $ 69,959 $227,420 $ 51,559 $278,979
========= ======== ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Long-term debt, current portion ............. $ -- $ 3,802 $ (2,742) $ 1,060
Capitalized lease obligations, current
portion .................................... -- 495 (140) 355
Corporate taxes payable ..................... -- 462 -- 462
Accounts payable ............................ -- 7,604 -- 7,604
Accrued expenses ............................ 18,542 21,452 -- 21,452
Accrued compensation and related
expenses ................................... -- 3,486 -- 3,486
Unearned revenue, net of related costs ...... -- 252 -- 252
--------- -------- --------- --------
Total current liabilities ................... 18,542 37,553 (2,882) 34,671
Funds held in trust for clients
Long-term liabilities:
Long term debt, net of current portion ...... 75,000 94,715 (93,792) 923
Capitalized lease obligations, net of
current portion ............................ -- 909 (95) 814
Deferred taxes .............................. -- 2,256 -- 2,256
Unearned revenue, net of related costs ...... -- 31 -- 31
Convertible Preferred Stock .................. (6,003) -- -- --
Commitments and contingencies
Shareholders' equity ......................... (17,580) 91,956 148,328 240,284
--------- -------- --------- --------
Total liabilities and shareholders' equity ... $ 69,959 $227,420 $ 51,559 $278,979
========= ======== ========= ========
</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
-----------------------------------------
Pending
NCO TRC (4) Acquisitions (5)
---------- --------- ------------------
<S> <C> <C> <C>
Revenue ....................... $27,609 $788 $20,002
Operating costs and
expenses:
Payroll and related
expenses .................... 14,144 429 11,778
Selling, general and
administrative expenses 8,568 162 6,779
Depreciation and amorti-
zation expense .............. 1,155 7 904
------- ---- -------
Total operating costs
and expenses ............... 23,867 598 19,461
------- ---- -------
Income from operations ........ 3,742 190 541
Other income (expense):
Interest and investment
income ...................... 232 -- 89
Interest expense ............. (79) -- (704)
------- ---- -------
Total other income
(expense) .................. 153 -- (615)
------- ---- -------
Income (loss) before provi-
sion for income taxes ........ 3,895 190 (74)
Income tax expense
(benefit) .................... 1,579 -- (56)
------- ---- -------
Net income .................... $ 2,316 $190 $ (18)
======= ==== =======
Net income per share:
Basic ........................ $ 0.17
=======
Diluted ...................... $ 0.17
=======
Weighted average shares
outstanding:
Basic ........................ 13,240
Diluted ...................... 13,801
</TABLE>
<PAGE>
<TABLE>
<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 $ 0.20
======== ==========
Diluted ...................... $ 0.17 $ 0.19
======== ==========
Weighted average shares
outstanding:
Basic ........................ 13,240 17,452(13)
Diluted ...................... 13,801 18,013(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)
----------- ------------------- -------------------
<S> <C> <C> <C>
Revenue .......................... $ 85,284 $ 8,621 $ 9,555
Operating costs and
expenses:
Payroll and related
expenses ........................ 42,502 5,656 5,789
Selling, general and
administrative expenses.......... 27,947 3,731 2,129
Depreciation and amortiza-
tion expense .................... 3,369 257 91
Reorganization charge ........... -- -- --
-------- --------- -------
Total operating costs
and expenses .................... 73,818 9,644 8,009
-------- --------- -------
Income (loss) from opera-
tions ........................... 11,466 (1,023) 1,546
Other income (expense):
Interest and investment
income .......................... 1,020 14 --
Interest expense ................ (591) (12) --
Other ........................... (41) -- --
-------- --------- -------
Total other income
(expense) ...................... 388 2 --
-------- --------- -------
Income before provision for
income taxes .................... 11,854 (1,021) 1,546
Income tax expense (benefit) 4,780 -- --
-------- --------- -------
Net income (loss) ................ $ 7,074 $ (1,021) $ 1,546
======== ========= =======
Net income per share:
Basic ........................... $ 0.59
========
Diluted ......................... $ 0.57
========
Weighted average shares outstanding:
Basic ........................... 11,941
Diluted ......................... 12,560
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pending Acquisitions
-------------------------------------------------------------------------------------------
FCA MedSource
----------------- ------------------------------------------------------------------------
Completed Acquisition
Historical (16) Historical (17) Acquisitions (18) Adjustments Pro Forma
----------------- ----------------- ------------------- ------------------- -----------
<S> <C> <C> <C> <C> <C>
Revenue .......................... $ 62,224 $ 12,458 $10,253 $ -- $ 22,711
Operating costs and
expenses:
Payroll and related
expenses ........................ 37,076 5,665 5,826 -- 11,491
Selling, general and
administrative expenses.......... 21,494 6,148 2,842 -- 8,990
Depreciation and amortiza-
tion expense .................... 2,522 569 132 355(19) 1,056
Reorganization charge ........... 1,517 -- -- -- --
-------- -------- ------- -------------- --------
Total operating costs
and expenses .................... 62,609 12,382 8,800 355 21,537
-------- -------- ------- -------------- --------
Income (loss) from opera-
tions ........................... (385) 76 1,453 (355) 1,174
Other income (expense):
Interest and investment
income .......................... 409 30 45 -- 75
Interest expense ................ (423) (616) (53) (1,446)(20) (2,115)
Other ........................... -- -- -- -- --
-------- -------- ------- -------------- --------
Total other income
(expense) ...................... (14) (586) (8) (1,446) (2,040)
-------- -------- --------- -------------- --------
Income before provision for
income taxes .................... (399) (510) 1,445 (1,801) (866)
Income tax expense (benefit) 310 (150) 583 (614) (181)
-------- -------- -------- -------------- --------
Net income (loss) ................ $ (709) $ (360) $ 862 $ (1,187) $ (685)
======== ======== ======== ============== ========
Net income per share:
Basic ...........................
Diluted .........................
Weighted average shares out-
standing:
Basic ...........................
Diluted .........................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Acquisition Offering Pro Forma
Adjustments Pro Forma Adjustments (27) As Adjusted
------------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Revenue .......................... $ -- $ 188,395 $ -- $ 188,395
Operating costs and
expenses:
Payroll and related
expenses ........................ (8,199)(21) 94,315 -- 94,315
Selling, general and
administrative expenses.......... (1,766)(22) 62,525 -- 62,525
Depreciation and amortiza-
tion expense .................... 4,245 (23) 11,540 -- 11,540
Reorganization charge ........... -- 1,517 -- 1,517
----------- ---------- ------ ----------
Total operating costs
and expenses .................... (5,720) 169,897 -- 169,897
----------- ---------- ------ ----------
Income (loss) from opera-
tions ........................... 5,720 18,498 -- 18,498
Other income (expense):
Interest and investment
income .......................... -- 1,518 -- 1,518
Interest expense ................ (4,644)(24) (7,785) 7,382 (403)
Other ........................... -- (41) -- (41)
----------- ---------- ------ ----------
Total other income
(expense) ...................... (4,644) (6,308) 7,382 1,074
----------- ---------- ------ ----------
Income before provision for
income taxes .................... 1,076 12,190 7,382 19,572
Income tax expense (benefit) 780 (25) 5,689 2,953 8,642
----------- ---------- ------ ----------
Net income (loss) ................ $ 296 $ 6,501 $4,429 $ 10,930
=========== ========== ====== ==========
Net income per share:
Basic ........................... $ 0.51 $ 0.65(29)
========== ==========
Diluted ......................... $ 0.49 $ 0.62(29)
========== ==========
Weighted average shares outstanding:
Basic ........................... 12,732(26) 16,944(28)
Diluted ......................... 13,364(26) 17,576(28)
</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 pending acquisition of FCA for approximately $67.6
million in cash, which was assumed to be borrowed against the Company's
credit facility, and the recognition of certain acquisition related
liabilities; and (ii) the pending acquisition of MedSource for approximately
$17.9 million in cash, of which $7.4 million was assumed to be borrowed from
the Company's credit facility, and the recognition of certain acquisition
related liabilities. The Company expects to recognize goodwill of $56.2
million and $36.3 million for the FCA and MedSource acquisitions,
respectively.
3. Gives effect to the issuance of 5.8 million shares of Common Stock at an
assumed public offering price of $27.00 per share. The estimated net
proceeds of $148.3 million from the Offering, net of the estimated
underwriting discount and offering expenses payable by the Company, will be
used to repay acquisition related debt of $75.0 million, repay FCA's and
MedSource's acquired debt of $4.8 million and $17.1 million, respectively,
with the balance added to working capital. In addition, estimated net
proceeds includes the exercise of 61,058 stock options resulting in
proceeds of $157,920 to the Company.
4. Represents the historical results of operations of TRC from January 1, 1998
to February 5, 1998, the period prior to the acquisition.
5. Represents the combined historical results of operations of the pending
acquisitions of FCA and MedSource for the three months ended March 31, 1998
as follows (dollars in thousands):
Income (Loss) Net
From Income
Pending Acquisitions Revenue Operations (Loss)
-------------------- --------- --------------- ---------
FCA (1) ................... $14,683 $ 442 $ 320
MedSource ................. 5,319 99 (338)
------- ----- ------
$20,002 $ 541 $ (18)
======= ===== ======
(1) Converted from Canadian dollars to U.S. dollars based upon the
applicable exchange rate.
6. Reflects the elimination of payroll and related expenses relating to certain
redundant collection and administrative personnel costs immediately
eliminated at the time of the TRC acquisition or expenses identified
during the due diligence process which will be eliminated upon the closing
of the Pending Acquisitions.
7. Reflects the elimination of certain rental expenses and related operating
costs attributable to facilities which were identified during the due
diligence process and will be closed upon the completion of the Pending
Acquisitions.
8. Gives effect to: (i) the increase in amortization expense assuming the TRC
acquisition and the Pending Acquisitions had been acquired on January 1,
1998; and (ii) the elimination of depreciation and amortization expense
related to assets revalued or not acquired.
F-6
<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 acquisition and the Pending Acquisitions as if they
occurred on January 1, 1998.
10. Reflects interest expense on borrowings related to the Pending Acquisitions
as if they occurred on January 1, 1998.
11. Reflects the estimated income tax expense, after giving consideration to
non-deductible goodwill expense, as if the TRC acquisition and the Pending
Acquisitions occurred on January 1, 1998.
12. Reflects the elimination of interest expense on debt assumed to be repaid
with a portion of the proceeds from the Offering as if it had occurred on
January 1, 1998.
13. Reflects the issuance of 4.2 million shares of Common Stock at an assumed
public offering price of $27.00 per share, net of the estimated underwriting
discount and offering expenses payable by the Company, which would be
sufficient to repay acquisition related debt of $75.0 million, repay debt of
$4.8 million and $17.1 million assumed in connection with the FCA and
MedSource acquisitions, respectively, and pay an additional $10.5 million
necessary to fund the Pending Acquisitions.
14. Represents the combined historical results of operations of the 1997
Acquisitions for the periods prior to their acquisition by NCO, as follows
(dollars in thousands):
<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. Represents the historical results of operations of FCA for the twelve month
period ended December 31, 1997, converted from Canadian dollars to U.S.
dollars based upon the applicable exchange rate.
17. Represents the historical results of operations of MedSource for the year
ended December 31, 1997.
F-7
<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 Pending Acquisitions.
22. Reflects the elimination of certain rental expenses and related operating
costs attributable to facilities which were closed at the time of the 1997
Acquisitions and the 1998 Acquisitions and facilities identified during
the due diligence process which will be closed upon the completion of the
Pending Acquisitions.
23. Gives effect to: (i) the increase in amortization expense assuming the
Acquisitions had been acquired on January 1, 1997; and (ii) the elimination
of depreciation and amortization expense related to assets revalued or not
acquired.
24. Reflects interest expense on borrowings related to the Acquisitions as if
they occurred on January 1, 1997.
25. Reflects the estimated income tax expense, after giving consideration to
non-deductible goodwill expense, as if the Acquisitions occurred on January
1, 1997.
26. Gives effect to: (i) the issuance of 517,767 shares of Common Stock and
warrants exercisable for 375,000 shares of Common Stock in connection with
the acquisition of CRWCD; (ii) the issuance of 1,425,753 shares of Common
Stock in the July 1997 Offering at the public offering price of $19.67 per
share which, net of the underwriting discount and offering expenses paid by
the Company, would be sufficient to repay acquisition related debt of $8.4
million and to fund the acquisitions of AFECD and TRC; and (iii) the
issuance of 46,442 shares of Common Stock issued in connection with the
acquisition of AFS.
27. Reflects the elimination of interest expense on current and long-term debt
assumed to be repaid with a portion of the proceeds from the Offering as if
it had occurred on January 1, 1997.
<PAGE>
28. Gives effect to the issuance of 4.2 million shares of Common Stock at an
assumed public offering price of $27.00 per share as of January 1, 1997,
net of the estimated underwriting discount and offering expenses payable by
the Company, which would be sufficient to repay acquisition related debt of
$75.0 million, repay debt of $4.8 million and $17.1 million recognized in
connection with the FCA and MedSource acquisitions, respectively, and pay an
additional $10.5 million necessary to fund the Pending Acqusitions.
29. Includes reorganization charges and other costs of $1.9 million and $90,000
for the year ended December 31, 1997 and the three months ended March 31,
1998, respectively. Net income per share - basic, and net income per share -
diluted would have been $0.72, and $0.69, respectively, and $0.20 and $0.20,
respectively, on a pro forma basis, assuming those charges had not been
incurred.
F-8
<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
===============================================================================
<PAGE>
===============================================================================
6,565,000 Shares
[GRAPHIC OMITTED]
Common Stock
------------
PROSPECTUS
------------
NationsBanc Montgomery
Securities LLC
BT Alex. Brown
Janney Montgomery Scott Inc.
The Robinson-Humphrey Company
, 1998
===============================================================================
<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. ......... $ 56,660
National Association of Securities Dealers, Inc. Fee ......... 19,707
Nasdaq Listing Fee ........................................... 17,500
Printing and Engraving Expenses .............................. 100,000
Accounting Fees and Expenses ................................. 125,000
Legal Fees and Expenses ...................................... 100,000
Blue Sky Qualification Fees and Expenses ..................... 10,000
Transfer Agent and Registrar Fees and Expenses ............... 10,000
Miscellaneous ................................................ 161,133
--------
Total ..................................................... $600,000
========
The foregoing, except for the Securities and Exchange Commission
registration fee, the National Association of Securities Dealers, Inc. fee, and
the Nasdaq Listing fee are estimates.
Item 15. Indemnification of Directors and Officers.
Sections 1741 through 1750 of Subchapter D, Chapter 17, of the Pennsylvania
Business Corporation Law of 1988, as amended (the "BCL"), contain provisions for
mandatory and discretionary indemnification of a corporation's directors,
officers and other personnel, and related matters.
Under Section 1741, subject to certain limitations, a corporation has the
power to indemnify directors and officers under certain prescribed circumstances
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with an action or
proceeding, whether civil, criminal, administrative or investigative, to which
any of them is a party by reason of his being a representative, director or
officer of the corporation or serving at the request of the corporation as a
representative of another corporation, partnership, joint venture, trust or
other enterprise, if he acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
with respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful. Under Section 1743, indemnification is mandatory to the
extent that the officer or director has been successful on the merits or
otherwise in defense of any action or proceeding if the appropriate standards of
conduct are met.
Section 1742 provides for indemnification in derivative actions except in
respect of any claim, issue or matter as to which the person has been adjudged
to be liable to the corporation unless and only to the extent that the proper
court determines upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for the expenses that the court deems proper.
Section 1744 provides that, unless ordered by a court, any indemnification
under Section 1741 or 1742 shall be made by the corporation only as authorized
in the specific case upon a determination that the representative met the
applicable standard of conduct, and such determination will be made by the board
of directors (i) by a majority vote of a quorum of directors not parties to the
action or proceeding; (ii) if a quorum is not obtainable, or if obtainable and a
majority of disinterested directors so directs, by independent legal counsel; or
(iii) by the shareholders.
Section 1745 provides that expenses (including attorney's fees) incurred by
an officer, director, employee or agent in defending a civil or criminal action
or proceeding may be paid by the corporation in advance of the final disposition
of such action or proceeding upon receipt of an undertaking by or on behalf of
such person to repay such amount if it shall ultimately be determined that he or
she is not entitled to be indemnified by the corporation.
II-1
<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
4.1(2) Specimen of Common Stock Certificate
5.1 Opinion of Blank Rome Comisky & McCauley LLP
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Arthur Andersen & Co.
23.3 Consent of Blank Rome Comisky & McCauley LLP (included in the
opinion filed as Exhibit 5.1 hereto)
24.1 Power of Attorney of directors and officers (included on Page II-4)
27.1 Financial Data Schedules
</TABLE>
- ------------
(1) Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on May 4, 1998.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-11745), as amended, filed with the Securities and
Exchange Commission on September 11, 1996.
(b) Financial Statement Schedules
None required.
Item 17. Undertakings.
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 15 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such
II-2
<PAGE>
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 1, 1998.
NCO GROUP, INC.
By: /s/ Michael J. Barrist
-------------------------------------
Michael J. Barrist,
Chairman of the Board, President and
Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael J. Barrist and Steven L. Winokur, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution or resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documentation in connection therewith, as well as any related registration
statement (or amendment thereto) filed pursuant to Rule 462(b) promulgated under
the Securities Act of 1933 with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to enable NCO
Group, Inc. to comply with the provisions of the Securities Act of 1933 and all
requirements of the Securities and Exchange Commission, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
- ------------------------ ------------------------------------------------ -----------
<S> <C> <C>
/s/ Michael J. Barrist Chairman of the Board, President and Chief May 1, 1998
- ------------------------ Executive Officer (principal executive officer)
Michael J. Barrist
/s/ Charles C. Piola Executive Vice President and Director May 1, 1998
- ------------------------
Charles C. Piola
/s/ Steven L. Winokur Executive Vice President, Finance, Chief May 1, 1998
- ------------------------ Financial Officer and Treasurer (principal
Steven L. Winokur financial and accounting officer)
/s/ Bernard R. Miller Executive Vice President, Development and May 1, 1998
- ------------------------ Director
Bernard R. Miller
/s/ Eric S. Siegel Director May 1, 1998
- ------------------------
Eric S. Siegel
/s/ Allen F. Wise Director May 1, 1998
- ------------------------
Allen F. Wise
</TABLE>
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
4.1(2) Specimen of Common Stock Certificate
5.1 Opinion of Blank Rome Comisky & McCauley LLP
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Arthur Andersen & Co.
23.3 Consent of Blank Rome Comisky & McCauley LLP (included in the
opinion filed as Exhibit 5.1 hereto)
24.1 Power of Attorney of directors and officers (included on Page II-4)
27.1 Financial Data Schedules
</TABLE>
- ------------
(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>
6,565,000 Shares
NCO GROUP, INC.
Common Stock
Underwriting Agreement
dated May [___], 1998
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
<S> <C> <C>
Section 1. Representations and Warranties.................................................................2
A. Representations and Warranties of the Company
and the Significant Selling Shareholders................................................2
Compliance with Registration Requirements..................................................2
Offering Materials Furnished to Underwriters...............................................3
Distribution of Offering Material By the Company...........................................3
The Underwriting Agreement.................................................................3
Authorization of the Common Shares.........................................................4
No Applicable Registration or Other Similar Rights.........................................4
No Material Adverse Change.................................................................4
Independent Accountants....................................................................4
Preparation of the Financial Statements....................................................4
Incorporation and Good Standing of the Company and its Subsidiaries........................5
Capitalization and Other Capital Stock Matters.............................................6
Stock Exchange Listing.....................................................................6
Non-Contravention of Existing Instruments;
No Further Authorizations or Approvals Required.........................................6
No Material Actions or Proceedings.........................................................7
Intellectual Property Rights...............................................................7
All Necessary Permits, etc.................................................................7
Title to Properties........................................................................8
Tax Law Compliance.........................................................................8
Company Not an "Investment Company"........................................................8
Insurance..................................................................................8
No Price Stabilization or Manipulation.....................................................8
Related Party Transactions.................................................................9
No Unlawful Contributions or Other Payments................................................9
Regulatory Compliance......................................................................9
Recent Acquisitions........................................................................9
B. Representations and Warranties of the Selling Shareholders..................................10
The Underwriting Agreement.................................................................10
The Custody Agreement and Power of Attorney................................................10
Title to Common Shares to be Sold; All Authorizations Obtained.............................10
Delivery of the Common Shares to be Sold...................................................11
Non-Contravention; No Further Authorizations or Approvals Required.........................11
No Registration or Other Similar Rights....................................................11
No Further Consents, etc...................................................................11
Disclosure Made by Such Selling Shareholder in the Prospectus..............................12
No Price Stabilization or Manipulation.....................................................12
Confirmation of Company Representations and Warranties.....................................12
</TABLE>
- i -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Section 2. Purchase, Sale and Delivery of the Common Shares...............................................12
The Firm Common Shares.....................................................................12
The First Closing Date.....................................................................12
The Optional Common Shares; the Second Closing Date........................................13
Public Offering of the Common Shares.......................................................14
Payment for the Common Shares..............................................................14
Delivery of the Common Shares..............................................................14
Delivery of Prospectus to the Underwriters.................................................15
Section 3. Additional Covenants...........................................................................15
Underwriters' Review of Proposed Amendments and Supplements................................15
Securities Act Compliance..................................................................15
Amendments and Supplements to the Prospectus
and Other Securities Act Matters........................................................16
Copies of any Amendments and Supplements to the Prospectus.................................16
Blue Sky Compliance........................................................................16
Use of Proceeds............................................................................16
Transfer Agent.............................................................................17
Earnings Statement.........................................................................17
Periodic Reporting Obligations.............................................................17
Agreement Not To Offer or Sell Additional Securities.......................................17
Future Reports to the Underwriters.........................................................17
Exchange Act Compliance....................................................................17
Covenants of the Selling Shareholders......................................................18
Agreement Not to Offer or Sell Additional Securities.......................................18
Delivery of Forms W-8 and W-9..............................................................18
Section 4. Payment of Expenses............................................................................18
Section 5. Conditions of the Obligations of the Underwriters..............................................19
Accountants' Comfort Letter................................................................20
Compliance with Registration Requirements; No Stop Order;
No Objection from NASD..................................................................20
No Material Adverse Change ................................................................21
Opinion of Counsel for the Company.........................................................21
Opinion of Counsel for the Underwriters....................................................21
Officers' Certificate......................................................................21
Bring-down Comfort Letter..................................................................22
Opinion of Counsel for the Selling Shareholders............................................22
Selling Shareholders' Certificate..........................................................22
Selling Shareholders' Documents............................................................22
Lock-Up Agreement from Certain Shareholders
of the Company Other Than Selling Shareholders..........................................23
Additional Documents.......................................................................23
-ii-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Section 6. Reimbursement of Underwriters' Expenses....................................................23
Section 7. Effectiveness of this Agreement............................................................23
Section 8. Indemnification............................................................................24
Indemnification of the Underwriters........................................................24
Indemnification of the Company, its Directors and Officers.................................26
Notifications and Other Indemnification Procedures.........................................26
Settlements................................................................................27
Section 9. Contribution...............................................................................28
Section 10. Default of One or More of the Several Underwriter..........................................29
Section 11. Termination of this Agreement..............................................................30
Section 12. Representations and Indemnities to Survive Delivery........................................30
Section 13 Notices....................................................................................31
Section 14. Successors.................................................................................32
Section 15. Partial Unenforceability...................................................................32
Section 16. Governing Law Provisions...................................................................32
Section 17. Failure of One or More of the Selling Shareholders to Sell and
Deliver Common Shares......................................................................32
Section 18. General Provisions.........................................................................33
</TABLE>
-iii-
<PAGE>
Underwriting Agreement
May [___], 1998
NATIONSBANC MONTGOMERY SECURITIES LLC
BT ALEX. BROWN INCORPORATED
JANNEY MONTGOMERY SCOTT INC.
THE ROBINSON-HUMPHREY COMPANY, LLC
c/o NATIONSBANC MONTGOMERY SECURITIES LLC
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
Introductory. NCO Group, Inc., a Pennsylvania corporation (the
"Company), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of 5,800,000 shares of its Common
Stock, no par value (the "Common Stock"); and the shareholders of the Company
named in Schedule B (collectively, the "Selling Shareholders") severally propose
to sell to the Underwriters an aggregate of 765,000 shares of Common Stock. The
5,800,000 shares of Common Stock to be sold by the Company and the 765,000
shares of Common Stock to be sold by the Selling Shareholders are collectively
called the "Firm Common Shares". In addition, the Company has granted to the
Underwriters an option to purchase up to an additional 887,233 shares of Common
Stock and certain of the Selling Shareholders have severally granted to the
Underwriters an option to purchase up to an additional 97,517 shares of Common
Stock, each such Selling Shareholder selling up to the amount set forth opposite
such Selling Shareholder's name in Schedule B, all as provided in Section 2. The
additional 887,233 shares to be sold by the Company and the additional 97,517
shares to be sold by certain of the Selling Shareholders pursuant to such option
are collectively called the "Optional Common Shares". The Firm Common Shares
and, if and to the extent such option is exercised, the Optional Common Shares
are collectively called the "Common Shares".
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-3 (File No.
333-[___]), which contains a form of prospectus to be used in connection with
the public offering and sale of the Common Shares. Such registration statement,
as amended, including the financial statements, exhibits and schedules thereto,
in the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including all documents incorporated or
deemed to be incorporated by reference therein and any information deemed to be
a part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act or the Securities Exchange Act of 1934 and the rules
and regulations promulgated thereunder (collectively, the "Exchange Act"), is
called the "Registration Statement". Any registration statement filed by the
Company pursuant to Rule 462(b) under the Securities Act is called the "Rule
462(b) Registration Statement", and from and after the date and time of filing
of the Rule 462(b) Registration Statement the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. Such prospectus, in the
form first used by the Underwriters to confirm sales of the Common Shares, is
called the "Prospectus"; provided, however, if the Company has, with the consent
of NationsBanc Montgomery Securities LLC, elected to rely upon Rule 434 under
the Securities Act, the term "Prospectus" shall mean the Company's prospectus
subject to completion (each, a "preliminary prospectus") dated May ___, 1998
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(such preliminary prospectus is called the "Rule 434 preliminary prospectus"),
together with the applicable term sheet (the "Term Sheet") prepared and filed by
the Company with the Commission under Rules 434 and 424(b) under the Securities
Act and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. All references in this Agreement to the
Registration Statement, the Rule 462(b) Registration Statement, a preliminary
prospectus, the Prospectus or the Term Sheet, or any amendments or supplements
to any of the foregoing, shall include any copy thereof filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR"). All references in this Agreement to financial statements and
schedules and other information which is "contained," "included" or "stated" in
the Registration Statement or the Prospectus (and all other references of like
import) shall be deemed to mean and include all such financial statements and
schedules and other information which is or is deemed to be incorporated by
reference in the Registration Statement or the Prospectus, as the case may be;
and all references in this Agreement to amendments or supplements to the
Registration Statement or the Prospectus shall be deemed to mean and include the
filing of any document under the Exchange Act which is or is deemed to be
incorporated by reference in the Registration Statement or the Prospectus, as
the case may be.
The Company and each of the Selling Shareholders hereby confirm their
respective agreements with the Underwriters as follows:
Section 1. Representations and Warranties of the Company and the
Selling Shareholders.
A. Representations and Warranties of the Company and the Selling
Shareholders. Each of the Company and, to the best of their knowledge, each of
the Significant Selling Shareholders (as defined in Schedule B hereto) hereby
represents, warrants and covenants to each Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the
Commission for additional or supplemental information. No stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement is in effect and no proceedings for such
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purpose have been instituted or are pending or, to the best knowledge
of the Company or any of the Significant Selling Shareholders, are
contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed
complied in all material respects with the Securities Act and, if filed
by electronic transmission pursuant to EDGAR (except as may be
permitted by Regulation S-T under the Securities Act), was identical to
the copy thereof delivered to the Underwriters for use in connection
with the offer and sale of the Common Shares. Each of the Registration
Statement, any Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective and
at all subsequent times, complied and will comply in all material
respects with the Securities Act and did not and will not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made,
not misleading. The Prospectus, as amended or supplemented, as of its
date and at all subsequent times, did not and will not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately
preceding sentences do not apply to statements in or omissions from the
Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment thereto, or the Prospectus, or any amendments
or supplements thereto, made in reliance upon and in conformity with
information furnished to the Company in writing by the Underwriters
expressly for use therein. There are no contracts or other documents
required to be described in the Prospectus or to be filed as exhibits
to the Registration Statement which have not been described or filed as
required.
(b) Offering Materials Furnished to Underwriters. Company has
delivered to the Underwriters four complete manually signed copies of
the Registration Statement and of each consent and certificate of
experts filed as a part thereof, and conformed copies of the
Registration Statement (without exhibits) and preliminary prospectuses
and the Prospectus, as amended or supplemented, in such quantities and
at such places as the Underwriters have reasonably requested.
(c) Distribution of Offering Material By the Company. The
Company has not distributed and will not distribute, prior to the later
of the Second Closing Date (as defined below) and the completion of the
Underwriters' distribution of the Common Shares, any offering material
in connection with the offering and sale of the Common Shares other
than a preliminary prospectus, the Prospectus or the Registration
Statement.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding
agreement of, the Company, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by
applicable law and public policy and except as the enforcement hereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting the rights and remedies of
creditors or by general equitable principles.
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(e) Authorization of the Common Shares. The Common Shares to be
purchased by the Underwriters from the Company have been duly
authorized for issuance and sale pursuant to this Agreement and, when
issued and delivered by the Company pursuant to this Agreement and paid
for in the manner set forth in this Agreement, will be validly issued,
fully paid and nonassessable.
(f) No Applicable Registration or Other Similar Rights. There
are no persons with registration or other similar rights to have any
equity or debt securities registered for sale under the Registration
Statement or included in the offering contemplated by this Agreement,
other than the Selling Shareholders with respect to the Common Shares
included in the Registration Statement, except for such rights as have
been duly waived.
(g) No Material Adverse Change. Except as otherwise disclosed or
incorporated by reference in the Prospectus, subsequent to the
respective dates as of which information is given in the Prospectus:
(i) there has been no material adverse change, or any development that
could reasonably be expected to result in a material adverse change, in
the condition, financial or otherwise, or in the earnings, business,
operations or prospects, whether or not arising from transactions in
the ordinary course of business, of the Company and its subsidiaries,
considered as one entity (any such change is called a "Material Adverse
Change"); (ii) the Company and its subsidiaries, considered as one
entity, have not incurred any material liability or obligation,
indirect, direct or contingent, not in the ordinary course of business
nor entered into any material transaction or agreement not in the
ordinary course of business; and (iii) there has been no dividend or
distribution of any kind declared, paid or made by the Company or,
except for dividends paid to the Company or other subsidiaries, any of
its subsidiaries on any class of capital stock or repurchase or
redemption by the Company or any of its subsidiaries of any class of
capital stock.
(h) Independent Accountants. Coopers & Lybrand L.L.P., who have
expressed their opinion with respect to the financial statements of the
Company (which term as used in this Agreement includes the related
notes thereto) included or incorporated by reference in the
Registration Statement and the Prospectus, are independent public or
certified public accountants as required by the Securities Act and the
Exchange Act. Arthur Andersen LLP, who have expressed their opinion
with respect to the financial statements of FCA International Ltd.
("FCA") and MedSource, Inc. ("MedSource") (which term as used in this
Agreement includes the related notes thereto) included or incorporated
by reference in the Registration Statement and the Prospectus, are
independent public or certified public accountants as required by the
Securities Act and the Exchange Act.
(i) Preparation of the Financial Statements. The financial
statements included or incorporated by reference in the Registration
Statement and the Prospectus present fairly in all material respects
the
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consolidated financial position of the Company and its subsidiaries as
of and at the dates indicated and the results of their operations and
cash flows for the periods specified. The financial statements included
or incorporated by reference in the Registration Statement and the
Prospectus present fairly in all material respects the consolidated
financial positions of FCA and MedSource as of and at the dates
indicated and the results of their respective operations and cash flows
for the periods specified. Such financial statements have been prepared
in conformity with generally accepted accounting principles as applied
in the United States applied on a consistent basis throughout the
periods involved, except as may be expressly stated in the related
notes thereto. No other financial statements are required to be
included or incorporated by reference in the Registration Statement.
The financial data set forth in the Prospectus under the captions
"Prospectus Summary--Summary Financial Data", "Selected Financial Data"
and "Capitalization" fairly present the information set forth therein
on the basis stated in the Registration Statement, except as it relates
to pro forma and as adjusted information. The pro forma consolidated
financial statements of the Company and its subsidiaries and the
related notes thereto included under the caption "Prospectus
Summary--Summary Financial Data", "Selected Financial Data",
"Capitalization" and elsewhere in the Prospectus and in the
Registration Statement have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements and have been properly presented on the bases described
therein, and in the opinion of the Company, the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions and circumstances
referred to therein.
(j) Incorporation and Good Standing of the Company and its
Subsidiaries. Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation and has
corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Prospectus and, in the
case of the Company, to enter into and perform its obligations under
this Agreement. Each of the Company and each subsidiary is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except for such jurisdictions where the failure to
so qualify or to be in good standing would not result in a Material
Adverse Change. All of the issued and outstanding capital stock of each
subsidiary has been duly authorized and validly issued, is fully paid
and nonassessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage,
pledge, lien, encumbrance or claim, except that the stock of its
subsidiaries is pledged to Mellon Bank Corporation to secure the
Company's obligations under the Revolving Credit Agreement (the "Credit
Agreement") with Mellon Bank Corporation, as lender, dated March 23,
1998. The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than (i) the
subsidiaries listed in Exhibit 21.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 and (ii) FCA
Acquisition Corporation and its subsidiaries, including FCA.
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(k) Capitalization and Other Capital Stock Matters. The
authorized, issued and outstanding capital stock of the Company is as
set forth in the Prospectus under the caption "Capitalization" (other
than for subsequent issuances, if any, pursuant to employee benefit
plans described in the Prospectus or upon exercise of outstanding
options or warrants or conversion of convertible notes described in the
Prospectus). The Common Stock (including the Common Shares) conforms in
all material respects to the description thereof contained in the
Prospectus. All of the issued and outstanding shares of Common Stock
(including the shares of Common Stock owned by Selling Shareholders)
have been duly authorized and validly issued, are fully paid and
nonassessable and have been issued in compliance in all material
respects with federal and state securities laws. None of the
outstanding shares of Common Stock were issued in violation of any
preemptive rights, rights of first refusal or other similar rights to
subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights
of first refusal or other rights to purchase, or equity or debt
securities convertible into or exchangeable or exercisable for, any
capital stock of the Company or any of its subsidiaries other than
those described in the Prospectus. The description of the Company's
stock option, stock bonus and other stock plans or arrangements, and
the options or other rights granted thereunder, set forth in the
Prospectus accurately and fairly presents the information required to
be shown with respect to such plans, arrangements, options and rights.
(l) Stock Exchange Listing. The Common Stock (including the
Common Shares) is registered pursuant to Section 12(g) of the Exchange
Act and is listed on the Nasdaq National Market, and the Company has
taken no action designed to, or likely to have the effect of,
terminating the registration of the Common Stock under the Exchange Act
or delisting the Common Stock from the Nasdaq National Market, nor has
the Company received any notification that the Commission or the
National Association of Securities Dealers, Inc. (the "NASD") is
contemplating terminating such registration or listing.
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. Neither the Company nor any of
its subsidiaries is in violation of its articles of s Required
incorporation or by-laws or is in default (or, with the giving of
notice or lapse of time, would be in default) ("Default") under any
indenture, mortgage, loan or credit agreement, note, contract,
franchise, lease or other instrument to which the Company or any of its
subsidiaries is a party or by which it or any of them may be bound
(including, without limitation, the Credit Agreement), or to which any
of the property or assets of the Company or any of its subsidiaries is
subject (each, an "Existing Instrument"), except for such Defaults as
would not, individually or in the aggregate, result in a Material
Adverse Change. The Company's execution, delivery and performance of
this Agreement and consummation of the transactions contemplated hereby
and by the Prospectus (i) have been duly authorized by all necessary
corporate action and will not result in any violation of the provisions
of the articles of incorporation or by-laws of the Company or any
subsidiary, (ii) will not conflict with or constitute a breach of, or
Default under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
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of its subsidiaries pursuant to, or require the consent of any other
part to, any Existing Instrument, except for such conflicts, breaches,
Defaults, liens, charges or encumbrances as would not result in a
Material Adverse Change and (iii) will not result in any violation of
any law, administrative regulation or administrative or court decree
applicable to the Company or any subsidiary. No consent, approval,
authorization or other order of, or registration or filing with, any
court or other governmental or regulatory authority or agency, is
required for the Company's execution, delivery and performance of this
Agreement and consummation of the transactions contemplated hereby and
by the Prospectus, except such as have been obtained or made by the
Company and are in full force and effect under the Securities Act,
applicable state securities or blue sky laws and from the NASD.
(n) No Materials Actions or Proceedings. There are no legal or
governmental actions, suits or proceedings pending or, to the best of
the Company's knowledge, threatened (i) against or affecting the
Company or any of its subsidiaries, (ii) which has as the subject
thereof any officer or director of, or property owned or leased by, the
Company or any of its subsidiaries or (iii) relating to environmental
or discrimination matters, where in any such case (A) there is a
reasonable possibility that such action, suit or proceeding might be
determined adversely to the Company or such subsidiary and (B) any such
action, suit or proceeding, if so determined adversely, would
reasonably be expected to result in a Material Adverse Change or
adversely affect the consummation of the transactions contemplated by
this Agreement. No material labor dispute with the employees of the
Company or any of its subsidiaries exists or, to the best of the
Company's knowledge, is threatened or imminent.
(o) Intellectual Property Rights. The Company and its
subsidiaries own or possess sufficient trademarks, trade names, patent
rights, copyrights, licenses, approvals, trade secrets and other
similar rights (collectively, "Intellectual Property Rights")
reasonably necessary to conduct their businesses as now conducted; and
the expected expiration of any of such Intellectual Property Rights
would not result in a Material Adverse Change. Neither the Company nor
any of its subsidiaries has received any notice of infringement or
conflict with asserted Intellectual Property Rights of others, which
infringement or conflict, if the subject of an unfavorable decision,
would result in a Material Adverse Change.
(p) All Necessary Permits, etc. The Company and each subsidiary
possess such valid and current certificates, authorizations or permits
issued by the appropriate state, federal or foreign regulatory agencies
or bodies necessary to conduct their respective businesses except where
the failure to obtain or maintain any such certificate, authorization
or permit would not, individually or in the aggregate, result in a
Material Adverse Change, and neither the Company nor any subsidiary has
received any notice of proceedings relating to the revocation or
modification of, or non-compliance with, any such certificate,
authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in
a Material Adverse Change.
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(q) Title to Properties. The Company and each of its
subsidiaries have good and marketable title to all the properties and
assets reflected as owned in the financial statements referred to in
Section 1(A) (i) above (or elsewhere in the Prospectus), in each case
free and clear of any security interests, mortgages, liens,
encumbrances, equities, claims and other defects, except such as (i)
are reflected in the financial statements or elsewhere in the
Prospectus or (ii) do not materially and adversely affect the value of
such property and do not materially interfere with the use made or
proposed to be made of such property by the Company or such
subsidiary. The real property, improvements, equipment and personal
property held under lease by the Company or any subsidiary are held
under valid and enforceable leases, with such exceptions as are not
material and do not materially interfere with the use made or proposed
to be made of such real property, improvements, equipment or personal
property by the Company or such subsidiary.
(r) Tax law Compliance. The Company and its subsidiaries have
filed all necessary federal, state and foreign income and franchise tax
returns (or have properly requested extensions thereof) and have paid
all taxes required to be paid by any of them and, if due and payable,
any related or similar assessment, fine or penalty levied against any
of them (except as may be being contested in good faith and by
appropriate proceedings and adequately reserved for in the financial
statements of the Company). The Company has made adequate charges,
accruals and reserves in the applicable financial statements referred
to in Section 1(A) (i) above in respect of all federal, state and
foreign income and franchise taxes for all periods as to which the tax
liability of the Company or any of its subsidiaries has not been
finally determined.
(s) Company Not an "Investment Company". The Company has been
advised of the rules and requirements under the Investment Company Act
of 1940, as amended (the "Investment Company Act"). The Company is not,
and after receipt of payment for the Common Shares will not be, an
"investment company" within the meaning of Investment Company Act and
will conduct its business in a manner so that it will not become
subject to the Investment Company Act.
(t) Insurance. Each of the Company and its subsidiaries are
insured by recognized, financially sound and reputable institutions
with policies in such amounts and with such deductibles and covering
such risks as are generally deemed adequate and customary for their
businesses including, but not limited to, policies covering real and
personal property owned or leased by the Company and its subsidiaries
against theft, damage, destruction, acts of vandalism and earthquakes.
The Company has no reason to believe that it or any subsidiary will not
be able (i) to renew its existing insurance coverage as and when such
policies expire or (ii) to obtain comparable coverage from similar
institutions as may be necessary or appropriate to conduct its business
as now conducted and at a cost that would not result in a Material
Adverse Change. Neither of the Company nor any subsidiary has been
denied any insurance coverage which it has sought or for which it has
applied.
(u) No Price Stabilization or Manipulation. The Company has not
taken and will not take, directly or indirectly, prior to the later of
(i) the Second Closing Date and (ii) the Underwriters' distribution of
the Common Shares any action designed to or that might be reasonably
expected to cause or result in
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stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Common Shares.
(v) Related Party Transactions. There are no related-party
transactions involving the Company or any subsidiary on the one hand,
and any other person required to be described in the Prospectus which
have not been described or incorporated by reference as required.
(w) Exchange Act Compliance. The documents incorporated or
deemed to be incorporated by reference in the Prospectus, at the time
they were or hereafter are filed with the Commission, complied and will
comply in all material respects with the requirements of the Exchange
Act, and, when read together with the other information in the
Prospectus, at the time the Registration Statement and any amendments
thereto become effective and at the First Closing Date and the Second
Closing Date, as the case may be, will not contain an untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(x) No Unlawful Contributions or Other Payments. To the
Company's knowledge, neither the Company nor any of its subsidiaries
has made any contribution or other payment to any official of, or
candidate for, any federal, state or foreign office in violation of any
law or of the character required to be disclosed in the Prospectus.
(y) Regulatory Compliance. The Company has not been advised, and
has no reason to believe, that either it or any of its subsidiaries is
not conducting business in compliance with all applicable laws, rules
and regulations of the jurisdictions in which it is conducting
business, including, without limitation, the federal Fair Debt
Collection Practices Act, the federal Fair Credit Reporting Act, the
federal Telemarketing and Consumer Fraud and Abuse Prevention Act of
1994, the federal Telephone Consumer Protection Act of 1991, related
state and local statutes and regulations, all applicable international
laws, rules and regulations and all applicable local, state and federal
environmental laws and regulations, except where failure to be so in
compliance would not result in a Material Adverse Change.
(z) Recent Acquisitions. The FCA Tender Offer (as such term is
defined in the Prospectus) has been consummated, and, as a result, the
Company, directly or indirectly, owns or controls at least two-thirds
of the issued and outstanding capital stock of FCA free and clear of
any security interest, mortgage, pledge, lien, encumbrance or to the
best of the Company's or any of the Significant Selling Shareholder's
knowledge, any pending or threatened claim. The agreements necessary
to effect the acquisitions of FCA, MedSource, and each other company
included in the Company's pro forma balance sheet included in the
Prospectus and Registration Statement have been duly authorized,
executed and
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delivered by each of the parties thereto and constitute the valid,
legal and binding agreements of each such party.
Any certificate signed by an officer of the Company and delivered to
the Underwriters or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
B. Representations and Warranties of the Selling Shareholders. Each
Selling Shareholder, severally and not jointly, represents, warrants
and covenants to each Underwriter as follows:
(a) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by or on behalf of such Selling
Shareholder and is a valid and binding agreement of such Selling
Shareholder, enforceable in accordance with its terms, except as rights
to indemnification hereunder may be limited by applicable law and
public policy and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting the rights and remedies of creditors or
by general equitable principles.
(b) The Custody Agreement and Power of Attorney. Each of the (i)
Custody Agreement signed by such Selling Shareholder and Michael J.
Barrist, as custodian (the "Custodian"), relating to the deposit of the
Common Shares to be sold by such Selling Shareholder (the "Custody
Agreement") and (ii) Power of Attorney appointing certain individuals
named therein as such Selling Shareholder's attorneys-in-fact (each, an
"Attorney-in-Fact") to the extent set forth therein relating to the
transactions contemplated hereby and by the Prospectus (the "Power of
Attorney"), of such Selling Shareholder has been duly authorized,
executed and delivered by such Selling Shareholder and is a valid and
binding agreement of such Selling Shareholder, enforceable in
accordance with its terms, except as rights to indemnification
thereunder may be limited by applicable law and except as the
enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting the rights and remedies of creditors or by general equitable
principles.
(c) Title to Common Shares to be Sold; All Authorizations
Obtained. Such Selling Shareholder has, or has the right to acquire,
and on the First Closing Date and the Second Closing Date (as defined
below) will have, good and valid title to all of the Common Shares
which may be sold by such Selling Shareholder pursuant to this
Agreement on such date and the legal right and power, and all
authorizations and approvals required by law and under its charter or
by-laws, partnership agreement, trust agreement or other organizational
documents, as applicable, to enter into this Agreement and its Custody
Agreement and Power of Attorney, to sell, transfer and deliver all of
the Common Shares which may be sold
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by such Selling Shareholder pursuant to this Agreement and to comply
with its other obligations hereunder and thereunder.
(d) Delivery of the Common Shares to be Sold. Delivery of the
Common Shares which are sold by such Selling Shareholder pursuant to
this Agreement will pass good and valid title to such Common Shares,
free and clear of any security interest, mortgage, pledge, lien,
encumbrance or other claim.
(e) Non-Contravention; No Further Authorizations or Approvals
Required. The execution and delivery by such Selling Shareholder of,
and the performance by such Selling Shareholder of its obligations
under, this Agreement, the Custody Agreement and the Power of Attorney
will not contravene or conflict with, result in a breach of, or
constitute a Default under, or require the consent of any other party
to, the charter or by-laws, partnership agreement, trust agreement or
other organizational documents, as applicable, of such Selling
Shareholder or any other material agreement or instrument to which such
Selling Shareholder is a party or by which it is bound or under which
it is entitled to any right or benefit, any provision of applicable law
or any judgment, order, decree or regulation applicable to such Selling
Shareholder of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over such Selling
Shareholder. No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority
or agency, is required for the consummation by such Selling Shareholder
of the transactions contemplated in this Agreement, except such as have
been obtained or made and are in full force and effect under the
Securities Act, applicable state securities or blue sky laws and from
the NASD.
(f) No Registration or Other Similar Rights. Such Selling
Shareholder does not have any registration or other similar rights to
have any equity or debt securities registered for sale by the Company
under the Registration Statement or included in the offering
contemplated by this Agreement, except for such rights as are described
or incorporated by reference in the Prospectus.
(g) No Further Consents, etc. Except for the (i) exercise by
such Selling Shareholder of certain registration rights pursuant to the
Registration Rights Agreement dated as of [___] (which registration
rights have been duly exercised pursuant thereto), (ii) consent of such
Selling Shareholder to the respective number of Common Shares to be
sold by all of the Selling Shareholders pursuant to this Agreement and
(iii) waiver by certain other holders of Common Stock of certain
registration rights pursuant to such Registration Rights Agreement, no
consent, approval or waiver is required under any instrument or
agreement to which such Selling Shareholder is a party or by which it
is bound or under which it is entitled to any right or benefit, in
connection with the offering, sale or purchase by the Underwriters of
any of the Common Shares which may be sold by such Selling Shareholder
under this Agreement or the consummation by such Selling Shareholder of
any of the other transactions contemplated hereby.
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(h) Disclosure Made by Such Selling Shareholder in the
Prospectus. All information furnished by or on behalf of such Selling
Shareholder in writing expressly for use in the Registration Statement
and Prospectus is, and on the First Closing Date and the Second Closing
Date will be, true, correct, and complete in all material respects, and
does not, and on the First Closing Date and the Second Closing Date
will not, contain any untrue statement of a material fact or omit to
state any material fact necessary to make such statements, in light of
the circumstances under which they were made, not misleading. Such
Selling Shareholder confirms as accurate the number of shares of Common
Stock set forth opposite such Selling Shareholder's name in the
Prospectus under the caption "Principal and Selling Shareholders" (both
prior to and after giving effect to the sale of the Common Shares).
(i) No Price Stabilization or Manipulation. Such Selling
Shareholder has not taken and will not take, directly or indirectly,
prior to the later of (i) the Second Closing Date and (ii) the
Underwriters' distribution of the Common Shares any action designed to
or that might be reasonably expected to cause or result in
stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Common Shares.
(j) Confirmation of Company Representations and Warranties. Such
Selling Shareholder is not aware that any of the representations and
warranties of the Company contained in Section 1(A) hereof is untrue or
inaccurate in any material respect.
Any certificate signed by or on behalf of any Selling Shareholder and
delivered to the Underwriters or to counsel for the Underwriters shall be deemed
to be a representation and warranty by such Selling Shareholder to each
Underwriter as to the matters covered thereby.
Section 2. Purchase, Sale and Delivery of the Common Shares.
The Firm Common Shares. Upon the terms herein set forth, (i) the
Company agrees to issue and sell to the several Underwriters an aggregate of
5,800,000 Firm Common Shares and (ii) the Selling Shareholders agree to sell to
the several Underwriters an aggregate of 765,000 Firm Common Shares, each
Selling Shareholder selling the number of Firm Common Shares set forth opposite
such Selling Shareholder's name on Schedule B. On the basis of the
representations, warranties and agreements herein contained, and upon the terms
but subject to the conditions herein set forth, the Underwriters agree,
severally and not jointly, to purchase from the Company and the Selling
Shareholders the respective number of Firm Common Shares set forth opposite
their names on Schedule A. The purchase price per Firm Common Share to be paid
by the several Underwriters to the Company and the Selling Shareholders shall be
$[___] per share.
The First Closing Date. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters and payment therefor shall be made at
the offices of NationsBanc Montgomery Securities LLC, 600 Montgomery Street, San
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Francisco, California (or such other place as may be agreed to by the Company
and NationsBanc Montgomery Securities LLC, as Representative of the
Underwriters) at 6:00 a.m. San Francisco time, on [___], or such other time and
date not later than 10:30 a.m. San Francisco time , on [___] as the Underwriters
shall designate by notice to the Company (the time and date of such closing are
called the "First Closing Date"). The Company and the Selling Shareholders
hereby acknowledge that circumstances under which the Underwriters may provide
notice to postpone the First Closing Date as originally scheduled include, but
are in no way limited to, any determination by the Company, the Selling
Shareholders or the Underwriters to recirculate to the public copies of an
amended or supplemented Prospectus or a delay as contemplated by the provisions
of Section 10.
The Optional Common Shares; the Second Closing Date. In addition, on
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the Company
and the Selling Shareholders severally and not jointly hereby grant an option to
the Underwriters to purchase, severally and not jointly, up to an aggregate of
887,233 Optional Common Shares from the Company and 97,517 Optional Common
Shares from the Selling Shareholders as set forth in Schedule B at the purchase
price per share to be paid by the Underwriters for the Firm Common Shares. The
option granted hereunder is for use by the Underwriters solely in covering any
over-allotments in connection with the sale and distribution of the Firm Common
Shares. The option granted hereunder may be exercised at any time (but not more
than once) upon notice by the Underwriters to the Company and the Selling
Shareholders, which notice may be given at any time within 30 days from the date
of this Agreement. Such notice shall set forth (i) the aggregate number of
Optional Common Shares as to which the Underwriters are exercising the option,
(ii) the names and denominations in which the certificates for the Optional
Common Shares are to be registered and (iii) the time, date and place at which
such certificates will be delivered (which time and date may be simultaneous
with, but not earlier than, the First Closing Date; and in such case the term
"First Closing Date" shall refer to the time and date of delivery of
certificates for the Firm Common Shares and the Optional Common Shares). Such
time and date of delivery, if subsequent to the First Closing Date, is called
the "Second Closing Date" and shall be determined by the Underwriters and shall
not be earlier than three nor later than five full business days after delivery
of such notice of exercise. If any Optional Common Shares are to be purchased,
(a) each Underwriter agrees, severally and not jointly, to purchase the number
of Optional Common Shares (subject to such adjustments to eliminate fractional
shares as the Underwriters may determine) that bears the same proportion to the
total number of Optional Common Shares to be purchased as the number of Firm
Common Shares set forth on Schedule A opposite the name of such Underwriter
bears to the total number of Firm Common Shares and (b) the Company and each
Selling Shareholder agree, severally and not jointly, to sell the number of
Optional Common Shares (subject to such adjustments to eliminate fractional
shares as the Underwriters may determine) that bears the same proportion to the
total number of Optional Common Shares to be sold as the number of Optional
Common Shares set forth in Schedule B opposite the name of such Selling
Shareholder (or, in the case of the Company, as the number of Optional Common
Shares to be sold by the Company as set forth in the paragraph "Introductory" of
this Agreement) bears to the total number of Optional Common Shares. The
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Underwriters may cancel the option at any time prior to its expiration by giving
written notice of such cancellation to the Company and the Selling Shareholders.
Public Offering of the Common Shares. The Underwriters hereby advise
the Company and the Selling Shareholders that the Underwriters intend to offer
for sale to the public, as described in the Prospectus, their respective
portions of the Common Shares as soon after this Agreement has been executed and
the Registration Statement has been declared effective as the Underwriters, in
their sole judgment, have determined is advisable and practicable.
Payment for the Common Shares. Payment for the Common Shares to be sold
by the Company shall be made at the First Closing Date (and, if applicable, at
the Second Closing Date) by wire transfer of immediately available funds to the
order of the Company. Payment for the Common Shares to be sold by the Selling
Shareholders shall be made at the First Closing Date (and, if applicable, at the
Second Closing Date) by wire transfer of immediately available funds to the
order of the Custodian.
It is understood that NationsBanc Montgomery Securities LLC has been
authorized, for its own account and the accounts of the several Underwriters, to
accept delivery of and receipt for, and make payment of the purchase price for,
the Firm Common Shares and any Optional Common Shares the Underwriters have
agreed to purchase. NationsBanc Montgomery Securities LLC, individually and not
as the Representative of the Underwriters, may (but shall not be obligated to)
make payment for any Common Shares to be purchased by any Underwriter whose
funds shall not have been received by the Representative by the First Closing
Date or the Second Closing Date, as the case may be, for the account of such
Underwriter, but any such payment shall not relieve such Underwriter from any of
its obligations under this Agreement.
Each Selling Shareholder hereby agrees that (i) it will pay all stock
transfer taxes, stamp duties and other similar taxes, if any, payable upon the
sale or delivery of the Common Shares to be sold by such Selling Shareholder to
the several Underwriters, or otherwise in connection with the performance of
such Selling Shareholder's obligations hereunder and (ii) the Custodian is
authorized to deduct for such payment any such amounts from the proceeds to such
Selling Shareholder hereunder and to hold such amounts for the account of such
Selling Shareholder with the Custodian under the Custody Agreement.
Delivery of the Common Shares. The Company and the Selling Shareholders
shall deliver, or cause to be delivered, to the Representative for the accounts
of the several Underwriters certificates for the Firm Common Shares to be sold
by them at the First Closing Date, against the irrevocable release of a wire
transfer of immediately available funds for the amount of the purchase price
therefor. The Company and the Selling Shareholders shall also deliver, or cause
to be delivered, to the Representative for the accounts of the several
Underwriters, certificates for the Optional Common Shares the Underwriters have
agreed to purchase from them at the First Closing Date or the Second Closing
Date, as the case may be, against the irrevocable release of a wire transfer of
immediately available funds for the amount of the purchase price therefor. The
certificates for the Common Shares shall be in definitive form and registered in
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such names and denominations as the Underwriters shall have requested at least
two full business days prior to the First Closing Date (or the Second Closing
Date, as the case may be) and shall be made available for inspection on the
business day preceding the First Closing Date (or the Second Closing Date, as
the case may be) at a location in New York City as the Underwriters may
designate. Time shall be of the essence, and delivery at the time and place
specified in this Agreement is a further condition to the obligations of the
Underwriters.
Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m.
on the second business day following the date the Common Shares are released by
the Underwriters for sale to the public, the Company shall deliver or cause to
be delivered copies of the Prospectus in such quantities and at such places as
the Underwriters shall request.
Section 3. Additional Covenants.
A. Covenants of the Company. Covenants of the Company. The
Company further covenants and agrees with each Underwriter as follows:
(a) Underwriters' Review of Proposed Amendments and Supplements.
During such period beginning on the date hereof and ending on the later
of the First Closing Date or such date, as in the opinion of counsel
for the Underwriters, the Prospectus is no longer required by law to be
delivered in connection with sales by an Underwriter or dealer (the
"Prospectus Delivery Period"), prior to amending or supplementing the
Registration Statement (including any registration statement filed
under Rule 462(b) under the Securities Act) or the Prospectus
(including any amendment or supplement through incorporation by
reference of any report filed under the Exchange Act), the Company
shall furnish to the Underwriters for review a copy of each such
proposed amendment or supplement, and the Company shall not file any
such proposed amendment or supplement to which the Underwriters
reasonably object.
(b) Securities Act Compliance. After the date of this Agreement,
the Company shall promptly advise the Underwriters in writing (i) of
the receipt of any comments of, or requests for additional or
supplemental information from, the Commission, (ii) of the time and
date of any filing of any post-effective amendment to the Registration
Statement or any amendment or supplement to any preliminary prospectus
or the Prospectus, (iii) of the time and date that any post-effective
amendment to the Registration Statement becomes effective and (iv) of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any post-effective
amendment thereto or of any order preventing or suspending the use of
any preliminary prospectus or the Prospectus, or of any proceedings to
remove, suspend or terminate from listing or quotation the Common Stock
from any securities exchange upon which it is listed for trading or
included or designated for quotation, or of the threatening or
initiation of any proceedings for any of such purposes. If the
Commission shall enter any such stop order at any time, the Company
will use its best efforts to obtain the lifting of such order at the
earliest possible moment. Additionally, the Company agrees that it
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shall comply with the provisions of Rules 424(b), 430A and 434, as
applicable, under the Securities Act and will use its reasonable
efforts to confirm that any filings made by the Company under such Rule
424(b) were received in a timely manner by the Commission.
(c) Amendments and Supplements to the Prospectus and Other
Securities Act Matters. If, during the Prospectus Delivery Period, any
event shall occur or condition exist as a result of which it is
necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, or if in the reasonable opinion of the
Underwriters or counsel for the Underwriters it is otherwise necessary
to amend or supplement the Prospectus to comply with law, the Company
agrees to promptly prepare (subject to Section 3(A)(a) hereof), file
with the Commission and furnish at its own expense to the Underwriters
and to dealers, amendments or supplements to the Prospectus so that the
statements in the Prospectus as so amended or supplemented will not, in
the light of the circumstances under which they were made, be
misleading or so that the Prospectus, as amended or supplemented, will
comply with law.
(d) Copies of any Amendments and Supplements to the Prospectus.
The Company agrees to furnish the Underwriters, without charge, during
the Prospectus Delivery Period, as many copies of the Prospectus and
any amendments and supplements thereto (including any documents
incorporated or deemed incorporated by reference therein) as the
Underwriters may request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Underwriters and counsel for the Underwriters to qualify or register
the Common Shares for sale under (or obtain exemptions from the
application of) the Blue Sky or state securities laws of those
jurisdictions designated by the Underwriters, shall comply with such
laws and shall continue such qualifications, registrations and
exemptions in effect so long as required for the distribution of the
Common Shares. The Company shall not be required to qualify as a
foreign corporation or to take any action that would subject it to
general service of process in any such jurisdiction where it is not
presently qualified or where it would be subject to taxation as a
foreign corporation. The Company will advise the Underwriters promptly
of the suspension of the qualification or registration of (or any such
exemption relating to) the Common Shares for offering, sale or trading
in any jurisdiction or any initiation or threat of any proceeding for
any such purpose, and in the event of the issuance of any order
suspending such qualification, registration or exemption, the Company
shall use its best efforts to obtain the withdrawal thereof at the
earliest possible moment.
(f) Use of Proceeds. The Company shall apply the net proceeds
from the sale of the Common Shares sold by it in accordance with the
manner described under the caption "Use of Proceeds" in the Prospectus.
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(g) Transfer Agent. The Company shall engage and maintain, at
its expense, a registrar and transfer agent for the Common Stock.
(h) Earnings Statement. As soon as practicable, the Company will
make generally available to its security holders and to the
Underwriters an earnings statement (which need not be audited) covering
the twelve-month period ending [___], 1999 that satisfies the
provisions of the last paragraph of Section 11(a) of the Securities
Act.
(i) Periodic Reporting Obligations. During the Prospectus
Delivery Period the Company shall file, on a timely basis, with the
Commission and The Nasdaq Stock Market all reports and documents
required to be filed under the Exchange Act.
(j) Agreement Not to Offer or Sell Additional Securities. During
the period of 90 days following the date of the Prospectus, the Company
will not, without the prior written consent of NationsBanc Montgomery
Securities LLC (which consent may be withheld at the sole discretion of
NationsBanc Montgomery Securities LLC), directly or indirectly, sell,
offer, contract or grant any option to sell, pledge, transfer or
establish an open "put equivalent position" within the meaning of Rule
16a-1(h) under the Exchange Act, or otherwise dispose of or transfer,
or announce the offering of, or file any registration statement under
the Securities Act in respect of, any shares of Common Stock, options
or warrants to acquire shares of the Common Stock or securities
exchangeable or exercisable for or convertible into shares of Common
Stock (other than as contemplated by this Agreement with respect to the
Common Shares) except for (a) issuances of Common Stock pursuant to
this Agreement, (b) grants of options to the Company's employees,
directors and consultants under the Company's stock option plans as
disclosed or incorporated by reference in the Prospectus, (c) issuances
of Common Stock upon the exercise or conversion of reserved, authorized
or outstanding stock options, warrants or convertible notes disclosed
or incorporated by reference in the Prospectus, (d) issuances of the
Company's Common Stock or other equity securities or any other
securities convertible into or exchangeable for its Common Stock or
other equity securities as full or partial consideration for any bona
fide loan to the Company or for any bona fide merger or acquisition
transaction or (e) registration statements on Forms S-4 or S-8, or
their successor forms, or pursuant to the issuance of securities
pursuant to clause (b) or (d) above.
(k) Future Reports to the Underwriters. During the period of
five years hereafter the Company will furnish to the NationsBanc
Montgomery Securities LLC at 600 Montgomery Street, San Francisco, CA
94111 Attention: James A. Philip (i) as soon as practicable after the
end of each fiscal year, copies of the Annual Report of the Company
containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, shareholders' equity and cash
flows for the year then ended and the opinion thereon of the Company's
independent public or certified public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy statement,
Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current
Report on Form 8-K or other report filed by the Company with the
Commission, the NASD or any securities exchange; and (iii) as soon as
available, copies of any report or communication of the Company mailed
generally to holders of its capital stock.
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(l) Exchange Act Compliance. During the Prospectus Delivery
Period, the Company will file all documents required to be filed with
the Commission pursuant to Section 13, 14 or 15 of the Exchange Act in
the manner and within the time periods required by the Exchange Act.
B. Covenants of the Selling Shareholders Each Selling Shareholder
further covenants and agrees with each Underwriter:
(a) Agreement Not to Offer or Sell Additional Securities. Such
Selling Shareholder will not, without the prior written consent of
NationsBanc Montgomery Securities LLC (which consent may be withheld in
its sole discretion), directly or indirectly, sell, offer, contract or
grant any option to sell (including without limitation any short sale),
pledge, transfer, establish an open "put equivalent position" within
the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise
dispose of any shares of Common Stock, options or warrants to acquire
shares of Common Stock, or securities exchangeable or exercisable for
or convertible into shares of Common Stock currently or hereafter owned
either of record or beneficially (as defined in Rule 13d-3 under
Securities Exchange Act of 1934, as amended) by the undersigned, or
publicly announce the undersigned's intention to do any of the
foregoing, for a period commencing on the date hereof and continuing
through the close of trading on the date 90 days after the date of the
Prospectus; provided, however, that the provisions of this paragraph
shall not preclude the Selling Shareholders from: (a) exercising any
warrant or stock option provided, that they are prohibited from
selling, offering to sell or otherwise disposing of the securities upon
exercise thereof except as provided in this paragraph, (b) transferring
shares of Common Stock, warrants, options or other securities of the
Company by gift, by will or laws of descent and distribution to any
person or entity provided such person or entity agrees in writing to be
bound by the provisions of this paragraph or (c) pledging shares of
Common Stock to secure bona fide loans provided that the pledgee agrees
in writing to be bound by the provisions of this paragraph.
(b) Delivery of Forms W-8 and W-9. To deliver to the
Underwriters prior to the First Closing Date a properly completed and
executed United States Treasury Department Form W-8 (if the Selling
Shareholder is a non-United States person) or Form W-9 (if the Selling
Shareholder is a United States Person).
NationsBanc Montgomery Securities LLC, on behalf of the several
Underwriters, may, in its sole discretion, waive in writing the performance by
the Company or any Selling Shareholder of any one or more of the foregoing
covenants or extend the time for their performance.
Section 4. Payment of Expenses. The Company agrees to pay all costs,
fees and expenses incurred in connection with the performance of the obligations
of the Company and the Selling Shareholders hereunder and in connection with the
transactions contemplated hereby, including without limitation (i) all expenses
incident to the issuance and delivery of the Common Shares (including
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all printing and engraving costs), (ii) all fees and expenses of the registrar
and transfer agent of the Common Stock, (iii) all necessary issue, transfer and
other stamp taxes in connection with the issuance and sale of the Common Shares
to the Underwriters, (iv) all fees and expenses of the Company's counsel,
independent public or certified pubic accountants and other advisors, (v) all
costs and expenses incurred in connection with the preparation, printing,
filing, shipping and distribution of the Registration Statement (including
financial statements, exhibits, schedules, consents and certificates of
experts), each preliminary prospectus and the Prospectus, and all amendments and
supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees
and expenses incurred by the Company or the Underwriters in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Common Shares for offer and sale under
the Blue Sky laws, and, if requested by the Underwriters, preparing and printing
a "Blue Sky Survey" or memorandum, and any supplements thereto, advising the
Underwriters of such qualifications, registrations and exemptions, (vii) the
filing fees incident to, and the reasonable fees and expenses of counsel for the
Underwriters in connection with (which fees and expenses of counsel shall not
exceed $10,000), the NASD's review and approval of the Underwriters'
participation in the offering and distribution of the Common Shares, (viii) the
fees and expenses associated with including the Common Shares on the Nasdaq
National Market, and (ix) all other fees, costs and expenses referred to in Item
14 of Part II of the Registration Statement. Except as provided in this Section
4, Section 6, Section 8 and Section 9 hereof, the Underwriters shall pay their
own expenses, including the fees and disbursements of their counsel. The Company
and the Selling Shareholders shall not in any event be liable to any of the
Underwriters for the loss of anticipated profit from the transactions covered by
this Agreement.
The Selling Shareholders further agree with each Underwriter to pay
(directly or by reimbursement) all fees and expenses incident to the performance
of their obligations under this Agreement which are not otherwise specifically
provided for herein, including but not limited to (i) fees and expenses of
counsel and other advisors for such Selling Shareholders, (ii) fees and expenses
of the Custodian and (iii) expenses and taxes incident to the sale and delivery
of the Common Shares to be sold by such Selling Shareholders to the Underwriters
hereunder (which taxes, if any, may be deducted by the Custodian under the
provisions of Section 2 of this Agreement).
This Section 4 shall not affect or modify any separate, valid agreement
relating to the allocation of payment of expenses between the Company, on the
one hand, and the Selling Shareholders, on the other hand.
Section 5. Conditions of the Obligation of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company and
the Selling Shareholders set forth in Sections 1(A) and 1(B) hereof as of the
date hereof and as of the First Closing Date as though then made and, with
respect to the Optional Common Shares, as of the Second Closing Date as though
then made, to the timely performance by the Company and the Selling Shareholders
of their respective covenants and other obligations hereunder, and to each of
the following additional conditions:
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(a) Accountants' Comfort Letter. On the date hereof, the
Underwriters shall have received from Coopers & Lybrand L.L.P.,
independent public or certified public accountants for the Company, a
letter dated the date hereof addressed to the Underwriters, in form and
substance satisfactory to the Underwriters, containing statements and
information of the type ordinarily included in accountant's "comfort
letters" to underwriters, delivered according to Statement of Auditing
Standards No. 72 (or any successor bulletin), with respect to the
audited and unaudited financial statements and certain financial
information contained in the Registration Statement and the Prospectus
or incorporated by reference therein (and the Underwriters shall have
received an additional four conformed copies of such accountants'
letter for each of the several Underwriters). On the date hereof, the
Underwriters shall have received from Arthur Andersen LLP, independent
public or certified public accountants for FCA and MedSource, letters
dated the date hereof addressed to the Underwriters, in form and
substance satisfactory to the Underwriters, containing statements and
information of the type ordinarily included in accountant's "comfort
letters" to underwriters, delivered according to Statement of Auditing
Standards No. 72 (or any successor bulletin), with respect to the
audited and unaudited financial statements and certain financial
information of FCA and MedSource contained in the Registration
Statement and the Prospectus (and the Underwriters shall have received
an additional four conformed copies of such accountants' letters for
each of the several Underwriters).
(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. For the period from and after effectiveness of
this Agreement and prior to the First Closing Date and, with respect to
the Optional Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A
under the Securities Act) in the manner and within the time
period required by Rule 424(b) under the Securities Act; or the
Company shall have filed a post-effective amendment to the
Registration Statement containing the information required by
such Rule 430A, and such post-effective amendment shall have
become effective; or, if the Company elected to rely upon Rule
434 under the Securities Act and obtained the Underwriters'
consent thereto, the Company shall have filed a Term Sheet with
the Commission in the manner and within the time period required
by such Rule 424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement,
or any post-effective amendment to the Registration Statement,
shall be in effect and no proceedings for such purpose shall
have been instituted or threatened by the Commission; and
(iii) the NASD shall have raised no objection to the
fairness and reasonableness of the underwriting terms and
arrangements.
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(c) No Material Adverse Change. For the period from and after
the date of this Agreement and prior to the First Closing Date and,
with respect to the Optional Common Shares, the Second Closing Date
there shall not have occurred any Material Adverse Change.
(d) Opinion of Counsel for the Company. On each of the First
Closing Date and the Second Closing Date the Underwriters shall have
received the favorable opinion of Blank Rome Comisky & McCauley LLP,
counsel for the Company, dated as of such Closing Date, the form of
which is attached as Exhibit A (and the Underwriters shall have
received an additional four conformed copies of such counsel's legal
opinion for each of the several Underwriters).
(e) Opinion of Counsel for the Underwriters. On each of the
First Closing Date and the Second Closing Date the Underwriters shall
have received the favorable opinion of Piper & Marbury L.L.P., counsel
for the Underwriters, dated as of such Closing Date, with respect to
the matters set forth in paragraphs (i), (vi), (viii), (ix), (x), (xi),
(xii), and the next-to-last paragraph of Exhibit A (and the
Underwriters shall have received an additional four conformed copies of
such counsel's legal opinion for each of the several Underwriters).
(f) Officers' Certificate. On each of the First Closing Date and
the Second Closing Date the Underwriters shall have received a written
certificate executed by the Chairman of the Board, Chief Executive
Officer and President of the Company and the Chief Financial Officer of
the Company, dated as of such Closing Date, to the effect set forth in
subsections (b)(ii) of this Section 5, and further to the effect that:
(i) for the period from and after the date of this
Agreement and prior to such Closing Date, there has not occurred
any Material Adverse Change;
(ii) the representations, warranties and covenants of the
Company set forth in Section 1(A) of this Agreement are true and
correct with the same force and effect as though expressly made
on and as of such Closing Date; and
(iii) the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or
satisfied at or prior to such Closing Date.
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(g) Bring-down Comfort Letter. On each of the First Closing Date
and the Second Closing Date the Underwriters shall have received from
Coopers & Lybrand L.L.P., independent public or certified public
accountants for the Company, a letter dated such date, in form and
substance satisfactory to the Underwriters, to the effect that they
reaffirm the statements made in the letter furnished by them pursuant
to subsection (a) of this Section 5, except that the specified date
referred to therein for the carrying out of procedures shall be no more
than three business days prior to the First Closing Date or Second
Closing Date, as the case may be (and the Underwriters shall have
received an additional four conformed copies of such accountants'
letter for each of the several Underwriters). On each of the First
Closing Date and the Second Closing Date the Underwriters shall have
received from Arthur Andersen LLP, independent public or certified
public accountants for FCA and MedSource, letters dated such date, in
form and substance satisfactory to the Underwriters, to the effect that
they reaffirm the statements made in the letters furnished by them
pursuant to subsection (a) of this Section 5, except that the specified
date referred to therein for the carrying out of procedures shall be no
more than three business days prior to the First Closing Date or Second
Closing Date, as the case may be (and the Underwriters shall have
received an additional four conformed copies of such accountants'
letter for each of the several Underwriters).
(h) Opinion of Counsel for the Selling Shareholders. On each of
the First Closing Date and the Second Closing Date the Underwriters
shall have received the favorable opinion of Blank Rome Comisky &
McCauley LLP, counsel for the Selling Shareholders who are directors,
officers or employees of the Company and any family member or related
trust of such directors, officers, or employees, and an opinion from
counsel to the other Selling Shareholders, each dated as of such
Closing Date, the form of which is attached as Exhibit B (and the
Underwriters shall have received an additional four conformed copies
of such counsels' legal opinion for each of the several Underwriters).
(i) Selling Shareholders' Certificate. On each of the First
Closing Date and the Second Closing Date the Underwriters shall
received a written certificate executed by the Attorney-in-Fact of each
Selling Shareholder, dated as of such Closing Date, to the effect that:
(ii) the representations, warranties and covenants of such
Selling Shareholder set forth in Section 1(B) of this Agreement
are true and correct with the same force and effect as though
expressly made by such Selling Shareholder on and as of such
Closing Date; and
(ii) such Selling Shareholder has complied with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to such Closing Date.
(j) Selling Shareholders' Documents. On the date hereof, the
Company and the Selling Shareholders shall have furnished for review by
the Underwriters copies of the Powers of Attorney and Custody
Agreements executed by each of the Selling Shareholders and such
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further information, certificates and documents as the Underwriters may
reasonably request.
(k) Lock-Up Agreement for Certain Shareholders of the Company
Other than Selling Shareholders. On the date hereof, the Company shall
have furnished to the Underwriters an agreement in the form of Exhibit
C hereto from the directors and executive officers of the Company, and
such agreement shall be in full force and effect on each of the First
Closing Date and the Second Closing Date.
(l) Additional Documents. On or before each of the First Closing
Date and the Second Closing Date, the Underwriters and counsel for the
Underwriters shall have received such information, documents and
opinions as they may reasonably require for the purposes of enabling
them to pass upon the issuance and sale of the Common Shares as
contemplated herein, or in order to evidence the accuracy of any of the
representations and warranties, or the satisfaction of any of the
conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Underwriters by notice to the Company and the Selling Shareholders at any time
on or prior to the First Closing Date and, with respect to the Optional Common
Shares, at any time prior to the Second Closing Date, which termination shall be
without liability on the part of any party to any other party, except that
Section 4, Section 6, Section 8 and Section 9 shall at all times be effective
and shall survive such termination.
Section 6. Reimbursement of Underwriters' Expenses. If this Agreement
is terminated by the Underwriters pursuant to Section 5 or by the Company
pursuant to Section 7, [Section 11] or Section 17, or if the sale to the
Underwriters of the Common Shares on the First Closing Date is not consummated
because of any refusal, inability or failure on the part of the Company or the
Selling Shareholders to perform any agreement herein or to comply with any
provision hereof, unless such refusal, inability or failure is due to the breach
of any material term or condition of this Agreement by the Underwriters, the
Company agrees to reimburse the Underwriters (or such Underwriters as have
terminated this Agreement with respect to themselves), upon demand for all
out-of-pocket expenses that shall have been reasonably incurred by the
Underwriters in connection with the proposed purchase and the offering and sale
of the Common Shares, including but not limited to fees and disbursements of
counsel, printing expenses, travel expenses, postage, facsimile and telephone
charges.
Section 7. Effectiveness of this Agreement
This Agreement shall not become effective until the later of (i) the
execution of this Agreement by the parties hereto and (ii) notification by the
Commission to the Company and the Underwriters of the effectiveness of the
Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated by the
Company by notice to the Underwriters and the Selling Shareholders or by the
Underwriters by notice to the Company and Selling Shareholders, and any such
termination shall be without liability on the part of (a) the Company or the
Selling Shareholders to any Underwriter, except that, in the event of
termination by the Company, the Company
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shall be obligated to reimburse the expenses of the Underwriters pursuant to
Sections 4 and 6 hereof, (b) of any Underwriter to the Company or the Selling
Shareholders, or (c) of any party hereto to any other party except that the
provisions of Section 8 and Section 9 shall at all times be effective and shall
survive such termination.
Section 8. Indemnification
(a) Indemnification of the Underwriters. The Company and each of
the Selling Shareholders, severally and not jointly, agree to indemnify
and hold harmless each Underwriter, its officers and employees, and
each person, if any, who controls any Underwriter within the meaning of
the Securities Act and the Exchange Act against any loss, claim,
damage, liability or expense, as incurred, to which such Underwriter or
such controlling person may become subject, under the Securities Act,
the Exchange Act or other federal or state statutory law or regulation,
or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of
the Company), insofar as such loss, claim, damage, liability or expense
(or actions in respect thereof as contemplated below) arises out of or
is based (i) upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, or any amendment
thereto, including any information deemed to be a part thereof pursuant
to Rule 430A or Rule 434 under the Securities Act, or the omission or
alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that
in the case of any Selling Shareholder other than a Significant Selling
Shareholder the indemnification provided hereunder shall only apply to
any omission or alleged omission of a material fact that relates to
such Selling Shareholder; or (ii) upon any untrue statement or alleged
untrue statement of a material fact contained in any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto),
or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that
in the case of any Selling Shareholder other than a Significant Selling
Shareholder the indemnification provided hereunder shall only apply to
any omission or alleged omission of a material fact that relates to
such Selling Shareholder; or (iii) in whole or in part upon any
inaccuracy in the representations and warranties of the Company or the
Selling Shareholders contained herein; or (iv) in whole or in part upon
any failure of the Company or the Selling Shareholders to perform their
respective obligations hereunder or under law; or (v) any act or
failure to act or any alleged act or failure to act by any Underwriter
in connection with, or relating in any manner to, the Common Stock or
the offering contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or action arising out
of or based upon any matter covered by clause (i) or (ii) above,
provided that the Company shall not be liable under this clause (v) to
the extent that a court of competent jurisdiction shall have determined
by a final judgment that such loss, claim, damage, liability or action
resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its gross negligence or
willful misconduct; and to reimburse each Underwriter and each such
controlling person for any and all expenses (including the fees and
disbursements of counsel chosen by NationsBanc Montgomery Securities
LLC) as such expenses are reasonably incurred by such Underwriter or
such controlling person in connection with investigating, defending,
settling, compromising or paying (if such settlement, compromise or
payment is effected with the written consent of the Company) any such
loss, claim, damage, liability, expense or action; provided, however,
that the foregoing
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<PAGE>
indemnity agreement shall not apply to any loss, claim, damage,
liability or expense to the extent, but only to the extent, arising out
of or based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in reliance upon and in conformity
with written information furnished to the Company and the Selling
Shareholders by the Underwriters expressly for use in the Registration
Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto); provided, further, that with respect
to any preliminary prospectus, the foregoing indemnity agreement shall
not inure to the benefit of any Underwriter from whom the person
asserting any loss, claim, damage, liability or expense purchased
Common Shares, or any person controlling such Underwriter, if copies of
the Prospectus were timely delivered to the Underwriter pursuant to
Section 2 and a copy of the Prospectus (as then amended or supplemented
if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to
such person, if required by law so to have been delivered, at or prior
to the written confirmation of the sale of the Common Shares to such
person, and if the Prospectus (as so amended or supplemented) would
have cured the defect giving rise to such loss, claim, damage,
liability or expense; and provided, further, that with respect to
clause (iii) and clause (iv) above, a Selling Shareholder (other than
a Significant Selling Shareholder) shall not be liable for a breach of
a representation, warranty or covenant of the Company or another
Selling Shareholder. The indemnity agreement set forth in this Section
8(a) shall be in addition to any liabilities that the Company and the
Selling Shareholders may otherwise have.
The Company and the Selling Shareholders may agree, as among
themselves and without limiting the rights of the Underwriters under
this Agreement, as to the respective amounts of such liability for
which they each shall be responsible. In no event, however, shall the
liability of any Selling Shareholder for indemnification or
contribution under this Section 8 or Section 9, respectively, or
otherwise at law or in equity (other than claims based in whole or in
part on fraud) exceed the proceeds received by such Selling Shareholder
from the Underwriters in the offering. Notwithstanding anything to the
contrary in this Section 8, each Underwriter and each person who
controls such Underwriter agrees not to assert its rights to indemnity
under this Section 8(a) against the Selling Shareholders unless and
until (i) such Underwriter or controlling person has requested
indemnification and reimbursement from the Company for such losses,
claims, damages or liabilities (including any legal or other expenses
reasonably incurred) and (ii) the Company does not within thirty (30)
days of such request (A) agree to so indemnify such Underwriter or
controlling person and (B) reimburse in full such Underwriter or
controlling person for any such losses, damages or liabilities
(including legal or other expenses) incurred. In the event that
litigation between the parties with respect to the Section 8 results in
a joint or several judgment against the Company and the Selling
Shareholders, each Underwriter and each person who controls such
Underwriter, agrees that it will not attempt to enforce such judgment
against the Selling Shareholders unless and until any part of such
judgment shall remain unsatisfied by the Company for more than thirty
(30) days.
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<PAGE>
(b) Indemnification of the Company, its Directors and Officers.
Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, each of its directors, each of its officers
who signed the Registration Statement, the Selling Shareholders and
each person, if any, who controls the Company or any Selling
Shareholder within the meaning of the Securities Act or the Exchange
Act, against any loss, claim, damage, liability or expense, as
incurred, to which the Company, or any such director, officer, Selling
Shareholder or controlling person may become subject, under the
Securities Act, the Exchange Act, or other federal or state statutory
law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the
written consent of such Underwriter), insofar as such loss, claim,
damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based: (i) upon any untrue or
alleged untrue statement of a material fact contained in the
Registration Statement, any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto), or arises out of or is based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in the Registration Statement,
any preliminary prospectus, the Prospectus (or any amendment or
supplement thereto), in reliance upon and in conformity with written
information furnished to the Company and the Selling Shareholders by
the Underwriters expressly for use therein or (ii) the failure of any
Underwriter at or prior to the written confirmation of the sale of
shares to send or deliver a copy of an amended Preliminary Prospectus
or the Prospectus (or the Prospectus as amended or supplemented) to the
person asserting any such losses, claims, damages, liabilities or
expenses who purchased the Shares which is the subject thereof and the
untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the amended Preliminary
Prospectus or Prospectus (or the Prospectus as amended or
supplemented); and to reimburse the Company, or any such director,
officer, Selling Shareholder or controlling person for any legal and
other expense reasonably incurred by the Company, or any such director,
officer, Selling Shareholder or controlling person in connection with
investigating, defending, settling, compromising or paying any such
loss, claim, damage, liability, expense or action. The Company and each
of the Selling Shareholders hereby acknowledge that the only
information that the Underwriters have furnished to the Company and the
Selling Shareholders expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto) are the statements set forth (A) as the two
paragraphs on the inside front cover page of the Prospectus concerning
stabilization and passive market making by the Underwriters and (B) in
the table in the first paragraph and as the second paragraph under the
caption "Underwriting" in the Prospectus; and the Underwriters
represent and warrant that such statements are correct. The indemnity
agreement set forth in this Section 8(b) shall be in addition to any
liabilities that each Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly
after receipt by an indemnified party under this Section 8 of notice of
the commencement of any action, such indemnified party will, if a claim
in respect thereof is to be made against an indemnifying party under
this Section 8, notify the indemnifying party in writing of the
26
<PAGE>
commencement thereof, but the omission so to notify the
indemnifying party will not relieve it from any liability which it may
have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 8 or to the extent it
is not prejudiced as a proximate result of such failure. In case any
such action is brought against any indemnified party and such
indemnified party seeks or intends to seek indemnity from an
indemnifying party, the indemnifying party will be entitled to
participate in, and, to the extent that it shall elect, jointly with
all other indemnifying parties similarly notified, by written notice
delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense
thereof with counsel reasonably satisfactory to such indemnified party;
provided, however, if the defendants in any such action include both
the indemnified party and the indemnifying party and the representation
of both parties by the same counsel would be inappropriate due to
conflicts of interest between the positions of the indemnifying party
and the indemnified party in conducting the defense of any such action
or that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties
shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such
indemnifying party's election so to assume the defense of such action
and approval by the indemnified party of counsel, the indemnifying
party will not be liable to such indemnified party under this Section 8
for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance
with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the
expenses of more than one separate counsel (together with local counsel
solely as it relates to matters of local law), approved by the
indemnifying party (NationsBanc Montgomery Securities LLC in the case
of Section 8(b) and Section 9), representing the indemnified parties
who are parties to such action) or (ii) the indemnifying party shall
not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice
of commencement of the action, in each of which cases the fees and
expenses of counsel shall be at the expense of the indemnifying party.
(d) Settlements. The indemnifying party under this Section 8
shall not be liable for any settlement of any proceeding effected
without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party
agrees to indemnify the indemnified party against any loss, claim,
damage, liability or expense by reason of such settlement or judgment,
subject to the term and conditions of Section 8. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have
requested an indemnifying party to reimburse the indemnified party for
fees and expenses of counsel as contemplated by Section 8(c) hereof,
the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if
(i) such settlement is entered into more than 30 days after receipt by
such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in
accordance with such request prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement, compromise or
27
<PAGE>
consent to the entry of judgment in any pending or threatened action,
suit or proceeding in respect of which any indemnified party is or
could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise
or consent includes an unconditional release of such indemnified party
from all liability on claims that are the subject matter of such
action, suit or proceeding.
Section 9. Contribution.
If the indemnification provided for in Section 8 is for any reason held
to be unavailable to or otherwise insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then each indemnifying party shall contribute to the
aggregate amount paid or payable by such indemnified party, as incurred, as a
result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Shareholders, on the one hand,
and the Underwriters, on the other hand, from the offering of the Common Shares
pursuant to this Agreement or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company and the Selling Shareholders, on the one
hand, and the Underwriters, on the other hand, in connection with the statements
or omissions or inaccuracies in the representations and warranties herein which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative benefits received by
the Company and the Selling Shareholders, on the one hand, and the Underwriters,
on the other hand, in connection with the offering of the Common Shares pursuant
to this Agreement shall be deemed to be in the same respective proportions as
the total net proceeds from the offering of the Common Shares pursuant to this
Agreement (before deducting expenses) received by the Company and the Selling
Shareholders, and the total underwriting discount received by the Underwriters,
in each case as set forth on the front cover page of the Prospectus (or, if Rule
434 under the Securities Act is used, the corresponding location on the Term
Sheet) bear to the aggregate initial public offering price of the Common Shares
as set forth on such cover. The relative fault of the Company and the Selling
Shareholders, on the one hand, and the Underwriters, on the other hand, shall be
determined by reference to, among other things, whether any such untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact or any such inaccurate or alleged inaccurate
representation or warranty relates to information supplied by the Company or the
Selling Shareholders, on the one hand, or the Underwriters, on the other hand,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 8(c), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
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<PAGE>
Section 8(c) with respect to notice of commencement of any action shall apply if
a claim for contribution is to be made under this Section 9; provided, however,
that no additional notice shall be required with respect to any action for which
notice has been given under Section 8(c) for purposes of indemnification.
The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 9
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule A. For purposes of this Section 9, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company.
Section 10. Default of One or More of the Several Underwriter. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Common
Shares that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on Schedule A
bears to the aggregate number of Firm Common Shares set forth opposite the names
of all such non-defaulting Underwriters, or in such other proportions as may be
specified by the Underwriters with the consent of the non-defaulting
Underwriters, to purchase the Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the Underwriters shall fail or refuse to purchase Common Shares and the
aggregate number of Common Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Common Shares to be purchased on such
date, and arrangements satisfactory to the Underwriters and the Company for the
purchase of such Common Shares are not made within 48 hours after such default,
this Agreement shall terminate without liability of any party to any other party
except that the provisions of Section 4, Section 6, Section 8 and Section 9
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<PAGE>
shall at all times be effective and shall survive such termination. In any such
case either the Underwriters or the Company shall have the right to postpone the
First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
Section 11. Termination of this Agreement. Prior to the First Closing
Date this Agreement maybe terminated by the Underwriters by notice given to the
Company and the Selling Shareholders if at any time (i) trading or quotation in
any of the Company's securities shall have been suspended or limited by the
Commission or by The Nasdaq Stock Market, or trading in securities generally on
either The Nasdaq Stock Market or the New York Stock Exchange shall have been
suspended or limited, or minimum or maximum prices shall have been generally
established on any of such stock exchanges by the Commission or the NASD; (ii) a
general banking moratorium shall have been declared by any of federal, New York,
Pennsylvania or California authorities; (iii) there shall have occurred any
outbreak or escalation of national or international hostilities or any crisis or
calamity, or any change in the United States or international financial markets,
or any substantial change or development involving a prospective substantial
change in United States' or international political, financial or economic
conditions, as in the judgment of the Underwriters is material and adverse and
makes it impracticable to market the Common Shares in the manner and on the
terms described in the Prospectus or to enforce contracts for the sale of
securities; (iv) if there shall have occurred any Material Adverse Change; or
(v) the Company shall have sustained a loss by strike, fire, flood, earthquake,
accident or other calamity of such character as in the judgment of the
Underwriters may interfere materially with the conduct of the business and
operations of the Company regardless of whether or not such loss shall have been
insured. Any termination pursuant to this Section 11 shall be without liability
on the part of (a) the Company or the Selling Shareholders to any Underwriter,
except that the Company and the Selling Shareholders shall be obligated to
reimburse the expenses of the Underwriters pursuant to Sections 4 and 6 hereof,
(b) any Underwriter to the Company or the Selling Shareholders, or (c) of any
party hereto to any other party except that the provisions of Section 8 and
Section 9 shall at all times be effective and shall survive such termination.
Section 12. Representation and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Shareholders and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Selling Shareholders, as
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<PAGE>
the case may be, and will survive delivery of and payment for the Common Shares
sold hereunder and any termination of this Agreement.
Section 13. Notices. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Underwriters:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-249-5558
Attention: Richard A. Smith
with a copy to:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
If to the Company:
NCO Group, Inc.
515 Pennsylvania Avenue
Fort Washington, Pennsylvania 19034
Facsimile: (215) 793-2908
Attention: Michael J. Barrist, Chairman, President
and Chief Executive Officer
with a copy to:
Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, Pennsylvania 19103
Facsimile: (215) 569-5555
Attention: Francis E. Dehel, Esquire
If to the Selling Shareholders:
NCO Group, Inc.
515 Pennsylvania Avenue
Fort Washington, Pennsylvania 19034
Facsimile: (215) 793-2908
Attention: Michael J. Barrist, Chairman, President
and Chief Executive Officer
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<PAGE>
with a copy to:
Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, Pennsylvania 19103
Facsimile: (215) 569-5555
Attention: Francis E. Dehel, Esquire
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
Section 14. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors, and personal representatives, and no
other person will have any right or obligation hereunder. The term "successors"
shall not include any purchaser of the Common Shares as such from any of the
Underwriters merely by reason of such purchase.
Section 15. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
Section 16. Governing Law Provisions. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
Section 17. Failure of One or More of the Selling Shareholders to Sell
and Deliver Common SHares. If one or more of the Selling Shareholders shall fail
to sell and deliver to the Underwriters the Common Shares to be sold and
delivered by such Selling Shareholders at the First Closing Date pursuant to
this Agreement, then the Underwriters may at their option, by written notice
from the Underwriters to the Company and the Selling Shareholders, either (i)
terminate this Agreement without any liability on the part of any Underwriter
or, except as provided in Sections 4, 6, 8 and 9 hereof, the Company or the
Selling Shareholders, or (ii) purchase the shares which the Company and other
Selling Shareholders have agreed to sell and deliver in accordance with the
terms hereof. If one or more of the Selling Shareholders shall fail to sell and
deliver to the Underwriters the Common Shares to be sold and delivered by such
Selling Shareholders pursuant to this Agreement at the First Closing Date or the
Second Closing Date, then the Underwriters shall have the right, by written
32
<PAGE>
notice from the Underwriters to the Company and the Selling Shareholders, to
postpone the First Closing Date or the Second Closing Date, as the case may be,
but in no event for longer than seven days in order that the required changes,
if any, to the Registration Statement and the Prospectus or any other documents
or arrangements may be effected.
Section 18. General Provisions. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
33
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company and the Custodian the enclosed
copies hereof, whereupon this instrument, along with all counterparts hereof,
shall become a binding agreement in accordance with its terms.
Very truly yours,
NCO GROUP, INC.
By:________________________________________
Michael J. Barrist, Chairman, President
and Chief Executive Officer
SELLING SHAREHOLDERS
By:_______________________________________
Michael J. Barrist
Acting on behalf of the Selling
Shareholders
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Underwriters in San Francisco, California as of the date first above
written.
NATIONSBANC MONTGOMERY SECURITIES LLC
BT ALEX. BROWN INCORPORATED
JANNEY MONTGOMERY SCOTT INC.
THE ROBINSON-HUMPHREY COMPANY, LLC
By NATIONSBANC MONTGOMERY SECURITIES LLC
By:_____________________________
Richard A. Smith
34
<PAGE>
SCHEDULE A
Number of
Firm Common Shares
to be Purchased
Underwriters
NationsBanc Montgomery Securities LLC ................. [ ]
BT Alex. Brown Incorporated ........................... [ ]
Janney Montgomery Scott Inc. .......................... [ ]
The Robinson-Humphrey Company, LLC .................... [ ]
Total........................................... 6,565,000
1
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of Maximum Number of
Selling Shareholder Firm Common Shares Optional Common Shares
to be Sold to be Sold
<S> <C> <C>
Selling Shareholder #1*
[address]
Attention: [___] [___] [___]
Selling Shareholder #2
[address]
Attention: [___] [___] [___]
Total: 765,000 97,517
</TABLE>
* Significant Selling Shareholder
2
<PAGE>
EXHIBIT A
Opinion of counsel for the Company to be delivered pursuant to Section
5(d) of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any supplements
thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
Commonwealth of Pennsylvania.
(ii) The Company has the corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its
obligations under the Underwriting Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each other jurisdiction in
which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except for
such jurisdictions where the failure to so qualify or to be in good
standing would not, individually or in the aggregate, result in a
Material Adverse Change.
(iv) Each significant subsidiary (as defined in Rule 405 under
the Securities Act) has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction of
its incorporation, has the corporate power and authority to own, lease
and operate its properties and to conduct its business as described in
the Prospectus and, to the best knowledge of such counsel, is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except for such jurisdictions where the failure to
so qualify or to be in good standing would not, individually or in the
aggregate, result in a Material Adverse Change.
(v) All of the issued and outstanding capital stock of each such
significant subsidiary has been duly authorized and validly issued, is
fully paid and non-assessable and is owned by the Company, directly or
through subsidiaries, free and clear of any security interest,
mortgage, pledge, lien, encumbrance or, to the best knowledge of such
counsel, any pending or threatened claim, except for the pledge of such
shares to Mellon Bank Corporation to secure obligations under the
Credit Agreement.
(vi) The authorized, issued and outstanding capital stock of the
Company (including the Common Stock) conform to the descriptions
thereof set forth or incorporated by reference in the Prospectus. All
1
<PAGE>
of the outstanding shares of Common Stock (including the shares of
Common Stock owned by the Selling Shareholders) have been duly
authorized and validly issued, are fully paid and nonassessable and, to
the best of such counsel's knowledge, have been issued in compliance
with the registration and qualification requirements of federal and
state securities laws. The form of certificate used to evidence the
Common Stock is in due and proper form and complies with all applicable
requirements of the articles of incorporation and by-laws of the
Company and the Pennsylvania Business Corporation Law. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents
the information required to be shown with respect to such plans,
arrangements, options and rights.
(vii) No shareholder of the Company or any other person has any
preemptive right, right of first refusal or other similar right to
subscribe for or purchase securities of the Company arising (i) by
operation of the articles of incorporation or by-laws of the Company or
the Pennsylvania Business Corporation Law or (ii) to the best knowledge
of such counsel, otherwise.
(viii)The Underwriting Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the
Company, enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except
as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles.
(ix) Each document filed pursuant to the Exchange Act (other
than the financial statements and supporting schedules included
therein, as to which no opinion need be rendered) and incorporated or
deemed to be incorporated by reference in the Prospectus complied when
so filed as to form in all material respects with the Exchange Act; and
such counsel has no reason to believe that any of such documents, when
they were so filed, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made when such documents were filed, not misleading.
(x) The Common Shares to be purchased by the Underwriters from
the Company have been duly authorized for issuance and sale pursuant to
the Underwriting Agreement and, when issued and delivered by the
Company pursuant to the Underwriting Agreement against payment of the
consideration set forth therein, will be validly issued, fully paid and
nonassessable.
2
<PAGE>
(xi) The Registration Statement and the Rule 462(b) Registration
Statement, if any, has been declared effective by the Commission under
the Securities Act. To the best knowledge of such counsel, no stop
order suspending the effectiveness of either of the Registration
Statement or the Rule 462(b) Registration Statement, if any, has been
issued under the Securities Act and no proceedings for such purpose
have been instituted or are pending or are contemplated or threatened
by the Commission. Any required filing of the Prospectus and any
supplement thereto pursuant to Rule 424(b) under the Securities Act has
been made in the manner and within the time period required by such
Rule 424(b).
(xii) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus including any document
incorporated by reference therein, and each amendment or supplement to
the Registration Statement and the Prospectus including any document
incorporated by reference therein, as of their respective effective or
issue dates (other than the financial statements and supporting
schedules included or incorporated by reference therein or in exhibits
to or excluded from the Registration Statement, as to which no opinion
need be rendered) comply as to form in all material respects with the
applicable requirements of the Securities Act and the Exchange Act.
(xiii) The Common Shares have been approved for listing on the
Nasdaq National Market.
(xiv) The statements (i) in the Prospectus under the captions
"Risk Factors--Government Regulation", "Risk Factors--Shares Eligible
for Future Sale", "Risk Factors--Anti-Takeover Provisions",
"Management's Discussion and Analysis and Results of
Operations--Liquidity and Capital Resources", "Business--Regulation",
and "Business--Legal Proceedings" and (ii) Item 15 of the Registration
Statement, insofar as such statements constitute matters of law,
summaries of legal matters, the Company's charter or by-law provisions,
documents or legal proceedings, or legal conclusions, has been reviewed
by such counsel and fairly present and summarize, in all material
respects, the matters referred to therein.
(xv) To the best knowledge of such counsel, there are no legal
or governmental actions, suits or proceedings pending or threatened
which are required to be disclosed in the Registration Statement, other
than those disclosed therein.
(xvi) To the best knowledge of such counsel, there are no
Existing Instruments required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than
those described or referred to therein or filed or incorporated by
reference as exhibits thereto; and the descriptions thereof and
references thereto are correct in all material respects.
3
<PAGE>
(xvii) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority
or agency, is required for the Company's execution, delivery and
performance of the Underwriting Agreement and consummation of the
transactions contemplated thereby and by the Prospectus, except as
required under the Securities Act, applicable state securities or blue
sky laws and from the NASD.
(xviii) The execution and delivery of the Underwriting Agreement
by the Company and the performance by the Company of its obligations
thereunder (other than performance by the Company of its obligations
under the indemnification section of the Underwriting Agreement, as to
which no opinion need be rendered) (i) have been duly authorized by all
necessary corporate action on the part of the Company; (ii) will not
result in any violation of the provisions of the charter or by-laws of
the Company or any subsidiary; (iii) will not constitute a breach of,
or Default under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
of its subsidiaries pursuant to, (A) the Company's Revolving Credit
Agreement, or (B) to the best knowledge of such counsel, any other
material Existing Instrument; or (iv) to the best knowledge of such
counsel, will not result in any violation of any law, administrative
regulation or administrative or court decree applicable to the Company
or any subsidiary.
(xix) The Company is not, and after receipt of payment for the
Common Shares will not be, an "investment company" within the meaning
of Investment Company Act.
(xx) Except as disclosed in the Prospectus, to the best
knowledge of such counsel, there are no persons with registration or
other similar rights to have any equity or debt securities registered
for sale under the Registration Statement or included in the offering
contemplated by the Underwriting Agreement, other than the Selling
Shareholders, except for such rights as have been duly waived.
(xxi) To the best knowledge of such counsel, neither the Company
nor any subsidiary is in violation of its articles of incorporation or
by-laws or any law, administrative regulation or administrative or
court decree applicable to the Company or any subsidiary or is in
Default in the performance or observance of any obligation, agreement,
covenant or condition contained in any material Existing Instrument,
except in each such case for such violations or Defaults as would not,
individually or in the aggregate, result in a Material Adverse Change.
(xxii) The FCA Tender Offer has been consummated, and, as a
result, the Company, directly or indirectly, owns or controls all of
the issued and outstanding capital stock of FCA free and clear of any
security interest, mortgage, pledge, lien, encumbrance or to the best
4
<PAGE>
of the Company's or any of the Significant Selling Shareholder's
knowledge, any pending or threatened claim. The agreements necessary to
effect the acquisitions of FCA, MedSource, [CSI] and each other company
included in the Company's pro forma balance sheet included in the
Prospectus and Registration Statement have been duly authorized,
executed and delivered by each of the parties thereto and constitute
the valid, legal and binding agreements of each such party, and the
acquisition of all of the capital stock or assets of the respective
acquired company by the Company and the related transactions
contemplated thereby have been consummated pursuant to the terms
described in the Prospectus.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants for
the Company and with representatives of the Underwriters at which the contents
of the Registration Statement and the Prospectus, and any supplements or
amendments thereto, and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus (other than as specified above), and
any supplements or amendments thereto, on the basis of the foregoing, nothing
has come to their attention which would lead them to believe that either the
Registration Statement or any amendments thereto, at the time the Registration
Statement or such amendments became effective, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or at the First Closing Date or the Second Closing
Date, as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no belief as to
the financial statements or schedules or other financial or statistical data
derived therefrom, included or incorporated by reference in the Registration
Statement or the Prospectus or any amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
Pennsylvania Business Corporation Law or the federal law of the United States,
to the extent they deem proper and specified in such opinion, upon the opinion
(which shall be dated the First Closing Date or the Second Closing Date, as the
case may be, shall be satisfactory in form and substance to the Underwriters,
shall expressly state that the Underwriters may rely on such opinion as if it
were addressed to them and shall be furnished to the Underwriters) of other
counsel of good standing whom they believe to be reliable and who are
satisfactory to counsel for the Underwriters; provided, however, that such
counsel shall further state that they believe that they and the Underwriters are
justified in relying upon such opinion of other counsel, and (B) as to matters
of fact, to the extent they deem proper, on certificates of responsible officers
of the Company and public officials.
5
<PAGE>
EXHIBIT B
The opinion of such counsel pursuant to Section 5(h) shall be rendered
to the Underwriters at the request of the Company and shall so state therein.
References to the Prospectus in this Exhibit B include any supplements thereto
at the Closing Date.
(i) The Underwriting Agreement has been duly authorized,
executed and delivered by or on behalf of, and is a valid and binding
agreement of, the Selling Shareholders, enforceable in accordance with
its terms, except as rights to indemnification thereunder may be
limited by applicable law and except as the enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles.
(ii) The execution and delivery by the Selling Shareholders of,
and the performance by the Selling Shareholders of their obligations
under, the Underwriting Agreement and the Custody Agreements and the
Powers of Attorney will not contravene or conflict with, result in a
breach of, or constitute a default under, the charter or by-laws,
partnership agreement, trust agreement or other organizational
documents, as the case may be, of each Selling Shareholder, or, to the
best of such counsel's knowledge, violate or contravene any provision
of applicable law or regulation, or violate, result in a breach of or
constitute a default under the terms of any other agreement or
instrument to which each Selling Shareholder is a party or by which it
is bound, or any judgment, order or decree applicable to each Selling
Shareholder of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over such Selling
Shareholder.
(iii) Each Selling Shareholder has good and valid title to all
of the Common Shares which may be sold by such Selling Shareholder
under the Underwriting Agreement and has the legal right and power, and
all authorizations and approvals required under its charter and
by-laws, partnership agreement, trust agreement or other organizational
documents, as the case may be, to enter into the Underwriting Agreement
and its Custody Agreement and its Power of Attorney, to sell, transfer
and deliver all of the Common Shares which may sold by such Selling
Shareholder under the Underwriting Agreement and to comply with its
other obligations under the Underwriting Agreement, its Custody
Agreement and its Power of Attorney.
(iv) Each of the Custody Agreement and Power of Attorney of each
Selling Shareholder has been duly authorized, executed and delivered by
such Selling Shareholder and is a valid and binding agreement of such
Selling Shareholder, enforceable in accordance with its terms, except
as rights to indemnification thereunder may be limited by applicable
1
<PAGE>
law and except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally or by general equitable
principles.
(v) Assuming that the Underwriters purchase the Common Shares
which are sold by each Selling Shareholder pursuant to the Underwriting
Agreement for value, in good faith and without notice of any adverse
claim, the delivery of such Common Shares pursuant to the Underwriting
Agreement will pass good and valid title to such Common Shares, free
and clear of either any security interest, mortgage, pledge, lieu
encumbrance or other claim.
(vi) To the best of such counsel's knowledge, no consent,
approval, authorization or other order of, or registration or filing
with, any court or governmental authority or agency, is required for
the consummation by each Selling Shareholder of the transactions
contemplated in the Underwriting Agreement, except as required under
the Securities Act, applicable state securities or blue sky laws, and
from the NASD.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
Pennsylvania Business Corporation Law or the federal law of the United States,
to the extent they deem proper and specified in such opinion, upon the opinion
(which shall be dated the First Closing Date or the Second Closing Date, as the
case may be, shall be satisfactory in form and substance to the Underwriters,
shall expressly state that the Underwriters may rely on such opinion as if it
were addressed to them and shall be furnished to the Underwriters) of other
counsel of good standing whom they believe to be reliable and who are
satisfactory to counsel for the Underwriters; provided, however, that such
counsel shall further state that they believe that they and the Underwriters are
justified in relying upon such opinion of other counsel, and (B) as to matters
of fact, to the extent they deem proper, on certificates of the Selling
Shareholders and public officials
2
<PAGE>
EXHIBIT C
May ___, 1998
NATIONSBANC MONTGOMERY SECURITIES LLC
BT ALEX. BROWN INCORPORATED
JANNEY MONTGOMERY SCOTT INC.
THE ROBINSON-HUMPHREY COMPANY, LLC
c/o NATIONSBANC MONTGOMERY SECURITIES LLC
600 Montgomery Street
San Francisco, California 94111
RE: NCO Group, Inc. (the "Company")
---------------
Ladies and Gentlemen:
The undersigned is an owner of record or beneficially of certain shares
of Common Stock of the Company ("Common Stock") or securities convertible into
or exchangeable or exercisable for Common Stock. The Company proposes to carry
out a public offering of Common Stock (the "Offering") for which you will act as
the underwriters. The undersigned recognizes that the Offering will be of
benefit to the undersigned and will benefit the Company by, among other things,
raising additional capital for its operations. The undersigned acknowledges that
you and the other underwriters are relying on the representations and agreements
of the undersigned contained in this letter in carrying out the Offering and in
entering into underwriting arrangements with the Company with respect to the
Offering.
In consideration of the foregoing, the undersigned hereby agrees that
the undersigned will not, without the prior written consent of NationsBanc
Montgomery Securities LLC (which consent may be withheld in its sole
discretion), directly or indirectly, sell, offer, contract or grant any option
to sell (including without limitation any short sale), pledge, transfer,
establish an open "put equivalent position" within the meaning of Rule 16a-1(h)
under the Securities Exchange Act of 1934, or otherwise dispose of any shares of
Common Stock, options or warrants to acquire shares of Common Stock, or
securities exchangeable or exercisable for or convertible into shares of Common
Stock currently or hereafter owned either of record or beneficially (as defined
in Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the
undersigned, or publicly announce the undersigned's intention to do any of the
foregoing, for a period commencing on the date hereof and continuing through the
close of trading on the date 90 days after the date of the Prospectus; provided,
however, that the provisions of this paragraph shall not preclude the
undersigned from: (a) exercising any warrant or stock option provided that it is
prohibited from selling, offering to sell or otherwise disposing of the
1
<PAGE>
securities upon exercise thereof except as provided in this paragraph, (b)
transferring shares of Common Stock, warrants, options or other securities of
the Company by gift, by will or laws of descent and distribution to any person
or entity provided such person or entity agrees in writing to be bound by the
provisions of this paragraph or (c) pledging shares of Common Stock to secure
bona fide loans provided that the pledgee agrees in writing to be bound by the
provisions of this paragraph. The undersigned also agrees and consents to the
entry of stop transfer instructions with the Company's transfer agent and
registrar against the transfer of shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock held by the
undersigned except in compliance with the foregoing restrictions.
With respect to the Offering only, the undersigned waives any
registration rights relating to registration under the Securities Act of any
Common Stock owned either of record or beneficially by the undersigned,
including any rights to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned
and the respective successors, heirs, personal representatives, and assigns of
the undersigned.
________________________________
Printed Name of Holder
By:_____________________________
Signature
________________________________
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity)
2
<PAGE>
Blank Rome Cominsky & McCauley LLP
Counselors at Law
One Logan Square
Philadelphia, Pennsylvania 19103
215-569-5500
Fax 215-569-5555
May 1, 1998
NCO Group, Inc.
515 Pennsylvania Avenue
Fort Washington, PA 19034
Re: NCO Group, Inc.
Registration Statement
on Form S-3
Gentlemen:
We have acted as counsel to NCO Group, Inc. (the "Company") in
connection with the Registration Statement on Form S-3 (the "Registration
Statement") being filed by the Company with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended, relating to: (i)
the offer and sale by the Company of 5,800,000 shares of Common Stock, no par
value (the "Common Stock"); (ii) the offer and sale by the Selling Shareholders
named in the Registration Statement ("Selling Shareholders") of 765,000 shares
of Common Stock; and (iii) the offer and sale by the Company and certain Selling
Shareholders of up to 887,233 shares and 97,515 shares of Common Stock,
respectively, to be purchased at the option of the Underwriters to cover
over-allotments, if any. This opinion is furnished pursuant to the requirements
of Item 601(b)(5) of Regulation S-K.
In rendering this opinion, we have examined only the following
documents: (i) the Company's Amended and Restated Articles of Incorporation and
Bylaws; (ii) the Company's 1995 Amended and Restated Stock Option Plan and the
Company's 1996 Stock Option Plan (collectively, the "Plans") and options to
purchase an aggregate of 61,058 shares of Common Stock (the "Stock Options")
issued pursuant thereto to employees who are Selling Shareholders; (iii)
resolutions adopted by the Board of Directors; (iv) the Company's minute book
and stock records books since the date of incorporation of NCO Group, Inc.; and
(v) the
<PAGE>
NCO Group, Inc.
May 1, 1998
Page 2
Registration Statement. We have not performed any independent investigation
other than the document examination described. We have assumed and relied, as to
questions of fact and mixed questions of law and fact, on the truth,
completeness, authenticity and due authorization of all certificates, documents
and records examined and the genuineness of all signatures. This opinion is
limited to the laws of the Commonwealth of Pennsylvania.
Based upon and subject to the foregoing, we are of the opinion that:
(i) 6,687,233 shares of Common Stock which are being offered by the Company
pursuant to the Registration Statement, when sold in the manner and for the
consideration contemplated by the Registration Statement, will be legally
issued, fully paid and non-assessable; (ii) 801,457 shares of Common Stock which
are being offered by certain Selling Shareholders pursuant to the Registration
Statement, other than the shares issuable pursuant to the Stock Options, are
legally issued, fully paid and non-assessable; and (iii) 61,058 shares of Common
Stock which are being offered by certain Selling Shareholders pursuant to the
Registration Statement upon the exercise of the Stock Options, when acquired by
such Selling Shareholders upon exercise of the Stock Options in the manner
contemplated by the Plans and the Stock Options, including payment of the
applicable exercise price therefor, will be legally issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus, which is part of the Registration Statement.
Sincerely,
/s/ Blank Rome Cominsky & McCauley LLP
--------------------------------------
BLANK ROME COMINSKY & McCAULEY LLP
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
NCO Group, Inc. on Form S-3 of our report dated March 6, 1998, on our audits of
the consolidated financial statements of NCO Group, Inc. as of December 31, 1996
and 1997, and for each of the three years in the period ended December 31, 1997,
which report is included in the NCO Group Inc.'s Form 10-K for the year ended
December 31, 1997. We also consent to the references to our firm under the
captions "Selected Financial Data." and "Experts".
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
May 1, 1998
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
NCO Group, Inc. on Form S-3 of our report dated September 2, 1997, on our audits
of the consolidated financial statements of FCA International Ltd. as of June
30, 1997 and 1996, and for each of the three years in the period ended June 30,
1997, which report is included in the NCO Group Inc.'s Form 8-K dated May 1,
1998. We also consent to the reference to our firm under the caption "Experts".
ARTHUR ANDERSEN & CO.
Montreal Quebec General Partnership
May 1, 1998 Chartered Accountants
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 16,087,658
<SECURITIES> 0
<RECEIVABLES> 14,847,568
<ALLOWANCES> 431,000
<INVENTORY> 0
<CURRENT-ASSETS> 32,493,296
<PP&E> 10,746,210
<DEPRECIATION> 2,500,815
<TOTAL-ASSETS> 105,708,754
<CURRENT-LIABILITIES> 10,319,812
<BONDS> 0
0
0
<COMMON> 80,802,585
<OTHER-SE> 11,153,906
<TOTAL-LIABILITY-AND-EQUITY> 105,708,754
<SALES> 27,608,516
<TOTAL-REVENUES> 27,608,516
<CGS> 0
<TOTAL-COSTS> 23,867,101
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 153,250
<INCOME-PRETAX> 3,894,665
<INCOME-TAX> 1,578,921
<INCOME-CONTINUING> 2,315,744
<DISCONTINUED> 0
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