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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 2000
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-21639
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NCO GROUP, INC.
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(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2858652
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
515 Pennsylvania Avenue
Fort Washington, Pennsylvania 19034-3313
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(Address of principal (Zip Code)
executive offices)
Registrant's Telephone Number, Including Area Code (215) 793-9300
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Securities Registered Pursuant to Section 12(b) of the Act: None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common stock, no par value 25,749,018
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(Title of Class) (Number of Shares Outstanding
as of March 14, 2001)
Indicate by check mark whether the Registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant is approximately $596,601,000 (1)
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Proxy Statement to be filed in connection with
its 2001 Annual Meeting of Shareholders are incorporated by reference into Part
III of this Report. Other documents incorporated by reference are listed in the
Exhibit Index.
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(1) The aggregate market value of the voting stock set forth equals the number
of shares of the Company's common stock outstanding, reduced by the amount of
common stock held by officers, directors and shareholders owning 10% or more of
the Company's common stock, multiplied by $31.938, the last reported sale price
for the Company's common stock on March 14, 2001. The information provided shall
in no way be construed as an admission that any officer, director or 10%
shareholder in the Company may be deemed an affiliate of the Company or that he
is the beneficial owner of the shares reported as being held by him, and any
such inference is hereby disclaimed. The information provided herein is included
solely for record keeping purposes of the Securities and Exchange Commission.
TABLE OF CONTENTS
Page
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PART I
Item 1. Business. 1
Item 2. Properties. 18
Item 3. Legal Proceedings. 19
Item 4. Submission of Matters to a Vote of Security Holders. 19
Item 4.1 Executive Officers of the Registrant who are not also Directors. 19
PART II
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters. 21
Item 6. Selected Financial Data. 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 24
Item 7a Quantitative and Qualitative Disclosures about Market Risk. 33
Item 8. Financial Statements and Supplementary Data. 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures. 33
PART III
Item 10. Directors and Executive Officers of the Registrant. 34
Item 11. Executive Compensation. 34
Item 12. Security Ownership of Certain Beneficial Owners and Management. 34
Item 13. Certain Relationships and Related Transactions. 34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 35
Signatures. 40
Index to Consolidated Financial Statements and
Financial Statement Schedule. F-1
As used in this Annual Report on Form 10-K, unless the context otherwise
requires, "we,""us," "our,""Company" or "NCO" refers to NCO Group, Inc. and its
subsidiaries.
Forward-Looking Statements
Certain statements included in this Annual Report on Form 10-K, including
without limitation statements in Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations", other than historical facts,
are forward-looking statements (as such term is defined in the Securities
Exchange Act of 1934, and the regulations thereunder) which are intended to be
covered by the safe harbors created thereby. Forward-looking statements include,
without limitation, statements as to the Company's expected future results of
operations, the Company's growth strategy, the Company's internet and e-commerce
strategy, expected increases in operating efficiencies, anticipated trends in
the accounts receivable management industry, the effects of legal or
governmental proceedings, the effects of changes in accounting pronouncements
and statements as to trends or the Company's or management's beliefs,
expectations and opinions. Forward-looking statements are subject to risks and
uncertainties and may be affected by various factors that may cause actual
results to differ materially from those in the forward-looking statements. In
addition to the factors discussed in this report, certain risks, uncertainties
and other factors, including, without limitation, the risk that the Company will
not be able to achieve expected future results of operations, the risk that the
Company will not be able to implement its growth strategy as and when planned,
risks associated with the recent expansion of NCO Portfolio Management, Inc.,
risks associated with growth and future acquisitions, the risk that the Company
will not be able to realize operating efficiencies in the integration of its
acquisitions, fluctuations in quarterly operating results, risks relating to the
timing of contracts, risks associated with technology, the internet and the
Company's e-commerce strategy and other risks described under Item 1. "Business
- - Investment Considerations" or in the Company's other filings made from time to
time with the Securities and Exchange Commission, can cause actual results and
developments to be materially different from those expressed or implied by such
forward-looking statements.
Item 1. Business.
PART I
General
We believe we are the largest outsourced accounts receivable management and
collection company in the world, serving a wide range of clients in North
America and abroad. Our extensive industry knowledge, technological expertise,
management depth and longstanding client relationships enable us to deliver
customized solutions that improve our clients' receivables recovery rates, thus
improving their financial performance. Our services are provided through the
utilization of sophisticated technologies including advanced workstations,
leading-edge client interface systems and call management systems comprised of
predictive dialers, automated call distribution systems, digital switching and
customized computer software. We have over 9,000 employees and provide our
services through the operation of 82 centers.
-1-
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 and collection. This trend is being
driven by a number of industry-specific factors:
o First, the complexity of accounts receivable management and collection
functions in certain industries has increased dramatically in recent
years. For example, with the increasing popularity of health maintenance
organizations, or HMOs, and preferred provider organizations, or 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.
o Second, the increasing complexity of the collection process which
requires sophisticated call management and database systems for efficient
collections.
o Third, the trend in certain industries to outsource non-core functions,
due to competitive pressures, changing regulations and/or required
capital expenditures.
o Fourth, the increased focus by credit grantors on early identification
and intervention in pre-delinquent debt (i.e., debt with an average age
of less than 90 days).
We operate in a large industry with positive growth dynamics. Growth in our
industry is fundamentally driven by the continuing growth in consumer and
commercial debt. According to SMR Research Corporation, an industry research
firm, overall consumer debt in 1999 exceeded $6.3 trillion. In 2000,
approximately $135 billion of delinquent consumer debt was estimated to have
been placed for collection with third-party collection agencies, nearly double
the $73 billion placed in 1990 according to the Nilson Report, an industry
newsletter. The primary market segments within our industry are financial
services, healthcare, and retail and commercial. Other important market segments
include telecommunications and utilities.
The accounts receivable management and collection industry is highly
fragmented. Based on information obtained from the American Collectors
Association, there are approximately 6,500 accounts receivable management and
collection companies in the United States, the majority of which are small,
local businesses. We believe that many smaller competitors have insufficient
capital to expand and invest in technology and are unable to adequately meet the
geographic coverage and quality standards demanded by businesses seeking to
outsource their accounts receivable management function.
Strategy
Our strategy is to maintain our market dominance as we become a global
provider of accounts receivable management and collection services. Our strategy
to achieve these objectives includes the following elements:
Expand our relationships with clients - A significant amount of our growth
stems from the expansion of existing client relationships. These relationships
and the resultant opportunities continue to grow in scale, complexity and profit
potential. Over time, management believes these relationships should transition
from the operational delivery of services to the strategic development of
long-term, goal-oriented partnerships where we are sharing in the improved
profitability and operational efficiencies created for our clients.
-2-
Enhance our operating margins - Until 1999, we focused primarily on
realizing efficiencies through the integration of acquired companies. Over the
next several years, we intend to continue to pursue the following initiatives to
increase profitability:
o standardization of systems and practices;
o consolidation of facilities;
o automation of clerical functions;
o use of statistical analysis to improve performance and reduce direct unit
costs; and
o leveraging our purchasing power.
Enhance our technology capabilities - We will continue to enhance our
technology platform as well as continue to update and modernize our equipment,
including the workstations and predictive dialers used by account
representatives. In addition, we will continue to update and refine our NCO
Access interface, which translates client account information into a standard
presentation format that provides our account representatives with a common
visual interface that links directly into disparate client host systems.
The Internet offers the potential for significant operational benefits.
There are a variety of cost-reducing applications available, such as improved
data exchange capabilities and the replacement of direct mail with e-mail. We
are creating client-specific web pages that will facilitate reporting of
payments and account activity, online tracking of collection results and online
statistical modeling.
Expand internationally - We believe that business process outsourcing is
gaining widespread acceptance throughout Canada, Europe and Asia. Our
international expansion strategy is designed to capitalize on each of these
markets in the near term, as well as continue to monitor all developing
opportunities to determine the timing of entry into new markets. We operate in
Canada and the United Kingdom through wholly owned subsidiaries and are one of
the largest providers of consumer collection services in both of these markets.
We expect to further penetrate these markets through increased sales of accounts
receivable management and collection services and deployment of our commercial
sales model in order to further develop business-to-business opportunities.
Additionally, we expect to pursue strategic alliances and partnerships and
further explore acquisitions in these markets. For example, we formed a
strategic alliance with Alec Burlington N.V. in 1999 and with Receivables
Management Group Pty Ltd. in 2000 to provide an entre into the European and
Australasian markets, respectively, to service our U.S. clients. These alliances
enhance our service offerings as well as increase the awareness of NCO as a
global provider of accounts receivable management and collection services.
Increase purchases of delinquent receivables through NCO Portfolio - Since
1991, we have purchased, collected and managed portfolios of purchased accounts
receivables. These portfolios have consisted primarily of delinquent
receivables. Due to the profitability of these purchases, we expanded our
presence in this marketplace in 1999 and determined that it would be beneficial
to further expand our presence, while at the same time limiting our exposure to
credit risk. Through the merger of our subsidiary NCO Portfolio with Creditrust,
we have created a vehicle which will be one of the only publicly-traded
companies purchasing delinquent receivables. Under the terms of our credit
agreement, our investment in NCO Portfolio currently is limited to our $25.0
million equity investment and the $50.0 million credit subfacility. In the
future, NCO Portfolio may develop partnerships with banks, commercial lenders,
and other investors who will provide additional funding sources for purchases of
delinquent receivables. By utilizing such risk sharing partnerships, we will
gain access to capital while limiting both our and NCO Portfolio's exposure to
credit risk.
-3-
Continue to explore strategic acquisition opportunities - The accounts
receivable management and collection industry is highly fragmented with over
6,500 participants in the United States. The vast majority of these participants
are small, local businesses. Although our focus is on internal growth, we
believe we will continue to find attractive acquisition opportunities over time.
Services
Accounts Receivable Management and Collection
We provide a wide range of accounts receivable management and collection
services to our clients utilizing an extensive technological infrastructure.
Although most of our accounts receivable management and collection services to
date have focused on the recovery of traditional delinquent accounts, we do
engage in the recovery of current receivables and early stage delinquencies
(generally, accounts which are 90 days or less past due). We generate
approximately 60% of our revenue from the recovery of delinquent accounts
receivable on a contingent fee basis. In addition, we generate revenue from
fixed fees for certain accounts receivable management and collection and other
related services. We seek to be a low cost provider and, as such, our contingent
fees typically range from 15% to 35% of the amount recovered on behalf of our
clients. However, fees can range from 6% for the management of accounts placed
early in the accounts receivable cycle to 50% for accounts that have been
serviced extensively by the client or by third-party providers. Our average fee
is approximately 25% across all industries, with the exception of the healthcare
industry where it is lower due to a higher percentage of early intervention
accounts receivable management business.
Accounts receivable management and collection services typically include
the following activities:
Management Planning. Our approach to accounts receivable management and
collection 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. We have developed a
library of standard processes for accounts receivable management and collection,
which is based upon our accumulated experience. We will integrate these
processes with our 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. Our standard approach, which
may be tailored to the specialized requirements of our clients, defines and
controls the steps that will be undertaken by us on behalf of the client and the
manner in which data will be reported to the client. Through our systemized
approach to accounts receivable management and collection, we remove most
decision making from the recovery staff and ensure uniform, cost-effective
performance.
Once the approach has been defined, we electronically or manually transfer
pertinent client data into our information system. When the client's records
have been established in our system, we commence the recovery process.
Skiptracing. In cases where the customer's telephone number or address is
unknown, we systematically search the United States Post Office National Change
of Address service, consumer databases, 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 we have located
the customer, the notification process can begin.
-4-
Account Notification. We initiate the recovery process by forwarding an
initial letter that 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 his or her
rights as required by the federal Fair Debt Collection Practices Act. We
continue 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 us and begin a dialogue
to develop a payment program.
Credit Reporting. At a client's request, we 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.
Payment Process. After we receive payment from the customer, we either
remit the amount received minus our fee to the client or remit the entire amount
received to the client and bill the client for our 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. We emphasize quality control throughout all phases of the
accounts receivable management and collection 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 our performance to that of our peers.
Delinquency Management
We provide pre-charge-off delinquency management services that enable
clients to manage their at-risk customers and quickly restore the relationships
to a current payment status. We mail reminder letters and make first-party calls
to the clients' customers, reminding of the past due balance and encouraging
them to make immediate repayment using pay-by-phone direct debit checks or, in
certain cases, credit cards. Our services include responding to inbound calls
seven days a week. We apply our extensive database and predictive modeling
techniques to the customer's profile, assigning more intense efforts to higher
risk customers.
Customer Service and Support
We utilize our communications and information system infrastructure to
supplement or replace the customer service function of our clients. For example,
we are currently engaged by a large regional utility company to provide customer
service functions for a segment of the utility's customer base that is
delinquent. For other clients, we provide a wide range of specialized services
such as fraud-prevention, over-limit calling, inbound calling for customer
credit application and approval processes, and general back office support. We
can provide customer contact through inbound or outbound calling, or customized
web-enabled functions.
-5-
Billing
We complement existing service lines by offering adjunct billing services
to clients as an outsourcing option. Additionally, we can assist healthcare
clients in the billing and management of third party insurance.
Additional Services
We selectively provide other related services which complement our
traditional accounts receivable management and collection business and which
leverage our technological infrastructure. We believe that the following
services will provide additional growth opportunities for us:
Attorney Network Services. We will also coordinate litigation undertaken
by a nationwide network of more than 150 law firms whose attorneys specialize in
collection litigation. Our collection support staff manages the attorney
relationships and facilitates the transfer of all necessary documentation.
NCO ePayments. We can provide clients with a virtual 24-hour payment
center that is accessible by the use of telephones, personal computers or the
Internet.
Credit and Investigative Reporting Service. We develop the information
needed to profile commercial debtors and make decisions affecting extensions of
credit.
NCO Benefit Systems. We administer compliant COBRA administration services
for human resources departments.
Technology and Infrastructure
We have made a substantial investment in our information systems such as
"thin client" network computing devices, predictive dialers, automated call
distribution systems, digital switching and customized computer software,
including the NCO Access interface product. As a result, we believe we are able
to address accounts receivable management and collection activities more
reliably and more efficiently than our competitors. Our systems also permit
network access to enable clients to electronically communicate with us and
monitor operational activity on a real-time basis. We provide our services
through the operation of 82 centers that are electronically linked through an
international wide area network, with the exception of our two United Kingdom
centers.
We also utilize a custom-developed NCO Access interface product that
leverages industry standard visual basic and thin client server technology in
order to facilitate the critical process of "real-time" translation of account
data from our clients' host systems to our system. The NCO Access interface
product set allows rapid ramp up of new client projects and the ability to work
online with client host systems while completely integrating and leveraging the
power of our base receivables management software infrastructure. Additionally,
this technology allows sophisticated reporting capabilities that are not always
available on clients' host systems. The NCO Access interface product translates
client account information into a standard presentation format that provides our
account representatives with a common visual interface that links directly into
disparate client host systems. Key benefits of the NCO Access interface include
dramatic reduction in project ramp up time, reduction in training costs, and an
overall increase in account representative productivity.
-6-
We utilize approximately 65 predictive dialer locations with over 3,000
stations to address our low balance, high volume accounts. These systems scan
our databases, 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 record keeping and
follow-up activities including letter and report generation. Our automated
method of operations dramatically improves the productivity of our collection
staff.
We employ an approximately 250-person MIS staff led by a Chief Information
Officer. We maintain disaster recovery contingency plans and have implemented
procedures to protect against the loss of data resulting from power outages,
fire and other casualties. We have implemented a security system to protect the
integrity and confidentiality of our computer systems and data and maintain
comprehensive business interruption and critical systems insurance on our
telecommunications and computer systems.
Sales and Marketing
Our sales force is organized at the corporate level to address clients by
need based upon their respective complexity, geography and industry. We utilize
a focused and professional direct selling effort in which sales representatives
personally cultivate relationships with prospective and existing clients. Our
sales effort consists of an approximately 60-person direct sales force, and for
the commercial sector, approximately 300 telephone sales representatives. Each
sales representative is charged with identifying leads, qualifying prospects and
closing sales. When appropriate, our operating personnel will join in the sales
effort to provide detailed information and advice regarding our operational
capabilities. We supplement our direct sales effort with print media and
attendance at trade shows.
Many of our prospective clients issue requests-for-proposals as part of the
contract award process. We have a staff of technical writers for the purpose of
preparing detailed, professional responses to requests-for-proposals.
Quality Assurance and Client Service
Our reputation for quality service is critical to acquiring and retaining
clients. Therefore, we and our clients monitor our representatives for strict
compliance with the clients' specifications and our policies. We regularly
measure the quality of our 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
our telephone representatives' performance and to assure compliance with our
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. Our information systems enable us to
provide clients with reports on a real-time basis as to the status of their
accounts and clients can choose to network with our computer system to access
such information directly.
-7-
We maintain 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 clients on a regular basis in order to
establish a close rapport, determine clients' overall level of satisfaction and
identify practical methods of improving their satisfaction.
Client Relationships
Our client base currently includes over 13,700 companies in the financial
services, healthcare, education, retail, utilities, government and
telecommunications sectors, and over 58,000 companies in the commercial sector.
Our 10 largest clients in 2000 accounted for approximately 26.9% of our revenue.
In 2000, no client accounted for more than 6.0% of total revenue. In 2000, we
derived 29.8% of our revenue from financial institutions (which included the
banking and insurance sectors), 28.8% from healthcare organizations, 22.1% from
retail and commercial entities, 6.5% from educational organizations, 5.6% from
telecommunications companies, 5.1% from utilities, and 2.1% from government
entities.
The following table sets forth a list of certain of our key clients:
Financial Services Healthcare Retail and Commercial
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Bank of America Columbia/HCA Airborne Freight Corporation
Capital One Financial Corporation Healthcare Corporation Business Dayton Hudson Corporation
Citicorp Services Emery Worldwide
First Union National Bank, N.A. Health Management Associates, Inc. Federal Express Corporation
MBNA UCSF Stanford University Sears, Roebuck and Co.
The Progressive Corporation
Education Telecommunications Utilities and Government
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California Student Aid AT&T Consumer Energy
Commission / EDFUND BellSouth Telecommunications, Inc. PECO Energy Company
New York State Higher Education MCI WorldCom The City of Philadelphia, Water
Service Corporation Sprint Corporation Revenue Bureau
Pennsylvania Higher Education Verizon The United States Department of
Assistance Agency Treasury
Penn State University Virginia Power
The United States Department of
Education
We enter into contracts with most of our clients that 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 us
prior to the date of termination, thus providing us with an ongoing stream of
revenue from such accounts which diminish over time. Under the terms of our
contracts, clients are not required to place accounts with us but do so on a
discretionary basis.
-8-
Personnel and Training
Our success in recruiting, hiring and training a large number of employees
is critical to our ability to provide high quality accounts receivable
management and collection, customer support and teleservices programs to our
clients. We seek to hire personnel with previous experience in accounts
receivable management and collection or as a telephone representative. NCO
generally offers competitive compensation and benefits and offers promotion
opportunities within NCO.
All our collection personnel receive comprehensive training that consists
of a combination of classroom and practical experience. Prior to customer
contact, new employees receive one week of training in our operating systems,
procedures and telephone techniques and instruction in applicable federal and
state regulatory requirements. Our personnel also receive a wide variety of
continuing professional education consisting of both classroom and role playing
sessions.
As of December 31, 2000, we had a total of approximately 8,400 full-time
employees and 800 part-time employees, of which 6,800 are telephone
representatives. None of our employees are represented by a labor union. We
believe that our relations with our employees are good.
Competition
The accounts receivable management and collection industry is highly
competitive. We compete with a large number of providers, including large
national corporations such as Outsourcing Solutions, Inc., IntelliRisk
Management Corporation, and GC Services, Inc., as well as many regional and
local firms. Some of our competitors may offer more diversified services and/or
operate in broader geographic areas than us. In addition, the accounts
receivable management and collection services offered by us are performed
in-house by many companies. Moreover, many larger clients retain multiple
accounts receivable management and collection providers which exposes us to
continuous competition in order to remain a preferred vendor. We believe that
the primary competitive factors in obtaining and retaining clients are the
ability to provide customized solutions to a client's requirements, personalized
service, sophisticated call and information systems, and price.
Regulation
The accounts receivable management and collection industry is regulated
both at the federal and state level. The federal Fair Debt Collection Practices
Act 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
Fair Debt Collection Practices Act 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 Fair Debt Collection Practices Act
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 Fair Debt Collection Practices Act contains various notice and disclosure
requirements and prohibits unfair or misleading representations by debt
collectors. We are also subject to the Fair Credit Reporting Act which regulates
the consumer credit reporting industry and which may impose liability on us to
the extent that the adverse credit information reported on a consumer to a
credit bureau is false or inaccurate. The Federal Trade Commission has the
authority to investigate consumer complaints against debt collection companies
and to recommend enforcement actions and seek monetary penalties. The accounts
receivable management and collection business is also subject to state
-9-
regulation. Some states require that we be licensed as a debt collection
company. We believe that we currently hold applicable licenses from all states
where required.
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 we carry 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, our 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. We believe that
we hold all necessary licenses in those provinces and territories that require
them.
If we engage in other teleservice activities in Canada, 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, the accounts receivable management and collection industry is
regulated in the United Kingdom, including a licensing requirement. If we expand
our international operations, we 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 us are also subject to varying degrees
of government regulation. Although compliance with these regulations is
generally the responsibility of our clients, we could be subject to a variety of
enforcement or private actions for our failure or the failure of our clients to
comply with such regulations.
We devote significant and continuous efforts, through training of personnel
and monitoring of compliance, to ensure that we are in compliance with all
federal and state regulatory requirements. We believe that we are in material
compliance with all such regulatory requirements.
-10-
History of Acquisitions
The following is a summary of the acquisitions we completed since 1994
(dollars in thousands):
Revenue for the
Date Value of Fiscal Year Prior
Acquired Business Purchase Price to Acquisition
-------- ---------------------- -------------- -----------------
Creditrust Corporation 2/20/01 Purchased A/R $ 25,000(1) $ 36,491
Compass International Services 8/20/99 A/R Management and 104,100 105,800(2)
Corporation Telemarketing
Co-Source Corporation 5/21/99 Commercial Receivables 124,600 61,100
Management
JDR Holdings, Inc. 3/31/99 Technology-Based 103,100 51,000
Outsourcing, A/R
Management and
Telemarketing
Medaphis Services Corporation 11/30/98 Healthcare Receivables 117,500 96,700
Management
MedSource, Inc. 7/1/98 Healthcare Receivables 35,700(3) 22,700
Management
FCA International Ltd. 5/5/98 A/R Management 69,900 62,800
The Response Center 2/6/98 Market Research 15,000 8,000
Collections Division of American 1/1/98 A/R Management 1,700 1,700
Financial Enterprises, Inc.
ADVANTAGE Financial 10/1/97 A/R Management 5,000 5,100
Services, Inc.
Credit Acceptance Corporation 10/1/97 A/R Management 1,800 2,300
Collections Division of CRW 2/2/97 A/R Management 12,800 25,900
Financial, Inc.
CMS A/R Services 1/31/97 A/R Management 5,100 6,800
Tele-Research Center, Inc. 1/30/97 Market Research and 2,200 1,800
Telemarketing
Goodyear & Associates, Inc. 1/22/97 A/R Management 5,400 5,500
Management Adjustment 9/5/96 A/R Management 9,000 13,500
Bureau, Inc.
Collections Division of Trans 1/3/96 A/R Management 4,800 7,000
Union Corporation
Eastern Business Services, Inc. 8/1/95 A/R Management 2,000 2,000
B. Richard Miller, Inc. 4/29/94 A/R Management 1,400 1,300
(1) We merged our subsidiary NCO Portfolio Management, Inc. with Creditrust
Corporation. We own approximately 63% of the post-merger company.
(2) Pro Forma Revenue - Assumes the acquisitions completed by Compass
International Services Corporation in 1998 and the sale of its Print
and Mail Division were all completed on January 1, 1998.
(3) Includes $17.3 million of debt repaid by us.
-11-
Investment Considerations
Our business is dependent on our ability to grow internally.
Our business is dependent on our ability to grow internally, which is
dependent upon (1) our ability to retain existing clients and expand our
existing client relationships and (2) our ability to attract new clients.
Our ability to retain existing clients and expand those relationships is
subject to a number of risks, including, the risk that:
o we fail to maintain the quality of services we provide to our clients;
o we fail to maintain the level of attention expected by our clients; and
o we fail to successfully leverage our existing client relationships to
sell additional services.
Our ability to attract new clients is subject to a number of risks,
including:
o the market acceptance of our service offerings;
o the quality and effectiveness of our salesforce; and
o the competitive factors within the accounts receivable management and
collection industry.
If our efforts to retain and expand our client relationships and to attract
new clients do not prove effective, it could have a materially adverse effect on
our business, results of operations and financial condition.
If we are not able to respond to technological changes in
telecommunications and computer systems in a timely manner, we may not be able
to remain competitive.
Our success depends in large part on our sophisticated telecommunications
and computer systems. We use these systems to identify and contact large numbers
of debtors and to record the results of collection efforts. If we are not able
to respond to technological changes in telecommunications and computer systems
in a timely manner, we may not be able to remain competitive. We have made a
significant investment in technology to remain competitive and we anticipate
that it will be necessary to continue to do so in the future. Computer and
telecommunications technologies are changing rapidly and are characterized by
short product life cycles, so that we must anticipate technological
developments. If we are not successful in anticipating, managing or adopting
technological changes on a timely basis or if we do not have the capital
resources available to invest in new technologies, our business would be
materially adversely affected.
We are highly dependent on our telecommunications and computer systems.
As noted above, our business is highly dependent on our telecommunications
and computer systems. These systems could be interrupted by natural disasters,
power losses, or similar events. Our business also is materially dependent on
services provided by various local and long distance telephone companies. If our
equipment or systems cease to work or become unavailable, or if there is any
significant interruption in telephone services, we may be prevented from
providing services. Because we generally recognize income only as accounts are
collected, any failure or interruption of services would mean that we would
continue to incur payroll and other expenses without any corresponding income.
-12-
We currently utilize three computer hardware systems and are in the process
of evaluating a transition to one system. If we decide to transition to one
platform and do not succeed in that migration, our business may be materially
adversely affected.
We compete with a large number of providers in the accounts receivable
management and collection industry. This competition could have a materially
adverse effect on our future financial results.
We compete with a large number of companies in providing accounts
receivable management and collection services. We compete with other sizable
corporations in the United States and abroad such as Outsourcing Solutions,
Inc., IntelliRisk Management Corporation, and GC Services, Inc., as well as many
regional and local firms. We may lose business to competitors that offer more
diversified services and/or operate in broader geographic areas than us. We may
also lose business to regional or local firms who are able to use their
proximity to or contacts at local clients as a marketing advantage. In addition,
the accounts receivable management and collection services offered by us are
performed in-house by many companies. Many larger clients retain multiple
accounts receivable management and collection providers, which exposes us to
continuous competition in order to remain a preferred provider. Because of this
competition, in the future we may have to reduce our collection fees to remain
competitive and this competition could have a materially adverse effect on our
future financial results.
Many of our clients are concentrated in the financial services, healthcare,
and retail and commercial sectors. If any of these sectors performs poorly or if
there are any adverse trends in these sectors, it could materially adversely
affect us.
For the year ended December 31, 2000, we derived approximately 29.8% of our
revenue from clients in the financial services sector, approximately 28.8% of
our revenue from clients in the healthcare sector and approximately 22.1% of our
revenue from clients in the retail and commercial sectors. If any of these
sectors performs poorly, clients in these sectors may have fewer or smaller
accounts to refer to us or they may elect to perform accounts receivable
management and collection services in-house. If there are any trends in any of
these sectors to reduce or eliminate the use of third-party accounts receivable
management and collection services, the volume of referrals to us could
decrease.
Most of our contracts do not require clients to place accounts with us,
they may be terminated on 30 or 60 days notice and they are on a contingent fee
basis. We cannot guarantee that existing clients will continue to use our
services at historical levels, if at all.
Under the terms of most of our contracts, clients are not required to give
accounts to us for collection and usually have the right to terminate our
services on 30 or 60 days notice. Accordingly, we cannot guarantee that existing
clients will continue to use our services at historical levels, if at all. In
addition, most of these contracts provide that we are entitled to be paid only
when we collect accounts. Under applicable accounting principles, therefore, we
can recognize revenues only as accounts are recovered.
We are subject to risks as a result of our investment in NCO Portfolio.
We are subject to risks as a result of our investment in NCO Portfolio,
including:
o The operations of NCO Portfolio could divert management's attention from
our daily operations, particularly that of Michael J. Barrist, our
-13-
Chairman, President and Chief Executive Officer, who is also serving in
the same capacities for NCO Portfolio, and otherwise require the use of
other of our management, operational and financial resources.
o Our investment in NCO Portfolio currently is limited to our $25.0 million
equity investment and the $50.0 million subfacility. If NCO Portfolio
defaults on that credit, which would be a default under our credit
agreement with our lenders, or if the value of our investment is
impaired, it would have a material adverse effect on us.
NCO Portfolio will have additional business risks that may have an adverse
effect on our combined financial results.
NCO Portfolio is subject to additional business related risks common to the
purchase and management of delinquent receivables business. The results of NCO
Portfolio will be consolidated into our results. To the extent that those risks
have an adverse effect on NCO Portfolio, they will have an adverse effect on our
combined financial results. Some of those risks are:
o Receivables may not be collectible --NCO Portfolio purchases, collects
and manages delinquent receivables generated primarily by consumer credit
transactions. These are obligations that the individual consumer has
failed to pay when due. The receivables are purchased from credit
grantors, including banks, finance companies, retail merchants and other
service providers. Substantially all of the receivables consist of
account balances that the credit grantor has made numerous attempts to
collect, has subsequently deemed uncollectible and charged off from its
books. The receivables are purchased at a significant discount to the
amount the customer owes and, although the belief is that the recoveries
on the receivables will be in excess of the amount paid for the
receivables, actual recoveries on the receivables may vary and may be
less than the amount expected. The timing or amounts to be collected on
those receivables cannot be assured. If cash flow from operations is less
than anticipated as a result of NCO Portfolio's inability to collect its
receivables, NCO Portfolio will not be able to purchase new receivables
after it has exhausted the availability under the subfacility and its
future growth and profitability will be materially adversely affected. We
cannot guarantee that NCO Portfolio's operating performance will be
sufficient to service debt on the subfacility or finance the purchase of
new receivables.
o Use of estimates in accounting --NCO Portfolio's revenue is recognized
based on estimates of future collections on the pools of receivables
managed. Although estimates are based on statistical analysis, the actual
amount collected on these pools and the timing of those collections may
not correlate to NCO Portfolio's estimates upon which its revenue
recognition is based. If collections on these pools are less than
estimated, NCO Portfolio may be required to take a charge to earnings in
an amount that could materially adversely affect earnings and
creditworthiness.
o Possible shortage of receivables for purchase at favorable prices --The
availability of portfolios of delinquent receivables for purchase at
favorable prices depends on a number of factors outside of NCO
Portfolio's control, including the continuation of the current growth
trend in consumer debt and competitive factors affecting potential
purchasers and sellers of portfolios of receivables. Any slowing of the
consumer debt growth trend could result in less credit being extended by
credit grantors. Consequently, fewer delinquent receivables could be
available at prices that NCO Portfolio finds attractive. If competitors
raise the prices they are willing to pay for portfolios of receivables
above those NCO Portfolio wishes to pay, NCO Portfolio may be unable to
buy delinquent receivables at prices consistent with its historic return
targets. In addition, NCO Portfolio may overpay for portfolios of
delinquent receivables, which may have a materially adverse effect on our
combined financial results.
o Government regulation of NCO Portfolio operations --Federal and state
consumer protection and related laws and regulations govern the
relationship of a customer and a creditor. Significant laws include the
-14-
Fair Debt Collection Practices Act, the Federal Truth-In-Lending Act, the
Fair Credit Billing Act, the Equal Credit Opportunity Act, the Fair
Credit Reporting Act and the Electronic Funds Transfer Act, and various
federal regulations which relate to these acts, as well as comparable
statutes in the states where account debtors reside or where credit
grantors are located. Some of these laws may apply to NCO Portfolio's
activities. If credit grantors who sell receivables to NCO Portfolio fail
to comply with these laws, NCO Portfolio's ability to collect on those
receivables could be limited regardless of any act or omission on its
part. NCO Portfolio's failure to comply with these laws may also limit
its ability to collect on the receivables.
The SEC is reviewing the historical financial statements of Creditrust.
Prior to the merger with NCO Portfolio, the staff of the Division of
Corporation Finance of the SEC made certain comments to Creditrust regarding its
historical financial statements. The staff raised questions as to the manner in
which Creditrust estimated and accounted for the collectibility of its purchased
receivables, as well as to its use of the accrual basis of accounting.
Creditrust discussed these matters with its independent accountants, and
believed that these matters were accounted for properly and that its financial
statements were fairly stated. We cannot guarantee you that the SEC will not
continue to comment on the historical financial statements of Creditrust or
require NCO Portfolio to restate Creditrust's historical financial statements.
Our success depends on our senior management team and if we are not able to
retain them, it could have a materially adverse effect on us.
We are highly dependent upon the continued services and experience of our
senior management team, including Michael J. Barrist, our Chairman, President
and Chief Executive Officer. NCO depends on the services of Mr. Barrist and the
other members of our senior management team to, among other things, continue our
growth strategies and maintain and develop our client relationships.
We may seek to make strategic acquisitions of companies. Acquisitions
involve additional risks that may adversely affect us.
We may be unable to make acquisitions because suitable companies in the
accounts receivable management and collection business are not available at
favorable prices due to increased competition for these companies.
We may have to borrow money or incur liabilities, or sell stock, to pay for
future acquisitions and we may not be able to do so at all or on terms favorable
to us. Additional borrowings and liabilities may have a materially adverse
effect on our liquidity and capital resources. If we issue stock for all or a
portion of the purchase price for future acquisitions, our shareholders may be
diluted. If the price of our common stock decreases or potential sellers are not
willing to accept our common stock as payment for the sale of their businesses,
we may be required to use more of our cash resources, if available, in order to
continue our acquisition program.
Completing acquisitions involves a number of risks, including diverting
management's attention from our daily operations and other additional
management, operational and financial resources. We might not be able to
successfully integrate future acquisitions into our business or operate the
acquired businesses profitably, and we may be subject to unanticipated problems
and liabilities of acquired companies.
-15-
We are dependent on our employees and a higher turnover rate would
materially adversely affect us.
We are dependent on our ability to attract, hire and retain qualified
employees. The accounts receivable management and collection industry
experiences a high employee turnover rate. Many of our employees receive modest
hourly wages and some of these employees are employed on a part-time basis. A
higher turnover rate among our employees would increase our recruiting and
training costs and could materially adversely impact the quality of services we
provide to our clients. If we were unable to recruit and retain a sufficient
number of employees, we would be forced to limit our growth or possibly curtail
our operations. Growth in our business will require us to recruit and train
qualified personnel at an accelerated rate from time to time. We cannot assure
you that we will be able to continue to hire, train and retain a sufficient
number of qualified employees. Any increase in hourly wages, costs of employee
benefits or employment taxes also could materially adversely affect us.
If we fail to comply with government regulation of the collections
industry, it could result in the suspension or termination of our ability to
conduct business.
The collections industry is regulated under various United States federal
and state, Canadian and United Kingdom laws and regulations. Many states, as
well as Canada and the United Kingdom, require that we be licensed as a debt
collection company. The Federal Trade Commission has the authority to
investigate consumer complaints against debt collection companies and to
recommend enforcement actions and seek monetary penalties. If we fail to comply
with applicable laws and regulations, it could result in the suspension or
termination of our ability to conduct collections, which would have a materially
adverse effect on us. In addition, new federal, state or foreign laws or
regulations, or changes in the ways these rules or laws are interpreted or
enforced, could limit our activities in the future or significantly increase the
cost of regulatory compliance. If we expand our international operations, we may
become subject to additional government controls and regulations in other
countries, which may be stricter or more burdensome than those in the United
States.
Several of the industries served by us are also subject to varying degrees
of government regulation. Although our clients are generally responsible for
complying with these regulations, we could be subject to a variety of
enforcement or private actions for our failure, or the failure of our clients,
to comply with these regulations.
We may experience variations from quarter to quarter in operating results
and net income that could adversely affect the price of our common stock.
Factors that could cause quarterly fluctuations include, among other
things, the following:
o the timing of our clients' accounts receivable management and collection
programs and the commencement of new contracts;
o customer contracts which require us to incur costs in periods prior to
recognizing revenue under those contracts;
o the effect of a change of business mix on profit margins;
o the timing of additional selling, general and administrative expenses
to support new business;
o the costs and timing of completion and integration of acquisitions; and
o that our business tends to be slower in the third and fourth quarters of
the year due to the summer and holiday seasons.
-16-
If we do not achieve the results projected in our public forecasts, it
could have a materially adverse effect on the market price of our common stock.
We have publicly announced our 2001 investor guidance concerning our
expected results of operations for 2001. Our 2001 investor guidance contains
forward-looking statements and may be affected by various factors discussed in
"Risk Factors" and elsewhere in this offering memorandum which may cause actual
results to differ materially from the results discussed in the 2001 investor
guidance. Our 2001 investor guidance reflects numerous assumptions, including
our anticipated future performance, general business and economic conditions and
other matters, some of which are beyond our control. In addition, unanticipated
events and circumstances may affect our actual financial results. Our 2001
investor guidance is not a guarantee of future performance and the actual
results throughout the periods covered by the 2001 investor guidance may vary
from the projected results. If we do not achieve the results projected in our
2001 investor guidance, it could have a materially adverse effect on the market
price of our common stock.
Goodwill represented 67.9% of our total assets at December 31, 2000. If our
management as incorrectly overstated the permissible length of the amortization
period for goodwill, earnings reported in periods immediately following our
acquisitions would be overstated. In later years, we would be burdened by a
continuing charge against earnings.
Our balance sheet includes amounts designated as intangibles, which
predominantly consist of "goodwill." Goodwill represents the excess of purchase
price over the fair market value of the net assets of the acquired businesses
based on their respective fair values at the date of acquisition. GAAP requires
that this and all other intangible assets be amortized over the period
benefited. Our management has determined that period to range from 15 to 40
years based on the attributes of each acquisition.
As of December 31, 2000, our balance sheet included goodwill that
represented 67.9% of total assets and 137.7% of shareholders' equity. If our
management has incorrectly overstated the permissible length of the amortization
period for goodwill, earnings reported in periods immediately following our
acquisitions would be overstated. In later years, we would be burdened by a
continuing charge against earnings without the associated benefit to income
valued by our management in arriving at the consideration paid for the business.
Earnings in later years also could be significantly affected if our management
determined then that the remaining balance of goodwill was impaired.
Our stock price has been and is likely to continue to be volatile, which
may make it difficult for shareholders to resell common stock when they want at
prices they find attractive.
The trading price of our common stock has been and is likely to be highly
volatile. Our stock price could be subject to wide fluctuations in response to a
variety of factors, including the following:
o announcements of fluctuations in our, or our competitors', operating
results;
o the timing and announcement of acquisitions by us or our competitors;
o changes in our publicly available guidance of future results of
operations;
o government regulatory action;
o changes in estimates or recommendations by securities analysts;
o adverse or unfavorable publicity about us or our services;
o the commencement of material litigation, or an unfavorable verdict,
against us;
o additions or departures of key personnel; and
o sales of common stock.
-17-
In addition, the stock market in recent years has experienced significant
price and volume fluctuations and a significant cumulative decline in recent
months. Such volatility and decline have affected many companies irrespective
of, or disproportionately to, the operating performance of these companies.
These broad fluctuations may materially adversely affect the market price of our
common stock.
Most of our outstanding shares are available for resale in the public
market without restriction. The sale of a large number of these shares could
adversely affect our stock price and could impair our ability to raise capital
through the sale of equity securities or make acquisitions for stock.
Sales of our common stock could adversely affect the market price of our
common stock and could impair our future ability to raise capital through the
sale of equity securities or make acquisitions for stock. As of March 16, 2001,
there were 25,749,018 shares of our common stock outstanding. Most of those
shares are available for resale in the public market without restriction,
except for shares held by our affiliates. Generally, our affiliates may either
sell their shares under a registration statement or in compliance with the
volume limitations and other requirements imposed by Rule 144 adopted by the
SEC.
In addition, as of March 16, 2001, we had the authority to issue up to
approximately 3,794,946 shares of our common stock under our stock option plans.
We also had outstanding warrants to purchase approximately 397,000 shares of our
common stock.
"Anti-takeover" provisions may make it more difficult for a third party to
acquire control of us, even if the change in control would be beneficial to
shareholders.
We are a Pennsylvania corporation. Anti-takeover provisions in Pennsylvania
law and our charter and bylaws could make it more difficult for a third party to
acquire control of us. These provisions could adversely affect the market price
of our common stock and could reduce the amount that shareholders might receive
if we are sold. For example, our charter provides that our board of directors
may issue preferred stock without shareholder approval. In addition, our bylaws
provide for a classified board, with each board member serving a staggered
three-year term. Directors may be removed only for cause and only with the
approval of the holders of at least 65% of our common stock.
Item 2. Properties.
We currently lease 79 offices throughout North America, two offices in the
United Kingdom and one office in Puerto Rico. The leases of these facilities
expire between 2001 and 2015, and most contain renewal options.
We believe that our facilities are adequate for our current operations, but
additional facilities may be required to support growth. We believe that
suitable additional or alternative space will be available as needed on
commercially reasonable terms.
-18-
Item 3. Legal Proceedings.
We are involved in legal proceedings from time to time in the ordinary
course of our business. Our management believes that none of these legal
proceedings will have a materially adverse effect on our financial condition or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 4.1 Executive Officers of the Registrant who are not Directors.
Name Age Position
- --------------------------------------- --- ---------------------------------------------
Robert Di Sante........................ 49 Executive Vice President, International
Operations
Stephen W. Elliott..................... 39 Executive Vice President, Information
Technology and Chief Information Officer
Joshua Gindin, Esq..................... 44 Executive Vice President and General Counsel
Steven Leckerman....................... 48 Executive Vice President, U.S. Operations
Louis A. Molettiere.................... 57 Executive Vice President and Chief Operating
Officer
Paul E. Weitzel, Jr.................... 42 Executive Vice President, Corporate
Development and International Services
Steven L. Winokur...................... 41 Executive Vice President, Finance; Chief
Financial Officer; and Treasurer
Albert Zezulinski...................... 53 Executive Vice President, Healthcare Services
Robert Di Sante. Mr. Di Sante joined us through the acquisition of FCA
International Ltd. in May 1998 and became an Executive Vice President in
February 1999. Prior to joining us, Mr. Di Sante was Executive Vice President,
Finance and Corporate Services of FCA International Ltd. Mr. Di Sante is a
chartered accountant.
Stephen W. Elliot. Mr. Elliot joined us in 1996 as Senior Vice President,
Technology and Chief Information Officer after having provided consulting
services to us for the year prior to his arrival. Mr. Elliott became an
Executive Vice President in February 1999. Prior to joining us, Mr. Elliott was
employed by Electronic Data Systems, a computer services company, for almost 10
years, most recently as Senior Account Manager.
-19-
Joshua Gindin, Esq. Mr. Gindin joined us in May 1998. Prior to joining us,
Mr. Gindin was a partner in the law firm of Kessler & Gindin which served as our
legal counsel since 1986.
Steven Leckerman. Mr. Leckerman joined us in 1995 as Senior Vice President,
Collection Operations, and became Executive Vice President, U.S. Operations in
January 2001. From 1982 to 1995, Mr. Leckerman was employed by Allied Bond
Corporation, a division of Union Corporation, where he served as manager of
dialer and special projects.
Louis A. Molettiere. Mr. Molettiere joined us through the acquisition of
the Co-Source Corporation in May 1999 and became Executive Vice President and
Chief Operating Officer in February 2000. Prior to joining us, Mr. Molettiere
was Vice President of Marketing of Milliken & Michaels, a subsidiary of
Co-Source Corporation, since 1993. Prior to joining Milliken & Michaels, Mr.
Molettiere was with AT&T for 22 years, most recently as General Marketing
Manager - National and Major Markets.
Paul E. Weitzel, Jr. Mr. Weitzel joined us through the acquisition of
MedSource, Inc. in July 1998. Prior to joining us, Mr. Weitzel was Chairman and
Chief Executive Officer of MedSource, Inc. since 1997. Prior to joining
MedSource, Inc., Mr. Weitzel was with MedQuist, Inc., a medical transcription
company, for four years, most recently as President and Chief Executive Officer.
Mr. Weitzel is a certified public accountant.
Steven L. Winokur. Mr. Winokur joined us in December 1995. Prior to that,
Mr. Winokur acted as a part-time consultant to us 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 with Gross & Company, a certified public accounting firm, where he most
recently served as Administrative Partner. Mr. Winokur is a certified public
accountant.
Albert Zezulinski. Mr. Zezulinski joined us in January 2001. Prior to
joining us, Mr. Zezulinski was Director of Healthcare Financial Services for BDO
Seidman, LLP, an international accounting and consulting firm. Mr. Zezulinski
has more than 30 years of experience in the healthcare field.
-20-
PART II
Item 5. Market for the Registrant's Common Stock and
Related Shareholder Matters.
The Company's common stock is listed on the Nasdaq National Market under
the symbol "NCOG." The following table sets forth, for the fiscal quarters
indicated, the high and low closing sale prices for the common stock, as
reported by Nasdaq.
High Low
---- ---
1999
First Quarter $ 43.75 $28.81
Second Quarter 38.00 25.75
Third Quarter 49.88 36.38
Fourth Quarter 52.75 25.88
2000
First Quarter $31.94 $18.13
Second Quarter 34.38 21.06
Third Quarter 27.00 11.88
Fourth Quarter 30.94 12.69
On March 14, 2001, the last reported sale price of our common stock as
reported on The Nasdaq National Market was $31.938 per share. On March 14, 2001,
there were approximately 85 holders of record of our common stock.
Dividend Policy
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. In addition, our credit agreement prohibits us from paying
cash dividends without the lender's prior consent. We currently intend to retain
future earnings to finance our operations and fund the growth of our business.
Any payment of future dividends will be at the discretion of our board of
directors and will depend upon, among other things, our earnings, financial
condition, capital requirements, level of indebtedness, contractual restrictions
with respect to the payment of dividends and other factors that our board of
directors deems relevant.
-21-
Sales of Unregistered Securities during 2000
Set forth below is information concerning certain issuances of common stock
during 2000 which were not registered under the Securities Act and which have
not been previously reported.
During 2000, we granted options to certain executive officers and key
employees under the 1996 Stock Option Plan on the dates and at the exercise
prices set forth below. Generally, options will become exercisable in equal
one-third installments beginning on the first anniversary of the date of grant.
All of the options were issued in connection with such employee's employment
with us and no cash or other consideration was received by us in exchange for
the grant of such options. The grants of the options were not registered under
the Securities Act because there was no "sale" of the options; however, the
stock issued upon the exercise of the options has been registered on Form S-8.
Date Issued Options Granted Exercise Price
----------- --------------- --------------
January through March 2000 2,000 $25.98
April through June 2000 2,000 $23.06
July through September 2000 69,000 $17.74
October through December 2000 970,000 $25.21
In May 2000, we issued options in accordance with the 1996 Non-Employee
Director Stock Option Plan to purchase 3,000 shares of common stock to each of
Eric S. Siegel, Alan F. Wise, and Stuart Wolf. These options were granted at an
exercise price of $31.188 per share, which was the fair market value of the
underlying shares on the grant date. In September 2000, we issued options in
accordance with the 1996 Non-Employee Director Stock Option Plan to purchase
15,000 shares of common stock to each of William C. Dunkleberg and Leo J. Pound.
These options were granted at an exercise price of $16.125 per share, which was
the fair market value of the underlying shares on the grant date. The grants of
the options were not registered under the Securities Act because there was no
"sale" of the options; however, the stock issued upon the exercise of the
options has been registered on Form S-8.
-22-
Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA (1)
(Amounts in thousands, except per share data)
For the years ended December 31,
----------------------------------------------------------------------
1996(3) 1997 1998 1999 2000
------- ------- -------- -------- --------
Statement of Income Data (2):
Revenue $30,760 $99,720 $209,947 $460,311 $605,884
Operating costs and expenses:
Payroll and related expenses 14,651 51,493 106,787 237,709 293,292
Selling, general and administrative
expenses 10,032 34,379 61,607 128,177 179,924
Depreciation and amortization
expense 1,254 4,052 8,615 21,805 32,360
Nonrecurring acquisition costs - - - 4,601 -
------- ------- -------- -------- --------
Income from operations 4,823 9,796 32,938 68,019 100,308
Other income (expense) (576) (419) (1,794) (16,899) (22,126)
------- ------- -------- -------- --------
Income before provision for income taxes 4,247 9,377 31,144 51,120 78,182
Income tax expense 1,706 4,638 12,881 22,821 32,042
------- ------- -------- -------- --------
Income from continuing operations 2,541 4,739 18,263 28,299 46,140
Accretion of preferred stock to redemption value - (1,617) (1,604) (377) -
------- ------- -------- -------- --------
Income from continuing operations applicable
to common shareholders 2,541 3,122 16,659 27,922 46,140
Discontinued operations, net of taxes:
Income (loss) from discontinued operations - (148) 82 1,067 (975)
Loss on disposal of discontinued operations - - - - (23,179)
------- ------- -------- -------- --------
Net income applicable to common shareholders $ 2,541 $ 2,974 $ 16,741 $ 28,989 $ 21,986
======= ======= ======== ======== ========
Income from continuing operations applicable to
common shareholders per share:
Basic $ 0.34 $ 0.23 $ 0.91 $ 1.22 $ 1.80
======= ======= ======== ======== ========
Diluted $ 0.34 $ 0.21 $ 0.84 $ 1.17 $ 1.79
======= ======= ======== ======== ========
Net income applicable to common
shareholders per share:
Basic $ 0.34 $ 0.22 $ 0.91 $ 1.27 $ 0.86
======= ======= ======== ======== ========
Diluted $ 0.34 $ 0.20 $ 0.85 $ 1.22 $ 0.85
======= ======= ======== ======== ========
Weighted average shares outstanding:
Basic 7,630 13,736 18,324 22,873 25,587
======= ======= ======== ======== ========
Diluted 7,658 14,808 19,758 23,799 25,842
======= ======= ======== ======== ========
Other Consolidated Financial Data (2):
EBITDA (4) $ 6,077 $ 13,848 $ 41,553 $ 89,824 $ 132,668
December 31,
----------------------------------------------------------------------
1996 1997 1998 1999 2000
------- -------- -------- -------- --------
Balance Sheet Data (2):
Cash and cash equivalents $12,059 $ 30,194 $ 22,528 $ 50,513 $ 13,490
Working capital 13,629 37,825 31,517 65,937 79,732
Net assets of discontinued operations - 9,484 27,740 41,492 -
Total assets 35,826 129,301 410,992 791,692 784,006
Long-term debt, net of
current portion 1,478 14,940 143,831 323,949 303,920
Redeemable preferred stock - 6,522 11,882 - -
Shareholders' equity 30,648 94,336 199,465 364,888 386,426
(1) This data should be read in conjunction with the consolidated financial
statements, including the accompanying notes, included elsewhere in
this report on Form 10-K.
(2) Gives effect to the restatement of our historical financial statements
for: (i) the acquisition of JDR Holdings, Inc. using the
pooling-of-interests method of accounting; and (ii) the treatment of
the Market Strategy division as discontinued operations.
(3) We were 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 we had been subject to income taxes.
(4) Earnings before interest, taxes, depreciation, and amortization,
referred to as EBITDA, is used by management to measure results of
operations and is not intended to report results of operations in
conformity with generally accepted accounting principles.
-23-
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Overview
We believe we are the largest outsourced accounts receivable management and
collection company in the world, serving a wide range of clients in North
America and abroad. We generate approximately 60% of our revenue on a
contingency fee basis. Our contingent fees typically range from 15% to 35% of
the amount recovered on behalf of our clients. However, fees can range from 6%
for the management of accounts placed early in the accounts receivable cycle to
50% for accounts that have been serviced extensively by the client or by
third-party providers. Our average fee is approximately 25% across all
industries, with the exception of the healthcare industry where it is lower due
to a higher percentage of early intervention accounts receivable management
business. In addition, we generate revenue from fixed fee services for certain
accounts receivable management and collection services. Revenue is earned and
recognized upon collection of accounts receivable for contingency fee services
and as work is performed for fixed fee services. We enter into contracts with
most of our clients which define, among other things, fee arrangements, scope of
services and termination provisions. Clients typically have the right to
terminate their contracts on 30 or 60 days notice.
Our operating 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 of our employees, including management and administrative
personnel. Selling, general and administrative expenses include telephone,
postage and mailing costs and other collection costs as well as expenses which
directly support operations including facilities costs, equipment maintenance,
sales and marketing, data processing, professional fees and other management
costs.
We have grown rapidly, through both internal growth and acquisitions. To
date, all of our acquisitions, except the acquisition in 1999 of JDR Holdings,
Inc., referred to as JDR, have been accounted for under the purchase method of
accounting with the results of the acquired companies included in our operating
results beginning on the date of acquisition. JDR was accounted for under the
pooling-of-interests method of accounting.
On April 14, 2000, our board of directors approved a plan to divest our
Market Strategy division. The Market Strategy division provided market research
and telemarketing services and was divested as part of our strategic plan to
increase long-term shareholder value and focus on our core accounts receivable
management and collection services business. The Market Strategy division's
operations for all periods presented prior to April 14, 2000 have been presented
separately as income or loss from discontinued operations in our consolidated
statements of income. We completed the divestiture in October 2000 and recorded
a loss of $23.2 million. This loss reflects the difference between the net
assets and the proceeds from the divestiture as well as the operating losses
from April 14, 2000 through the completion of the divestiture.
During 2000, the continued integration of our infrastructure facilitated
the reduction of our operating divisions from three to two. Effective October 1,
2000, the new operating divisions included U.S. Operations (formerly Accounts
Receivable Management Services and Technology-Based Outsourcing) and
International Operations. Each of these divisions maintains industry specific
functional groups. Management's discussion of operating results has been
adjusted for this change.
-24-
In February 2001, we completed the merger of our subsidiary, NCO Portfolio
Management, Inc., referred to as NCO Portfolio, with Creditrust Corporation,
referred to as Creditrust. As a result of this merger, our results of operations
will be more significantly impacted by purchases of and collections on
delinquent receivables. NCO Portfolio recognizes revenue based on estimates of
future portfolio collections and the timing of these collections. On a periodic
basis, NCO Portfolio reviews and adjusts the amount and timing of expected
future collections, based on the performance of the portfolio to date. We own
approximately 63.0% of NCO Portfolio after the merger. The results of NCO
Portfolio will be consolidated into our results, with a charge for minority
interest and elimination of significant intercompany transactions.
Results of Operations
The following table sets forth selected historical income statement data
(amounts in thousands):
For the years ended December 31,
------------------------------------------------------------------------
1998 (1) 1999 (1) 2000 (1)
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------ ----- ------ -----
Revenue $209,947 100.% $460,311 100.% $605,884 100.%
Payroll and related expenses 106,787 50.9 237,709 51.6 293,292 48.4
Selling, general, and administrative
expenses 61,607 29.3 128,177 27.9 179,924 29.7
Nonrecurring acquisition costs - 0.0 4,601 1.0 - 0.0
-------- -------- -------- ----- -------- -----
EBITDA (2) 41,553 19.8 89,824 19.5 132,668 21.9
Depreciation and amortization 8,615 4.1 21,805 4.7 32,360 5.3
Other expense 1,794 0.9 16,899 3.7 22,126 3.7
Income tax expense 12,881 6.1 22,821 5.0 32,042 5.3
-------- -------- -------- ----- -------- ----
Income from continuing operations $ 18,263 8.7% $ 28,299 6.1% $ 46,140 7.6%
======== ======== ======== ===== ======== ====
(1) Gives effect to the restatement of our historical financial statements
for: (i) the acquisition of JDR Holdings, Inc. in 1999 using the
pooling-of-interests method of accounting; and (ii) the treatment of
the Market Strategy division as discontinued operations. We divested
our Market Strategy division in October 2000.
(2) Earnings before interest, taxes, depreciation, and amortization
("EBITDA") is used by management to measure results of operations and
is not intended to report results of operations in conformity with
generally accepted accounting principles.
Year ended December 31, 2000 Compared to Year ended December 31, 1999
Revenue. Revenue increased $145.6 million, or 31.6%, to $605.9 million in
2000, from $460.3 million in 1999. Our U.S. Operations and International
Operations divisions represented $574.2 million and $31.7 million, respectively,
of the revenue for 2000.
Our U.S. Operations division's revenue increased $144.9 million, or 33.8%,
to $574.2 million for 2000, from $429.3 million for the comparable period in
1999. A full year of revenue from the acquisitions of Compass International
Services Corporation, referred to as Compass, on August 20, 1999 and Co-Source
Corporation, referred to as Co-Source, on May 21, 1999 represented $42.5 million
and $33.5 million of this increase, respectively. The remainder of the increase
in our U.S. Operations division's revenue was attributable to the addition of
new clients and the growth in business from existing clients.
-25-
Our International Operations division's revenue increased $665,000, or
2.1%, to $31.7 million for the year ended December 31, 2000, from $31.0 million
for the comparable period in 1999. This increase in our International Operations
division's revenue was primarily attributable to the addition of new clients and
growth in business from existing clients. However, the growth was limited due to
the effects of a weak Canadian economy.
Payroll and related expenses. Payroll and related expenses increased $55.6
million to $293.3 million in 2000, from $237.7 million in 1999, but decreased as
a percentage of revenue to 48.4% from 51.6%.
The payroll and related expenses of our U.S Operations division increased
$55.9 million to $276.0 million in 2000, from $220.1 million in 1999, but
decreased as a percentage of revenue to 48.1% from 51.3%. This decrease as a
percentage of revenue was partially attributable to the continuing process of
rationalizing staff levels in both our U.S. Operations division's acquired and
existing businesses, as well as an increase in productivity that was achieved
through the expansion of our use of predictive dialing equipment. The remaining
portion of the percentage decrease was the result of spreading the fixed portion
of our payroll cost structure over a larger revenue base.
The payroll and related expenses of our International Operations division
decreased $352,000 to $17.2 million in 2000, from $17.6 million in 1999, and
decreased as a percentage of revenue to 54.4% from 56.7%. This decrease as a
percentage of revenue was partially attributable to the reduction of redundant
information technology staff upon the completion of an internal systems
migration. In addition, a portion of the decrease was attributable to the
continuing process of rationalizing staff levels, as well as an increase in
productivity that was achieved through the expansion of our use of predictive
dialing equipment.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $51.7 million to $179.9 million in 2000 from
$128.2 million in 1999. Selling, general and administrative expenses increased
as a percentage of revenue to 29.7% in 2000 from 27.9% in 1999. The increase as
a percentage of revenue was primarily attributable to increased information
technology costs associated with the expansion of our use of predictive dialing
equipment. However, increased productivity more than offset the increase in
selling, general, and administrative expenses through a reduction in payroll and
related expenses. The remaining increase was primarily attributable to start-up
costs incurred as a result of new client relationships, further integration of
information technology infrastructure and increased collection costs attributed
to certain adverse changes in the payment patterns of consumers which made
collections more difficult in the second half of 2000.
Depreciation and amortization. Depreciation and amortization increased to
$32.4 million in 2000 from $21.8 million in 1999. Of this increase, $3.0 million
was attributable to a full year of depreciation related to the Compass
acquisition and $1.6 million was attributable to a full year of depreciation
related to the Co-Source acquisition. The remaining $6.0 million increase
consisted of depreciation resulting from normal capital expenditures made in the
ordinary course of business during 2000. These capital expenditures included
purchases associated with our planned migration towards a single, integrated
information technology platform, and predictive dialers and other equipment
required to expand our infrastructure to handle future growth.
Non-recurring acquisition costs. In the first quarter of 1999, we incurred
$4.6 million of nonrecurring acquisition costs in connection with the
acquisition of JDR. These costs consisted primarily of investment banking fees,
legal and accounting fees, and printing costs.
-26-
Other income (expense). Interest and investment income increased $1.1
million to $2.5 million for 2000 over the comparable period in 1999. This
increase was primarily attributable to an increase in funds held on behalf of
clients and the implementation of our new cash investment strategy. Interest
expense increased to $25.9 million for the year ended December 31, 2000, from
$18.3 million for the comparable period in 1999. The increase was primarily
attributable to our financing the May 1999 Co-Source acquisition with borrowings
of $122.7 million under the revolving credit facility. Additionally, a portion
of the increase was attributable to borrowings under the revolving credit
facility of $29.5 million that were used to repay debt that was assumed as a
result of the August 1999 acquisition of Compass. The remainder of the increase
was attributable to an increase in interest rates that was partially offset by
repayments of debt made during 2000. In addition, we received insurance proceeds
of approximately $1.3 million for flood and telephone outages experienced in the
fourth quarter of 1999.
Income tax expense. Income tax expense for 2000 increased to $32.0 million,
or 41.0%, of income before taxes, from $22.8 million, or 44.6% of income before
taxes, for 1999. The decrease in the effective tax rate was primarily
attributable to the nondeductible portion of the $4.6 million of nonrecurring
acquisition costs incurred during the first quarter of 1999 in connection with
the JDR acquisition. A portion of the decrease was attributable to higher
revenues diluting the impact of the nondeductible goodwill related to certain
acquisitions. In addition, as the result of tax savings initiatives implemented
during 2000, we were able to utilize, on a one-time basis, previously generated
tax benefits of $850,000.
Accretion of preferred stock to redemption value. The accretion of
preferred stock to redemption value relates to JDR's preferred stock that was
outstanding prior to its conversion into our common stock on March 31, 1999.
This non-cash accretion represents the periodic amortization of the difference
between the original carrying amount and the mandatory redemption amount.
Discontinued operations. The Market Strategy division had a net loss from
operations of $975,000 for the period from January 1, 2000 to April 14, 2000, as
compared to net income of $1.1 million for the year ended December 31, 1999. For
the year ended December 31, 2000, we recorded a $23.2 million net loss on the
disposal of the Market Strategy division. The loss on disposal included the
operations for the period from April 14, 2000 to completion of the divestiture.
We completed the divestiture of the Market Strategy division on October 26,
2000.
Year ended December 31, 1999 Compared to Year ended December 31, 1998
Revenue. Revenue increased $250.4 million, or 119.3%, to $460.3 million in
1999 from $209.9 million in 1998. Our U.S. Operations and International
Operations divisions represented $429.3 million and $31.0 million, respectively,
of the revenue for 1999.
Our U.S. Operations division's revenue increased $237.9 million, or 124.3%,
to $429.3 million for 1999, from $191.4 million for 1998. Incremental revenue
from the Compass and Co-Source acquisitions, which were completed in August and
May 1999, respectively, represented $28.0 million and $44.2 million of this
increase. Additionally, a full year of revenue from the acquisitions of Medaphis
Services Corporation, referred to as MSC, on November 30, 1998, MedSource, Inc.,
referred to as MedSource, on July 1, 1998, and FCA International Ltd., referred
to as FCA, on May 5, 1998, represented $101.4 million, $12.3 million, and $7.9
million of the increase, respectively. The remainder of the increase in the U.S.
Operations division's revenue was attributable to the addition of new clients
and the growth in business from existing clients.
-27-
The International Operations division's revenue increased $12.4 million, or
67.3%, to $31.0 million for the year ended December 31, 1999, from $18.6 million
for the comparable period in 1998. The International Operations division was
created in May 1998 as a result of the acquisition of FCA. The increase in 1999
was attributable to a full year of revenue from the Canadian and United Kingdom
operations of FCA.
Payroll and related expenses. Payroll and related expenses increased $130.9
million to $237.7 million in 1999 from $106.8 million in 1998, and increased as
a percentage of revenue to 51.6% from 50.9%.
The payroll and related expenses of the U.S. Operations division increased
$124.2 million to $220.1 million in 1999 from $95.9 million in 1998, and
increased as a percentage of revenue to 51.3% from 50.1%. This increase was due
primarily to several recent acquisitions having a higher cost structure than the
remainder of our business. In addition, a portion of this increase was
attributable to an increase in the size of our commercial operations, which have
a higher payroll cost structure than the consumer collection business. However,
the higher payroll structure of the commercial operations was offset by its
lower selling, general and administrative cost structure.
The payroll and related expenses of the International Operations division
increased $6.7 million to $17.6 million in 1999, from $10.9 million in 1998, but
decreased as a percentage of revenue to 56.7% from 58.8%. Payroll and related
expenses decreased as a percentage of revenue due to the successful integration
of FCA and spreading these costs over a larger revenue base.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $66.6 million to $128.2 million in 1999 from
$61.6 million in 1998. Selling, general and administrative expenses decreased as
a percentage of revenue to 27.9% from 29.3%. This percentage decrease resulted
from the realization of operating efficiencies and by spreading selling, general
and administrative expenses over a larger revenue base. In addition, a portion
of this percentage decrease was attributable to an increase in the size of the
commercial operations, which have lower selling, general and administrative cost
structures than the consumer collection business.
Depreciation and amortization. Depreciation and amortization increased to
$21.8 million in 1999 from $8.6 million in 1998. Of this increase, $1.7 million
was attributable to incremental depreciation from the Compass acquisition and
$2.2 million incremental depreciation from the Co-Source acquisition. In
addition, $4.0 million, $940,000 and $1.8 million was attributable a full year
of depreciation for MSC, a full year of depreciation for MedSource and a full
year of depreciation for FCA, respectively. The remaining $2.6 million consisted
of depreciation resulting from capital expenditures made in the ordinary course
of business during 1999. These capital expenditures included purchases
associated with our planned migration towards a single, integrated information
technologies platform, the expansion of our infrastructure to handle future
growth and our year 2000 compliance program.
Nonrecurring acquisition costs. In the first quarter of 1999, we incurred
$4.6 million of nonrecurring acquisition costs in connection with the JDR
acquisition. These costs consisted primarily of investment banking fees, legal
and accounting fees, and printing costs.
Other income (expense). Interest and investment income increased to $1.4
million for 1999 from $1.1 million in 1998. This increase was primarily
attributable to an increase in operating funds and funds held on behalf of
clients. Interest expense increased to $18.3 million in 1999 from $2.9 million
-28-
in 1998. The increase was partially attributable to a full year of interest
expense from our financing a portion of the July 1998 acquisition of MedSource
and all of the November 1998 acquisition of MSC with borrowings of $25.5 million
and $107.5 million, respectively, under our revolving credit facility. In
addition, we financed the May 1999 acquisition of Co-Source with borrowings of
$122.7 million under our revolving credit facility. In addition, a further
portion of the increase was attributable to borrowings under the revolving
credit facility of $29.5 million that were used to repay debt that was assumed
as a result of the Compass acquisition.
Income tax expense. Income tax expense for 1999 increased to $22.8 million,
or 44.6% of income before taxes, from $12.9 million, or 41.4% of income before
taxes, for 1998. The increase in the effective tax rate was partially
attributable to the impact of nondeductible goodwill related to certain
acquisitions. In addition, the increase was also attributable to the
nondeductible portion of the $4.6 million of nonrecurring acquisition costs
incurred during the first quarter of 1999 in connection with the JDR
acquisition.
Accretion of preferred stock to redemption value. The accretion of
preferred stock to redemption value relates to JDR's preferred stock that was
outstanding prior to its conversion into our common stock on March 31, 1999.
This non-cash accretion represents the periodic amortization of the difference
between the original carrying amount and the mandatory redemption amount.
Discontinued operations. The Market Strategy division had net income of
$1.1 million for 1999 as compared to net income of $82,000 for 1998.
Quarterly Results of Operations (Unaudited)
The following table sets forth selected historical financial data for the
calendar quarters of 1999 and 2000. This quarterly information is unaudited, but
has been prepared on a basis consistent with our audited financial statements
presented elsewhere herein and, in management'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. All amounts have been restated to reflect the divestiture of the Market
Strategy division in 2000.
1999 Quarters Ended
-------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- --------
(Amounts in thousands, except per share data)
Revenue $89,528 $103,955 $127,100 $139,728
Income from operations 8,304 16,102 19,978 23,635
Income from continuing operations, applicable
to common shareholders 1,945 7,206 8,405 10,366
Income from discontinued operations, net of taxes 184 315 497 71
Net income applicable to common shareholders 2,129 7,521 8,902 10,437
Income from continuing operations applicable to
common shareholders per share:
Basic $ 0.09 $ 0.34 $ 0.36 $ 0.41
Diluted $ 0.09 $ 0.32 $ 0.35 $ 0.40
Net income applicable to common shareholders
per share:
Basic $ 0.10 $ 0.35 $ 0.38 $ 0.41
Diluted $ 0.10 $ 0.34 $ 0.37 $ 0.40
-29-
2000 Quarters Ended
----------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
(Amounts in thousands, except per share data)
Revenue $143,998 $154,048 $153,858 $153,980
Income from operations 24,249 26,098 25,835 24,126
Income from continuing operations, applicable to
common shareholders 11,393 11,623 11,547 11,577
Loss from discontinued operations, net of taxes 21,718 71 2,365 -
Net (loss) income applicable to common shareholders (10,325) 11,552 9,182 11,577
Income from continuing operations applicable to
common shareholders per share:
Basic $ 0.45 $ 0.45 $ 0.45 $ 0.45
Diluted $ 0.44 $ 0.45 $ 0.45 $ 0.45
Net (loss) income applicable to common shareholders per share:
Basic $ (0.40) $ 0.45 $ 0.36 $ 0.45
Diluted $ (0.40) $ 0.45 $ 0.36 $ 0.45
We have experienced and expect 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 and collection programs, the commencement of new
contracts, the termination of existing contracts, the costs to support growth by
acquisition or otherwise, the 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. Additionally, our 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 our business
historically have been obscured by our rapid growth, our 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
Historically, our primary sources of cash have been bank borrowings, public
offerings, and cash flows from operations. Cash has been used for acquisitions,
repayments of bank borrowings, purchases of equipment, purchases of receivables,
and working capital to support our growth.
Cash Flows from Operating Activities. Cash provided by operating activities
was $52.3 million in 2000 and $47.7 million in 1999. The increase in cash
provided by operations was primarily due to the increase in income from
continuing operations to $46.1 million in 2000 from $28.3 million in 1999 and
the increase in non-cash charges, depreciation and amortization, to $32.4
million in 2000 from $21.8 million in 1999. A portion of these increases was
offset by the $14.8 million increase in accounts receivable and the $8.2 million
decrease in other long-term liabilities.
Cash provided by operating activities was $47.7 million in 1999 and $22.4
million in 1998. The increase in cash provided by operating activities was
primarily due to the increase in income from continuing operations to $28.3
million in 1999 from $18.3 million in 1998 and the increase in non-cash charges,
depreciation and amortization, to $21.8 million in 1999 from $8.6 million in
1998. In addition, a portion of the increase was the result of deferred taxes
that were recorded as a result of acquisition accounting. A portion of these
increases was offset by the $8.5 million increase in accounts receivable and the
$5.7 million decrease in accounts payable and accrued expenses.
-30-
Cash Flows from Investing Activities. Cash used in investing activities was
$69.6 million in 2000, compared to $170.0 million for 1999. The decrease was due
primarily to cash paid in 1999 to acquire Co-Source and Compass. We financed
these acquisitions with borrowings under our revolving credit agreement. This
increase was partially offset by a $25.3 million increase in the purchase of
delinquent receivables.
Cash used in investing activities was $170.0 million in 1999 compared to
$233.0 million for 1998. The decrease was due primarily to cash paid in 1998 to
acquire The Response Center, FCA, MedSource, and MSC. We financed these
acquisitions with the proceeds from our 1998 public offering and borrowings
under our revolving credit agreement. This increase was partially offset by our
financing the May 1999 acquisition of Co-Source with borrowings under our
revolving credit facility.
Capital expenditures were $31.0 million, $29.6 million, and $10.3 million
in 2000, 1999, and 1998, respectively.
Cash Flows from Financing Activities. Cash used in financing activities was
$19.8 million in 2000, compared to cash provided by financing activities of
$149.7 million in 1999. During 2000, we did not have any significant sources of
cash from financing activities and we repaid $19.0 million of borrowings under
our revolving credit agreement. During 1999, our primary source of cash from
financing activities was borrowings under the revolving credit facility that
were used to repay the existing debt under the JDR credit facility and to
finance the acquisition of Co-Source.
Cash provided by financing activities was $149.7 million in 1999, compared
to $203.0 million in 1998. During 1999, our primary source of cash from
financing activities was borrowings under our revolving credit facility that
were used to repay the existing debt under the JDR credit facility and to
finance the acquisition of Co-Source. Net proceeds of $91.3 million from our
1998 public offering and net borrowings of $135.6 million were our primary
sources of cash from financing activities in 1998,which were used for the
acquisitions of FCA, MedSource and MSC.
Credit Facility. We have a credit agreement with Mellon Bank, N.A., for
itself and as administrative agent for other participating lenders, to provide
for borrowings up to $350.0 million, structured as a $350.0 million revolving
credit facility. At our option, the borrowings bear interest at a rate equal to
either Mellon Bank's prime rate plus a margin of 0.25% to 0.50% that is
determined quarterly based upon our consolidated funded debt to earnings before
interest, taxes, depreciation, and amortization, also referred to as EBITDA,
ratio (Mellon Bank's prime rate was 9.50% at December 31, 2000), or the London
InterBank Offered Rate, also referred to as LIBOR, plus a margin of 1.25% to
2.25% depending on our consolidated funded debt to EBITDA ratio (LIBOR was 6.57%
at December 31, 2000). Borrowings are collateralized by substantially all of our
assets. The balance under the revolving credit facility shall become due on May
20, 2004. The credit agreement contains certain financial covenants such as
maintaining net worth and funded debt to EBITDA requirements and includes
restrictions on, among other things, acquisitions and distributions to
shareholders. As of December 31, 2000, we had $46.2 million available on our
revolving credit facility.
In connection with the merger of our subsidiary NCO Portfolio with
Creditrust, we amended our credit facility to provide for a $50.0 million
subfacility through which we may borrow under our credit facility for the
purpose of extending credit to NCO Portfolio. As of February 28, 2001, we have
loaned $36.3 million to NCO Portfolio.
We believe that funds generated from operations, together with existing
cash and available borrowings under our credit agreement will be sufficient to
-31-
finance our current operations, planned capital expenditure requirements, and
internal growth at least through the next twelve months. However, we could
require additional debt or equity financing if we were to make any other
significant acquisitions for cash during that period.
Market Risk
We are exposed to various types of market risk in the normal course of
business, including the impact of interest rate changes, foreign currency
exchange rate fluctuations, and changes in corporate tax rates. A material
change in these rates could adversely affect our operating results and cash
flows. A 25 basis-point increase in interest rates could increase our annual
interest expense by $250,000 for each $100 million of variable debt outstanding
for the entire year. We employ risk management strategies that may include the
use of derivatives such as interest rate swap agreements, interest rate ceilings
and floors, and foreign currency forwards and options to manage these exposures.
The fair value of the interest rate collar agreements was determined to be
immaterial at December 31, 1999 and 2000.
Goodwill
Our balance sheet includes amounts designated as intangibles, which are
predominantly comprised of "goodwill." Goodwill represents the excess of
purchase price over the fair market value of the net assets of the acquired
businesses, based on their respective fair values at the date of acquisition.
Generally accepted accounting principles in the United States requires that this
and all other intangible assets be amortized over the period benefited. Our
management has determined that period to range from 15 to 40 years based on the
attributes of each acquisition.
As of December 31, 2000, our balance sheet included goodwill that
represented approximately 67.9% of total assets and 137.7% of shareholders'
equity.
If our management has incorrectly overestimated the length of the
amortization period for goodwill, earnings reported in periods immediately
following the acquisition would be overstated. In later years, we would be
burdened by a continuing charge against earnings without the associated benefit
to income valued by management in arriving at the consideration paid for the
business. Earnings in later years also could be significantly affected if our
management determined then that the remaining balance of goodwill was impaired.
Our management has concluded that the anticipated future cash flows associated
with intangible assets recognized in the acquisitions will continue
indefinitely, and there is no persuasive evidence that any material portion will
dissipate over a period shorter than the respective amortization period.
Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
subsequently amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities --Deferral of the Effective Date of FASB Statement No. 133,"
collectively referred to as SFAS No. 133. SFAS No. 133 is effective for the
fiscal years beginning after June 15, 2000 and requires that an entity recognize
all derivative instruments as either assets or liabilities on its balance sheet
at their fair values. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction, and, if it is, the type
of hedge transaction. We will adopt SFAS No. 133 by the first quarter of 2001.
The adoption of SFAS No. 133 is not expected to have a material impact on our
consolidated results of operations, financial condition, or cash flows.
-32-
In February 2001, the FASB issued an Exposure Draft regarding Business
Combinations and Intangible Assets Accounting for Goodwill where it concluded
that purchased goodwill would not be amortized but would be reviewed for
impairment when certain events indicate that the goodwill of a reporting unit is
impaired. The impairment test will use a fair-value based approach, whereby if
the implied fair value of a reporting unit's goodwill is less than its carrying
amount, goodwill would be considered impaired. The proposed statement would not
require that goodwill be tested for impairment upon adoption of the final
statement unless an indicator of impairment exists at that date. However, it
would require that a benchmark assessment be performed for all existing
reporting units within six months of the date of adoption. The new goodwill
model would apply not only to goodwill arising from acquisitions completed after
the effective date of a new standard, but also to goodwill previously recorded.
We would be required to initially apply the provisions of this proposed
statement at the beginning of the first fiscal quarter following issuance of the
final statement.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.
Included in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, of this Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data.
The financial statements, financial statement schedules and related
documents that are filed with this Report are listed in Item 14(a) of this
Report on Form 10-K and begin on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
Previously reported.
-33-
PART III
Item 10. Directors and Executive Officers of the Registrant.
Incorporated by reference from the Company's Proxy Statement relating to
the 2001 Annual Meeting of Shareholders to be filed in accordance with General
Instruction G(3) to Form 10-K, except information concerning certain executive
officers of the Company which is set forth in Section 4.1 of this Annual Report
on Form 10-K.
Item 11. Executive Compensation.
Incorporated by reference from the Company's Proxy Statement relating to
the 2001 Annual Meeting of Shareholders to be filed in accordance with General
Instruction G(3) to Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference from the Company's Proxy Statement relating to
the 2001 Annual Meeting of Shareholders to be filed in accordance with General
Instruction G(3) to Form 10-K.
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference from the Company's Proxy Statement relating to
the 2001 Annual Meeting of Shareholders to be filed in accordance with General
Instruction G(3) to Form 10-K.
-34-
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K.
(a). Documents filed as part of this report:
1. List of Consolidated Financial Statements. The following consolidated
financial statements and the accompanying notes of NCO Group, Inc., have been
included in this Report on Form 10-K beginning on page F-1:
Report of Independent Auditors
Report of Independent Accountants
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1999 and 2000
Consolidated Statements of Income for each of the three years
in the period ended December 31, 2000
Consolidated Statements of Redeemable Preferred Stock and
Shareholders' Equity for each of the three years
in the period ended December 31, 2000
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 2000
Notes to Consolidated Financial Statements
2. List of Financial Statement Schedules. The following financial statement
schedule of NCO Group, Inc., has been included in this Report on Form 10-K
beginning on page S-1:
II - Valuation and Qualifying Accounts
All other financial statement schedules are omitted because the required
information is not present or not present in amounts sufficient to require
submission of the schedule or because the information required is included in
the respective financial statements or notes thereto contained herein.
3. List of Exhibits filed in accordance with Item 601 of Regulation S-K.
The following exhibits are incorporated by reference in, or filed with, this
Report on Form 10-K. Management contracts and compensatory plans, contracts and
arrangements are indicated by "*":
Exhibit No. Description
- ------------------ --------------------------------------------------------
2.1(5) Agreement and Plan of Reorganization, dated November 2,
1998, among JDR Holdings, Inc., NCO Group, inc. and JDR
Acquisition Inc. NCO will furnish to the Securities and
Exchange Commission a copy of any omitted schedules upon
request.
2.2(5) Agreement and Plan of Merger, dated November 2, 1998,
among JDR Holdings, Inc., NCO Group, Inc. and JDR
Acquisition Inc. NCO will furnish to the Securities and
Exchange Commission a copy of any omitted schedules upon
request.
-35-
2.3(7) Stock Purchase Agreement dated April 17, 1999, among
Co-Source Corporation, its shareholders and option
holders, H.I.G.-DCI Investments, L.P. and NCO Group,
Inc. NCO will furnish to the Securities and Exchange
Commission a copy of any omitted schedules upon request.
2.4(8) Agreement and Plan of Merger dated May 12, 1999, by and
among Compass International Services Corporation, NCO
Group, Inc. and Cardinal Acquisition Corporation. NCO
will furnish to the Securities and Exchange Commission a
copy of any omitted schedules upon request.
2.5 Asset Purchase Agreement dated October 26, 2000, among
TRC Holdings, Inc., and NCO Group, Inc. and its wholly
owned subsidiary, NCO Teleservices, Inc. NCO will
furnish to the Securities and Exchange Commission a copy
of any omitted schedules upon request.
2.6 Asset Purchase Agreement dated September 29, 2000, among
Creative Marketing Strategies, Inc. and NCO Group, Inc.
and its wholly owned subsidiary, NCO Teleservices, Inc.
NCO will furnish to the Securities and Exchange
Commission a copy of any omitted schedules upon request.
2.7(12) Second Amended and Restated Agreement and Plan of Merger
dated September 20, 2000, by and among Creditrust
Corporation, and NCO Group, Inc. and its wholly owned
subsidiaries, NCO Portfolio Funding, Inc. and NCO
Financial Systems, Inc. NCO will furnish to the
Securities and Exchange Commission a copy of any omitted
schedules upon request.
3.1(1) The Company's amended and restated Articles of
Incorporation.
3.2(3) Amendment to Amended and Restated Articles of
Incorporation.
3.3(1) The Company's amended and restated Bylaws.
4.1(1) Specimen of Common Stock Certificate.
4.2(7) Form of warrant to purchase NCO Group, Inc. common
stock.
*10.1(1) Employment Agreement, dated September 1, 1996, between
the Company and Michael J. Barrist.
*10.2(9) Addendum, dated January 1, 1999, to the Employment
Agreement, dated September 1, 1996, between the Company
and Michael J. Barrist.
*10.3(1) Employment Agreement, dated September 1, 1996, between
the Company and Steven L. Winokur.
*10.4(9) Addendum, dated January 1, 1999, to the Employment
Agreement, dated September 1, 1996, between the Company
and Steven L. Winokur.
*10.5 Employment Agreement, dated June 5, 1998, between the
Company and Joshua Gindin.
-36-
*10.6 Addendum, dated January 1, 1999, to the Employment
Agreement, dated June 5, 1998, between the Company and
Joshua Gindin.
*10.7(11) Employment Agreement, dated May 2, 1998, between the
Company and Paul E. Weitzel, Jr.
*10.8(11) Addendum, dated January 1, 1999, to the Employment
Agreement, dated May 2, 1998, between the Company and
Paul E. Weitzel, Jr.
*10.9(11) Employment Agreement, dated June 1, 1998, between the
Company and Robert Di Sante.
*10.10 Employment Agreement, dated December 8, 2000, between
the Company and Albert Zezulinski.
*10.11(1) Amended and Restated 1995 Stock Option Plan.
*10.12(4) 1996 Stock Option Plan, as amended.
*10.13(4) 1996 Non-Employee Director Stock Option Plan, as
amended.
10.14(1) Distribution and Tax Indemnification Agreement
10.15(1) Irrevocable Proxy Agreement by and between Michael J.
Barrist and Annette H. Barrist.
10.16(2) Nontransferable Common Stock Purchase Warrant dated
February 2, 1997, issued to CRW Financial, Inc.
10.17(2) Registration Rights Agreement dated February 2, 1997,
between NCO and CRW Financial, Inc.
10.18(11) Fifth Amended and Restated Credit Agreement dated as of
December 31, 1999, by and among NCO Group, Inc., as
Borrower, Mellon Bank, N.A., as Administrative Agent and
a Lender, and the Financial Institutions identified
therein as Lenders and such other Agents as may be
appointed from time to time. NCO will furnish to the
Securities and Exchange Commission a copy of any omitted
schedules upon request.
10.19(3) Executive Salary Continuation Agreement.
10.20(9) Transfer Agreement dated January 26, 1998, among NCO,
CRW Financial, Inc. and Swiss Bank Corporation.
*10.21(6) Compass International Services Corporation Employee
Incentive Compensation Plan
*10.22(10) JDR 1997 Option Plan
10.23 First Amendment, dated March 24, 2000, to the Fifth
Amended and Restated Credit Agreement dated as of
December 31, 1999, by and among NCO Group, Inc., as
Borrower, Mellon Bank, N.A., as Administrative Agent and
a Lender, and the Financial Institutions identified
therein as Lenders and such other Agents as may be
appointed from time to time. NCO will furnish to the
Securities and Exchange Commission a copy of any omitted
schedules upon request.
-37-
10.24 Second Amendment and Waiver, dated October 26, 2000, to
the Fifth Amended and Restated Credit Agreement dated as
of December 31, 1999, by and among NCO Group, Inc., as
Borrower, Mellon Bank, N.A., as Administrative Agent and
a Lender, and the Financial Institutions identified
therein as Lenders and such other Agents as may be
appointed from time to time. NCO will furnish to the
Securities and Exchange Commission a copy of any omitted
schedules upon request.
10.25 Third Amendment, dated December 15, 2000, to the Fifth
Amended and Restated Credit Agreement dated as of
December 31, 1999, by and among NCO Group, Inc., as
Borrower, Mellon Bank, N.A., as Administrative Agent and
a Lender, and the Financial Institutions identified
therein as Lenders and such other Agents as may be
appointed from time to time. NCO will furnish to the
Securities and Exchange Commission a copy of any omitted
schedules upon request.
10.26 Fourth Amendment, dated January 23, 2001, to the Fifth
Amended and Restated Credit Agreement dated as of
December 31, 1999 by and among NCO Group, Inc., as
Borrower, Mellon Bank, N.A., as Administrative Agent and
a Lender, and the Financial Institutions identified
therein as Lenders and such other Agents as may be
appointed from time to time. NCO will furnish to the
Securities and Exchange Commission a copy of any omitted
schedules upon request.
10.27 Fifth Amendment, dated February 20, 2001, to the Fifth
Amended and Restated Credit Agreement dated as of
December 31, 1999 by and among NCO Group, Inc., as
Borrower, Mellon Bank, N.A., as Administrative Agent and
a Lender, and the Financial Institutions identified
therein as Lenders and such other Agents as may be
appointed from time to time. NCO will furnish to the
Securities and Exchange Commission a copy of any omitted
schedules upon request.
10.28 Credit Agreement, dated as of February 20, 2001, by and
between NCO Portfolio Management, Inc., as Borrower, and
NCO Group, Inc., as Lender.
10.29 Note Receivable, dated October 27, 2000, from Creative
Marketing Strategies, Inc. for the original principal
amount of $6.0 million, as payment of the purchase price
for the acquisition of certain assets of NCO
Teleservices, Inc.
10.30 Note Receivable, dated October 26, 2000, from TRC
Holdings, Inc. for the original principal amount of
$12.25 million, as payment of the purchase price for the
acquisition of certain assets of NCO Teleservices, Inc.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Arthur Andersen LLP.
-38-
- ------------------------------
(1)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.
(2)Incorporated by reference to the Company's Current Report on Form 8-K/A (File
No. 0-21639) filed with the Securities and Exchange Commission on February 18,
1997.
(3)Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 (File No. 0-21639), filed with the Securities
and Exchange Commission on May 4, 1998.
(4)Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 (File No. 0-21639), filed with the Securities
and Exchange Commission on August 14, 1998.
(5)Incorporated by reference to the Company's Registration Statement on Form S-4
(Registration No. 333-73087), as amended, filed with the Securities and Exchange
Commission on February 26, 1998.
(6)Incorporated by reference to Compass International Service Corporation's
Registration Statement on Form S-1 (Registration No. 333-50021), as amended,
filed with the Securities and Exchange Commission on April 13, 1998.
(7)Incorporated by reference to the Company's Current Report on Form 8-K/A (File
No. 0-21639) filed with the Securities and Exchange Commission on August 4,
1999.
(8)Incorporated by reference to the Company's Proxy/Registration Statement on
Form-S-4 (Registration No. 333-83229) filed with the Securities and Exchange
Commission on July 20, 1999.
(9)Incorporated by reference to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 (File No. 0-21639), as amended, filed with
the Securities and Exchange Commission on March 31, 1999.
(10)Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 0-21639) filed with the Securities and Exchange Commission on April 15,
1999.
(11)Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999 (File No. 0-21639), as amended, filed
with the Securities and Exchange Commission on March 27, 2000.
(12)Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 0-21639) filed with the Securities and Exchange Commission on March 5, 2001.
(b). Reports on Form 8-K
Date of Report Item Reported
3/5/01 Item 2 - Creditrust Corporation acquisition
Item 5 - Investor Guidance for 2001
3/14/01 Item 7 - Creditrust Corporation acquisition
-39-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NCO GROUP, INC.
Date: March 16, 2001 By: /s/ Michael J. Barrist
----------------------
Michael J. Barrist, Chairman of the
Board, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
SIGNATURE TITLE(S) DATE
--------- -------- ----
/s/ Michael J. Barrist Chairman of the Board, President and Chief March 16, 2001
- ------------------------- Executive Officer (principal executive
Michael J. Barrist officer)
/s/ Steven L. Winokur Executive Vice President, Finance; Chief March 16, 2001
- ------------------------- Financial Officer; and Treasurer (principal
Steven L. Winokur financial and accounting officer)
/s/ William C. Dunkelberg Director March 16, 2001
- -------------------------
William C. Dunkelberg
/s/ Charles C. Piola, Jr. Director March 16, 2001
- -------------------------
Charles C. Piola, Jr.
/s/ Leo J. Pound Director March 16, 2001
- -------------------------
Leo J. Pound
/s/ Eric S. Siegel Director March 16, 2001
- -------------------------
Eric S. Siegel
/s/ Allen F. Wise Director March 16, 2001
- -------------------------
Allen F. Wise
/s/ Stuart Wolf Director March 16, 2001
- -------------------------
Stuart Wolf
-40-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Financial Statements:
Report of Independent Auditors...............................................F-2
Report of Independent Accountants............................................F-3
Report of Independent Public Accountants.....................................F-4
Consolidated Balance Sheets as of December 31, 1999 and 2000 ................F-5
Consolidated Statements of Income for each of the three years
in the period ended December 31, 2000...................................F-6
Consolidated Statements of Redeemable Preferred Stock and
Shareholders' Equity for each of the three years
in the period ended December 31, 2000...................................F-7
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 2000...................................F-8
Notes to Consolidated Financial Statements...................................F-9
Financial Statement Schedule:
For the years ended December 31, 1998, 1999 and 2000:
II - Valuation and Qualifying Accounts...................................S-1
F-1
Report of Independent Auditors
To the Board of Directors and
Shareholders of NCO Group, Inc.
We have audited the accompanying consolidated balance sheet of NCO Group, Inc.
as of December 31, 2000, and the related consolidated statements of income,
redeemable preferred stock and shareholders' equity, and cash flows for the year
then ended. Our audit also included the financial statement schedule for the
year ended December 31, 2000 listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of NCO Group, Inc. at
December 31, 2000, and the consolidated results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule for the year ended December 31, 2000, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
We also audited the reclassification of the 1999 consolidated balance sheet and
the 1998 and 1999 consolidated statements of income and cash flows and schedule
as a result of the discontinued operations described in Note 3. In our opinion,
the reclassification adjustments are appropriate and have been properly applied.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 13, 2001
F-2
Report of Independent Accountants
To the Board of Directors
and Shareholders of NCO Group, Inc.:
In our opinion, based on our audits and the report of other auditors, the
consolidated balance sheets and the related consolidated statements of income,
redeemable preferred stock and shareholders' equity and of cash flows present
fairly, in all material respects, the financial position of NCO Group, Inc. and
its subsidiaries at December 31, 1999 prior to its restatement for discontinued
operations (and, therefore, is not presented herein), and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1999 prior to their restatement for discontinued operations (and,
therefore, are not presented herein) in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
Schedule II-Valuation and Qualifying Accounts (the financial statement schedule)
presents fairly, in all material respects, the information set forth therein for
each of the two years ended December 31, 1999 prior to its restatement for
discontinued operations (and, therefore is not presented herein) when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule (prior to their
restatement) based on our audits. The consolidated financial statements and
financial statement schedule give retroactive effect to the merger of JDR
Holdings, Inc. on March 31, 1999 in a transaction accounted for as a pooling of
interests, as described in Note 4 to the consolidated financial statements. We
did not audit the financial statements of JDR Holdings, Inc., which statements
reflect total revenues of $50,976,251 for the year ended December 31, 1998.
Those statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for JDR Holdings, Inc., is based solely on the report of the
other auditors. We conducted our audits of these statements (prior to
restatement) in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, PA
February 16, 2000
F-3
Report of Independent Public Accountants
To JDR Holdings, Inc.:
We have audited the consolidated statements of operations, redeemable preferred
and common stock and stockholders' equity (deficit), and cash flows of JDR
Holdings, Inc. (a Delaware corporation) and subsidiaries for the year ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of their operations and their cash flows of
JDR Holdings, Inc. and subsidiaries for the year ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Philadelphia, Pa.,
January 29, 1999
F-4
Part 1 - Financial Information
Item 1 - Financial Statements
NCO GROUP, INC.
Consolidated Balance Sheets
(Amounts in thousands)
December 31,
----------------------------------
ASSETS 1999 2000
---------------- --------------
Current assets:
Cash and cash equivalents $ 50,513 $ 13,490
Accounts receivable, trade, net of allowance for
doubtful accounts of $5,391 and $7,080, respectively 70,430 93,971
Purchased accounts receivable, current portion 2,517 10,861
Deferred income taxes 2,965 2,287
Other current assets 5,800 7,925
---------- ----------
Total current assets 132,225 128,534
Funds held on behalf of clients
Property and equipment, net 53,714 66,401
Other assets:
Intangibles, net of accumulated amortization 553,879 536,750
Net assets of discontinued operations 41,492 -
Purchased accounts receivable, net of current portion 4,202 23,614
Notes receivable - 18,250
Other assets 6,180 10,457
---------- ----------
Total other assets 605,753 589,071
---------- ----------
Total assets $ 791,692 $ 784,006
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 1,302 $ 642
Corporate taxes payable 11,490 1,328
Accounts payable 8,457 12,360
Accrued expenses 30,430 19,168
Accrued compensation and related expenses 14,609 15,304
---------- ----------
Total current liabilities 66,288 48,802
Funds held on behalf of clients
Long-term liabilities:
Long-term debt, net of current portion 323,949 303,920
Deferred income taxes 25,747 40,549
Other long-term liabilities 10,820 4,309
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized,
no shares issued and outstanding - -
Common stock, no par value, 37,500 shares authorized, 25,533 and 25,627
shares issued and outstanding, respectively 314,601 316,372
Other comprehensive income (loss) 694 (1,525)
Retained earnings 49,593 71,579
---------- ----------
Total shareholders' equity 364,888 386,426
---------- ----------
Total liabilities and shareholders' equity $ 791,692 $ 784,006
========== ==========
See accompanying notes.
F-5
NCO GROUP, INC.
Consolidated Statements of Income
(Amounts in thousands, except per share data)
For the Years Ended December 31,
---------------------------------------------------
1998 1999 2000
----------- ---------- ------------
Revenue $ 209,947 $ 460,311 $ 605,884
Operating costs and expenses:
Payroll and related expenses 106,787 237,709 293,292
Selling, general, and administrative
expenses 61,607 128,177 179,924
Depreciation and amortization expense 8,615 21,805 32,360
Nonrecurring acquisition costs - 4,601 -
---------- ---------- ----------
Total operating costs and expenses 177,009 392,292 505,576
---------- ---------- ----------
Income from operations 32,938 68,019 100,308
Other income (expense):
Interest and investment income 1,135 1,363 2,503
Interest expense (2,929) (18,262) (25,942)
Other income - - 1,313
---------- ---------- ----------
Total other income (expense) (1,794) (16,899) (22,126)
---------- ---------- ----------
Income before income tax expense 31,144 51,120 78,182
Income tax expense 12,881 22,821 32,042
---------- ---------- ----------
Income from continuing operations 18,263 28,299 46,140
Accretion of preferred stock to redemption value (1,604) (377) -
---------- ---------- ----------
Income from continuing operations applicable to
common shareholders 16,659 27,922 46,140
Discontinued operations, net of income taxes:
Income (loss) from discontinued operations 82 1,067 (975)
Loss on disposal of discontinued operations - - (23,179)
---------- ---------- ----------
Net income applicable to common shareholders $ 16,741 $ 28,989 $ 21,986
========== ========== ==========
Income from continuing operations applicable to
common shareholders per share:
Basic $ 0.91 $ 1.22 $ 1.80
Diluted $ 0.84 $ 1.17 $ 1.79
Net income applicable to common shareholders per share:
Basic $ 0.91 $ 1.27 $ 0.86
Diluted $ 0.85 $ 1.22 $ 0.85
Weighted average shares outstanding:
Basic 18,324 22,873 25,587
Diluted 19,758 23,799 25,842
See accompanying notes.
F-6
NCO GROUP, INC.
Consolidated Statements of Redeemable Preferred Stock
and Shareholders' Equity
For the Years Ended December 31, 1998, 1999 and 2000
(Amounts in thousands)
----------------------------------------------------
Redeemable Preferred Stock Preferred Stock Common Stock
-------------------------- ------------------------ ---------------------
Number of Number of Number of
Shares Amount Shares Amount Shares Amount
--------- -------- --------- -------- --------- --------
Balance, January 1, 1998 451 $ 6,522 149 $ 1,746 15,277 $ 88,961
Issuance of common stock - - - - 4,802 93,637
Exercise of voting and nonvoting
common conversion options 334 3,863 - - (334) -
Accretion of preferred to redemption value - 1,497 - 107 - -
Common stock options granted to consultant - - - - - 687
Redemption of nonvoting common - - - - (1) -
Comprehensive income, net of tax:
Net income - - - - - -
Other comprehensive income:
Foreign currency translation adjustment - - - - - -
Total comprehensive income
------ -------- ----- -------- ------- ---------
Balance, December 31, 1998 785 11,882 149 1,853 19,744 183,285
Issuance of common stock - - - - 4,747 119,387
Issuance of warrants in conjunction with
acquisitions - - - - - 1,925
Accretion of preferred to redemption value 93 349 15 28 - -
Exchange of redeemable preferred stock
for common stock (878) (12,231) - - 878 12,231
Exchange of convertible preferred stock
for common stock - - (164) (1,881) 164 1,881
Retirement of treasury stock - - - - - (4,108)
Comprehensive income, net of tax:
Net income - - - - - -
Other comprehensive income:
Foreign currency translation adjustment - - - - - -
Total comprehensive income
------ -------- ----- -------- ------- ---------
Balance, December 31, 1999 - - - - 25,533 314,601
Issuance of common stock - - - - 94 1,771
Comprehensive income, net of tax:
Net income - - - - - -
Other comprehensive income:
Foreign currency translation adjustment - - - - - -
Total comprehensive income
------ -------- ----- -------- ------- ---------
Balance, December 31, 2000 - $ - - $ - 25,627 $316,372
====== ======== ===== ======== ======= =========
Shareholders' Equity
------------------------------------------------------------------------------------
Treasury Stock
----------------------- Other
Number of Comprehensive Retained Comprehensive
Shares Amount Income (Loss) Earnings Income Total
--------- -------- ------------- -------- ------------- --------
Balance, January 1, 1998 20 $ (234) $ - $ 3,863 $ 94,336
Issuance of common stock - - - - 93,637
Exercise of voting and nonvoting
common conversion options 335 (3,863) - - (3,863)
Accretion of preferred to redemption value - - - (1,604) (1,497)
Common stock options granted to consultant - - - - 687
Redemption of nonvoting common 1 (11) - - (11)
Comprehensive income, net of tax:
Net income - - - 18,345 $ 18,345 18,345
Other comprehensive income:
Foreign currency translation adjustment - - (2,169) - (2,169) (2,169)
---------
Total comprehensive income $ 16,176
----- ------- -------- -------- ========= --------
Balance, December 31, 1998 356 (4,108) (2,169) 20,604 199,465
Issuance of common stock - - - - 119,387
Issuance of warrants in conjunction with
acquisitions - - - - 1,925
Accretion of preferred to redemption value - - - (377) (349)
Exchange of redeemable preferred stock
for common stock - - - - 12,231
Exchange of convertible preferred stock
for common stock - - - - -
Retirement of treasury stock (356) 4,108 - - -
Comprehensive income, net of tax:
Net income - - - 29,366 $ 29,366 29,366
Other comprehensive income:
Foreign currency translation adjustment - - 2,863 - 2,863 2,863
---------
Total comprehensive income $ 32,229
----- ------- -------- -------- ========= --------
Balance, December 31, 1999 - - 694 49,593 364,888
Issuance of common stock - - - - 1,771
Comprehensive income, net of tax:
Net income - - - 21,986 $ 21,986 21,986
Other comprehensive income:
Foreign currency translation adjustment - - (2,219) - (2,219) (2,219)
---------
Total comprehensive income $ 19,767
----- ------- -------- -------- ========= --------
Balance, December 31, 2000 - $ - $ (1,525) $ 71,579 $386,426
===== ======= ======== ======== ========
See accompanying notes.
F-7
NCO GROUP, INC
Consolidated Statements of Cash Flows
(Amounts in thousands)
For the Years Ended December 31,
-------------------------------------------------
1998 1999 2000
---------- ---------- ----------
Cash flows from operating activities:
Income from continuing operations $ 18,263 $ 28,299 $ 46,140
Adjustments to reconcile income from continuing
operations to net cash provided by continuing
operating activities:
Depreciation 3,616 8,342 15,180
Amortization of intangibles 4,999 13,463 17,180
Write-off of deferred financing costs - 353 -
Provision for doubtful accounts 927 2,553 5,906
Compensation expense on stock options granted 686 34 -
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, trade (6,416) (14,906) (29,696)
Deferred taxes 3,090 16,980 15,480
Other assets (434) (1,496) (5,293)
Accounts payable and accrued expenses (334) (6,067) 977
Corporate taxes payable 59 (1,644) (9,568)
Other long-term liabilities - 1,711 (6,511)
---------- ---------- ----------
Net cash provided by continuing operating activities 24,456 47,622 49,795
Net cash (used in) provided by discontinued
operating activities (2,067) 120 2,487
---------- ---------- ----------
Net cash provided by operating activities 22,389 47,742 52,282
Cash flows from investing activities:
Acquisition of purchased accounts receivable (857) (7,660) (32,961)
Collections applied to principal of purchased
accounts receivable 972 2,538 5,084
Purchase of property and equipment (10,292) (29,631) (31,042)
Net cash paid for acquisitions (222,843) (135,237) (10,665)
---------- ---------- ----------
Net cash used in investing activities (233,020) (169,990) (69,584)
Cash flows from financing activities:
Repayment of notes payable (1,256) (1,574) (1,934)
Repayment of acquired notes payable (21,919) (42,000) -
Borrowings under revolving credit agreement 94,789 190,715 -
Repayment of borrowings under revolving credit agreement (84,193) (4,000) (19,000)
Borrowings under term loan 125,000 - -
Payment of fees to acquire new debt (3,015) (3,565) -
Issuance of common stock, net 93,637 10,079 1,175
Redemption of common stock (11) - -
---------- ---------- ----------
Net cash provided by (used in) financing activities 203,032 149,655 (19,759)
Effect of exchange rate on cash (67) 578 38
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents (7,666) 27,985 (37,023)
Cash and cash equivalents at beginning of year 30,194 22,528 50,513
---------- ---------- ----------
Cash and cash equivalents at end of year $ 22,528 $ 50,513 $ 13,490
========== ========== ==========
See accompanying notes.
F-8
NCO GROUP, INC.
Notes to Consolidated Financial Statements
1. Nature of operations:
NCO Group, Inc. (the "Company") is a leading provider of accounts receivable
management and collection services. The Company's client base includes companies
in the financial services, healthcare, education, commercial, retail, utilities,
government and telecommunications sectors. These clients are primarily located
throughout the United States of America, Canada, the United Kingdom and Puerto
Rico.
2. Accounting policies:
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries after elimination of significant intercompany
accounts and transactions.
Revenue Recognition:
The Company generates revenues from contingent fees and contractual services.
Contingent fee revenue is recognized upon collection of funds on behalf of
clients. Contractual services revenue is recognized as services are performed
and accepted by the client.
The Company also generates revenues from purchased accounts receivable and
recognizes revenue based on estimates of future portfolio collections and the
timing of these collections on a periodic basis. The Company reviews and adjusts
the amount and timing of expected future collections based on the performance of
the portfolios to date.
Credit Policy:
The Company has two types of arrangements under which it collects its contingent
fee revenue. For certain clients, the Company remits funds collected on behalf
of the client net of the related contingent fees while, for other clients, the
Company remits gross funds collected on behalf of clients and bills the client
separately for its contingent fees. Management carefully monitors its client
relationships in order to minimize its credit risk and generally does not
require collateral. In many cases, in the event of collection delays from
clients, management may, at its discretion, change from the gross remittance
method to the net remittance method.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with an initial
maturity of three months or less to be cash equivalents. These financial
instruments potentially subject the Company to concentrations of credit risk.
The Company minimizes this risk by dealing with major financial institutions
that have high credit ratings.
Property and Equipment:
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful life of each class of assets
using the straight-line method. Expenditures for maintenance and repairs are
charged to expense as incurred. Renewals and betterments are capitalized. When
property is sold or retired, the cost and related accumulated depreciation are
removed from the balance sheet and any gain or loss on the transaction is
included in the statement of income.
F-9
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
2. Accounting policies (continued):
Property and Equipment (continued):
Effective January 1, 1999, the Company adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 identified the characteristics of internal
use software and established guidelines for identifying which costs must be
expensed as incurred and which costs must be capitalized.
The Company reviews long-lived assets and certain identifiable intangibles for
impairment, based on the estimated undiscounted future cash flows, whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable.
Intangibles:
Intangibles consists primarily of goodwill and deferred financing costs.
Goodwill represents the excess of purchase price over the fair market value of
the net assets of the acquired businesses based on their respective fair values
at the date of acquisition. Goodwill is amortized on a straight-line basis over
15 to 40 years. The Company reviews the recoverability of its goodwill whenever
events or changes in circumstances indicate that the carrying amount of the
goodwill may not be recoverable. If such circumstances arise, the Company would
use an estimate of the undiscounted value of expected future operating cash
flows to determine whether the goodwill is recoverable.
Deferred financing costs relate to debt issuance costs incurred, which are
capitalized and amortized over the term of the debt.
Accumulated amortization at December 31, 1999 and 2000 totaled $21.9 million and
$37.7 million, respectively.
Income Taxes:
The Company accounts for income taxes using an asset and liability approach. The
asset and liability approach requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the financial reporting basis and the tax basis of assets and
liabilities.
Income taxes were computed after giving effect to the nondeductible portion of
goodwill expenses attributable to certain acquisitions and, in 1999,
nonrecurring acquisition costs attributable to the acquisition of JDR Holdings,
Inc. ("JDR") on March 31, 1999.
Foreign Currency Translation:
The Company has foreign subsidiaries whose local currency has been determined to
be the functional currency. For these foreign subsidiaries, the assets and
liabilities have been translated using the current exchange rates, and the
income and expenses have been translated using historical exchange rates. The
adjustments resulting from translation have been recorded separately in
shareholders' equity as other comprehensive income and are not included in
determining consolidated net income.
F-10
2. Accounting policies (continued):
Use of Estimates:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications:
Certain amounts for December 31, 1998 and 1999, and for the years then ended
have been reclassified for comparative purposes.
3. Discontinued operations:
On April 14, 2000 (the "Measurement Date"), the Company's Board of Directors
approved a plan to divest the Company's Market Strategy division as part of its
strategic plan to increase long-term shareholder value and focus on its core
business of accounts receivable management services. The Market Strategy
division provided market research and telemarketing services. The market
research assets were acquired through the January 1997 acquisition of the
Tele-Research Center, Inc. and the February 1998 acquisition of The Response
Center. The telemarketing assets were acquired as non-core components of the
March 1999 acquisition of JDR, and the August 1999 acquisition of Compass
International Services Corporation. On October 26, 2000, TRC Holdings, Inc. and
Creative Marketing Strategies, Inc., both management-led groups, acquired the
assets of the market research and telemarketing businesses, respectively.
In consideration for the purchased assets of the market research business, the
Company received a $12.25 million note. The note earns interest at a fixed rate
of 9% per year and the interest payments are due monthly. The entire principal
balance is due on December 31, 2002. In the event that the principal and the
remaining interest is not paid in full on December 31, 2002, the principal of
the note will be increased by a maximum of $2.0 million. The remaining principal
and interest will be due in equal monthly payments until December 31, 2005.
In consideration for the purchased assets of the telemarketing business, the
Company received a $6.0 million note. The note earns interest at a fixed rate of
9% per year and the interest payments are due monthly. Commencing on December 1,
2003, in addition to the interest payments, principal payments of $25,000 will
be due monthly until November 1, 2005. The remaining principal and interest will
become due in full on November 1, 2005.
In accordance with the Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the
consolidated financial statements and the accompanying notes of the Company have
been presented to reflect the Market Strategy division as discontinued
operations for all periods presented.
F-11
3. Discontinued operations (continued):
The following summary of the assets and liabilities of the Market Strategy
division has been presented net in the Company's consolidated balance sheet as
of December 31, 1999 as follows (amounts in thousands):
Current assets $13,734
Total assets 47,740
Current liabilities 6,248
Total liabilities 6,248
Net assets of discontinued operations 41,492
The following summary of the Market Strategy division's operations prior to the
Measurement Date for the years ended December 31, 1998, 1999, and 2000 have been
presented net in the Company's consolidated statements of operations (amounts in
thousands):
1998 1999 2000
----------- ----------- ------------
Revenue $20,005 $32,043 $7,802
=========== =========== ============
Income (loss) from discontinued operations
before income tax expense $332 $1,940 $(1,498)
Income tax expense (benefit) 250 873 (523)
----------- ----------- ------------
Income (loss) from discontinued operations,
net of income taxes $ 82 $1,067 $ (975)
=========== =========== ============
For the year ended December 31, 2000, the Company recorded a $23.2 million loss
(net of a tax benefit of $4.3 million), or $0.90 loss per share on a diluted
basis, on the disposal of the Market Strategy division. This loss reflects the
difference between the net assets of the Market Strategy division and the
proceeds from the divestiture as well as the operating losses from the
Measurement Date through the completion of the divestiture in October 2000.
Included in this loss was a write-off of $29.9 million of goodwill. Also
included in this loss was an extraordinary item of $6.3 million (net of taxes of
$42,000), or $0.24 per share on a diluted basis, from the loss on the disposal
of the portion of the telemarketing business that was acquired with JDR. The
purchase of JDR was accounted for as a pooling-of-interests transaction, and the
Company had no plans or intentions to dispose of JDR's telemarketing business at
the time of the acquisition.
For the years ended December 31, 1998 and 1999 and for the period in 2000 before
the Measurement Date, the income (loss) from discontinued operations, net of
taxes, included an allocation of interest expense of $929,000, $1.1 million, and
$441,000, respectively. For the period in 2000 from the Measurement Date through
the divestiture date, the loss on the disposal of discontinued operations
included an allocation of interest expense of $706,000. The interest expense was
allocated to the Market Strategy division based on the expected proceeds.
F-12
4. Acquisitions:
Pooling-of-Interests Transaction:
On March 31, 1999, the Company acquired all of the outstanding shares of JDR for
approximately 3.4 million shares of NCO common stock. The transaction was
accounted for as a pooling-of-interests and a tax-free reorganization.
Accordingly, the historical financial information of the Company has been
restated to include the historical information of JDR.
For the year ended December 31, 1999, the Company incurred $4.6 million of
nonrecurring acquisition costs in connection with the JDR acquisition. These
costs consisted primarily of investment banking fees, legal and accounting fees,
and printing costs.
Purchase Transactions:
The following acquisitions have been accounted for under the purchase method of
accounting. As part of the purchase accounting, the Company recorded accruals
for acquisition related expenses. These accruals included professional fees
related to the acquisition, termination costs related to certain redundant
personnel immediately eliminated at the time of the acquisitions, and certain
future rental obligations attributable to facilities which were closed at the
time of the acquisitions.
On January 1, 1998, the Company purchased the net assets of the Collections
Division of American Financial Enterprises, Inc. for $1.7 million in cash. The
Company recognized goodwill of $2.2 million and is amortizing the goodwill on a
straight-line basis over 25 years.
On February 6, 1998, the Company purchased the net assets of The Response
Center, which was an operating division of TeleSpectrum Worldwide, Inc., for
$15.0 million in cash. The Company recognized goodwill of $14.3 million and is
amortizing the goodwill on a straight-line basis over 25 years.
On May 5, 1998, the Company purchased all of the outstanding common shares of
FCA International Ltd. ("FCA") for $69.9 million in cash. The Company recognized
goodwill of $93.2 million and is amortizing the goodwill on a straight-line
basis over 40 years.
On July 1, 1998, the Company purchased all of the outstanding stock of
MedSource, Inc. for $18.4 million in cash. In connection with the acquisition,
the Company repaid debt of $17.3 million. The Company recognized goodwill of
$37.2 million and is amortizing the goodwill on a straight-line basis over 25
years.
On November 30, 1998, the Company acquired all of the outstanding stock of
Medaphis Services Corporation ("MSC"), a wholly owned subsidiary of Medaphis
Corporation, for $107.5 million in cash, plus an earn-out of $10.0 million based
on MSC achieving certain operational targets during 1999. The Company recognized
goodwill of $115.7 million and is amortizing the goodwill on a straight-line
basis over 40 years.
On May 21, 1999, the Company acquired all of the outstanding stock of Co-Source
Corporation ("Co-Source") for approximately $122.7 million in cash plus a
warrant to purchase 250,000 shares of NCO common stock. The purchase price was
valued at approximately $124.6 million. The Company recognized goodwill of
$128.6 million and is amortizing the goodwill on a straight-line basis over 40
years.
On August 20, 1999, the Company acquired all of the outstanding shares of
Compass International Services Corporation ("Compass") for approximately 3.3
million shares of NCO common stock. In connection with the acquisition, the
Company assumed outstanding stock options to purchase approximately 200,000
shares of NCO common stock. The purchase price was valued at approximately
$104.1 million. The Company recognized goodwill of $139.1 million and is
amortizing the goodwill on a straight-line basis over 40 years.
F-13
4. Acquisitions (continued):
Purchase Transactions (continued):
The following summarizes the unaudited pro forma results of operations for the
acquisitions completed during the year ended December 31, 1999, assuming these
acquisitions had occurred as of the beginning of the year. The pro forma
information is provided for informational purposes only. It is based on
historical information and does not necessarily reflect the actual results that
would have occurred, nor is it indicative of future results of operations of the
consolidated entities (amounts in thousands):
1999
---------------
(Unaudited)
Revenue $ 539,251
Income from continuing operations applicable
to common shareholders $ 25,876
Income from continuing operations applicable
to common shareholders per share:
Basic $ 1.04
Diluted $ 1.00
5. Funds held on behalf of clients:
In the course of the Company's regular business activities as a provider of
accounts receivable management services, the Company receives clients' funds
arising from the collection of accounts placed with the Company. These funds are
placed in segregated cash accounts and are generally remitted to clients within
30 days. Funds held on behalf of clients of $47.7 million and $54.1 million at
December 31, 1999 and 2000, respectively, have been shown net of their
offsetting liability for financial statement presentation.
6. Property and equipment:
Property and equipment, at cost, consisted of the following at December 31, 1999
and 2000 (amounts in thousands):
Estimated
Useful Life 1999 2000
-------------- ------ ------
Computer equipment 5 years $ 46,711 $ 60,049
Furniture and fixtures 5 to 10 years 9,033 10,638
Computer software developed
for internal use 5 years 8,407 18,040
Leasehold improvements 5 to 12 years 4,117 7,226
-------- --------
68,268 95,953
Less accumulated depreciation 14,554 29,552
-------- --------
$ 53,714 $ 66,401
======== ========
Depreciation charged to operations amounted to $3.6 million, $8.3 million, and
$15.2 million for the years ended December 31, 1998, 1999, and 2000,
respectively.
F-14
7. Long-term debt:
Long-term debt consisted of the following at December 31, 1999 and 2000 (amounts
in thousands):
1999 2000
--------- ---------
Revolving credit loan $ 322,750 $ 303,750
Subordinated seller notes payable; interest rates ranging
from 7.16% to 8.00%, $750,000 due May 2000 through
August 2000 and $130,000 due May 2001 880 130
Capital leases 1,621 682
Less current portion (1,302) (642)
--------- ---------
$ 323,949 $ 303,920
========= =========
The following summarizes the Company's required debt payments (amounts in
thousands):
2001 $ 642
2002 161
2003 9
2004 303,750
The Company has a credit agreement with Mellon Bank, N.A. ("Mellon Bank"), for
itself and as administrative agent for other participating lenders, that
provides for borrowings up to $350.0 million, structured as a $350.0 million
revolving credit facility. At the option of NCO, the borrowings bear interest at
a rate equal to either Mellon Bank's prime rate plus a margin of 0.25% to 0.50%
that is determined quarterly based upon the Company's consolidated funded debt
to earnings before interest, taxes, depreciation, and amortization ("EBITDA")
ratio (Mellon Bank's prime rate was 9.50% at December 31, 2000), or the London
InterBank Offered Rate ("LIBOR") plus a margin of 1.25% to 2.25% depending on
the Company's consolidated funded debt to EBITDA ratio (LIBOR was 6.57% at
December 31, 2000). The Company is charged a fee on the unused portion of the
credit facility ranging from 0.13% to 0.38% depending on the Company's
consolidated funded debt to EBITDA ratio.
Borrowings are collateralized by substantially all the assets of the Company.
The balance under the revolving credit facility shall become due on May 20,
2004. The credit agreement contains certain financial covenants such as
maintaining net worth and funded debt to EBITDA requirements and includes
restrictions on, among other things, acquisitions and distributions to
shareholders.
At December 31, 2000, the Company had unused letters of credit of $2.6 million.
The Company leases certain equipment under agreements that are classified as
capital leases. The equipment leases have original terms ranging from 24 to 120
months and have purchase options at the end of the original lease term.
F-15
8. Operating leases:
The Company leases certain equipment and real estate facilities under
non-cancelable operating leases. Future minimum payments, by year and in the
aggregate, under non-cancelable operating leases with initial or remaining terms
of one year or more consisted of the following at December 31, 2000 (amounts in
thousands):
2001 $ 17,900
2002 14,409
2003 11,384
2004 9,681
2005 8,781
Thereafter 35,073
--------
$ 97,228
========
Rent expense was $7.3 million, $14.3 million, and $17.8 million for the years
ended December 31, 1998, 1999, and 2000, respectively. The total amount of base
rent payments is being charged to expense on the straight-line method over the
term of the lease.
9. Income taxes:
Income tax expense consisted of the following components for the years ended
December 31, 1998, 1999, and 2000 (amounts in thousands):
1998 1999 2000
------- ------- --------
Currently payable:
Federal $ 7,699 $ 9,158 $ 16,280
State 1,353 548 1,613
Foreign 331 500 1,269
Deferred:
Federal 2,823 10,314 12,180
State 675 2,301 1,353
Foreign - - (653)
-------- -------- --------
Provision for income taxes $ 12,881 $ 22,821 $ 32,042
======== ======== ========
Deferred tax assets (liabilities) consisted of the following at December 31,
1999 and 2000 (amounts in thousands):
1999 2000
---------- ---------
Deferred tax assets:
Net operating loss carryforwards $ - $ 5,279
Accrued expenses 2,965 3,751
--------- --------
Total deferred tax assets 2,965 9,030
Valuation allowance - 3,673
--------- --------
Net deferred tax assets 2,965 5,357
--------- --------
Deferred tax liabilities:
Amortization 21,310 29,576
Depreciation 4,437 9,103
Purchased accounts receivable - 4,940
--------- --------
25,747 43,619
--------- --------
Net deferred tax liabilities $ (22,782) $(38,262)
========= ========
F-16
9. Income taxes (continued):
The Company had state and foreign net operating loss carryforwards in the amount
of $7.8 million, subject to certain limitations, available at December 31, 2000,
which will expire during the years 2004 through 2010.
A reconciliation of the U.S. statutory income tax rate to the effective rate
(excluding the effect of the change in tax status) for the years ended December
31, 1998, 1999, and 2000 was as follows:
1998 1999 2000
------ ------ ------
U.S. statutory income tax rate 35.0% 35.0% 35.0%
Nondeductible goodwill and other
expenses 1.7 5.6 3.6
State taxes, net of federal 5.7 4.0 2.5
Utilization of net operating loss
carryforwards (1.0) - -
Benefit from foreign net operating losses - - (1.1)
Other, net - - 1.0
----- ----- -----
Effective tax rate 41.4% 44.6% 41.0%
===== ===== =====
10. Redeemable preferred stock and shareholders' equity:
Redeemable Preferred Stock
All of JDR's Redeemable Series A Preferred stock, Convertible Series A Preferred
stock and Convertible Series B Preferred stock was exchanged for NCO common
stock on March 31, 1999.
Preferred Stock
All of JDR's Series C Preferred stock was converted into NCO common stock on
March 31, 1999.
Common Stock
In June 1998, the Company completed a public offering, selling 4,469,000 shares
of common stock (469,000 of which were over-allotment shares exercised in July
1998) at a price to the public of $21.50 per share. The Company received net
proceeds, after underwriting discounts and expenses, of approximately $91.3
million.
Nonvoting Common Stock
All of JDR's nonvoting common stock was exchanged for NCO common stock on March
31, 1999.
Treasury Stock
All of JDR's treasury shares were retired on March 31, 1999.
F-17
10. Redeemable preferred stock and shareholders' equity (continued):
Common Stock Warrants
In February 1997, the Company issued warrants to purchase 375,000 shares of NCO
common stock, at $18.42 per share, in connection with the acquisition of certain
assets and the assumption of certain liabilities of the Collections Division of
CRW Financial, Inc. All of these warrants were outstanding as of December 31,
2000. These warrants expire in January 2002.
In May 1997, JDR issued warrants to purchase 621,000 shares of nonvoting common
stock at a nominal value in connection with the sale of capital stock and JDR's
credit facility. All of the warrants were exercised and exchanged for NCO common
stock on March 31, 1999.
In May 1999, the Company issued warrants to purchase 250,000 shares of NCO
common stock, at $32.97 per share, in connection with the acquisition of
Co-Source. During 1999, warrants to issue 228,000 shares of NCO common stock
were exercised. The holders of the warrants elected to use the option of
forfeiting a portion of their warrants to cover the exercise price. These
exercises resulted in the net issuance of 67,000 shares of NCO common stock.
Warrants to purchase 22,000 shares of NCO common stock were outstanding as of
December 31, 2000. These warrants expire in May 2009.
11. Earnings per share:
Basic earnings per share ("EPS") were computed by dividing the income from
continuing operations applicable to common shareholders and the net income
applicable to common shareholders for the years ended December 31, 1998, 1999,
and 2000, by the weighted average number of shares outstanding. Diluted earnings
per share were computed by dividing the income from continuing operations
applicable to common shareholders and the net income applicable to common
shareholders for the years ended December 31, 1998, 1999, and 2000, by the
weighted average number of shares outstanding plus all common equivalent shares.
Outstanding options, warrants, and convertible securities have been utilized in
calculating diluted amounts per share only when their effect would be dilutive.
The reconciliation of basic to diluted weighted average shares outstanding for
the years ended December 31, 1998, 1999, and 2000 consisted of the following
(amounts in thousands):
1998 1999 2000
------ ------ ------
Basic 18,324 22,873 25,587
Dilutive effect of warrants 725 206 88
Dilutive effect of options 615 712 167
Other 94 8 -
------ ------ ------
Diluted 19,758 23,799 25,842
====== ====== ======
12. Stock options:
In June 1995, the Company adopted the 1995 Stock Option Plan (the "1995 Plan").
In September 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan") and the 1996 Non-Employee Director Stock Option Plan (the "Director
Plan"). The 1995 Plan and 1996 Plan, as amended, authorized 333,000 and 3.7
million shares, respectively, of incentive or non-qualified stock options. The
Director Plan, as amended, authorized 150,000 shares. The vesting periods for
the outstanding options under the 1995 Plan, the 1996 Plan, and the Director
Plan are three years, three years and one year, respectively. The options expire
no later than 10 years from the date of grant.
In June 1997, JDR established the JDR Holdings, Inc. 1997 Stock Option Plan (the
"JDR Plan") and reserved 69,000 shares of common stock. All options that were
issued and outstanding under the JDR Plan as of March 31, 1999 became fully
vested as a result of the acquisition of JDR by NCO. The options expire no later
than 10 years from the date of grant.
F-18
12. Stock options (continued):
On August 20, 1999, as part of the acquisition of Compass, NCO assumed the
Compass Employee Incentive Compensation Plan (the "Compass Plan"). The Compass
Plan authorized up to 475,000 shares of non-qualified stock options. The vesting
periods for the outstanding options under the Compass Plan are one to three
years. The options expire no later than 10 years from the date of grant.
A summary of stock option activity of the 1995 Plan, the 1996 Plan, the Director
Plan, the JDR Plan and the Compass Plan is as follows (amounts in thousands,
except per share amounts):
Weighted
Average
Number of Exercise Price
Options Per Share
------------- ---------------
Outstanding at January 1, 1998 1,065 $ 13.95
Granted 776 27.32
Exercised (230) 5.98
Forfeited (32) 19.78
------ --------
Outstanding at December 31, 1998 1,579 21.44
Granted 1,497 32.58
Exercised (441) 16.89
Forfeited (24) 26.76
------ --------
Outstanding at December 31, 1999 2,611 $ 28.27
Granted 1,082 24.52
Exercised (94) 12.58
Forfeited (259) 33.39
------ --------
Outstanding at December 31, 2000 3,340 $ 27.10
====== ========
Stock options exercisable at December 31, 2000 1,343 $ 27.52
====== ========
The following table summarizes information about stock options outstanding as of
December 31, 2000 (shares in thousands):
Stock Options Outstanding Stock Options Exercisable
------------------------------------------------- -----------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Prices Shares Remaining Life Exercise Price Shares Exercise Price
--------------------- ------------ ----------------- --------------- ----------- ---------------
$ 1.82 to $23.58 619 7.30 years $ 17.65 424 $ 16.97
$24.50 to $25.83 1,136 9.40 years 25.10 160 24.56
$26.13 to $29.94 1,034 8.86 years 29.84 367 29.79
$30.75 to $38.13 408 8.14 years 33.50 261 34.00
$43.81 to $61.09 143 7.28 years 45.78 131 45.89
------------ ----------------- --------------- ----------- ---------------
3,340 8.60 years $ 27.10 1,343 $ 27.52
============ ================= =============== =========== ===============
F-19
12. Stock options (continued):
The Company accounts for stock option grants in accordance with APB Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations. Under APB 25, because the exercise price of the stock options
equaled the fair value of the underlying common stock on the date of grant, no
compensation cost was recognized. In accordance with FASB 123, "Accounting for
Stock-Based Compensation", the Company does not recognize compensation cost
based on the fair value of the options granted at grant date. If the Company had
elected to recognize compensation cost based on the fair value of the options
granted at grant date, net income applicable to common shareholders and net
income applicable to common shareholders per share for the years ended December
31, 1998, 1999, and 2000 would have been reduced to the unaudited, pro forma
amounts indicated in the following table (amounts in thousands, except per share
amounts):
1998 1999 2000
-------- -------- --------
Net income applicable to common
shareholders - pro forma $ 15,660 $ 26,673 $ 17,783
Net income applicable to common
shareholders per share - pro forma:
Basic $ 0.85 $ 1.17 $ 0.70
Diluted $ 0.79 $ 1.12 $ 0.69
The estimated weighted average, grant-date fair values of the options granted
during the years ended December 31, 1998, 1999, and 2000 were $9.86, $12.43, and
$10.52, respectively. All options granted were at the market price of the stock
on the grant date. For valuation purposes, the Company utilized the
Black-Scholes option pricing model using the following assumptions for the years
ended December 31, 1998, 1999, and 2000 on a weighted average basis:
1998 1999 2000
------ ------ ------
Risk-free interest rate 4.98% 5.73% 5.93%
Expected life in years 3.25 3.25 3.25
Volatility factor 43.38% 44.04% 52.88%
Dividend yield None None None
Forfeiture rate 5.00% 5.00% 5.00%
For valuation purposes prior to the JDR Acquisition, JDR utilized the
Black-Scholes option pricing model using the following assumptions on a weighted
average basis for the options granted under the JDR Plan: dividend yield of 0%,
expected volatility of 0%, risk-free interest rate of 6.6%, and an expected life
of 10 years.
13. Derivative financial instruments:
The Company selectively uses derivative financial instruments to manage interest
costs and minimize currency exchange risk. The Company does not hold derivatives
for trading purposes. While these derivative financial instruments are subject
to fluctuations in value, these fluctuations are generally offset by the value
of the underlying exposures being hedged. The Company minimizes the risk of
credit loss by entering into these agreements with major financial institutions
that have high credit ratings.
Interest Rate Collars:
During 1998 and 1999, the Company entered into interest rate collar agreements
to reduce the impact of changes in LIBOR on portions of the debt borrowed from
its revolving credit facility.
As of December 31, 2000, the Company was party to three interest rate collar
agreements that consisted of LIBOR ceilings and floors that are based on
different notional amounts. The first interest rate collar agreement consisted
of a ceiling portion with a rate of 7.75%, covering a notional amount of $30.0
million, and a floor portion with a rate of 4.75%, covering a notional amount of
$15.0 million. This interest rate collar agreement expires in September of 2001.
The other two interest rate collar agreements
F-20
13. Derivative financial instruments (continued):
Interest Rate Collars (continued):
consisted of a ceiling portion with a rate of 7.50% and a floor portion with a
rate of 5.50%, covering a total notional amount of $120.0 million. These
interest rate collar agreements expire in October of 2001. The notional amounts
of these interest rate collar agreements are used to measure the interest to be
paid or received and do not represent the amount of exposure due to credit loss.
The net cash amounts paid or received on the interest rate collar agreements are
accrued and recognized as an adjustment to interest expense. The fair value of
the interest rate collar instruments was determined to be immaterial at December
31, 1999 and 2000.
14. Fair value of financial instruments:
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
Cash and Cash Equivalents:
The carrying amount reported in the balance sheets approximates fair value
because of the short maturity of these instruments.
Notes Receivable:
The carrying amount reported in the balance sheets approximates market rates for
notes with similar terms and maturities, and, accordingly, the carrying amount
approximates fair value.
Long-Term Debt:
The Company's non-seller-financed debt is primarily variable in nature and based
on either the prime rate or LIBOR, and, accordingly, the carrying amount of debt
instruments approximates fair value. The stated interest rates of the Company's
nonconvertible seller-financed notes approximate market rates for debt with
similar terms and maturities, and, accordingly, the carrying amounts approximate
fair value.
15. Supplemental cash flow information:
The following are supplemental disclosures of cash flow information for the
years ended December 31, 1998, 1999, and 2000 (amounts in thousands):
1998 1999 2000
------- -------- -------
Cash paid for interest $2,228 $19,975 $24,038
Cash paid for income taxes 5,726 7,923 18,569
Non-cash investing and financing activities:
Notes received as consideration for the
divestiture of the Market Strategy Division - - 18,250
Fair value of assets acquired 47,872 28,368 -
Liabilities assumed from acquisitions 46,730 53,713 -
Fair value of contributed capital 3,834 - -
Property acquired under capital leases 138 - -
Convertible note payable, converted to
common stock - 900 -
Common stock issued for acquisitions - 101,526 -
Common stock options issued for acquisitions - 2,562 -
Redemption of redeemable preferred stock
for common stock - 12,231 -
Warrants issued - 1,925 -
Warrants exercised 247 6,332 -
F-21
16. Employee benefit plans:
The Company has a savings plan under Section 401(k) of the Internal Revenue Code
(the "Plan"). The Plan allows all eligible employees to defer up to 15% of their
income on a pretax basis through contributions to the Plan. The Company will
provide a matching contribution of 25% of an employee's contribution, subject to
a maximum of 1.5% of an employee's base salary. The charges to operations for
the matching contributions were $724,000, $1.4 million and $1.7 million, for
1998, 1999, and 2000, respectively.
17. Commitments and contingencies:
The Company is party, from time to time, to various legal proceedings incidental
to its business. In the opinion of management none of these items individually
or in the aggregate would have a significant effect on the financial position,
results of operations, cash flows, or liquidity of the Company.
18. Segment reporting:
During the first nine months of 2000, the Company was organized into operating
divisions that were focused on the operational delivery of services. The
Company's focus on the operational delivery of services allowed it to take
advantage of significant cross-selling opportunities and enhance the level of
service provided to its clients. The operating divisions during the first nine
months of 2000 included Accounts Receivable Management Services,
Technology-Based Outsourcing, and International Operations. During 2000, the
continued integration of the Company's infrastructure facilitated the further
reduction of the operating divisions from three to two. Effective October 1,
2000, the new operating divisions included U.S. Operations (formerly Accounts
Receivable Management Services and Technology-Based Outsourcing) and
International Operations. Each of these divisions will maintain industry
specific functional groups including healthcare, commercial, banking, retail,
education, utilities, telecommunications, and government.
The accounting policies of the segments are the same as those described in Note
2, "Accounting policies." Segment data include a charge allocating corporate
overhead costs to each of the operating segments based on revenue and employee
headcount.
The U.S Operations division provides accounts receivable management services to
consumer and commercial accounts for all market segments, serving clients of all
sizes in local, regional and national markets. In addition to traditional
accounts receivable collections, these services include developing the client
relationship beyond bad debt recovery and delinquency management, delivering
cost-effective receivables and customer relationship management solutions to all
market segments, serving clients of all sizes in local, regional and national
markets. The U.S. Operations division had total assets, net of any intercompany
balances, of $743.5 million and $736.6 million at December 31, 1999 and 2000,
respectively.
With the May 1998 acquisition of FCA, the International Operations division was
created. The International Operations division provides accounts receivable
management services across Canada and the United Kingdom. The International
Operations division had total assets, net of any intercompany balances, of $48.2
million and $47.4 million at December 31, 1999 and 2000, respectively.
F-22
18. Segment reporting (continued):
The following tables represent the revenue, payroll and related expenses,
selling, general and administrative expenses, and earnings before interest,
taxes, depreciation, and amortization ("EBITDA") for each segment for the years
ended December 31, 1998, 1999 and 2000. EBITDA is used by the Company's
management to measure the segments' operating performance and is not intended to
report the segments' operating results in conformity with generally accepted
accounting principles.
For the year ended December 31, 1998
(Amounts in thousands)
------------------------------------------------------------------------
Payroll and Selling,
Related General and
Revenue Expenses Admin. Expenses EBITDA
---------------- ----------------- ----------------- ---------------
U.S. Operations $ 191,391 $ 95,885 $ 56,749 $ 38,757
International Operations 18,556 10,902 4,858 2,796
---------------- ----------------- ----------------- ---------------
Total $ 209,947 $ 106,787 $ 61,607 $ 41,553
================ ================= ================= ===============
For the year ended December 31, 1999
(Amounts in thousands)
---------------------------------------------------------------------------
Selling,
Payroll and General and Nonrecurring
Related Admin. Acquisition
Revenue Expenses Expenses Costs EBITDA
------------ ------------- -------------- --------------- -----------
U.S. Operations $ 429,271 $ 220,110 $ 119,546 $ - $ 89,615
International Operations 31,040 17,599 8,631 - 4,810
Other - - - 4,601 (4,601)
------------ ------------- -------------- --------------- -----------
Total $ 460,311 $ 237,709 $ 128,177 $ 4,601 $ 89,824
============ ============= ============== =============== ===========
For the year ended December 31, 2000
(Amounts in thousands)
------------------------------------------------------------------------
Payroll and Selling,
Related General and
Revenue Expenses Admin. Expenses EBITDA
---------------- ----------------- ----------------- ---------------
U.S. Operations $ 574,179 $ 276,045 $ 170,644 $ 127,490
International Operations 31,705 17,247 9,280 5,178
---------------- ----------------- ----------------- ---------------
Total $ 605,884 $ 293,292 $ 179,924 $ 132,668
================ ================= ================= ===============
19. Subsequent event (unaudited):
In February 2001, the Company merged NCO Portfolio Management, Inc. ("NCO
Portfolio"), its wholly owned subsidiary, with Creditrust Corporation
("Creditrust") to form a new public entity focused on the purchase of accounts
receivable. The Company owned approximately 63% of NCO Portfolio after the
merger. The Company's contribution to the NCO Portfolio merger consisted of
$25.0 million of purchased accounts receivable. As part of the merger, the
Company has agreed to offer all of its future U.S. accounts receivable purchase
opportunities to NCO Portfolio. The Company has signed a 10-year service
agreement to be the sole provider of collection services to NCO Portfolio. In
connection with the acquisition, the Company amended its credit agreement with
Mellon Bank to make $50.0 million of its credit facility available for the use
of NCO Portfolio. Upon completion of the merger, the Company borrowed $36.3
million for NCO Portfolio.
F-23
20. Recent accounting pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
subsequently amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
(collectively "SFAS No. 133"). SFAS No. 133 is effective for the fiscal years
beginning after June 15, 2000 and requires that an entity recognize all
derivative instruments as either assets or liabilities on its balance sheet at
their fair values. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction, and, if it is, the type
of hedge transaction. The Company will adopt SFAS No. 133 by the first quarter
of 2001. The adoption of SFAS No. 133 is not expected to have a material impact
on the consolidated results of operations, financial condition, or cash flows of
the Company.
In February 2001, the FASB issued an Exposure Draft regarding Business
Combinations and Intangible Assets Accounting for Goodwill where it concluded
that purchased goodwill would not be amortized but would be reviewed for
impairment when certain events indicate that the goodwill of a reporting unit is
impaired. The impairment test will use a fair value based approach, whereby if
the implied fair value of a reporting unit's goodwill is less than its carrying
amount, goodwill would be considered impaired. The proposed statement would not
require that goodwill be tested for impairment upon adoption of the final
statement unless an indicator of impairment exists at that date. However, it
would require that a benchmark assessment be performed for all existing
reporting units within six months of the date of adoption. The new goodwill
model would apply not only to goodwill arising from acquisitions completed after
the effective date of the new standard, but also to goodwill previously
recorded. The Company would be required to initially apply the provisions of
this proposed statement at the beginning of the first fiscal quarter following
the issuance of the final statement.
F-24
NCO GROUP, INC.
Schedule II - Valuation and Qualifying Accounts
Additions
-------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
year Expenses accounts (1) Deductions (2) year
----------- ----------- ------------- --------------- -------------
Year ended December 31, 1998:
Allowance for doubtful accounts $ 500,000 $2,392,000 $ 2,122,000 $ (1,395,000) $ 3,619,000
Year ended December 31, 1999:
Allowance for doubtful accounts $3,619,000 $2,553,000 $ 900,000 $ (1,681,000) $ 5,391,000
Year ended December 31, 2000:
Allowance for doubtful accounts $5,391,000 $5,906,000 $ - $ (4,217,000) $ 7,080,000
(1) Allowance for doubtful accounts of acquired companies.
(2) Uncollectible accounts written off, net of recoveries.
S-1