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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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 Number 000-32403
NCO PORTFOLIO MANAGEMENT, INC.
(Exact name of Registrant as Specified in its charter)
Delaware 23-3005839
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1705 Whitehead Road, Baltimore, Maryland 21207-4004
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (410) 594-7000
Indicate by check mark whether the registrant (1) 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 such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock as of August
14, 2002 was 13,576,519.
NCO PORTFOLIO MANAGEMENT, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
As of December 31, 2001 and June 30, 2002.......................................... 3
Consolidated Statements of Income
For the Three and Six Months Ended June 30, 2001 and 2002.......................... 4
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2001 and 2002.................................... 5
Notes to Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................ 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................. 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 18
Item 2. Changes in Securities and Use of Proceeds.............................................. 18
Item 3. Defaults Upon Senior Securities........................................................ 18
Item 4. Submission of Matters to a Vote of Shareholders........................................ 18
Item 5. Other Information...................................................................... 18
Item 6. Exhibits and Reports on Form 8-K....................................................... 18
SIGNATURE...................................................................................... 19
2
Part 1 - Financial Information
Item 1 - Financial Statements
NCO PORTFOLIO MANAGEMENT, INC.
Consolidated Balance Sheets
(Amounts in thousands, except par values)
December 31, June 30,
2001 2002
ASSETS (Unaudited)
------------ -----------
Cash and cash equivalents $ 6,509 $ 8,326
Restricted cash 1,125 900
Purchased accounts receivable 136,339 128,241
Investment in securitization 7,312 7,387
Deferred income taxes 992 --
Deferred costs 651 501
Other assets 784 1,666
-------- --------
Total assets $153,712 $147,021
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 73 $ 75
Accrued expenses 2,861 2,046
Accrued compensation and related expenses 405 397
Notes payable 45,379 38,376
Notes payable - affiliates 47,130 42,250
Deferred income taxes -- 1,635
-------- --------
Total liabilities 95,848 84,779
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $.01 par value, 35,000 shares authorized,
13,576 shares issued and outstanding 136 136
Additional paid-in capital 40,826 40,826
Retained earnings 16,902 21,280
-------- --------
Total stockholders' equity 57,864 62,242
-------- --------
Total liabilities and stockholders' equity $153,712 $147,021
======== ========
See accompanying notes.
3
NCO PORTFOLIO MANAGEMENT, INC.
Consolidated Statements of Income
(Unaudited)
(Amounts in thousands, except per share data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
2001 2002 2001 2002
-------- -------- -------- --------
Revenue $ 17,916 $ 14,108 $ 30,534 $ 30,378
Operating costs and expenses:
Payroll and related expenses 551 549 808 1,103
Servicing fee expenses 7,695 8,064 13,346 16,364
Selling, general, and administrative expenses 641 806 1,095 1,372
Amortization expense 76 75 100 150
Impairment of purchased accounts receivable 463 401 463 1,198
-------- -------- -------- --------
Total operating costs and expenses 9,426 9,895 15,812 20,187
-------- -------- -------- --------
Income from operations 8,490 4,213 14,722 10,191
Other income (expense):
Interest and other income 86 303 118 434
Interest expense (2,299) (1,752) (3,873) (3,619)
-------- -------- -------- --------
Total other income (expense) (2,213) (1,449) (3,755) (3,185)
-------- -------- -------- --------
Income before income tax expense 6,277 2,764 10,967 7,006
Income tax expense 2,354 1,037 4,113 2,628
-------- -------- -------- --------
Net income $ 3,923 $ 1,727 $ 6,854 $ 4,378
======== ======== ======== ========
Net income per share:
Basic $ 0.29 $ 0.13 $ 0.56 $ 0.32
======== ======== ======== ========
Diluted $ 0.29 $ 0.13 $ 0.56 $ 0.32
======== ======== ======== ========
Weighted average shares outstanding:
Basic 13,576 13,576 12,166 13,576
Diluted 13,576 13,579 12,166 13,578
See accompanying notes.
4
NCO PORTFOLIO MANAGEMENT, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
For the Six Months
Ended June 30,
-------------------------
2001 2002
-------- --------
Cash flows from operating activities:
Net income $ 6,854 $ 4,378
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred costs 100 150
Impairment of purchased accounts receivable 463 1,198
Income from investment in securitization -- (75)
Equity income from investment in joint venture -- (303)
Changes in operating assets and liabilities, net of acquisition:
Restricted cash 2,555 225
Deferred income taxes 4,113 2,628
Other assets 466 (38)
Accounts payable and accrued expenses (1,146) (816)
-------- --------
Net cash provided by operating activities 13,405 7,347
-------- --------
Cash flows from investing activities:
Purchases of accounts receivable (26,253) (16,026)
Collections applied to principal on purchased accounts receivable 15,744 23,275
Investment in joint venture, net -- (542)
Net cash paid for pre-acquisition liabilities and acquisition related costs (11,077) --
-------- --------
Net cash (used in) provided by investing activities (21,586) 6,707
-------- --------
Cash flows from financing activities:
Borrowings (repayments) under NCO Group credit facility, net 43,230 (4,880)
Repayment of notes payable (30,034) (7,357)
Payment of fees to acquire new debt (900) --
Issuance of common stock 2,320 --
-------- --------
Net cash provided by (used in) financing activities 14,616 (12,237)
-------- --------
Net increase in cash and cash equivalents 6,435 1,817
Cash and cash equivalents at beginning of period -- 6,509
-------- --------
Cash and cash equivalents at end of period $ 6,435 $ 8,326
======== ========
See accompanying notes.
5
NCO PORTFOLIO MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note A - Organization and Business
NCO Portfolio Management, Inc. ("NCO Portfolio" or the "Company") was
incorporated in Delaware on January 22, 1999 (date of inception) under the name
of NCO Portfolio Funding, Inc. The Company changed its name from NCO Portfolio
Funding, Inc. to NCO Portfolio Management, Inc. in February 2001. NCO Portfolio
purchases and manages defaulted consumer accounts receivable from consumer
creditors such as banks, finance companies, retail merchants and other consumer
oriented companies. NCO Portfolio's purchased accounts receivable originate from
consumers located throughout the United States. NCO Portfolio has funded its
purchased accounts receivable through internal cash flows and financing from NCO
Group, Inc. ("NCO Group" or the "Parent"). NCO Portfolio was a wholly owned
subsidiary of NCO Group, Inc. until NCO Portfolio's merger with Creditrust
Corporation ("Creditrust") on February 20, 2001 (the "Merger"). In connection
with the Merger, NCO Portfolio became a publicly traded company (NASDAQ: NCPM).
Included in the statements of income are the results of operations of the net
assets acquired in the Merger with Creditrust for the period from February 21,
2001 through June 30, 2001 and for the six months ended June 30, 2002.
NCO Group owns approximately 63% of the outstanding NCO Portfolio common stock,
subject to certain adjustments. As part of the Merger, NCO Portfolio entered
into a ten-year service agreement that appointed a wholly owned subsidiary of
NCO Group, NCO Financial Systems, Inc. ("NCOF") as the provider of collection
services to NCO Portfolio. NCO Group has agreed to offer all of its future U.S.
accounts receivable purchase opportunities to NCO Portfolio. Additionally, NCO
Group amended its credit agreement with Citizens Bank of Pennsylvania ("Citizens
Bank") to provide a $50 million credit facility to NCO Portfolio in the form of
a sub-facility (See Note H).
Note B - Summary of Significant Accounting Policies
Basis of Accounting
The consolidated financial statements and disclosures included herein for the
three and six months ended June 30, 2001 and 2002 are unaudited. These
consolidated financial statements and disclosures have been prepared by the
Company in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of adjustments of a normal and recurring nature) considered necessary for a fair
presentation have been included. Operating results for the three and six month
periods ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2002. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 19, 2002.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all affiliated subsidiaries and entities controlled by the Company. All
significant intercompany accounts and transactions have been eliminated. Two
affiliates that the Company does not control are InoVision-MEDCLR-NCOP Ventures,
LLC and Creditrust SPV98-2, LLC ("SPV 98-2") (See Note E).
Cash and Cash Equivalents and Restricted Cash
NCO Portfolio considers all highly liquid securities purchased with an initial
maturity of three months or less to be cash equivalents. Two securitizations
that are accounted for as secured borrowings have provisions that restrict NCO
Portfolio's use of cash. During the three month period ended June 30, 2002, one
of the securitization notes payable was retired, and the corresponding
restricted cash of $225,000 was returned to the Company. Restricted cash as of
June 30, 2001 and 2002 was $1.1 million and $900,000, respectively.
6
NCO PORTFOLIO MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Note B - Summary of Significant Accounting Policies (Continued)
Purchased Accounts Receivable
NCO Portfolio accounts for its investment in purchased accounts receivable on an
accrual basis under the guidance of the American Institute of Certified Public
Accountants' Practice Bulletin No. 6, "Amortization of Discounts on Certain
Acquired Loans," using unique and exclusive static pools. Static pools are
established with accounts having similar attributes. Typically, each static pool
consists of an individual acquisition of accounts. Once a static pool is
established, the accounts in the pool are not changed. Proceeds from the sale of
accounts within a static pool are accounted for as collections in that static
pool. Collections on replacement accounts received from the originator of the
loans are included as collections in the corresponding static pools. The
discount between the cost of each static pool and the face value of the static
pool is not recorded since NCO Portfolio expects to collect a relatively small
percentage of each static pool's face value.
Each static pool is initially recorded at cost. Collections on the static pools
are allocated to revenue and principal reduction based on the estimated internal
rate of return ("IRR") for each static pool. The IRR for each static pool is
estimated based on the expected monthly collections over the estimated economic
life of each static pool (generally five years, based on NCO Portfolio's
collection experience), compared to the original purchase price. Revenue on
purchased accounts receivable is recorded monthly based on each static pool's
effective IRR applied to each static pool's monthly opening carrying value. To
the extent collections exceed the revenue, the carrying value is reduced and the
reduction is recorded as collections applied to principal. Because the IRR
reflects collections for the entire economic life of the static pool, and those
collections are not constant, lower collection rates, typically in the early
months of ownership, can result in a situation where the actual collections are
less than the revenue accrual. In this situation, the carrying value of the
static pool may be increased for the difference between the revenue accrual and
collections.
To the extent the estimated future cash flow increases or decreases from the
expected level of collections, NCO Portfolio prospectively adjusts the IRR
accordingly. If the carrying value of a particular static pool exceeds its
expected future cash flows, a charge to income would be recognized in the amount
of such impairment. Additional impairments on previously impaired static pools
may occur if the current estimated future cash flow projection, after being
adjusted prospectively for actual collection results, is less than the carrying
value recorded. After the impairment of a static pool, no income is recorded on
that static pool and collections are recorded as a return of capital until the
full carrying value of the static pool has been recovered. The estimated IRR for
each static pool is based on estimates of future cash flows from collections,
and actual cash flows will vary from current estimates. The difference could be
material.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes.
In the ordinary course of accounting for purchased accounts receivable,
estimates have been made by management as to the amount and timing of future
cash flows expected from each static pool. The estimated future cash flow of
each static pool is used to compute the IRR for the static pool. The IRR is used
to allocate cash flow between revenue and amortization of the carrying values of
the purchased accounts receivable.
On an ongoing basis, the Company compares the historical trends of each static
pool to projected collections. The future projections are then increased or
decreased, within parameters, in accordance with the historical trend. The
results are further reviewed by management with a view towards specifically
addressing any particular static pool's performance. Actual results will differ
from these estimates and a material change in these estimates could occur within
one year. (See note D)
7
NCO PORTFOLIO MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Note B - Summary of Significant Accounting Policies (Continued)
Investments in Debt and Equity Securities
NCO Portfolio accounts for investments, such as the investment in
securitization, SPV 98-2, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." As such, investments are recorded as either trading, available for
sale, or held to maturity based on management's intent relative to those
securities. NCO Portfolio records its investment in securitization as an
available for sale debt security. Such security is recorded at fair value, and
unrealized gains and losses, net of taxes, are not reflected in income but are
recorded as other comprehensive income in stockholders' equity until realized. A
decline in the value of an available for sale security below cost that is deemed
other than temporary is charged to earnings as an impairment and results in the
establishment of a new cost basis for the security.
The investment in securitization represents the residual interest in a
securitized pool of purchased accounts receivable acquired in the Merger. The
investment in securitization accrues interest at an effective yield (IRR), which
is estimated based on the expected monthly collections over the estimated
economic life of the investment (approximately five years). The carrying cost of
this investment approximates fair value at June 30, 2002. (See note E)
Income Taxes
NCO Portfolio was included in NCO Group's consolidated Federal income tax return
prior to the effective date of the Merger. Effective for periods after
consummation of the Merger, NCO Portfolio will file its own Federal income tax
return. 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 expected future tax consequences of temporary
differences between the financial reporting and tax basis of assets and
liabilities.
The static pools of purchased accounts receivable are composed of distressed
debt. Collection results are not guaranteed until received; accordingly, for tax
purposes, any gain on a particular static pool is deferred until the full cost
of its acquisition is recovered. Revenue for financial reporting purposes is
recognized over the life of the static pool. Deferred tax liabilities arise from
deferrals created during the early stages of the static pool. These deferrals
reverse after the cost basis of the static pool is recovered. In general, the
creation of new tax deferrals from future purchases of static pools are likely
to offset the reversal of the deferrals from static pools where the collections
have become fully taxable.
Deferred Costs
NCO Portfolio capitalized legal and professional fees incurred in connection
with its establishment of the NCO Group credit sub-facility. The costs are being
amortized over the term of the facility (three years).
Stock Split
In February 2001, the Board of Directors of NCO Portfolio declared an
8,599-for-one stock split. Share amounts for all periods presented have been
adjusted to reflect the stock split. The stated par value of each common share
was changed from $1 to $.01.
8
NCO PORTFOLIO MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Note C - Earnings per Share
Basic earnings per share ("EPS") was computed by dividing the net income for the
three and six months ended June 30, 2001 and 2002, by the weighted average
number of common shares outstanding. Diluted EPS was computed by dividing the
net income for the three and six months ended June 30, 2001 and 2002, by the
weighted average number of common shares outstanding plus all common equivalent
shares. Outstanding options have been utilized in calculating diluted net income
per share only when their effect would be dilutive. There were 460,000 and
593,000 options outstanding to purchase shares of common stock at June 30, 2001
and 2002, respectively.
The reconciliation of basic to diluted weighted average shares outstanding for
the three and six months ended June 30, 2001 and 2002 was as follows (amounts in
thousands):
For the three months ended For the six months ended
June 30, June 30,
-------------------------- ------------------------
2001 2002 2001 2002
------ ------ ------ ------
Basic 13,576 13,576 13,576 13,576
Dilutive effect of options -- 3 -- 2
------ ------ ------ ------
Diluted 13,576 13,579 13,576 13,578
====== ====== ====== ======
Note D - Purchased Accounts Receivable
NCO Portfolio purchases defaulted consumer accounts receivable at a discount
from the actual principal balance. The following summarizes the change in
purchased accounts receivable for the year ended December 31, 2001, and for the
six months ended June 30, 2002 (amounts in thousands):
2001 2002
---- ----
Balance, at beginning of period ........................................... $ 31,480 $ 136,339
Purchased accounts receivable acquired from the Merger 93,518 --
Purchases of accounts receivable ........................ 48,149 16,375
Collections on purchased accounts receivable ............ (97,088) (53,653)
Revenue recognized ...................................... 62,929 30,378
Impairment of purchased accounts receivable ............. (2,649) (1,198)
--------- ---------
Balance, at end of period ................................................. $ 136,339 $ 128,241
========= =========
During the three months ended June 30, 2001 and 2002, an impairment of $463,000
and $401,000, respectively, was recorded as a charge to income on static pools
where the carrying values exceeded the expected future cash flows. For the six
months ended June 30, 2001 and 2002, an impairment of $463,000 and $1.2 million,
respectively, was recorded as a charge to income. No revenue will be recorded on
these static pools until their carrying values have been fully recovered. As of
June 30, 2002, the combined carrying values on all impaired static pools
aggregated $8.3 million, or 6.5% of purchased accounts receivable, representing
their net realizable value.
9
NCO PORTFOLIO MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Note E - Investments in Unconsolidated Subsidiaries
NCO Portfolio owns a 100% retained residual interest in an investment in
securitization, SPV 98-2, which was acquired in the Merger. This transaction
qualified for gain on sale accounting when the purchased accounts receivable
were originally securitized by Creditrust. SPV 98-2 issued a note that is due
the earlier of January 2004 or satisfaction of the note from collections, and
had an outstanding balance of $3.8 million as of June 30, 2002. The retained
interest represents the present value of the residual interest in SPV 98-2 using
discounted future cash flows after the securitization note is fully repaid, plus
a cash reserve. As of June 30, 2002, the investment in SPV 98-2 was $7.4
million, composed of $4.1 million in present value of discounted residual cash
flows plus $3.3 million in cash reserves. The investment accrues non-cash income
at a rate of 8% per annum on the residual cash flow component only. The income
earned increases the investment balance until the securitization note has been
repaid. After repayment of the note, collections are split between income and
amortization of the investment in SPV 98-2 based on the discounted cash flows.
NCO Portfolio recorded $47,000 and $75,000 of income on this investment for the
three and six months ended June 30, 2002, respectively. The cash reserves of
$3.3 million plus the first $1.3 million in residual cash collections received,
after the securitization note has been repaid, have been pledged as collateral
against the Warehouse Facility (See Note F).
NCO Portfolio has a 50% ownership interest in a joint venture,
InoVision-MEDCLR-NCOP Ventures, LLC ("Joint Venture") with IMNV Holdings, LLC
("IMNV"). This Joint Venture was established in 2001 to purchase utility,
medical and various other small balance accounts receivable and is accounted for
using the equity method of accounting. NCO Portfolio and IMNV each have an
investment in the Joint Venture of approximately $1.4 million as of June 30,
2002. Included in the Statement of Income, in "other income," is $220,000 and
$303,000 for the three and six months ended June 30, 2002, respectively,
representing the Company's 50% share of operating income from this
unconsolidated subsidiary. The Joint Venture has access to capital through a
specialty finance lender who, at its option, lends 90% of the value of the
purchased accounts receivable to the Joint Venture. The debt is
cross-collateralized by all static pools in which the lender participates, and
is non-recourse to NCO Portfolio and IMNV. The following table summarizes the
financial information of the Joint Venture as of and for the six months ended
June 30, 2002 (amounts in thousands):
Total assets...................................... $ 7,187
Total liabilities................................. $ 4,220
Revenue........................................... $ 4,192
Net income........................................ $ 606
Note F - Notes Payable
NCO Portfolio assumed three securitized notes payable in connection with the
Merger. These notes payable were originally established to fund the purchase of
accounts receivable. Each of the notes payable is non-recourse to the Company
and NCO Group, is secured by a pool of purchased accounts receivable, and is
bound by an indenture and servicing agreement. Pursuant to the Merger, the
trustee appointed NCOF as the successor servicer for each static pool of
purchased accounts receivable. When the notes payable were established, a
separate non-recourse special purpose finance subsidiary was created to house
the assets and issue the debt. These are term notes without the ability to
re-borrow. Monthly principal payments on the notes equal all collections after
servicing fees, collection costs, interest expense and administrative fees.
The first securitized note ("Warehouse Facility") was established in September
1998 through Creditrust Funding I LLC, a special purpose finance subsidiary. The
Warehouse Facility carries a floating interest rate of LIBOR plus 0.65% per
annum, and the final due date of all payments under the facility is the earlier
of March 2005, or satisfaction of the note from collections. A $900,000
liquidity reserve is included in restricted cash as of June 30, 2002, and is
restricted as to use until the facility is retired. Interest expense, trustee
fees and guarantee fees aggregated $318,000 and $160,000 for the three months
ended June 30, 2001 and 2002, respectively. Interest expense, trustee fees and
guarantee fees aggregated $473,000 and $328,000 for the period from February 21,
2001 to June 30, 2001 and the six months ended June 30, 2002, respectively. As
of June 30, 2002, $16.4 million was outstanding on this facility. The note
insurer, Radian Asset Assurance, Inc., formerly Asset Guaranty Insurance
Company, has been guaranteed against loss by the Company for up to $4.5 million,
which will be reduced if and when cash reserves and residual cash flows from
another securitization, SPV 98-2, are posted as additional collateral for this
facility.
10
NCO PORTFOLIO MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Note F - Notes Payable (Continued)
The second securitized note ("SPV99-1 Financing") was established in August 1999
through Creditrust SPV99-1, LLC, a special purpose finance subsidiary. SPV99-1
Financing carried interest at 9.43% per annum, with a final payment date of the
earlier of August 2004, or satisfaction of the note from collections. In May
2002, the note was paid off, and the $225,000 liquidity reserve was returned to
the Company. Interest expense and trustee fees aggregated $257,000 and $3,000
for the three months ended June 30, 2001 and 2002, respectively. Interest
expense and trustee fees aggregated $398,000 and $56,000 for the period from
February 21, 2001 to June 30, 2001 and for the six months ended June 30, 2002,
respectively.
The third securitized note ("SPV99-2 Financing") was established in August 1999
through Creditrust SPV99-2, LLC, a special purpose finance subsidiary. SPV99-2
Financing carries interest at 15% per annum, with a final payment date of the
earlier of December 2004, or satisfaction of the note from collections. Interest
expense and trustee fees aggregated $1 million and $832,000 for the three months
ended June 30, 2001 and 2002, respectively. Interest expense and trustee fees
aggregated $1.4 million and $1.7 million for the period from February 21, 2001
to June 30, 2001 and for the six months ended June 30, 2002, respectively. As of
June 30, 2002, $21.6 million was outstanding on this facility.
Note G - Commitments and Contingencies
Forward-Flow Agreement
NCO Portfolio currently has a "forward-flow" agreement with a major financial
institution that obligates NCO Portfolio to purchase, on a monthly basis,
portfolios of charged-off accounts receivable meeting certain criteria. As of
June 30, 2002, NCO Portfolio is obligated to purchase accounts receivable at a
maximum of $1.8 million per month through August 2002, with an option to renew
for three additional three-month terms. A portion of the purchase price is
deferred for twelve months including a nominal rate of interest. As of June 30,
2002, the total deferred amount under this forward-flow agreement was $353,000,
which is included in notes payable on the balance sheet.
Litigation
NCO Portfolio 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 will have a significant effect on the financial
position, results of operations, cash flows, or liquidity of NCO Portfolio.
Note H - Related Party Transactions
Servicing Fees
As part of the Merger, NCO Portfolio entered into a ten-year service agreement
that appointed NCOF as the provider of collection services to NCO Portfolio. NCO
Group has agreed to offer all of its future U.S. accounts receivable purchase
opportunities to NCO Portfolio. NCO Portfolio pays NCOF to perform collection
services for its purchased accounts receivable. NCOF is paid a commission
ranging from 20% to 40% depending on the nature of the accounts. Management
believes that the commission rates paid are reasonable and are consistent with
rates charged by other collection agencies for the same type of services.
Servicing fees paid to NCOF amounted to $7.7 million and $8.1 million for the
three months ended June 30, 2001 and 2002, respectively. Servicing fees paid to
NCOF amounted to $13.1 million and $16.4 million for the six months ended June
30, 2001 and 2002, respectively.
Shared Services
NCO Group paid certain costs on behalf of NCO Portfolio during the three and six
months ended June 30, 2001 and 2002. NCO Portfolio reimburses NCO Group in full
for these costs. These costs related to certain shared services, including
office space, human resources, insurance, legal, payroll processing, external
reporting, management information systems and certain other administrative
expenses. Shared services amounted to $45,000 and 90,000 for the three and six
months ended June 30, 2001 and 2002, respectively.
11
NCO PORTFOLIO MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Note H - Related Party Transactions (Continued)
Notes Payable, Affiliate
Prior to the Merger, NCO Portfolio borrowed money from NCO Group to finance the
purchase of accounts receivable and to fund certain operating costs, and
remitted all cash collections to NCO Group. Effective with the Merger, all
collections are remitted to NCO Portfolio, net of the applicable servicing fees.
NCO Portfolio was charged interest on the net outstanding note balance using a
weighted average interest rate of 10.2% for the period from January 1, 2001 to
February 20, 2001. Interest expense of $379,000 was recorded for the period from
January 1, 2001 to February 20, 2001.
NCO Group Credit Facility
NCO Group has a credit agreement with Citizens Bank, for itself and as
administrative agent for other participating lenders that originally provided
for borrowings up to $350 million, structured as a revolving credit facility.
The borrowing capacity of the revolving credit facility is subject to mandatory
reductions including a quarterly reduction of $6.3 million on March 31, 2001,
subsequent quarterly reductions of $5.2 million until maturity, and 50% of the
net proceeds received from any offering of debt or equity. As of June 30, 2002,
there was $64.8 million available under the revolving credit agreement. NCO
Group's borrowings are collateralized by substantially all the assets of NCO
Group, including its common stock of NCO Portfolio. Pursuant to the Merger, NCO
Portfolio entered into a credit agreement with NCO Group, which provides NCO
Portfolio with a $50 million revolving line of credit from NCO Group in the form
of a sub-facility under its existing credit facility. Certain of NCO Portfolio's
assets have been pledged to Citizens Bank to secure its borrowings under the $50
million sub-facility. The balance under the revolving sub-facility will become
due on May 20, 2004 ("Maturity Date"). The borrowing capacity of the
sub-facility is subject to mandatory reductions including four quarterly
reductions of $2.5 million beginning March 31, 2002 through December 31, 2002.
Effective March 31, 2003, quarterly reductions of $3.75 million are required
until the earlier of the Maturity Date or the date at which the sub-facility is
reduced to $25 million. The maximum borrowing capacity on the sub-facility was
reduced to $45 million as of June 30, 2002. The NCO Group credit agreement and
the NCO Portfolio sub-facility contain certain financial covenants such as
maintaining net worth and funded debt to earnings before interest, taxes,
depreciation, and amortization ("EBITDA") requirements, and include restrictions
on, among other things, acquisitions and distributions to shareholders. As of
June 30, 2002, NCO Group and NCO Portfolio were in compliance with all of the
financial covenants.
The sub-facility carries interest at 2% over NCO Group's underlying rate from
Citizens Bank, of which 1% is paid to the bank and 1% is paid to NCO Group. At
the option of NCO Group, NCO Group's borrowings bear interest at a rate equal to
either Citizens Bank's prime rate plus a margin ranging from 0.25% to 0.50% that
is determined quarterly based upon NCO Group's consolidated funded debt to
EBITDA ratio (Citizens Bank's prime rate was 4.75% at June 30, 2002), or LIBOR
plus a margin ranging from 1.25% to 2.25% depending on NCO Group's consolidated
funded debt to EBITDA ratio (LIBOR was 1.84% at June 30, 2002). The sub-facility
contains a provision which provides Citizens Bank with an additional commitment
fee of 0.25% per quarter commencing August 20, 2001. This charge will continue
until the sub-facility is reduced to $25 million. NCO Portfolio was charged an
additional 0.25% per quarter on the full commitment for the quarter ended June
30, 2002, which is included as part of interest expense. NCO Portfolio is
charged a fee on the unused portion of the sub-facility ranging from 0.13% to
0.38% depending on NCO Group's consolidated funded debt to EBITDA ratio. As of
June 30, 2002, the outstanding balance under the sub-facility was $42.3 million.
Interest expense for the three months ended June 30, 2001 and 2002 amounted to
$876,000 and $807,000, respectively. Interest expense for the period from
February 21, 2001 to June 30, 2001 and the six months ended June 30, 2002
amounted to $1.3 million and $1.6 million, respectively.
Note I - Supplemental Cash Flow Information
The following are supplemental disclosures of cash flow information for the six
months ended June 30, 2001 and 2002 (amounts in thousands):
2001 2002
---- ----
Cash paid for interest................................................... $ 3,447 $ 3,649
Non-cash investing and financing activities:
Deferred portion of purchased accounts receivable................. $ -- $ 349
Common stock issued for Creditrust acquisition.................... $ 24,058 $ --
Fair value of assets acquired in Merger........................... $ 123,978 $ --
Liabilities assumed in the Merger................................. $ 109,394 $ --
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this report on Form 10Q, including, without limitation,
statements as to the Company's or management's outlook as to financial results
in 2002 and beyond, statements as to the effects of the economy on the Company's
business, statements as to the Company's or management's beliefs, expectations
or opinions, and all other statements in this report on Form 10Q, other than
historical facts, are forward-looking statements, as such term is defined in the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created thereby. Forward-looking statements are subject to risks and
uncertainties, are subject to change at any time, and may be affected by various
factors that may cause actual results to differ materially from the expected or
planned results. In addition to the factors discussed above, certain other
factors, including without limitation, risks relating to growth and future
accounts receivable purchases, risks related to the Company's debt, risks
related to the recoverability of the purchased accounts receivable, risks
related to the use of estimates, risks related to the ability to purchase
accounts receivable at favorable prices in the open market, risks related to
regulatory oversight, risks related to the retention of its senior management
team, risks related to securitization transactions, risks related to the
fluctuation in quarterly results, risks related to NCO Group's ownership control
of the Company, risks related to the dependency on NCO Group for collections,
and other risks detailed from time to time in the Company's filings with the
Securities and Exchange Commission, including the Annual Report on Form 10K,
filed on March 19, 2002, can cause actual results and developments to be
materially different from those expressed or implied by such forward-looking
statements.
A copy of the Annual Report on Form 10-K can be obtained, without charge except
for exhibits, by written request to Richard J. Palmer, Senior Vice President,
Finance/CFO, NCO Portfolio Management, Inc., 1705 Whitehead Road, Baltimore, MD
21207.
Quarter Ended June 30, 2002 Compared to Quarter Ended June 30, 2001
Revenue. Total revenue decreased $3.8 million, or 21.3%, from $17.9 million for
the three months ended June 30, 2001 to $14.1 million for the three months ended
June 30, 2002. The effective interest method is utilized in computing revenue.
Revenue is calculated by multiplying the beginning of the month carrying value
of a static pool of purchased accounts receivable by the estimated IRR
attributable to that static pool. The carrying value of each static pool is
adjusted monthly by the difference between collections and revenue recognized.
If collections are greater than the revenue recognized, the carrying value will
decrease. Conversely, if the revenue recognized is greater than collections, the
carrying value will increase. The IRR is an estimate based upon the expected
monthly collections over the remaining estimated economic life of each static
pool in conjunction with the carrying value of each static pool. Collections on
purchased accounts receivable decreased $1.6 million, or 5.5%, from $29.3
million for the three months ended June 30, 2001 to $27.7 million for the three
months ended June 30, 2002. Collections decreased from the quarter ended June
30, 2001 compared to 2002 due in part to the general softening of the economic
climate in the latter half of 2001,which has continued through the second half
of 2002. Further, the lower investment in purchased accounts receivable in the
second quarter of 2002 compared to 2001 contributed to the overall decline.
Revenue as a percentage of collections was 61% and 51% for the three months
ended June 30, 2001 and 2002, respectively.
Revenue as a percentage of collections can fluctuate period over period due to a
number of factors including:
(i) the relative under or over achievement of actual collections versus
the established estimates. Actual collections exceeding estimates will tend to
lower the percentage because revenue is not impacted at the same rate as the
change in collections due to the effective interest method of computing revenue,
and conversely, not meeting collection estimates will tend to increase the
percentage;
(ii) the differences in the composition of static pools at a point in
time in their life cycle. Over the life cycle of a static pool, the percentage
will fluctuate due to the variable collection stream. However, in the aggregate,
the percentage of collections recognized as revenue should approximate the
lifetime profit recognized and the remainder is amortized as a return of
capital;
(iii) the composition of the targeted IRRs present in all of the static
pools combined. Fresher purchased accounts receivable (static pools with few or
no placements to collection agencies prior to purchase) generally have lower
IRRs than purchased accounts receivable that have been placed with multiple
collection agencies prior to purchase. Fresher accounts receivable typically
cost more. However, net of servicing fees, lower IRRs are offset by lower costs
to collect, resulting in similar targeted net returns; and finally,
(iv) collection trends will increase or decrease our expected IRR.
Increases or decreases in collections have the effect of raising or lowering
(within specified parameters) the future collection projections on all static
pools, which translates into higher or lower IRRs, and in turn, affects the
percentage of collections recognized as revenue.
13
Revenue as a percentage of collections for this quarter declined principally due
to changes in the composition of purchased accounts receivable in 2002 versus
2001. Purchased accounts receivable acquired in, and subsequent to, the Merger
were acquired at a lower IRR compared to accounts receivable purchased prior to
the Merger. Purchases of accounts receivable made in the latter half of 2001 and
continuing into 2002 have returns that have been targeted lower at the time of
acquisition due to the tougher economic climate facing us in the near term.
Finally, the overall percentage was lowered due to a slow-down in collections as
a result of the softening economic climate in the last half of 2001 and the
first half of 2002. Decreases in collections had the effect of lowering the
future projections on most static pools, which translated to lower revenue in
the current period.
Additionally, static pools with $8.3 million in carrying value, or 6.5% of
purchased accounts receivable, as of June 30, 2002 were impaired and placed on
cost recovery. Accordingly, no revenue was recorded on these static pools after
their impairment, equating to a lower ratio of revenue to collections. See
impairment of purchased accounts receivable section below.
Payroll and related expenses. Payroll and related expenses were essentially flat
at $551,000 for the three months ended June 30, 2001 and $549,000 for the three
months ended June 30, 2002. Payroll and related expenses continue to be a small
part of the business model as a percentage of revenue.
Servicing fee expenses. Servicing fee expenses increased $369,000, or 4.8%, from
$7.7 million for the three months ended June 30, 2001 to $8.1 million for the
three months ended June 30, 2002. Servicing fees are paid as a commission on
collections, and include contingency legal fees. Servicing fee expenses are
impacted by the volume of collections on purchased accounts receivable and the
servicing fee rates charged. Servicing fees paid as a percentage of collections
was 26.3% and 29.1% for the quarters ended June 30, 2001 and 2002, respectively.
All of the servicing fees were paid to NCOF. Servicing fees as a percentage of
collections increased from 2001 to 2002 as the composition of accounts
receivable under management has changed and aged over the past twelve months. In
general, the accounts receivable acquired in the Merger have lower servicing
fees as compared to other accounts receivable purchased since the Merger. The
accounts receivable acquired in the Merger were generally older and had been
through multiple placements to collection agencies, and had demonstrated a track
record of producing a stream of cash flows. Accordingly, the servicing fees
agreed to in the ten-year servicing agreement were lower than would be the case
for comparably aged accounts receivable. As collections on accounts receivable
acquired in the Merger decrease over time (those having lower servicing fee
rates), and collections on new purchases increase due to increased purchases
(those having higher servicing rates), the blended servicing fees from all
accounts receivable under management will increase. Further, NCOF may outsource
collections in an attempt to offset negative economic trends, to test itself,
and generally to augment resources. The cost of outsourcing is generally higher
on such accounts since they are relatively more difficult to resolve.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $165,000, or 25.8%, from $641,000 for the
three months ended June 30, 2001 to $806,000 for the three months ended June 30,
2002. Selling, general and administrative expenses consist primarily of court
costs associated with legal collections, professional fees, insurance, trustee
fees, management fees and office expenses. The increase was principally
attributable to increased court costs associated with legal collections and
professional fees associated with operational compliance activities.
Impairment of purchased accounts receivable. On an ongoing basis, static pools
are reviewed to assess the expected future cash flows as they relate to the
carrying values of the purchased accounts receivable. If the estimated future
cash flows are not sufficient to recover the remaining carrying value of a
static pool, an impairment has occurred and the static pool must be written down
to its net realizable value. Additional impairments on previously impaired
static pools may occur if the current estimated future cash flow projection,
after being adjusted prospectively for actual collection results, is less than
the current carrying value recorded. Once a static pool is impaired, no revenue
will be recorded until the carrying value has been fully recovered. During the
quarters ended June 30, 2001 and 2002, impairment charges of $463,000 and
$401,000, respectively, were recorded. The combined remaining carrying value on
impaired static pools aggregated $8.3 million, or 6.5% of purchased accounts
receivable, as of June 30, 2002. Collections on impaired static pools for the
second quarter of 2002 totaled $1.2 million.
Other income (expense). Other income (expense) consisted principally of interest
expense and decreased $800,000, or 36.4%, from $2.2 million for the three months
ended June 30, 2001 to $1.4 million for the three months ended June 30, 2002.
The decrease was principally attributable to a decrease of $18 million in total
debt outstanding from $98.6 million as of June 30, 2001 to $80.6 million as of
June 30, 2002. Additionally, the cost of borrowing on certain floating rate debt
decreased dramatically during the second half of 2001 and the favorable rates
continued through the quarter ended June 30, 2002. Offsetting interest expense,
included in other income, is $267,000, consisting of $220,000 in income from our
50% interest in the IMNV joint venture accounted for under the equity method of
accounting, and $47,000 in income from our 100% interest in a securitization
trust, SPV 98-2, acquired in connection with the Merger. Income from these
investments in the same quarter of 2001 was not significant.
14
Income tax expense. Income tax expense was recorded at 37.5% of pre-tax income
for the three months ended June 30, 2001 and 2002. Our effective tax rate may
fluctuate as a result of changes in pre-tax income and nondeductible expenses.
Cash payments for taxes are deferred principally due to the book tax difference
of accounting for purchased accounts receivable on the accrual basis for GAAP
and the cost recovery basis for tax reporting. Prior to the Merger, we were
included in the consolidated tax return of NCO Group.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Revenue. Total revenue decreased modestly by $100,000, or 0.3%, from $30.5
million for the six months ended June 30, 2001 to $30.4 million for the six
months ended June 30, 2002. The effective interest method is utilized in
computing revenue. The IRR is an estimate based upon the expected monthly
collections over the remaining estimated economic life of each static pool in
conjunction with the carrying value of each static pool. Collections on
purchased accounts receivable increased $6.8 million, or 13.7%, from $49.7
million for the six months ended June 30, 2001 to $56.5 million for the six
months ended June 30, 2002. The increase in collections is principally due to
the purchase of $93.5 million in accounts receivable in connection with the
Merger, which occurred in the middle of the first quarter of 2001. Revenue as a
percentage of collections was 61.4% and 53.8% for the six months ended June 30,
2001 and 2002, respectively.
Revenue as a percentage of collections for the six months ended June 30, 2002
versus 2001 declined principally due to changes in the composition of purchased
accounts receivable in 2002 versus 2001. Purchased accounts receivable acquired
in, and subsequent to, the Merger were acquired at a lower IRR compared to
accounts receivable purchased prior to the Merger. Purchases of accounts
receivable made in the latter half of 2001 and the first half of 2002 have
returns that have been targeted lower at the time of acquisition due to the
tougher economic climate facing us in the near term. Finally, the overall
percentage was lowered due to a slow-down in collections as a result of the
softening economic climate in the last half of 2001 and the first half of 2002.
Decreases in collections had the effect of lowering the future projections on
most static pools, which translated to lower revenue in the current period.
Additionally, static pools with $8.3 million in carrying value, or 6.5% of
purchased accounts receivable, as of June 30, 2002 were impaired and placed on
cost recovery. Accordingly, no revenue was recorded on these static pools after
their impairment, equating to a lower ratio of revenue to collections. See
impairment of purchased accounts receivable section below.
Payroll and related expenses. Payroll and related expenses increased from
$808,000 for the six months ended June 30, 2001 to $1.1 million for the six
months ended June 30, 2002. The increase was attributable to an increase in
personnel as of the date of the Merger, which occurred in the middle of the
quarter ended 2001. Payroll and related expenses after the Merger increased as
additional staffing was needed to operate as an independent public company and
to manage a significant increase in purchased accounts receivable from the
Merger and internal growth.
15
Servicing fee expenses. Servicing fee expenses increased $3.1 million, or 23.3%,
from $13.3 million for the six months ended June 30, 2001 to $16.4 million for
the six months ended June 30, 2002. Servicing fees are paid as a commission on
collections, and include contingency legal fees. Servicing fee expenses are
impacted by the volume of collections on purchased accounts receivable and the
servicing fee rates charged. Servicing fees paid as a percentage of collections
was 26.9% and 28.9% for the six months ended June 30, 2001 and 2002,
respectively. Included therein are servicing fees paid to NCOF which totaled $13
million and $16.4 million for the six months ended June 30, 2001 and 2002,
respectively. Servicing fees as a percentage of collections increased from 2001
to 2002 as the composition of accounts receivable under management has changed
and aged over the past twelve months. In general, the accounts receivable
acquired in the Merger have lower servicing fees as compared to other accounts
receivable purchased since the Merger. The accounts receivable acquired in the
Merger were generally older and had been through multiple placements to
collection agencies, and had demonstrated a track record of producing a stream
of cash flows. Accordingly, the servicing fees agreed to in the ten-year
servicing agreement were lower than would be the case for comparably aged
accounts receivable. As collections on accounts receivable acquired in the
Merger decrease over time (those having lower servicing fee rates), and
collections on new purchases increase due to increased purchases (those having
higher servicing rates), the blended servicing fees from all accounts receivable
under management will increase. Further, NCOF may outsource collections in an
attempt to offset negative economic trends, to test itself, and generally to
augment resources. The cost of outsourcing is generally higher on such accounts
since they are relatively more difficult to resolve.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $300,000, or 27.3%, from $1.1 million for the
six months ended June 30, 2001 to $1.4 million for the six months ended June 30,
2002. Selling, general and administrative expenses consist primarily of court
costs associated with legal collections, professional fees, insurance, trustee
fees, and office expenses. The increase was attributable to costs incurred in
connection with being a separate public company. Accordingly, no selling,
general and administrative expenses were incurred prior to the Merger, which
occurred on February 20, 2001.
Impairment of purchased accounts receivable. On an ongoing basis, static pools
are reviewed to assess the expected future cash flows as they relate to the
carrying values of the purchased accounts receivable. If the estimated future
cash flows are not sufficient to recover the remaining carrying value of a
static pool, an impairment has occurred and the static pool must be written down
to its net realizable value. Additional impairments on previously impaired
static pools may occur if the current estimated future cash flow projection,
after being adjusted prospectively for actual collection results, is less than
the current carrying value recorded. Once a static pool is impaired, no revenue
will be recorded until the carrying value has been fully recovered. During the
six months ended June 30, 2001 and 2002, impairment charges of $463,000 and $1.2
million, respectively, were recorded. The combined remaining carrying value on
all impaired static pools aggregated $8.3 million, or 6.5% of purchased accounts
receivable, as of June 30, 2002.
Other income (expense). Other income (expense) consisted principally of interest
expense and decreased $600,000, or 15.8%, from $3.8 million for the six months
ended June 30, 2001 to $3.2 million for the six months ended June 30, 2002. The
decrease was principally attributable to a decrease of $18 million in total debt
outstanding from $98.6 million as of June 30, 2001 to $80.6 million as of June
30, 2002. Additionally, the cost of borrowing on certain floating rate debt
decreased dramatically during the second half of 2001 and the favorable rates
continued through the six months ended June 30, 2002. Offsetting interest
expense, included in other income, is $378,000 consisting of $303,000 in income
from our 50% interest in the IMNV joint venture accounted for under the equity
method of accounting, and $75,000 in income from our 100% interest in a
securitization trust, SPV 98-2, acquired in connection with the Merger. Income
from these investments for the six months ended June 30, 2001 was not
significant.
Income tax expense. Income tax expense was recorded at 37.5% of pre-tax income
for the six months ended June 30, 2001 and 2002. Our effective tax rate may
fluctuate as a result of changes in pre-tax income and nondeductible expenses.
Cash payments for taxes are deferred due principally to the book tax difference
of accounting for purchased accounts receivable on the accrual basis for GAAP
and the cost recovery basis for tax reporting. Prior to the Merger, we were
included in the consolidated tax return of NCO Group.
16
Liquidity and Capital Resources
Historically, we have derived all of our cash flow from collections on purchased
accounts receivable and borrowings from NCO Group. Effective with the Merger, we
entered into a credit agreement with NCO Group which originally provided us with
a $50 million revolving line of credit from NCO Group in the form of a
sub-facility under its existing credit facility. As of June 30, 2002, the
balance on the sub-facility was $42.3 million, with a capacity of $45 million,
which is subject to mandatory reductions.
The debt service requirements associated with borrowings under our secured
credit facilities and the mandatory reductions on our revolving sub-facility
have increased liquidity requirements. The sub-facility provides for mandatory
reductions of $2.5 million per quarter starting March 31, 2002, increasing to
$3.75 million per quarter starting March 31, 2003 until the sub-facility is
reduced to $25 million. However, we anticipate that cash flows from operations
will be sufficient to fund all mandatory reductions on the sub-facility, secured
debt, operating expenses, interest expense and future purchases of accounts
receivable including our existing forward-flow agreement. Cash flows from
operations are directly related to the amount of collections actually received.
Estimates are used to forecast collections and revenue. A decrease in cash flows
from operations due to a decrease in collections from changes in the economy or
the performance of NCOF as service provider, may require us to reduce the amount
of accounts receivable purchased. The effect of reduced accounts receivable
purchases would be a reduction in planned collections and revenue in the periods
affected.
Cash Flows from Operating Activities. Net cash provided by operating activities
was $13.4 million for the six months ended June 30, 2001, compared to $7.3
million for the six months ended June 30, 2002. The decrease in cash and cash
equivalents provided by operations was principally attributable to the decrease
in net income and activity included in 2001 that was non-recurring in nature.
Net income reported for the six months ended June 30, 2001 was $2.5 million
greater than in 2002. Additionally, in 2001, non-recurring operating activities
included approximately $2.6 million in restricted cash that was used to pay down
debt pursuant to the Merger and $1.1 million from increases in accounts payable
and accrued expenses related to recurring costs associated with the management
of the accounts receivable acquired in the Merger.
Cash Flows from Investing Activities. Net cash used in investing activities was
$21.6 million for the six months ended June 30, 2001, compared to $6.7 million
cash provided by investing activities for the six months ended June 30, 2002.
Cash used in or provided by investing activities is a function of the amount of
accounts receivable purchased, offset by collections applied to principal on
purchased accounts receivable. Collections applied to principal on purchased
accounts receivable is the difference between collections and revenue. Cash
purchases of accounts receivable were $26.3 million and $16 million in the six
months ended June 30, 2001 and 2002, respectively, while the amount of
collections applied to principal on purchased accounts receivable were $15.7
million and $23.3 million for the six months ended June 30, 2001 and 2002,
respectively. Additionally, in the six months ended June 30, 2002, $542,000 in
cash was used for the purchase of accounts receivable through the investment in
joint venture, and in the six months ended June 30, 2001, there were $11.1
million of pre-acquisition liabilities and related costs paid in connection with
the Merger that were non-recurring in 2002.
Cash Flows from Financing Activities. Net cash provided by financing activities
was $14.6 million for the six months ended June 30, 2001, compared to $12.2
million cash used in financing activities for the six months ended June 30,
2002. Total net repayments on notes payable and the revolving credit agreement
for the six months ended June 30, 2002 totaled $12.2 million, versus borrowings
for the six months ended June 30, 2001 of $43.2 million and repayments on notes
payable of $30 million. Borrowings in the first half of 2001 included the
initial cost of the Merger, and repayments included the paydown of certain notes
payable and revolving credit facilities in connection with the Merger.
Additionally, in 2001, there was $2.3 million in proceeds from the issuance of
common stock at the time of the Merger, and $900,000 in fees paid to secure the
NCO Group sub-facility, both of which were not repeated in 2002.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various types of market risk in the normal course of business,
including the impact of interest rate changes 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 $25,000 for each $10 million of variable
debt outstanding for the entire year. We retain an investment in securitization
with respect to its securitized accounts receivable which is a market risk
sensitive financial instrument held for purposes other than trading. This
investment exposes us to market risk, which may arise from changes in interest
and discount rates applicable to this investment. The impact of a 1% increase in
the discount rate used by us in the fair value calculations would not have a
material impact on our balance sheet as of June 30, 2002. There would be no
impact on our future cash flows. We do not invest in derivative financial or
commodity instruments.
Inflation
We believe that inflation has not had a material impact on our results of
operations for the three months ended June 30, 2001 and 2002.
17
PART II
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in legal proceedings from time to time in the ordinary
course of its business. Management believes that none of these legal proceedings
will have a materially adverse effect on the financial condition or results of
operations of the Company.
Item 2. Changes in Securities and Use of Proceeds.
None - not applicable
Item 3. Defaults Upon Senior Securities
None - not applicable
Item 4. Submission of Matters to a Vote of Shareholders
The Company held its Annual Meeting of Stockholders on May 20, 2002. At
the meeting, the following persons were elected as directors of the Company to
serve for a term of three years and until each of their respective successors is
duly elected and qualified.
Name Number of Votes
----------------------------- -------------------------------------
For Withhold Authority
--------- ------------------
James D. Rosener 8,599,037 0
Jeffrey A. Schraeder 8,599,037 0
The term of office for each of the following directors continued after the
meeting: Michael J. Barrist, James T. Hunter and Alan D. Scheinkman.
Item 5. Other Information
None - not applicable
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
99.1 Chief Executive Officer Certification Pursuant to U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer Certification Pursuant to U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(B) Reports on Form 8-K
NCO Portfolio filed an 8-K on May 10, 2002 Item 5 "Other Events", and Item 7
"Financial Statements and Exhibits".
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Baltimore,
State of Maryland, on August 14, 2002.
NCO PORTFOLIO MANAGEMENT, INC.
By: /s/ RICHARD J. PALMER
---------------------------------
Richard J. Palmer
Senior Vice President, Finance and Treasurer
19