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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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
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COMMISSION FILE NUMBER 0-21639
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NCO GROUP, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA
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(State or other jurisdiction of incorporation or organization)
507 Prudential Road, Horsham, Pennsylvania
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(Address of principal executive offices)
23-2858652
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(IRS Employer Identification Number)
19044
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(Zip Code)
215-441-3000
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(Registrant's telephone number including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ______
The number of shares outstanding of each of the issuer's classes of
common stock was 25,908,000 shares common stock, no par value, outstanding as of
August 13, 2002.
NCO GROUP, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets -
December 31, 2001 and June 30, 2002 1
Consolidated Statements of Income -
Three and six months ended June 30, 2001 and 2002 2
Consolidated Statements of Cash Flows -
Six months ended June 30, 2001 and 2002 3
Notes to Consolidated Financial Statements 4
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 23
PART II - OTHER INFORMATION 24
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Shareholders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Part 1 - Financial Information
Item 1 - Financial Statements
NCO GROUP, INC.
Consolidated Balance Sheets
(Amounts in thousands)
June 30
December 31, 2002
ASSETS 2001 (Unaudited)
-------- -----------
Current assets:
Cash and cash equivalents $ 32,161 $ 27,117
Restricted cash 1,125 900
Accounts receivable, trade, net of allowance for
doubtful accounts of $5,311 and $8,739, respectively 99,055 97,739
Purchased accounts receivable, current portion 47,341 50,272
Deferred income taxes 8,336 9,111
Other current assets 14,784 11,727
-------- --------
Total current assets 202,802 196,866
Funds held on behalf of clients
Property and equipment, net 71,457 78,515
Other assets:
Goodwill 514,161 515,510
Other intangible assets, net of accumulated amortization 7,929 6,808
Purchased accounts receivable, net of current portion 92,660 81,753
Other assets 42,016 48,218
-------- --------
Total other assets 656,766 652,289
-------- --------
Total assets $931,025 $927,670
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 21,922 $ 22,270
Income taxes payable 176 -
Accounts payable 12,164 12,828
Accrued expenses 39,382 28,101
Accrued compensation and related expenses 16,785 14,079
-------- --------
Total current liabilities 90,429 77,278
Funds held on behalf of clients
Long-term liabilities:
Long-term debt, net of current portion 357,868 332,575
Deferred income taxes 42,855 49,209
Other long-term liabilities 4,565 3,744
Minority interest 21,213 22,818
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized,
no shares issued and outstanding - -
Common stock, no par value, 50,000 shares authorized,
25,816 and 25,907 shares issued and outstanding, respectively 320,993 321,823
Other comprehensive loss (4,346) (2,338)
Retained earnings 97,448 122,561
-------- --------
Total shareholders' equity 414,095 442,046
-------- --------
Total liabilities and shareholders' equity $931,025 $927,670
======== ========
-1-
NCO GROUP, 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 $183,275 $177,678 $354,304 $356,585
Operating costs and expenses:
Payroll and related expenses 99,475 83,480 182,387 169,600
Selling, general and administrative expenses 58,164 61,343 109,287 122,416
Depreciation and amortization expense 9,623 6,521 18,577 12,747
-------- -------- -------- --------
Total operating costs and expenses 167,262 151,344 310,251 304,763
-------- -------- -------- --------
Income from operations 16,013 26,334 44,053 51,822
Other income (expense):
Interest and investment income 888 787 1,804 1,454
Interest expense (7,295) (4,963) (14,716) (9,949)
Other income (expense) - 305 - (290)
-------- -------- -------- --------
Total other income (expense) (6,407) (3,871) (12,912) (8,785)
-------- -------- -------- --------
Income before income tax expense 9,606 22,463 31,141 43,037
Income tax expense 3,719 8,522 12,385 16,319
-------- -------- -------- --------
Income from operations before minority interest 5,887 13,941 18,756 26,718
Minority interest (1,438) (633) (2,030) (1,605)
-------- -------- -------- --------
Net income $ 4,449 $ 13,308 $ 16,726 $ 25,113
======== ======== ======== ========
Net income per share:
Basic $ 0.17 $ 0.51 $ 0.65 $ 0.97
Diluted $ 0.17 $ 0.48 $ 0.63 $ 0.90
Weighted average shares outstanding:
Basic 25,781 25,891 25,734 25,873
Diluted 26,229 29,977 28,100 29,940
-2-
NCO GROUP, 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 $ 16,726 $ 25,113
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 9,710 11,383
Amortization of intangibles 8,867 1,364
Provision for doubtful accounts 2,202 5,537
Impairment of purchased accounts receivable 463 1,211
Gain on insurance proceeds from property and equipment - (847)
Minority interest 2,030 1,606
Changes in operating assets and liabilities, net of acquisitions:
Restricted cash 2,555 225
Accounts receivable, trade (14,157) (4,054)
Deferred income taxes 4,027 5,750
Other assets (4,101) (4,594)
Accounts payable and accrued expenses 8,327 (13,371)
Income taxes payable (208) (1,176)
Other long-term liabilities 1,081 (1,308)
--------- --------
Net cash provided by operating activities 37,522 26,839
Cash flows from investing activities:
Purchases of accounts receivable (26,319) (16,823)
Collections applied to principal of purchased accounts receivable 16,306 24,007
Purchases of property and equipment (13,491) (18,141)
Proceeds from notes receivable - 1,000
Insurance proceeds from involuntary conversion of
property and equipment - 2,633
Investment in consolidated subsidiary by minority interest 2,320 -
Net cash paid for pre-acquisition liabilities and
acquisition related costs (11,077) -
--------- --------
Net cash used in investing activities (32,261) (7,324)
Cash flows from financing activities:
Repayment of notes payable (10,740) (8,544)
Repayment of acquired notes payable (20,084) -
Borrowings under revolving credit agreement 51,330 370
Repayment of borrowings under revolving credit agreement (142,350) (17,250)
Payment of fees to acquire debt (5,055) (253)
Proceeds from the issuance of convertible debt 125,000 -
Issuance of common stock, net 3,647 747
--------- --------
Net cash provided by (used in) financing activities 1,748 (24,930)
Effect of exchange rate on cash (98) 371
--------- --------
Net increase (decrease) in cash and cash equivalents 6,911 (5,044)
Cash and cash equivalents at beginning of the period 13,490 32,161
--------- --------
Cash and cash equivalents at end of the period $ 20,401 $ 27,117
========= ========
-3-
NCO GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Nature of Operations:
NCO Group, Inc. (the "Company" or "NCO") is a leading provider of accounts
receivable management and collection services. The Company also owns
approximately 63% of NCO Portfolio Management, Inc., a separate public company
that purchases and manages defaulted consumer accounts receivable from consumer
creditors such as banks, finance companies, retail merchants, and other consumer
oriented companies. The Company's client base includes companies in the
financial services, healthcare, retail and commercial, utilities, education,
telecommunications, and government sectors. These clients are primarily located
throughout the United States of America, Canada, the United Kingdom, and Puerto
Rico.
2. Accounting Policies:
Interim Financial Information:
The accompanying unaudited consolidated financial statements have been prepared
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 only normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three-month and six-month periods
ended June 30, 2002, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002, or for any other interim period.
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. The
Company does not control InoVision-MEDCLR NCOP Ventures, LLC and Creditrust
SPV98-2, LLC (see note 15) and, accordingly, their financial condition and
results of operations are not consolidated with the Company's financial
statements.
Contingency Fees and Fees for Contractual Services:
The Company generates revenue from contingency fees and fees for contractual
services.
Contingency fee revenue is recognized upon collection of funds on behalf of
clients. Contingency fee revenue on long-term contracts with variable rates is
recognized upon collection of funds on behalf of clients at the anticipated
average fee over the life of the contract. For certain government clients, the
Company records revenue for services upon completion, less an allowance for
transactions that may not meet clients' guidelines at the time of funding.
Fees for contractual services are recognized as services are performed and
accepted by the client.
Purchased Accounts Receivable:
The Company 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 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 the Company expects to collect a relatively small
percentage of each static pool's face value.
-4-
2. Accounting Policies (continued):
Purchased Accounts Receivable (continued):
Each static pool is initially recorded at cost. Collections on the pools are
allocated to revenue and principal reduction based on the estimated internal
rate of return ("IRR") for each pool. The IRR for each static pool is estimated
based on the expected monthly collections over the estimated economic life of
each pool (generally five years, based on the Company'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 pool may be accreted 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, the Company 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 yield
for each static pool is based on estimates of future cash flows from
collections, and actual cash flows may vary from current estimates. The
difference could be material.
Credit Policy:
The Company has two types of arrangements under which it collects its
contingency fee revenue. For certain clients, the Company remits funds collected
on behalf of the client net of the related contingency fees while, for other
clients, the Company remits gross funds collected on behalf of clients and bills
the client separately for its contingency 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.
Intangibles:
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. Effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangibles" ("SFAS 142") (see note 3).
Other intangible assets consist primarily of deferred financing costs, which
relate to debt issuance costs incurred. Deferred financing costs are amortized
over the term of the debt (see note 3).
Interest Rate Hedges:
The Company accounts for its interest rate swap agreements as either assets or
liabilities on the balance sheet measured at fair value. Changes in the fair
value of the interest rate swap agreements will be recorded in other
comprehensive income since the interest rate swap agreements were designated and
qualified as cash flow hedges. If the interest rate swap agreements no longer
qualify as cash flow hedges, the change in the fair value will be recorded in
current earnings.
-5-
2. Accounting Policies (continued):
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.
Prior to the adoption of SFAS 142 on January 1, 2002, income taxes were computed
after giving effect to the nondeductible portion of goodwill expenses
attributable to certain acquisitions.
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 ratably over the life of the static pool. Deferred tax liabilities
arise from income tax deferrals created during the early stages of the static
pool. These deferrals reverse after the cost basis of the static pool is
recovered. The creation of new tax deferrals from future purchases of static
pools are expected to offset the reversal of the deferrals from static pools
where the collections have become fully taxable.
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 amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those estimates.
In the ordinary course of accounting for contingency fee revenue on long-term
contracts with variable rates, estimates have been made by management as to the
amount of total collections and contingency fee revenue to be earned over the
life of the contract. The estimated contingency fee revenue earned under the
contract through the balance sheet date was determined based on the amount of
actual collections through that date. Actual results could differ from those
estimates and a material change could occur within one reporting period.
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, we compare 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
reporting period.
Reclassifications:
Certain amounts for December 31, 2001, have been reclassified for comparative
purposes.
3. Intangible Assets:
Goodwill:
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangibles" ("SFAS 142"). As a result of
adopting SFAS 142, the Company no longer amortizes goodwill. Goodwill must be
tested at least annually for impairment, including an initial test that was
completed in connection with the adoption of SFAS 142. The test for impairment
uses 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 Company did not incur any impairment charges in
connection with the adoption of SFAS 142.
-6-
3. Intangible Assets (continued):
Goodwill (continued):
SFAS 142 requires goodwill to be allocated and tested at the reporting unit
level. The Company's reporting units under SFAS 142 are U.S. Operations,
Portfolio Management and International Operations. Portfolio Management does not
have any goodwill. The U.S. Operations and International Operations had the
following goodwill (amounts in thousands):
December 31, June 30,
2001 2002
------------ --------
U.S. Operations $484,182 $484,182
International Operations 29,979 31,328
-------- --------
Total $514,161 $515,510
======== ========
The change in International Operations' goodwill balance from December 31, 2001
to June 30, 2002 was due to changes in the exchange rates used for the foreign
currency translation.
The following presents the results of operations as if SFAS 142 had been adopted
on January 1, 2001 (dollars in thousands):
For the Three Months Ended For the Six Months Ended
June 30, 2001 June 30, 2001
------------------------------ ----------------------------
Diluted Diluted
Earnings Earnings
Amount Per Share Amount Per Share
--------------- -------------- ------------ ---------------
Net income, as reported $ 4,449 $ 0.17 $16,726 $ 0.63
Add back of goodwill amortization,
net of tax 2,908 0.11 5,824 0.20
------- -------- ------- --------
Adjusted net income $ 7,357 $ 0.28 $22,550 $ 0.83
======= ======== ======= ========
Other Intangible Assets:
The Company's adoption of SFAS 142 had no effect on its other intangible assets.
Other intangible assets consist primarily of deferred financing costs. The
following represents the other intangible assets (amounts in thousands):
December 31, 2001 June 30, 2002
--------------------------------- ---------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
---------------- --------------- ---------------- ---------------
Deferred financing costs $11,855 $ 4,294 $12,124 $ 5,606
Other intangible assets 900 532 900 610
------- ------- ------- -------
Total $12,755 $ 4,826 $13,024 $ 6,216
======= ======= ======= =======
-7-
3. Intangible Assets (continued):
Other Intangible Assets (continued):
The Company recorded amortization expense for all other intangible assets of
$401,000 and $687,000 during the three months ended June 30, 2001 and 2002,
respectively, and $1.0 million and $1.4 million during the six months ended June
30, 2001 and 2002, respectively. The following represents the Company's expected
amortization expense from these other intangible assets over the next five years
(amounts in thousands):
Estimated
For the Years Ended Amortization
December 31, Expense
----------------------- -----------------
2002 $ 2,778
2003 2,802
2004 1,578
2005 785
2006 229
4. Acquisition:
On February 20, 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. After the Creditrust merger, the Company owned approximately 63% of
the outstanding stock of NCO Portfolio, subject to certain adjustments. The
Company's contribution to the NCO Portfolio merger consisted of $25.0 million of
purchased accounts receivable. As part of the Creditrust merger, NCO Portfolio
signed a ten-year service agreement that appointed the Company as the sole
provider of collection services to NCO Portfolio. The Company has agreed to
offer all of its future U.S. accounts receivable purchase opportunities to NCO
Portfolio. In connection with the Creditrust merger, the Company amended its
revolving credit facility to provide NCO Portfolio with a $50.0 million
revolving line of credit in the form of a sub-facility under its existing credit
facility. Initially, NCO Portfolio borrowed $36.3 million to fund the Creditrust
merger.
The following summarizes the unaudited pro forma results of operations, assuming
the Creditrust merger occurred on January 1, 2001. 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, except per share data):
For the Six Months
Ended June 30, 2001
-------------------------
Revenue $ 357,884
Net income $ 7,758
Earnings per share - basic $ 0.30
Earnings per share - diluted $ 0.30
-8-
5. Comprehensive Income:
Comprehensive income consists of net income from operations, plus certain
changes in assets and liabilities that are not included in net income but are
reported as a separate component of shareholders' equity. The Company's
comprehensive income was as follows (amounts in thousands):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------ --------------------
2001 2002 2001 2002
------ ------- ------- -------
Net income $4,449 $13,308 $16,726 $25,113
Other comprehensive income:
Foreign currency translation adjustment 1,830 2,511 (431) 2,324
Unrealized gain on interest rate swap - (684) - (316)
------ ------- ------- -------
Comprehensive income $6,279 $15,135 $16,295 $27,121
====== ======= ======= =======
6. Purchased Accounts Receivable:
The Company's Portfolio Management and International Operations divisions
purchase defaulted consumer receivables at a discount from the actual principal
balance. As of June 30, 2002, the carrying values of Portfolio Management's and
International Operations' purchased accounts receivable were $128.2 million and
$3.8 million, respectively. The following summarizes the change in purchased
accounts receivable (amounts in thousands):
December 31, June 30,
2001 2002
-------- --------
Balance, at beginning of period $ 34,475 $140,001
Purchased accounts receivable acquired
from Creditrust 93,518 -
Purchases of accounts receivable 50,621 17,172
Collections on purchased accounts receivable (99,868) (55,959)
Revenue recognized 64,065 31,952
Impairment of purchased accounts receivable (2,738) (1,211)
Foreign currency translation adjustment (72) 70
-------- --------
Balance, at end of period $140,001 $132,025
======== ========
During the three and six months ended June 30, 2002, impairments of $414,000 and
$1.2 million, respectively, were recorded as a charge to income on static pools
where the carrying amounts exceeded the expected future cash flows. During the
three months ended June 30, 2001, impairments of $463,000 were recorded as a
charge to income on static pools where the carrying amounts exceeded the
expected future cash flows. No revenue will be recorded on these static pools
until the carrying values have been fully recovered. As of June 30, 2002, the
combined carrying values on all previously impaired static pools aggregated $8.5
million, or 6.4% of the total purchased accounts receivable, representing their
net realizable value.
7. 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 $56.8 million and $55.3 million at
December 31, 2001 and June 30, 2002, respectively, have been shown net of their
offsetting liability for financial statement presentation.
-9-
8. Long-term Debt:
Long-term debt consisted of the following (amounts in thousands):
December 31, June 30,
2001 2002
-------- --------
Revolving credit loan $206,630 $189,750
Convertible notes 125,000 125,000
Securitized debt 45,379 38,022
Capital leases and other 2,781 2,073
Less current portion (21,922) (22,270)
-------- --------
$357,868 $332,575
======== ========
Revolving Credit Facility:
The Company has a credit agreement with Citizens Bank of Pennsylvania, formerly
Mellon Bank, N.A., ("Citizens Bank"), for itself and as administrative agent for
other participating lenders, structured as a revolving credit facility. The
balance under the revolving credit facility is due on May 20, 2004 (the
"Maturity Date"). The borrowing capacity of the revolving credit facility is
subject to quarterly reductions of $5.2 million until the Maturity Date, and 50
percent of the net proceeds received from any offering of debt or equity.
At the option of NCO, the borrowings bear interest at a rate equal to either
Citizens Bank's prime rate plus a margin of 0.25% to 0.50%, which is determined
quarterly based upon the Company's consolidated funded debt to earnings before
interest, taxes, depreciation, and amortization ("EBITDA") ratio (Citizens
Bank's prime rate was 4.75% at June 30, 2002), 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 1.84% at June 30, 2002). 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.
In connection with the merger of Creditrust into NCO Portfolio, the Company
amended its revolving credit facility to allow the Company to provide NCO
Portfolio with a $50 million revolving line of credit in the form of a
sub-facility under its existing credit facility. 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 June 30, 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. At the option of NCO, the borrowings bear interest at a
rate equal to either Citizens Bank's prime rate plus a margin of 1.25% to 1.50%
that is determined quarterly based upon the Company's consolidated funded debt
to EBITDA ratio, or LIBOR plus a margin of 2.25% to 3.25% depending on the
Company's consolidated funded debt to EBITDA ratio.
The following summarizes the availability under the revolving credit facility as
of June 30, 2002 (amounts in thousands):
NCO Group NCO Portfolio Combined
--------- ------------- --------
Maximum capacity $212,125 $45,000 $257,125
Less:
Outstanding borrowings 147,500 42,250 189,750
Unused letters of credit 2,345 - 2,345
-------- ------- --------
Available $ 62,280 $ 2,750 $ 65,030
======== ======= ========
-10-
8. Long-term Debt (continued):
Revolving Credit Facility (continued):
Borrowings under the revolving credit facility are collateralized by
substantially all the assets of the Company, including the common stock of NCO
Portfolio, and certain assets of NCO Portfolio. 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 June 30, 2002, the Company
was in compliance with all required financial covenants.
Convertible Debt:
In April 2001, the Company completed the sale of $125.0 million aggregate
principal amount of 4.75% Convertible Subordinated Notes due 2006 ("Notes") in a
private placement pursuant to Rule 144A and Regulation S under the Securities
Act of 1933. The Notes are convertible into NCO common stock at an initial
conversion price of $32.92 per share. The Company will be required to repay the
$125.0 million of aggregate principal if the Notes are not converted prior to
their maturity in April 2006. The Company used the $121.3 million of net
proceeds from this offering to repay debt under its revolving credit facility.
In accordance with the terms of the credit agreement, 50% of the net proceeds
from the Notes permanently reduced the maximum borrowings available under the
revolving credit facility.
Securitized Debt:
Prior to the Creditrust merger, Creditrust established three securitized notes
payable to fund the purchase of accounts receivable. Each of the notes payable
is non-recourse to the Company and NCO Portfolio, secured by a static pool of
purchased accounts receivable, and is bound by an indenture and servicing
agreement. Pursuant to the acquisition, the trustee appointed NCO as the
successor servicer for each static pool of purchased accounts receivable. When
the notes payable were established, a separate special purpose finance
subsidiary was created to house the assets and debt. These notes 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 for the six months ended June 30, 2002,
respectively. As of June 30, 2002, $16.4 million was outstanding on this
facility. The note issuer, Radian Asset Assurance, Inc., formerly Asset Guaranty
Insurance Company, has been guaranteed against loss by NCO Portfolio for up to
$4.5 million, which will be reduced if and when reserves and residual cash flows
from another securitization, Creditrust SPV 98-2, LLC, are posted as additional
collateral for this facility (see note 15).
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
NCO Portfolio. Interest expense, trustee fees and guarantee fees aggregated
$257,000 and $3,000 for the three months ended June 30, 2001 and 2002,
respectively. Interest expense, trustee fees and guarantee 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.
-11-
8. Long-term Debt (continued):
Securitized Debt (continued):
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 15.00% 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 $1.0 million and $832,000 for the three
months ended June 30, 2001 and 2002, respectively. Interest expense, trustee
fees and guarantee 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.
9. Earnings Per Share:
Basic earnings per share ("EPS") was computed by dividing the net income by the
weighted average number of common shares outstanding. Diluted EPS was computed
by dividing the adjusted net income by the weighted average number of common
shares outstanding plus all common equivalent shares. Net income is adjusted to
add-back convertible interest expense, net of taxes. The convertible interest,
net of taxes, included in the diluted EPS calculation for the three and six
months ended June 30, 2002, was $920,000 and $1.8 million, respectively. There
was no convertible interest during the three and six months ended June 30, 2001.
Outstanding options, warrants and convertible securities have been utilized in
calculating diluted net income per share only when their effect would be
dilutive.
The reconciliation of basic to diluted weighted average shares outstanding was
as follows (amounts in thousands):
For the Three Months For the Six Months Ended
Ended June 30, June 30,
-------------------------- ---------------------------
2001 2002 2001 2002
------------ ------------ ------------ -------------
Basic 25,781 25,891 25,734 25,873
Dilutive effect of convertible debt - 3,797 1,815 3,797
Dilutive effect of options 313 289 406 270
Dilutive effect of warrants 135 - 145 -
------------ ------------ ------------ -------------
Diluted 26,229 29,977 28,100 29,940
============ ============ ============ =============
10. Interest Rate Hedge:
As of June 30, 2002, the Company was party to two interest rate swap agreements,
which qualified as cash flow hedges, to fix LIBOR at 2.8225% on an aggregate
amount of $96.7 million of the variable-rate debt outstanding under the
revolving credit facility. The aggregate notional amount of the interest rate
swap agreements is subject to quarterly reductions that will reduce the
aggregate notional amount to $62 million by maturity in September 2003.
11. Supplemental Cash Flow Information:
The following are supplemental disclosures of cash flow information (amounts in
thousands):
For the Six Months Ended
June 30,
----------------------------
2001 2002
----------- ------------
Non-cash investing and financing activities:
Fair value of assets acquired $ 123,978 $ -
Liabilities assumed from acquisitions 109,394 -
Warrants exercised - 875
-12-
12. 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.
The Company is a guarantor of NCO Portfolio for this "forward-flow" agreement.
Litigation
The Company is party, from time to time, to various legal proceedings incidental
to its business.
In June of 2001, the first floor of the Company's Fort Washington, PA,
headquarters was severely damaged by a flood caused by remnants of Tropical
Storm Allison. During the third quarter of 2001, the Company decided to abandon
the Fort Washington facilities and move its corporate headquarters to Horsham,
PA. The Company has currently filed a lawsuit against its landlord to terminate
the leases for the Fort Washington facilities. Due to the uncertainty of the
outcome of the lawsuit, the Company has recorded the full amount of rent due
under the remaining terms of the leases during the third quarter of 2001.
In the first quarter of 2002, the Company recorded a net expense of $1.3 million
for its expected exposure from an environmental litigation that was the result
of contamination that allegedly occurred in the pre-acquisition operations of a
company acquired by a subsidiary of Medaphis Services Corporation. The Company
acquired Medaphis Services Corporation in November 1998. These operations were
unrelated to the accounts receivable outsourcing business.
In the opinion of management no other legal proceedings individually or in the
aggregate will have a significant effect on the financial position, results of
operations, cash flows, or liquidity of the Company.
13. Segment Reporting:
The Company's business consists of three operating divisions: U.S. Operations,
Portfolio Management and International Operations. The accounting policies of
the segments are the same as those described in note 2, "Accounting Policies."
U.S. Operations provides accounts receivable management services to consumer and
commercial accounts for all market sectors including financial services,
healthcare, retail and commercial, utilities, education, telecommunications, and
government. U.S. Operations serves 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, and delivering cost-effective accounts
receivable and customer relationship management solutions to all market sectors.
U.S. Operations had total assets, net of any intercompany balances, of $732.4
million and $728.9 million at December 31, 2001, and June 30, 2002,
respectively.
Portfolio Management purchases and manages defaulted consumer accounts
receivable from consumer creditors such as banks, finance companies, retail
merchants, and other consumer oriented companies. Portfolio Management had total
assets, net of any intercompany balances, of $153.7 million and $147.0 million
at December 31, 2001, and June 30, 2002, respectively.
International Operations provides accounts receivable management services across
Canada and the United Kingdom. U.S. Operations uses International Operations as
a subcontractor to perform accounts receivable management services for some of
its clients. International Operations had total assets, net of any intercompany
balances, of $44.9 million and $51.8 million at December 31, 2001, and June 30,
2002, respectively.
-13-
13. 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. 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
accounting principles generally accepted in the United States.
For the three months ended June 30, 2001
-----------------------------------------------------------
Payroll and Selling, General
Related and Admin.
Revenue Expenses Expenses EBITDA
-------- -------- ------------------ -------
U.S. Operations $164,842 $93,931 $ 54,349 $16,562
Portfolio Management 17,916 551 8,799 8,566
International Operations 9,276 6,057 2,711 508
Eliminations (8,759) (1,064) (7,695) -
-------- ------- --------- -------
Total $183,275 $99,475 $ 58,164 $25,636
======== ======= ========= =======
For the Three Months Ended June 30, 2002
(amounts in thousands)
-----------------------------------------------------------
Payroll and Selling, General
Related and Admin.
Revenue Expenses Expenses EBITDA
-------- -------- ----------------- -------
U.S. Operations $162,316 $78,563 $ 56,905 $26,848
Portfolio Management 14,108 549 9,271 4,288
International Operations
11,951 7,001 3,231 1,719
Eliminations (10,697) (2,633) (8,064) -
-------- ------- --------- -------
Total $177,678 $83,480 $ 61,343 $32,855
======== ======= ========= =======
For the six months ended June 30, 2001
-----------------------------------------------------------
Payroll and Selling, General
Related and Admin.
Revenue Expenses Expenses EBITDA
-------- -------- ----------------- -------
U.S. Operations $320,614 $172,622 $102,278 $45,714
Portfolio Management 30,534 808 14,904 14,822
International Operations 18,044 10,799 5,151 2,094
Eliminations (14,888) (1,842) (13,046) -
-------- -------- -------- -------
Total $354,304 $182,387 $109,287 $62,630
======== ======== ======== =======
For the Six Months Ended June 30, 2002
(amounts in thousands)
-----------------------------------------------------------
Payroll and Selling, General
Related and Admin.
Revenue Expenses Expenses EBITDA
-------- -------- ----------------- -------
U.S. Operations $324,593 $160,251 $113,862 $50,480
Portfolio Management 30,378 1,103 18,934 10,341
International Operations 22,600 12,868 5,984 3,748
Eliminations (20,986) (4,622) (16,364) -
-------- -------- -------- -------
Total $356,585 $169,600 $122,416 $64,569
======== ======== ======== =======
-14-
14. Net Loss Due to Flood and Relocation of Corporate Headquarters:
In June 2001, the entire first floor of the Company's Fort Washington, PA
headquarters was severely damaged by a flood caused by remnants of Tropical
Storm Allison. During the third quarter of 2001, the Company decided to relocate
its corporate headquarters to Horsham, PA. The Company has filed a lawsuit
against its landlord to terminate the leases for the Fort Washington facilities.
Due to the uncertainty of the outcome of the lawsuit, the Company has recorded
the full amount of rent due under the remaining terms of the leases during the
third quarter of 2001. The Company has also recorded other expenses and expected
insurance proceeds during the third quarter of 2001 in connection with the flood
and the relocation of the corporate headquarters. The net effect of the charges
and the gain from the insurance proceeds included in selling, general, and
administrative expenses during the third quarter of 2001 was $11.2 million.
During the first quarter of 2002, the Company received insurance proceeds in
excess of its original estimate, which resulted in a gain of approximately $1.0
million. This gain was included in the Statement of Income in "other income
(expense)."
15. Investments in Unconsolidated Subsidiaries:
NCO Portfolio owns a 100% retained residual interest in an investment in
securitization, Creditrust SPV 98-2, LLC, which was acquired as part of the
Creditrust merger. This transaction qualified for gain on sale accounting when
the purchased accounts receivable were originally securitized by Creditrust.
This securitization 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 the securitization using discounted future
cash flows after the securitization note is fully repaid plus a cash reserve. As
of June 30, 2002, the investment in securitization 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 securitization based on the discounted cash flows. The Company
recorded $47,000 and $75,000 of income on this investment during 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 8). The Company performs collection services for
Creditrust SPV 98-2, LLC and recorded service fee revenue of $757,000 and
$445,000 for the three months ended June 30, 2001 and June 30, 2002,
respectively, and $757,000 and $955,000 for the six months ended June 30, 2001
and 2002, respectively.
NCO Portfolio has a 50% ownership interest in a joint venture, InoVision-MEDCLR
NCOP Ventures, LLC ("Joint Venture") with IMNV Holdings, LLC ("IMNV"). The 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 had an investment in the Joint
Venture of $1.4 million as of June 30, 2002. Included in the Statements of
Income, as "interest and investment income," were $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
Company performs collection services for the joint venture and recorded service
fee revenue of $1.2 million and $2.2 million for the three and six months ended
June 30, 2002, respectively. 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. 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
Operating income 606
-15-
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Certain statements included in this Report on Form 10-Q, 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, the final outcome of the environmental
liability, the effects of the terrorist attacks and the economy on the Company's
business, expected increases in operating efficiencies, anticipated trends in
the accounts receivable management industry, estimates of future cash flows of
purchased accounts receivable, estimates of goodwill impairments and
amortization expense for other intangible assets, 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 related to purchased accounts receivable, risks
associated with technology, the Internet and the Company's e-commerce strategy,
risks related to the expected settlement of the environmental liability, risks
related to past or possible future terrorist attacks, risks related to the
economy, and other risks detailed from time to time in the Company's filings
with the Securities and Exchange Commission, including the Company's Annual
Report on Form 10-K, filed 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 Steven L. Winokur, Executive Vice
President, Finance/CFO, NCO Group, Inc., 507 Prudential Rd., Horsham, PA 19044.
-16-
Three Months Ended June 30, 2002, Compared to Three Months Ended June 30,
2001
Revenue. Revenue decreased $5.6 million, or 3.1%, to $177.7 million for the
three months ended June 30, 2002, from $183.3 million for the comparable period
in 2001. U.S. Operations, Portfolio Management and International Operations
accounted for $162.3 million, $14.1 million and $12.0 million, respectively, of
the revenue for the three months ended June 30, 2002. U.S. Operations' revenue
included $8.1 million of revenue earned on services performed for Portfolio
Management that was eliminated upon consolidation. International Operations'
revenue included $2.6 million of revenue earned on services performed for U.S.
Operations that was eliminated upon consolidation.
U.S. Operations' revenue decreased $2.5 million, or 1.5%, to $162.3 million
for the three months ended June 30, 2002, from $164.8 million for the comparable
period in 2001. The decrease in U.S. Operations' revenue was attributable to a
reduction in consumer payment patterns and volume fluctuations in our early
stage delinquency business. A portion of the decrease was offset by the addition
of new clients and the growth in business from certain existing clients,
including a positive effect on revenue attributable to an amendment of a
long-term contract with a significant client during the second quarter of 2002.
Portfolio Management's revenue decreased $3.8 million, or 21.3%, to $14.1
million for the three months ended June 30, 2002, from $17.9 million for the
comparable period in 2001. Portfolio Management's collections decreased $1.6
million, or 5.5%, to $27.7 million for the three months ended June 30, 2002,
from $29.3 million for the comparable period in 2001. Portfolio Management's
revenue represented 51% of collections for the three months ended June 30, 2002,
as compared to 61% of collections for the same period in the prior year. This
decrease in Portfolio Management's revenue was partially attributable to a
reduction in consumer payment patterns due to the general softening of the
economy. The decrease was also attributable to a reduction in purchases of
accounts receivable. Purchases of accounts receivables declined due to upward
pricing pressure in the market and our unwillingness to sacrifice our internal
rate of returns by paying higher prices.
International Operations' revenue increased $2.7 million, or 28.8%, to
$12.0 million for the three months ended June 30, 2002, from $9.3 million for
the comparable period in 2001. This increase in International Operations'
revenue was primarily attributable to new services provided for our U.S.
Operations, the addition of new clients, and growth in business from existing
clients. A portion of the increase was offset by changes in the foreign currency
exchange rates used to translate the International Operations' results of
operations into U.S. dollars.
Payroll and related expenses. Payroll and related expenses decreased $16.0
million to $83.5 million for the three months ended June 30, 2002, from $99.5
million for the comparable period in 2001, and decreased as a percentage of
revenue to 47.0% from 54.3%.
U.S. Operations' payroll and related expenses decreased $15.3 million to
$78.6 million for the three months ended June 30, 2002, from $93.9 million for
the comparable period in 2001, and decreased as a percentage of revenue to 48.4%
from 57.0%. The decrease as a percentage of revenue was primarily attributable
to $10.0 million of one-time charges incurred by U.S. Operations during the
second quarter of 2001. These charges related to a comprehensive streamlining of
its expense structure designed to counteract the effects of operating in a more
difficult collection environment. These costs primarily consisted of the
elimination or acceleration of certain contractual employment obligations,
severance costs related to terminated employees, and costs related to a decision
to change the structure of our healthcare benefit programs from a large,
singular benefit platform to individual plans across the country. The decrease
was also attributable to our continued focus on managing our staffing levels to
our business volumes, despite the difficult collection environment.
Portfolio Management's payroll and related expenses decreased $2,000 to
$549,000 for the three months ended June 30, 2002, from $551,000 for the
comparable period in 2001, and increased as a percentage of revenue to 3.9% from
3.1%. Portfolio Management outsources all of its collection services to U.S.
Operations and, therefore, has a relatively small fixed payroll cost structure.
However, the increase as a percentage of revenue was attributable to spreading
the fixed portion of the payroll cost structure over a smaller revenue base.
International Operations' payroll and related expenses increased $944,000
to $7.0 million for the three months ended June 30, 2002, from $6.1 million for
the comparable period in 2001, but decreased as a percentage of revenue to 58.6%
from 65.3%. The decrease as a percentage of revenue was attributable to $736,000
of one-time charges incurred by International Operations during the second
quarter of 2001. These charges related to a comprehensive streamlining of its
expense structure. These costs primarily consisted of the elimination or
acceleration of certain contractual employment obligations and severance costs
related to terminated employees. This decrease was partially offset by an
increase in outsourcing services since those services typically have a higher
payroll cost structure than the remainder of International Operations' business.
The higher payroll cost structure of the outsourcing services was offset by a
lower selling, general and administrative cost structure than the remainder of
International Operations' business.
-17-
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $3.1 million to $61.3 million for the three
months ended June 30, 2002, from $58.2 million for the comparable period in
2001, and increased as a percentage of revenue to 34.5% from 31.7%. The increase
as a percentage of revenue was primarily attributable to reduced collectibility
within our contingency revenue stream due to the effects of the difficult
collection environment. Accordingly, in order to mitigate the effects of the
decreased collectibility while maintaining our performance for our clients, we
had to increase spending for direct costs of collections. These costs included
telephone, letter writing and postage, third party servicing fees, credit
reporting, skiptracing, and legal and forwarding fees. The increase as a
percentage of revenue was partially offset by $1.8 million of one-time charges
incurred during the second quarter of 2001 related to a comprehensive
streamlining of its expense structure designed to counteract the effects of
operating in a more difficult collection environment. These costs primarily
related to real estate obligations for closed facilities and equipment rental
obligations.
Depreciation and amortization. Depreciation and amortization decreased $3.1
million to $6.5 million for the three months ended June 30, 2002, from $9.6
million for the comparable period in 2001. This decrease was the result of the
adoption of Statement of Financial Accounting Standard No. 142, "Goodwill and
Other Intangibles" ("SFAS 142") on January 1, 2002. SFAS 142 eliminated the
amortization of goodwill, which was $3.9 million for the three months ended June
30, 2001. Partially offsetting the $3.9 million decrease was additional
depreciation resulting from normal capital expenditures made in the ordinary
course of business during 2001 and 2002. These capital expenditures included
purchases associated with our planned migration towards a single, integrated
information technology platform, the relocation of our corporate headquarters to
Horsham, PA, and predictive dialers and other equipment required to expand our
infrastructure to handle future growth.
Other income (expense). Interest and investment income decreased $101,000
to $787,000 for the three months ended June 30, 2002, over the comparable period
in 2001. This decrease was primarily attributable to lower interest rates earned
on operating cash, funds held in trust on behalf of clients, and notes
receivables. Interest expense decreased to $5.0 million for the three months
ended June 30, 2002, from $7.3 million for the comparable period in 2001. This
decrease was primarily attributable to lower interest rates and debt repayments
made during 2001 and 2002. The decrease was partially offset by Portfolio
Management's borrowings used to purchase accounts receivable portfolios. During
the three months ended June 30, 2002, we recorded income of $305,000. This
income was from a partial recovery of an environmental liability. The
environmental liability was originally recorded during the first quarter of 2002
and was the result of contamination that allegedly occurred in the
pre-acquisition operations of a company acquired by a subsidiary of Medaphis
Services Corporation. We acquired Medaphis Services Corporation in November
1998. These operations were unrelated to the accounts receivable outsourcing
business.
Income tax expense. Income tax expense for the three months ended June 30,
2002, increased to $8.5 million, or 37.9% of income before income tax expense,
from $3.7 million, or 38.7% of income before income tax expense, for the
comparable period in 2001. The decrease in the effective rate was primarily
attributable to the elimination of the amortization of nondeductible goodwill
related to certain acquisitions. The goodwill amortization was eliminated upon
the adoption of SFAS 142 on January 1, 2002.
Six Months Ended June 30, 2002, Compared to Six Months Ended June 30, 2001
Revenue. Revenue increased $2.3 million, or 0.6%, to $356.6 million for the
six months ended June 30, 2002, from $354.3 million for the comparable period in
2001. U.S. Operations, Portfolio Management and International Operations
accounted for $324.6 million, $30.4 million and $22.6 million, respectively, of
the revenue for the six months ended June 30, 2002. U.S. Operations' revenue
included $16.4 million of revenue earned on services performed for Portfolio
Management that was eliminated upon consolidation. International Operations'
revenue included $4.6 million of revenue earned on services performed for U.S.
Operations that was eliminated upon consolidation.
-18-
U.S. Operations' revenue increased $4.0 million, or 1.2%, to $324.6 million
for the six months ended June 30, 2002, from $320.6 million for the comparable
period in 2001. The increase in U.S. Operations' revenue was attributable to the
addition of new clients and the growth in business from existing clients,
including a positive effect on revenue attributable to an amendment of a
long-term contract with a significant client during the second quarter of 2002.
A portion of the increase was offset by a reduction in consumer payment patterns
and volume fluctuations in our early stage delinquency business.
Portfolio Management's revenue decreased $156,000, or 0.5%, to $30.4
million for the six months ended June 30, 2002, from $30.5 million for the
comparable period in 2001. Portfolio Management's collections increased $6.8
million, or 13.8%, to $56.5 million for the six months ended June 30, 2002, from
$49.7 million for the comparable period in 2001. Portfolio Management's revenue
represented 54% of collections for the six months ended June 30, 2002, as
compared to 61% of collections for the same period in the prior year. This
decrease in Portfolio Management's revenue was partially attributable to a
reduction in consumer payment patterns due to the general softening of the
economy. The decrease was also attributable to a reduction in purchases of
accounts receivable. Purchases of accounts receivables declined due to upward
pricing pressure in the market and our unwillingness to sacrifice our internal
rate of returns by paying higher prices.
International Operations' revenue increased $4.6 million, or 25.2%, to
$22.6 million for the six months ended June 30, 2002, from $18.0 million for the
comparable period in 2001. This increase in International Operations' revenue
was primarily attributable to new services provided for our U.S. Operations, the
addition of new clients, and growth in business from existing clients. A portion
of the increase was offset by changes in the foreign currency exchange rates
used to translate the International Operations' results of operations into U.S.
dollars.
Payroll and related expenses. Payroll and related expenses decreased $12.8
million to $169.6 million for the six months ended June 30, 2002, from $182.4
million for the comparable period in 2001, and decreased as a percentage of
revenue to 47.6% from 51.5%.
U.S. Operations' payroll and related expenses decreased $12.4 million to
$160.3 million for the six months ended June 30, 2002, from $172.6 million for
the comparable period in 2001, and decreased as a percentage of revenue to 49.4%
from 53.8%. The decrease as a percentage of revenue was primarily attributable
to $10.0 million of one-time charges incurred by U.S. Operations during the
second quarter of 2001. These charges related to a comprehensive streamlining of
its expense structure designed to counteract the effects of operating in a more
difficult collection environment. These costs primarily consisted of the
elimination or acceleration of certain contractual employment obligations,
severance costs related to terminated employees, and costs related to a decision
to change the structure of our healthcare benefit programs from a large,
singular benefit platform to individual plans across the country. The decrease
was also attributable to our continued focus on managing our staffing levels to
our business volumes, despite the difficult collection environment.
Portfolio Management's payroll and related expenses increased $295,000 to
$1.1 million for the six months ended June 30, 2002, from $808,000 for the
comparable period in 2001, and increased as a percentage of revenue to 3.6% from
2.6%. Portfolio Management outsources all of its collection services to U.S.
Operations and, therefore, has a relatively small fixed payroll cost structure.
However, due to the expansion of this division and the Creditrust merger in
February 2001, Portfolio Management required additional employees to operate NCO
Portfolio Management, Inc. as a separate public company.
International Operations' payroll and related expenses increased $2.1
million to $12.9 million for the six months ended June 30, 2002, from $10.8
million for the comparable period in 2001, but decreased as a percentage of
revenue to 56.9% from 59.8%. The decrease as a percentage of revenue was
attributable to $736,000 of one-time charges incurred by International
Operations during the second quarter of 2001. These charges related to a
comprehensive streamlining of its expense structure. These costs primarily
consisted of the elimination or acceleration of certain contractual employment
obligations and severance costs related to terminated employees. This decrease
was partially offset by an increase in outsourcing services since those services
typically have a higher payroll cost structure than the remainder of
International Operations' business. The higher payroll cost structure of the
outsourcing services was offset by a lower selling, general and administrative
cost structure than the remainder of International Operations' business.
-19-
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $13.1 million to $122.4 million for the six
months ended June 30, 2002, from $109.3 million for the comparable period in
2001, and increased as a percentage of revenue to 34.3% from 30.8%. The increase
as a percentage of revenue was primarily attributable to reduced collectibility
within our contingency revenue stream due to the effects of the difficult
collection environment. Accordingly, in order to mitigate the effects of the
decreased collectibility while maintaining our performance for our clients, we
had to increase spending for direct costs of collections. These costs included
telephone, letter writing and postage, third party servicing fees, credit
reporting, skiptracing, and legal and forwarding fees. The increase as a
percentage of revenue was partially offset by $1.8 million of one-time charges
incurred during the second quarter of 2001 related to a comprehensive
streamlining of its expense structure designed to counteract the effects of
operating in a more difficult collection environment. These costs primarily
related to real estate obligations for closed facilities and equipment rental
obligations.
Depreciation and amortization. Depreciation and amortization decreased $5.9
million to $12.7 million for the six months ended June 30, 2002, from $18.6
million for the comparable period in 2001. This decrease was the result of the
adoption of Statement of Financial Accounting Standard No. 142, "Goodwill and
Other Intangibles" ("SFAS 142") on January 1, 2002. SFAS 142 eliminated the
amortization of goodwill, which was $7.8 million for the six months ended June
30, 2001. Partially offsetting the $7.8 million decrease was additional
depreciation resulting from normal capital expenditures made in the ordinary
course of business during 2001 and 2002. These capital expenditures included
purchases associated with our planned migration towards a single, integrated
information technology platform, the relocation of our corporate headquarters to
Horsham, PA, and predictive dialers and other equipment required to expand our
infrastructure to handle future growth.
Other income (expense). Interest and investment income decreased $350,000
to $1.5 million for the six months ended June 30, 2002, over the comparable
period in 2001. This decrease was primarily attributable to lower interest rates
earned on operating cash, funds held in trust on behalf of clients, and notes
receivables. Interest expense decreased to $9.9 million for the six months ended
June 30, 2002, from $14.7 million for the comparable period in 2001. This
decrease was primarily attributable to lower interest rates and debt repayments
made during 2001 and 2002. The decrease was partially offset by a full six
months of interest from the Portfolio Management's $36.3 million of borrowings
made in connection with the Creditrust merger in February 2001 and its
subsequent borrowings used to purchase accounts receivable portfolios. In
addition, a portion of the decrease was offset by a full six months of interest
from securitized debt that was assumed as part of the Creditrust merger. During
the six months ended June 30, 2002, we recorded a net expense of $290,000. This
expense was the net effect of a $1.0 million insurance gain, and a $1.3 million
net expense from the estimated settlement of an environmental liability. The
gain resulted from the settlement of the insurance claim related to the June
2001 flood of the Fort Washington facilities. The insurance gain was principally
due to greater than estimated insurance proceeds. The expense from the
environmental liability was the result of contamination that allegedly occurred
in the pre-acquisition operations of a company acquired by a subsidiary of
Medaphis Services Corporation. We acquired Medaphis Services Corporation in
November 1998. These operations were unrelated to the accounts receivable
outsourcing business.
Income tax expense. Income tax expense for the six months ended June 30,
2002, increased to $16.3 million, or 37.9% of income before income tax expense,
from $12.4 million, or 39.8% of income before income tax expense, for the
comparable period in 2001. The decrease in the effective rate was primarily
attributable to the elimination of the amortization of nondeductible goodwill
related to certain acquisitions. The goodwill amortization was eliminated upon
the adoption of SFAS 142 on January 1, 2002.
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 accounts
receivable, and working capital to support our growth.
Cash Flows from Operating Activities. Cash provided by operating activities
was $26.8 million for the six months ended June 30, 2002, compared to $37.5
million for the comparable period in 2001. The decrease in cash provided by
operations was primarily attributable to a $13.4 million decrease in accounts
payable and accrued expenses compared to a $8.3 million increase for the same
period in the prior year. The reduction in accounts payable and accrued expenses
was related to large payments made in the first quarter of 2002 including the
termination liability from our prior healthcare plan. A portion of the decrease
was offset by less of an increase in accounts receivable as a result of our
increased efforts to improve collectibility of our accounts receivables.
-20-
Cash Flows from Investing Activities. Cash used in investing activities was
$7.3 million for the six months ended June 30, 2002, compared to $32.3 million
for the comparable period in 2001. The decrease was due partially due to the net
cash used to pay pre-acquisition liabilities and acquisition related costs
during the six months ended June 30, 2001. The decrease was also attributable to
a decrease in the purchases of accounts receivables and an increase in the
collections applied to principal. Purchases of accounts receivables declined due
to upward pricing pressure in the market and our unwillingness to sacrifice our
internal rate of returns by paying higher prices. The increase in collections
applied to principal was due to a full six month of collections from the
accounts receivables purchased as part of the February 20, 2001 Creditrust
merger and collections from accounts receivables purchased during 2001 and 2002.
Purchases of property and equipment were $18.1 million for the six months
ended June 30, 2002, compared to $13.5 million for the same period in 2001.
Cash Flows from Financing Activities. Cash used in financing activities was
$24.9 million for the six months ended June 30, 2002, compared to cash provided
by financing activities of $1.7 million for the same period in 2001. The cash
used in financing activities during the six months ended June 30, 2002 resulted
from repayments of borrowing under our revolving credit facility and repayments
of securitized debt assumed as part of the Creditrust merger. The cash provided
by financing activities during the six months ended June 30, 2001 related to the
net borrowings under the revolving credit facility made in connection with the
Creditrust merger that were used to repay the acquired notes payable, finance
purchased accounts receivable, and repay other acquisition related liabilities.
Credit Facility. We have a credit agreement with Citizens Bank of
Pennsylvania, formerly Mellon Bank, N.A., ("Citizens Bank"), for itself and as
administrative agent for other participating lenders, structured as a revolving
credit facility. The balance under the revolving credit facility is due on May
20, 2004 (the "Maturity Date"). The borrowing capacity of the revolving credit
facility is subject to quarterly reductions of $5.2 million until the Maturity
Date, and 50 percent of the net proceeds received from any offering of debt or
equity. As of June 30, 2002, the maximum borrowing capacity and the availability
under the revolving credit facility were $257.1 million and $65.0 million,
respectively.
At our option, the borrowings bear interest at a rate equal to either
Citizens Bank's prime rate plus a margin of 0.25% to 0.50%, which is determined
quarterly based upon our consolidated funded debt to earnings before interest,
taxes, depreciation, and amortization, also referred to as EBITDA, ratio
(Citizens Bank's prime rate was 4.75% at June 30, 2002), 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 1.84% at
June 30, 2002).
In connection with the Creditrust merger, the revolving credit facility was
amended to provide NCO Portfolio with a $50 million revolving line of credit in
the form of a sub-facility under the existing revolving credit facility. 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 June 30, 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. At our option, the borrowings
bear interest at a rate equal to either Citizens Bank's prime rate plus a margin
of 1.25% to 1.50% that is determined quarterly based upon our consolidated
funded debt to EBITDA ratio, or LIBOR plus a margin of 2.25% to 3.25% depending
on our consolidated funded debt to EBITDA ratio. As of June 30, 2002, there was
$2.8 million available under the NCO Portfolio sub-facility.
During February 2002, we entered into two interest rate swap agreements,
which qualified as cash flow hedges, to fix LIBOR at 2.8225% on an original
aggregate amount of $102 million of the variable-rate debt outstanding under the
revolving credit facility. The aggregate notional amount of the interest rate
swap agreements is subject to quarterly reductions that will reduce the
aggregate notional amount to $62 million by maturity in September 2003. As of
June 30, 2002, a notional amount of $96.7 million was covered by the interest
rate swap agreements.
Borrowings under the revolving credit facility are collateralized by
substantially all of our assets, including the common stock of NCO Portfolio,
and certain assets of NCO Portfolio. The balance under the revolving credit
facility will 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 June 30, 2002, we were in compliance with
all required financial covenants.
-21-
Convertible Notes. In April 2001, we completed the sale of $125.0 million
aggregate principal amount of 4.75% Convertible Subordinated Notes due 2006
("Notes") in a private placement pursuant to Rule 144A and Regulation S under
the Securities Act of 1933. The Notes are convertible into our common stock at
an initial conversion price of $32.92 per share. We used the $121.3 million of
net proceeds from this offering to repay debt under our revolving credit
agreement. In accordance with the terms of the credit agreement, 50% of the net
proceeds from the Notes permanently reduced the maximum borrowings available
under the revolving credit facility.
Off-Balance Sheet Arrangements
NCO Portfolio owns a 100% retained residual interest in an investment in
securitization, Creditrust SPV 98-2, LLC, which was acquired as part of the
merger with Creditrust. This transaction qualified for gain on sale accounting
when the purchased accounts receivable were originally securitized. This
securitization issued a note that is due in January 2004 and had a balance of
$3.8 million as of June 30, 2002. The retained interest represents the present
value of the residual interest in the securitization using discounted future
cash flows after the securitization note is fully repaid plus a cash reserve. As
of June 30, 2002, the investment in securitization 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
which the collections are split between income and amortization of the
investment in securitization based on the discounted cash flows. NCO Portfolio
recorded $47,000 and $75,000 of income on this investment for the three months
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
another securitized note.
NCO Portfolio has a 50% ownership interest in a joint venture,
InoVision-MEDCLR NCOP Ventures, LLC ("Joint Venture") with IMNV Holdings, LLC
("IMNV"). The Joint Venture was set up 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 had an investment in
the Joint Venture of $1.4 million as of June 30, 2002. Included in the
Statements of Income, as "interest and investment income," were $202,000 and
$303,000 for the three and six months ended June 30, 2002, respectively,
representing NCO Portfolio'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.
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.
Goodwill
Our balance sheet includes amounts designated as "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.
As of June 30, 2002, our balance sheet included goodwill that represented
approximately 55.6% of total assets and 116.6% of shareholders' equity.
-22-
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangibles" ("SFAS 142"). As a result of
adopting SFAS 142, we no longer amortize goodwill. Goodwill must be tested at
least annually for impairment, including an initial test that was completed in
connection with the adoption of SFAS 142. The test for impairment uses 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. We did not incur any impairment charges in connection with the
adoption of SFAS 142.
Critical Accounting Policies
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 the accompanying notes. Actual results could differ
from those estimates. We believe that the following accounting policies include
the estimates that are the most critical and could have the most potential
impact on its results of operations: revenue recognition for purchased accounts
receivable; bad debts; and deferred taxes. These and other critical accounting
policies are described in Note 2 to these financial statements, and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 2 to our 2001 financial statements contained in our Annual
Report on Form 10-K for the year ended December 31, 2001.
Impact of Recently Issued and Proposed Accounting Pronouncements
During 2001, the Accounting Staff Executive Committee approved an exposure
draft on a proposed Statement of Position, "Accounting for Discounts Related to
Credit Quality" ("SOP"). The proposed SOP would limit the revenue that may be
accrued to the excess of the estimate of expected future cash flows over a
static pool's initial cost of accounts receivable acquired. The proposed SOP
would require that the excess of the contractual cash flows over expected future
cash flows not be recognized as an adjustment of revenue, expense or on the
balance sheet. The proposed SOP would freeze the internal rate of return ("IRR")
originally estimated when the accounts receivable are purchased for subsequent
impairment testing. Rather than lower the estimated IRR if the original
collection estimates are not received, the carrying value of a static pool would
be written down to maintain the original IRR. Increases in expected future cash
flows would be recognized prospectively through adjustment of the IRR over a
static pool's remaining life. The exposure draft provides that previously issued
annual financial statements would not need to be restated. Until final issuance
of this SOP, we cannot ascertain its effect on our reporting.
Item 3
Quantitative and Qualitative Disclosures about Market Risk
Included in Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations, of this Report on Form 10-Q.
-23-
Part II. Other Information
Item 1. Legal Proceedings
-----------------
In June of 2001, the first floor of the Company's Fort Washington, PA,
headquarters was severely damaged by a flood caused by remnants of Tropical
Storm Allison. During the third quarter of 2001, the Company decided to
abandon the Fort Washington facilities and move its corporate headquarters
to Horsham, PA. The Company has currently filed a lawsuit against its
landlord to terminate the leases for the Fort Washington facilities. Due to
the uncertainty of the outcome of the lawsuit, the Company recorded the
full amount of rent due under the remaining terms of the leases during the
third quarter of 2001.
AssetCare, Inc., a subsidiary of the Company acquired as part of the
Medaphis Services Corporation acquisition, was identified in an
administrative order issued by the State of California as a party that is
partially responsible for cleanup costs and natural resource damages
associated with a former scrap recycling site next to Humboldt Bay in
California. The subsidiary was identified as a successor-in-interest to a
former scrap recycler who conducted limited operations at the site. The
subsidiary was also named in a civil proceeding brought by one of the
owners of the site as a party that is responsible for the costs that will
be incurred by the owner for complying with the terms of the order.
AssetCare agreed to pay $1,410,000 to settle the claims in the litigation
with the owner in exchange for a full release from the owner. Subsequently,
the Company reached an agreement in principle with the former owner of
Medaphis Services Corporation pursuant to which they agreed to partially
reimburse the Company for its claims under the acquisition agreement.
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
---------------------
None - not applicable
Item 3. Defaults Upon Senior Securities
-------------------------------
None - not applicable
Item 4. Submission of Matters to a Vote of Shareholders
-----------------------------------------------
The Annual Meeting of Shareholders of the Company was held on May 20,
2002. At the Annual Meeting, the shareholders elected Charles C. Piola, Jr.
and Eric S. Siegel as directors to serve for a term of three years as
described below:
Number of Votes
---------------
Withhold
Name For Authority
---- --- ---------
Charles C. Piola, Jr. 22,230,517 871,847
Eric S. Siegel 22,336,049 735,315
In addition, the terms of the following directors continued after the
Annual Meeting: Michael J. Barrist, William C. Dunkelberg, Ph.D., Leo J.
Pound and Allen F. Wise.
The proposal to amend the 1996 Stock Option Plan to increase the number
of shares of common stock that may be issued under such plan was withdrawn
by the Board of Directors prior to the meeting and no vote was taken on
such matter. Accordingly, the number of shares of common stock that can be
issued under such plan will remain at 4,717,422 shares.
Item 5. Other Information
-----------------
None - not applicable
-24-
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
99.1 Consolidating Schedule
99.2 Chief Executive Officer Certification of Financial Statements
99.3 Chief Financial Officer Certification of Financial Statements
(b) Reports on Form 8-K
Date of Report Item Reported
-------------- -------------
5/9/02 Item 5 - Press release and conference call
transcript from the earnings release for
the first quarter of 2002
Signatures
Pursuant to the requirement 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.
Date: August 14, 2002 By: /s/ Michael J. Barrist
----------------------
Michael J. Barrist
Chairman of the Board, President
and Chief Executive Officer
(principal executive officer)
Date: August 14, 2002 By: /s/ Steven L. Winokur
---------------------
Steven L. Winokur
Executive Vice President, Finance,
Chief Financial Officer and
Treasurer
-25-