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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
/X/ Quarterly report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2003, 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 23-2858652
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
507 Prudential Road, Horsham, Pennsylvania 19044
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(Address of principal executive offices) (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 (or for 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
---- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No
------ ------
The number of shares outstanding of each of the issuer's classes of
common stock as of November 13, 2003 was: 25,980,000 shares of common stock, no
par value.
NCO GROUP, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1 FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheets -
December 31, 2002 and September 30, 2003 1
Condensed Consolidated Statements of Income -
Three and nine months ended September 30, 2002 and 2003 2
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 2002 and 2003 3
Notes to Condensed Consolidated Financial Statements 4
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 23
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 32
Item 4 CONTROLS AND PROCEDURES 32
PART II - OTHER INFORMATION 33
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
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
Signatures 35
Part 1 - Financial Information
Item 1 - Financial Statements
NCO GROUP, INC.
Condensed Consolidated Balance Sheets
(Amounts in thousands)
September 30,
December 31, 2003
ASSETS 2002 (Unaudited)
--------- ---------
Current assets:
Cash and cash equivalents $ 25,159 $ 44,027
Restricted cash 900 900
Accounts receivable, trade, net of allowance for
doubtful accounts of $7,285 and $6,233, respectively 86,857 86,076
Purchased accounts receivable, current portion 60,693 54,852
Deferred income taxes 16,389 14,802
Bonus receivable, current portion 15,584 5,488
Prepaid expenses and other current assets 9,644 16,189
--------- ---------
Total current assets 215,226 222,334
Funds held on behalf of clients
Property and equipment, net 79,603 75,445
Other assets:
Goodwill 525,784 531,666
Other intangibles, net of accumulated amortization 14,069 13,384
Purchased accounts receivable, net of current portion 91,755 86,729
Bonus receivable, net of current portion 408 138
Other assets 39,436 37,062
--------- ---------
Total other assets 671,452 668,979
--------- ---------
Total assets $ 966,281 $ 966,758
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 40,678 $ 46,802
Income taxes payable 2,222 5,144
Accounts payable 8,285 6,013
Accrued expenses 30,595 31,336
Accrued compensation and related expenses 15,374 16,175
Deferred revenue, current portion 12,088 14,272
--------- ---------
Total current liabilities 109,242 119,742
Funds held on behalf of clients
Long-term liabilities:
Long-term debt, net of current portion 334,423 274,687
Deferred revenue, net of current portion 11,678 13,262
Deferred income taxes 48,605 53,365
Other long-term liabilities 2,144 2,655
Minority interest 24,427 26,046
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,
25,908 and 25,974 shares issued and outstanding, respectively 321,824 323,216
Other comprehensive (loss) income (3,876) 3,779
Retained earnings 117,814 150,006
--------- ---------
Total shareholders' equity 435,762 477,001
--------- ---------
Total liabilities and shareholders' equity $ 966,281 $ 966,758
========= =========
See accompanying notes.
-1-
NCO GROUP, INC.
Condensed Consolidated Statements of Income
(Unaudited)
(Amounts in thousands, except per share data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
2002 2003 2002 2003
--------- --------- --------- ---------
Revenue $ 168,119 $ 188,619 $ 531,225 $ 566,210
Operating costs and expenses:
Payroll and related expenses 81,869 87,878 251,469 264,506
Selling, general, and administrative expenses 63,211 70,623 185,627 210,299
Depreciation and amortization expense 7,031 7,851 19,778 23,746
--------- --------- --------- ---------
Total operating costs and expenses 152,111 166,352 456,874 498,551
--------- --------- --------- ---------
Income from operations 16,008 22,267 74,351 67,659
Other income (expense):
Interest and investment income 690 1,327 2,144 2,952
Interest expense (5,296) (5,586) (15,245) (17,267)
Other income (expense) -- 402 (290) 1,128
--------- --------- --------- ---------
Total other income (expense) (4,606) (3,857) (13,391) (13,187)
--------- --------- --------- ---------
Income before income tax expense 11,402 18,410 60,960 54,472
Income tax expense 4,316 6,978 23,113 20,661
--------- --------- --------- ---------
Income before minority interest 7,086 11,432 37,847 33,811
Minority interest (887) (709) (2,492) (1,619)
--------- --------- --------- ---------
Net income $ 6,199 $ 10,723 $ 35,355 $ 32,192
========= ========= ========= =========
Net income per share:
Basic $ 0.24 $ 0.41 $ 1.37 $ 1.24
Diluted $ 0.24 $ 0.39 $ 1.28 $ 1.17
Weighted average shares outstanding:
Basic 25,908 25,941 25,884 25,919
Diluted 29,721 29,947 29,867 29,811
See accompanying notes.
-2-
NCO GROUP, INC
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
For the Nine Months
Ended September 30,
------------------------------
2002 2003
-------- --------
Cash flows from operating activities:
Net income $ 35,355 $ 32,192
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 17,561 20,257
Amortization of intangibles 2,217 3,489
Provision for doubtful accounts 6,943 2,841
Impairment of purchased accounts receivable 1,629 1,198
Gain on insurance proceeds from property and equipment (847) --
Loss on disposal of fixed assets -- 339
Equity income on investment in joint venture (375) (1,667)
Other income -- (652)
Minority interest 2,493 1,618
Changes in operating assets and liabilities, net of acquisitions:
Restricted cash 225 --
Accounts receivable, trade 565 (1,959)
Deferred income taxes 10,758 6,275
Bonus receivable (9,518) 10,366
Other assets 4,508 (2,224)
Accounts payable and accrued expenses (6,970) 688
Income taxes payable (482) 2,970
Deferred revenue (6,397) 3,768
Other long-term liabilities (1,556) (89)
-------- --------
Net cash provided by operating activities 56,109 79,410
Cash flows from investing activities:
Purchases of accounts receivable (50,175) (41,179)
Collections applied to principal of purchased accounts receivable 38,161 55,316
Purchase price adjustment applied to principal of
purchased accounts receivable 3,197 --
Purchases of property and equipment (23,841) (14,037)
Net (investment in) distribution from joint venture -- 935
Proceeds from notes receivable 1,000 116
Insurance proceeds from involuntary conversion of
property and equipment 2,633 --
Net cash paid for acquisitions and related costs (10,862) --
-------- --------
Net cash (used in) provided by investing activities (39,887) 1,151
Cash flows from financing activities:
Repayment of notes payable (11,566) (22,385)
Borrowings under notes payable 20,610 10,640
Borrowings under revolving credit agreement 10,870 1,000
Repayment of borrowings under revolving credit agreement (37,620) (50,430)
Payment of fees to acquire debt (338) (2,804)
Issuance of common stock, net 756 1,261
-------- --------
Net cash used in financing activities (17,288) (62,718)
Effect of exchange rate on cash 257 1,025
-------- --------
Net (decrease) increase in cash and cash equivalents (809) 18,868
Cash and cash equivalents at beginning of the period 32,161 25,159
-------- --------
Cash and cash equivalents at end of the period $ 31,352 $ 44,027
======== ========
See accompanying notes.
-3-
NCO GROUP, INC.
Notes to Condensed 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 63 percent
of NCO Portfolio Management, Inc. ("NCO Portfolio"), a separate public company
that purchases and manages past due 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 condensed 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. Because of the seasonal nature of the Company's business,
operating results for the three-month and nine-month periods ended September 30,
2003, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2003, 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, as amended, filed
with the Securities and Exchange Commission on March 14, 2003.
Principles of Consolidation:
The condensed 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 16) and, accordingly, their financial condition and
results of operations are not consolidated with the Company's financial
statements.
Revenue Recognition:
Contingency Fees:
Contingency fee revenue is recognized upon collection of funds on behalf of
clients.
Contractual Services:
Fees for contractual services are recognized as services are performed and
accepted by the client.
-4-
2. Accounting Policies (continued):
Revenue Recognition (continued):
Long-Term Collection Contract:
The Company has a long-term collection contract with a large client to provide
collection services. The Company receives a base service fee based on
collections. The Company also earns a bonus if collections are in excess of the
collection amounts guaranteed by the Company before the specified measurement
dates. The Company is required to pay the client if collections do not reach the
guaranteed level by specified measurement dates; however, the Company is
entitled to recoup at least 90 percent of any such guarantee payments from
subsequent collections. Specified measurement dates occur on May 31, 2004 and
May 31, 2005. The specified measurement date is determined based on when the
receivables are placed with the Company, and all receivables placed with a
particular measurement date are referred to collectively as a tranche.
In accordance with the provision of Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," the Company defers all of the base service
fees until the collections exceed the collection guarantees. At the end of each
reporting period, the Company compares actual collections for each tranche to
the guaranteed collections for that tranche to determine if the Company is in a
net bonus or penalty position. The Company also projects the position as of the
specified measurement date. Based on the results of this comparison, the Company
may accrue additional penalties as a contingent liability.
Effective for placements of accounts beginning on January 1, 2004, the long-term
collection contract was not renewed, and the relationship with the client is
expected to transition to a traditional contingency collection relationship. The
Company expects to retain the majority of the client's business, and with the
increased placements of accounts, management believes that the new relationship
will offer the Company the same earnings opportunity as the previous
relationship without the need to defer substantial amounts of revenue into
future periods. Collections attributable to placements of accounts made prior to
January 1, 2004 will continue to be accounted for using the current accounting
method.
Although the Company expects to continue to generate additional collections, in
the unlikely event that the Company does not generate any additional collections
from September 30, 2003 through May 31, 2005, the Company's maximum exposure on
placements received through September 30, 2003, would be $13.6 million and $72.8
million on May 31, 2004 and May 31, 2005, respectively.
Purchased Accounts Receivable:
The Company accounts for its investment in purchased accounts receivable on an
accrual basis under the guidance of American Institute of Certified Public
Accountants' Practice Bulletin 6, "Amortization of Discounts on Certain Acquired
Loans," using unique and exclusive portfolios. Portfolios are established with
accounts having similar attributes. Typically, each portfolio consists of an
individual acquisition of accounts that are initially recorded at cost, which
includes external costs of acquiring portfolios. Once a portfolio is acquired,
the accounts in the portfolio are not changed. Proceeds from the sale of
accounts and return of accounts within a portfolio are accounted for as
collections in that portfolio. The discount between the cost of each portfolio
and the face value of the portfolio is not recorded since the Company expects to
collect a relatively small percentage of each portfolio's face value.
Collections on the portfolios are allocated to revenue and principal reduction
based on the estimated internal rate of return ("IRR") for each portfolio. The
IRR for each portfolio is derived based on the expected monthly collections over
the estimated economic life of each portfolio (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 applying
each portfolio's effective IRR for the quarter to its carrying value. To the
extent collections exceed the revenue, the carrying value is reduced and the
reduction is recorded as collections are applied to principal. Because the IRR
reflects collections for the entire economic life of the portfolio, 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
portfolio may be increased by the difference between the revenue accrual and
collections.
-5-
2. Accounting Policies (continued):
Revenue Recognition (continued):
Purchased Accounts Receivable (continued):
To the extent actual collections differ from estimated projections, the Company
prospectively adjusts the IRR. If the carrying value of a particular portfolio
exceeds its expected future collections, a charge to income would be recognized
in the amount of such impairment. Additional impairments on each quarter's
previously impaired portfolios 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. After the impairment
of a portfolio, all collections are recorded as a return of capital, and no
income is recorded on that portfolio until the full carrying value of the
portfolio has been recovered. Once the full cost of the carrying value has been
recovered, all collections will be recorded as revenue. The estimated IRR for
each portfolio is based on estimates of future collections, and actual
collections will vary from current estimates. The difference could be material.
Credit Policy:
The Company has two types of arrangements under which it collects its contingent
fee revenue. For certain clients, the Company remits funds collected on behalf
of the client net of the related contingent fees, while for other clients, the
Company remits gross funds collected on behalf of clients and bills the client
separately for its contingent fees.
Management carefully monitors its client relationships in order to minimize the
Company's credit risk, and maintains a reserve for potential collection losses
when such losses are deemed to be probable. The Company generally does not
require collateral and it does not charge finance fees on outstanding trade
receivables. 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. Trade accounts receivable are written off to the
allowance for doubtful accounts when collection appears highly unlikely.
Investments in Debt and Equity Securities:
The Company accounts for investments, such as the investment in securitization,
Creditrust SPV 98-2, LLC, in accordance with Statement of Financial Accounting
Standards 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. The Company records its investment in securitization as an available
for sale debt security. Such a security is recorded at fair value, and the
unrealized gains or losses, net of the related tax effects, are not reflected in
earnings but are recorded as other comprehensive income in the condensed
consolidated statement of shareholders' 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 income as an impairment and results in the establishment
of a new cost basis for the security.
The investment in securitization is included in other assets and represents the
residual interest in a securitized pool of purchased accounts receivable
acquired in connection with the merger of Creditrust Corporation ("Creditrust")
into NCO Portfolio in February 2001. The investment in securitization accrues
interest at an internal rate of return that is estimated based on the expected
monthly collections over the estimated economic life of the investment
(approximately five years). Cost approximated fair value of this investment as
of December 31, 2002 and September 30, 2003 (see note 16).
-6-
2. Accounting Policies (continued):
Intangibles:
Goodwill represents the excess of purchase price, including acquisition related
costs, over the fair market value of the net assets of the acquired businesses
based on their respective fair values at the date of acquisition (see note 8).
Other intangible assets consist primarily of deferred financing costs, which
relate to debt issuance costs incurred, and customer lists, which were acquired
as part of acquisitions. Deferred financing costs are amortized over the term of
the debt and customer lists are amortized over five years (see note 8).
Stock Options:
The Company accounts for stock option grants in accordance with APB Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations. Under APB 25, because the exercise price of the stock options
equaled the fair value of the underlying common stock on the date of grant, no
compensation cost was recognized. In accordance with SFAS 123, "Accounting for
Stock-Based Compensation," the Company does not recognize compensation cost
based on the fair value of the options granted at grant date. If the Company had
elected to recognize compensation cost based on the fair value of the options
granted at grant date, net income and net income per share would have been
reduced to the pro forma amounts indicated in the following table (amounts in
thousands, except per share amounts):
For the Three Months For the Nine Months Ended
Ended September 30, September 30,
----------------------------- ------------------------------
2002 2003 2002 2003
--------- ---------- ---------- ----------
Net income - as reported $ 6,199 $ 10,723 $ 35,355 $ 32,192
Pro forma compensation cost, net of taxes 1,354 1,028 4,062 3,083
--------- ---------- ---------- ----------
Net income - pro forma $ 4,845 $ 9,695 $ 31,293 $ 29,109
========= ========== ========== ==========
Net income per share - as reported:
Basic $ 0.24 $ 0.41 $ 1.37 $ 1.24
Diluted $ 0.24 $ 0.39 $ 1.28 $ 1.17
Net income per share - pro forma:
Basic $ 0.19 $ 0.37 $ 1.21 $ 1.12
Diluted $ 0.19 $ 0.35 $ 1.14 $ 1.07
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.
The portfolios 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 portfolio is deferred until the full cost of
its acquisition is recovered. Revenue for financial reporting purposes is
recognized ratably over the life of the portfolio. Deferred tax liabilities
arise from deferrals created during the early stages of the portfolio. These
deferrals reverse after the cost basis of the portfolio is recovered. The
creation of new tax deferrals from future purchases of portfolios are expected
to offset a significant portion of the reversal of the deferrals from portfolios
where the collections have become fully taxable.
-7-
2. Accounting Policies (continued):
Use of Estimates:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those estimates.
In the ordinary course of accounting for a long-term collection contract,
estimates are made by management as to the payments due to the client. 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 are made by management as to the amount and timing of future cash
flows expected from each portfolio. The estimated future cash flow of each
portfolio is used to compute the IRR for the portfolio and any impairment. The
IRR is used to allocate collections between revenue and principal reduction of
the carrying values of the purchased accounts receivable.
On an ongoing basis, the Company compares the historical trends of each
portfolio to projected collections. Future projected collections are then
increased within preset limits or decreased based on the actual cumulative
performance of each portfolio. Management reviews each portfolio's adjusted
projected collections to determine if further upward or downward adjustment is
warranted. Management regularly reviews the trends in collection patterns and
uses its best efforts to improve the collections of under-performing portfolios.
On newly acquired portfolios, additional reviews are made to determine if the
estimated collections at the time of purchase require upward or downward
adjustment due to unusual collection patterns in the early months of ownership.
However, actual results will differ from these estimates and a material change
in these estimates could occur within one reporting period (see note 6).
During the three months ended September 30, 2003, the Company adjusted the
remaining future collections on several portfolios that had account sale
proceeds. The change was made to more accurately reflect the remaining future
collections related to sold accounts from within these portfolios. The effect
was to increase net income for the three months ended September 30, 2003, by
$344,000, and diluted earnings per share by $0.01.
Reclassifications:
Certain amounts as of December 31, 2002 and for the nine months ended September
30, 2002 have been reclassified for comparative purposes.
3. Restated Financial Statements:
On February 6, 2003, the Company's independent auditors informed the Company
that, based on their further internal review and consultation, they no longer
considered the methodology for revenue recognition for a long-term collection
contract appropriate under revenue recognition guidelines. Previously, revenue
under the contract was recorded based upon the collection of funds on behalf of
clients at the anticipated average fee over the life of the contract. Further
review by the Company with its independent auditors led the Company to conclude
that it should change its method of revenue recognition for the contract. The
change resulted in the deferral of the recognition of revenue under the contract
until such time as any contingencies related to the realization of revenue have
been resolved. The financial statements and the accompanying notes of the
Company for the three and nine months ended September 30, 2002, have been
restated for a correction of an error due to this change.
-8-
3. Restated Financial Statements (continued):
The following table presents the impact of the restatement on the consolidated
financial statements (amounts in thousands, except per share amounts):
For the Three Months Ended For the Nine Months Ended
September 30, 2002 September 30, 2002
------------------------------- ------------------------------
As As
Previously Previously
Reported Restated Reported Restated
-------------- ------------- -------------- ------------
Selected income statement data:
Revenue $ 170,542 $ 168,119 $ 527,127 $ 531,225
Income before income tax
expense 13,825 11,402 56,862 60,960
Income tax expense 5,237 4,316 21,556 23,113
Net income 7,701 6,199 32,814 35,355
Net income per share:
Basic $ 0.30 $ 0.24 $ 1.27 $ 1.37
Diluted $ 0.29 $ 0.24 $ 1.19 $ 1.28
4. Business Combinations:
The following acquisitions have been accounted for under the purchase method of
accounting. As part of the purchase accounting, the Company recorded accruals
for acquisition-related expenses. These accruals included professional fees
related to the acquisition and termination costs related to certain redundant
personnel immediately identified for elimination at the time of the
acquisitions.
On August 19, 2002, the Company acquired certain assets and related operations,
excluding the purchased accounts receivable portfolio, and assumed certain
liabilities of Great Lakes Collection Bureau, Inc. ("Great Lakes"), a subsidiary
of GE Capital Corporation ("GE Capital"), for $10.1 million in cash. The Company
funded the purchase with borrowings under its credit facility. NCO Portfolio
acquired the purchased accounts receivable portfolio of Great Lakes for $22.9
million. NCO Portfolio funded the purchase with $2.3 million of existing cash
and $20.6 million of nonrecourse financing provided by CFSC Capital Corp. XXXIV
(see note 9). This nonrecourse financing is collateralized by the Great Lakes
purchased accounts receivable portfolio. As part of the acquisition, the Company
and GE Capital signed a multi-year agreement under which the Company will
provide services to GE Capital. The Company allocated $4.1 million of the
purchase price to the customer list and recognized goodwill of $3.4 million. The
goodwill is primarily deductible for tax purposes. The allocation of the fair
market value to the acquired assets and liabilities of Great Lakes was based on
preliminary estimates and may be subject to change. During the three and nine
months ended September 30, 2003, the Company revised the estimated allocation of
the fair market value that resulted in an increase in goodwill of $617,000 and
$1.3 million, respectively. As a result of the acquisition, the Company expects
to expand its current customer base, strengthen its relationship with certain
existing customers, and reduce the cost of providing services to the acquired
customers through economies of scale. Therefore, the Company believes the
allocation of a portion of the purchase price to goodwill is appropriate.
-9-
4. Business Combinations (continued):
On December 9, 2002, the Company acquired all of the stock of The Revenue
Maximization Group, Inc. ("RevGro") for $17.5 million in cash, including the
repayment of $889,000 of RevGro's pre-acquisition debt. The Company funded the
purchase with $16.8 million of borrowings under its credit facility and existing
cash. The Company allocated $4.7 million of the purchase price to the customer
list and recognized goodwill of $9.2 million. Most of the goodwill is not
deductible for tax purposes. The allocation of the fair market value to the
acquired assets and liabilities of RevGro was based on preliminary estimates and
may be subject to change. During the three months ended September 30, 2003, the
Company revised the estimated allocation of the fair market value that resulted
in an increase in goodwill of $27,000. During the nine months ended September
30, 2003, the Company revised the estimated allocation of the fair market value
that resulted in a decrease in goodwill of $148,000. As a result of the
acquisition, the Company expects to expand its current customer base, strengthen
its relationship with certain existing customers, and reduce the cost of
providing services to the acquired customers through economies of scale.
Therefore, the Company believes the allocation of a portion of the purchase
price to goodwill is appropriate.
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 Nine Months
Ended September 30, Ended September 30,
------------------------- ------------------------
2002 2003 2002 2003
------------ ----------- ----------- -----------
Net income $ 6,199 $ 10,723 $ 35,355 $ 32,192
Other comprehensive income:
Foreign currency translation adjustment (1,664) 239 660 7,195
Unrealized (loss) gain on interest rate
swap (265) 109 (581) 460
------------ ----------- ----------- -----------
Comprehensive income $ 4,270 $ 11,071 $ 35,434 $ 39,847
============ =========== =========== ===========
The income from the foreign currency translation during the three and nine
months ended September 30, 2003, was attributable to changes in the exchange
rates used to translate the financial statements of the Canadian and United
Kingdom subsidiaries into U.S. dollars.
-10-
6. Purchased Accounts Receivable:
The Company's Portfolio Management and International Operations divisions
purchase defaulted consumer accounts receivable at a discount from the actual
principal balance. On certain international portfolios, Portfolio Management and
International Operations jointly purchase defaulted consumer accounts
receivable. The following summarizes the change in purchased accounts receivable
(amounts in thousands):
For the Nine
For the Year Ended Months Ended
December 31, 2002 September 30, 2003
------------------ ------------------
Balance at beginning of period $ 140,001 $ 152,448
Purchases of accounts receivable 72,680 45,472
Collections on purchased accounts receivable (120,513) (111,397)
Purchase price adjustment (4,000) --
Revenue recognized 66,162 56,081
Impairment of purchased accounts receivable (1,999) (1,198)
Foreign currency translation adjustment 117 175
--------- ---------
Balance at end of period $ 152,448 $ 141,581
========= =========
During the three months ended September 30, 2002 and 2003, impairment charges of
$418,000 and $235,000, respectively, were recorded as charges to income on
portfolios where the carrying values exceeded the expected future cash flows.
During the nine months ended September 30, 2002 and 2003, impairment charges of
$1.6 million and $1.2 million, respectively, were recorded as charges to income.
No income will be recorded on these portfolios until the carrying values have
been fully recovered. As of December 31, 2002 and September 30, 2003, the
combined carrying values on all impaired portfolios aggregated $6.1 million and
$8.9 million, respectively, or 4.0 percent and 6.3 percent of total purchased
accounts receivable, respectively, representing their net realizable value.
Revenue from fully cost recovered portfolios was $183,000 and $483,000 for the
three and nine months ended September 30, 2003, respectively. Included in
collections for the three and nine months ended September 30, 2003, was $868,000
and $2.4 million, respectively, in proceeds from the sale of accounts.
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 $60.2 million and $61.1 million at
December 31, 2002 and September 30, 2003, respectively, have been shown net of
their offsetting liability for financial statement presentation.
-11-
8. 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. Fair value estimates are based upon the discounted value of
estimated cash flows. The Company did not incur any impairment charges in
connection with the adoption of SFAS 142 or the annual impairment test performed
on October 1, 2002, and does not believe that goodwill is impaired as of
September 30, 2003. The annual impairment analysis will be completed as of
October 1 of each year.
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, 2002 September 30, 2003
-------------------- ---------------------
U.S. Operations $ 495,575 $ 496,723
International Operations 30,209 34,943
-------------------- ---------------------
Total $ 525,784 $ 531,666
==================== =====================
The change in U.S. Operations' goodwill balance from December 31, 2002 to
September 30, 2003 was due to adjustments to the purchase accounting for the
Great Lakes and RevGro acquisitions (see note 4). The change in International
Operations' goodwill balance from December 31, 2002 to September 30, 2003 was
due to changes in the exchange rates used for the foreign currency translation.
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 and
customer lists. The following represents the other intangible assets (amounts in
thousands):
December 31, 2002 September 30, 2003
---------------------------------- ---------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
----------------- --------------- ---------------- ---------------
Deferred financing costs $ 12,422 $ 6,969 $ 15,226 $ 9,052
Customer lists 8,761 357 8,761 1,666
Other intangible assets 900 688 900 785
----------------- --------------- ---------------- ---------------
Total $ 22,083 $ 8,014 $ 24,887 $ 11,503
================= =============== ================ ===============
-12-
8. Intangible Assets (continued):
Other Intangible Assets (continued):
The Company recorded amortization expense for all other intangible assets of
$853,000 and $1.1 million during the three months ended September 30, 2002 and
2003, respectively, and $2.2 million and $3.5 million during the nine months
ended September 30, 2002 and 2003, respectively. The following represents the
Company's expected amortization expense from these other intangible assets over
the next five years (amounts in thousands):
For the Year Ended Estimated
December 31, Amortization Expense
----------------------- -----------------------
2003 $ 4,597
2004 4,350
2005 4,226
2006 2,305
2007 1,395
9. Long-Term Debt:
Long-term debt consisted of the following (amounts in thousands):
December 31, 2002 September 30, 2003
--------------------- ---------------------
Credit facility $ 193,180 $ 143,750
Convertible notes 125,000 125,000
Securitized nonrecourse debt 35,523 33,748
Other nonrecourse debt 18,463 12,852
Capital leases and other 2,935 6,139
Less current portion (40,678) (46,802)
--------------------- ---------------------
$ 334,423 $ 274,687
===================== =====================
Credit Facility:
On August 13, 2003, the Company amended its credit agreement with Citizens Bank
of Pennsylvania, formerly Mellon Bank, N.A., ("Citizens Bank"), for itself and
as administrative agent for other participating lenders. The amendment extended
the maturity date from May 20, 2004 to March 15, 2006 (the "Maturity Date"). The
amended credit facility is structured as a $150 million term loan and a $50
million revolving credit facility. The Company is required to make quarterly
repayments of $6.3 million on the term loan beginning on September 30, 2003, and
continuing until the Maturity Date. The remaining balance outstanding under the
term loan will become due on the Maturity Date. The balance under the revolving
credit facility will become due on the Maturity Date.
Until February 28, 2004, all borrowings bear interest at a rate equal to either,
at the option of NCO, Citizens Bank's prime rate plus a margin of 1.25 percent
(Citizens Bank's prime rate was 4.00 percent at September 30, 2003), or the
London InterBank Offered Rate ("LIBOR") plus a margin of 3.00 (LIBOR was 1.12
percent at September 30, 2003). After February 28, 2004, all borrowings bear
interest at a rate equal to either, at the option of NCO, Citizens Bank's prime
rate plus a margin of 0.75 percent to 1.25 percent, which is determined
quarterly based upon the Company's consolidated funded debt to earnings before
interest, taxes, depreciation, and amortization ("EBITDA") ratio, or LIBOR plus
a margin of 2.25 percent to 3.00 percent depending on the Company's consolidated
funded debt to EBITDA ratio. The Company is charged a fee on the unused portion
of the credit facility of 0.50 percent until February 28, 2004, and ranging from
0.38 percent to 0.50 percent depending on the Company's consolidated funded debt
to EBITDA ratio after February 28, 2004. The effective interest rate on credit
facility was approximately 4.34 percent and 4.39 percent for the three and nine
months ended September 30, 2003.
-13-
9. Long-Term Debt (continued):
Credit Facility (continued):
Borrowings under the credit agreement are collateralized by substantially all
the assets of the Company, including the common stock of NCO Portfolio that the
Company owns, and its rights under the revolving credit agreement with NCO
Portfolio (see note 17). 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 September 30, 2003, the Company was in compliance with
all required covenants.
Convertible Debt:
In April 2001, the Company completed the sale of $125.0 million aggregate
principal amount of 4.75 percent 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 credit facility.
Securitized Nonrecourse Debt:
NCO Portfolio assumed four securitized notes in connection with the Creditrust
merger, one of which is included in an unconsolidated subsidiary, Creditrust SPV
98-2, LLC (see note 16). The remaining three notes are reflected in long-term
debt. These notes were originally established to fund the purchase of accounts
receivable. Each of the notes payable is nonrecourse to the Company and NCO
Portfolio, is secured by a portfolio of purchased accounts receivable, and is
bound by an indenture and servicing agreement. Pursuant to the Creditrust
merger, the trustee appointed NCO as the successor servicer for each portfolio
of purchased accounts receivable within these securitized notes. When the notes
payable were established, a separate nonrecourse 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 was established in September 1998 through a special
purpose finance subsidiary. This note carries a floating interest rate of LIBOR
plus 0.65 percent 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
December 31, 2002 and September 30, 2003, and is restricted as to use until the
facility is retired. Interest expense, trustee fees and guarantee fees
aggregated $155,000 and $112,000 for the three months ended September 30, 2002
and 2003, respectively. Interest expense, trustee fees and guarantee fees
aggregated $483,000 and $357,000 for the nine months ended September 30, 2002
and 2003, respectively. As of December 31, 2002 and September 30, 2003, the
amount outstanding on the facility was $15.4 million and $14.3 million,
respectively. Pursuant to the Creditrust merger, the note issuer 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 16).
The second securitized note was established in August 1999 through a special
purpose finance subsidiary. This note carried interest at 9.43 percent per
annum. This facility was repaid and retired in May 2002. Interest expense,
trustee fees and guarantee fees aggregated $4,000 and $56,000 for the three and
nine months ended September 30, 2002, respectively.
-14-
9. Long-Term Debt (continued):
Securitized Nonrecourse Debt (continued):
The third securitized note was established in August 1999 through a special
purpose finance subsidiary. This note carries interest at 15.00 percent 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 $796,000 and $739,000 for the three months ended September 30, 2002
and 2003, respectively. Interest expense and trustee fees aggregated $2.5
million and $2.2 million for the nine months ended September 30, 2002 and 2003,
respectively. As of December 31, 2002 and September 30, 2003, the amount
outstanding on the facility was $20.1 million and $19.5 million, respectively.
Other Nonrecourse Debt:
In August 2002, NCO Portfolio entered into a four-year exclusivity agreement
with CFSC Capital Corp. XXXIV ("Cargill"). The agreement stipulates that all
purchases of accounts receivable by NCO Portfolio with a purchase price in
excess of $4.0 million must be first offered to Cargill for financing at its
discretion. The agreement has no minimum or maximum credit authorization. NCO
Portfolio may terminate the agreement at any time after two years for a cost of
$125,000 per month for each month of the remaining two years, payable monthly.
If Cargill chooses to participate in the financing of a portfolio of accounts
receivable, the financing will be at 90 percent of the purchase price, unless
otherwise negotiated, with floating interest at the prime rate plus 3.25 percent
(prime rate was 4.00 percent at September 30, 2003). Each borrowing is due two
years after the loan is made. Debt service payments equal collections less
servicing fees and interest expense. As additional interest, Cargill will
receive 40 percent of the residual cash flow, unless otherwise negotiated, which
is defined as all cash collections after servicing fees, floating rate interest,
repayment of the note, and the initial investment by NCO Portfolio, including
imputed interest. Borrowings under this financing agreement are nonrecourse to
NCO Portfolio and NCO, except for the assets within the special purpose entities
established in connection with the financing agreement. This loan agreement
contains a collections performance requirement, among other covenants, that, if
not met, provides for cross-collateralization with any other Cargill financed
portfolios, in addition to other remedies. As of September 30, 2003, NCO
Portfolio was in compliance with all required covenants.
Capital Leases:
The Company leases certain equipment under agreements that are classified as
capital leases. The equipment leases have original terms ranging from 35 to 60
months and have purchase options at the end of the original lease term.
10. 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 interest expense on convertible debt, net of taxes, if the convertible
debt is dilutive. The interest expense on the convertible debt, net of taxes,
included in the diluted EPS calculation was $920,000 for the three months ended
September 30, 2002 and 2003, and $2.8 million for the nine months ended
September 30, 2002 and 2003. Outstanding options, warrants, and convertible
securities have been utilized in calculating diluted net income per share only
when their effect would be dilutive.
-15-
10. Earnings Per Share (continued):
The reconciliation of basic to diluted weighted average shares outstanding was
as follows (amounts in thousands):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ -------------------------
2002 2003 2002 2003
----------- ----------- ------------ ------------
Basic 25,908 25,941 25,884 25,919
Dilutive effect of convertible debt
3,797 3,797 3,797 3,797
Dilutive effect of options 16 209 186 95
----------- ----------- ------------ ------------
Diluted 29,721 29,947 29,867 29,811
=========== =========== ============ ============
11. Interest Rate Hedge:
The Company was party to two interest rate swap agreements that matured on
September 1, 2003. These interest rate swap agreements qualified as cash flow
hedges to fix the LIBOR component of interest at 2.8225 percent on an aggregate
amount of $62.0 million of the variable-rate debt outstanding under the credit
facility.
12. Supplemental Cash Flow Information:
The following are supplemental disclosures of cash flow information (amounts in
thousands):
For the Nine Months Ended
September 30,
---------------------------
2002 2003
----------- ------------
Noncash investing and financing activities:
Fair value of assets acquired $ 14,517 $ --
Liabilities assumed from acquisitions 3,916 --
Deferred portion of purchased accounts receivable 1,135 4,293
Acquisition of accounts receivable paid for in
October 2002 946 --
Warrants exercised 875 --
13. Commitments and Contingencies:
Forward-Flow Agreement:
In May 2003, NCO Portfolio renewed a fixed price 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 September 30, 2003, NCO Portfolio was obligated to purchase accounts
receivable at a maximum of $2.5 million per month through May 2004. A portion of
the purchase price is deferred for 24 months, including a nominal rate of
interest. The deferred purchase price payable, included in long-term debt, as of
December 31, 2002 and September 30, 2003, was $2.1 million and $5.5 million,
respectively.
-16-
13. Commitments and Contingencies (continued):
Litigation:
The Company is party, from time to time, to various legal proceedings and
regulatory investigations incidental to its business. The Company continually
monitors these legal proceedings and regulatory investigations to determine the
impact and any required accruals.
FTC:
In October 2003, the Company was notified by the Federal Trade Commission
("FTC") that it intends to pursue a claim against the Company for violations of
the Fair Credit Reporting Act ("FCRA") relating to certain aspects of the
Company's credit reporting practices during 1999 and 2000.
The allegations relate primarily to a large group of consumer accounts from one
client that were transitioned to the Company for servicing during 1999. The
Company received incorrect information from the prior service provider at the
time of transition. The Company became aware of the incorrect information during
2000 and ultimately removed the incorrect information from the consumers' credit
files. The Company does not believe that it is liable for any monetary penalties
under the FCRA. However, the Company is currently negotiating a settlement of
this matter with the FTC, although no assurance can be given that a settlement
will be reached.
The Company is also a party to a class action litigation regarding this group of
consumer accounts. A tentative settlement of the class action litigation has
been agreed to, and is subject to court approval. The Company believes that the
class action litigation is covered by insurance, subject to applicable
deductibles.
The FTC is also alleging that certain reporting violations occurred on a small
subset of the Company's purchased accounts receivable.
The Company believes that the resolution of these matters will not have a
material adverse effect on its financial position, results of operations or
business.
Fort Washington Flood:
In June 2001, the first floor of the Company's Fort Washington, Pennsylvania,
headquarters was severely damaged by a flood caused by remnants of Tropical
Storm Allison. As previously reported, during the third quarter of 2001, the
Company decided to relocate its corporate headquarters to Horsham, Pennsylvania.
The Company filed a lawsuit in the Court of Common Pleas, Montgomery County,
Pennsylvania (Civil Action No. 01-15576) against the current landlord and the
former landlord of the Fort Washington facilities to terminate the leases and to
obtain other relief. 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.
In April 2003, the former landlord defendants filed a joinder complaint against
Michael J. Barrist, the Chairman, President and Chief Executive Officer of the
Company, Charles C. Piola, Jr., a director and former Executive Vice President
of the Company, and Bernard R. Miller, a former Executive Vice President and
director of the Company, to name such persons as additional defendants
(collectively, the "Joinder Defendants"). The Joinder Defendants were partners
in a partnership that owned real estate (the "Prior Real Estate") that the
Company leased at a market rent prior to moving to the Fort Washington facility.
The joinder complaint alleges that the Joinder Defendants breached their
statutory and common law duties of care and loyalty to the Company and
perpetrated a fraud upon the Company and its shareholders by refraining or
causing the Company to refrain from further investigation into the issue of
prior water intrusion at the Fort Washington facility and that it was a
condition to the lease of the Fort Washington facility that the former landlord
defendants purchase the Prior Real Estate from the Joinder Defendants. The
joinder complaint seeks to impose liability on the Joinder Defendants for any
damages suffered by the Company as a result of the flood.
-17-
13. Commitments and Contingencies (continued):
Litigation (continued):
Fort Washington Flood (continued):
Based upon its initial review of the facts, the Company believes that the
Joinder Defendants did not breach any duties to, or commit a fraud upon the
Company or its shareholders and that the allegations of any wrongdoing by the
Joinder Defendants are without merit.
Pursuant to the Company's Bylaws and the Joinder Defendants' employment
agreements, the Joinder Defendants will be indemnified by the Company against
any expenses or awards incurred in this suit, subject to certain exceptions.
The Company is involved in other legal proceedings and regulatory investigations
from time to time in the ordinary course of its business. Management believes
that none of these other legal proceedings or regulatory investigations will
have a materially adverse effect on the financial condition or results of
operations of the Company.
Purchase Commitments:
The Company is party to certain telephone contracts that require it to purchase
minimum amounts of services over specified periods of time. The contracts expire
on various dates between March 2004 and July 2006. The Company believes that it
will exceed the minimum usage requirements of these contracts. The following are
the minimum purchase requirements for these contracts (amounts in thousands):
For the Year Ended Minimum Purchase
December 31, Requirements
----------------------- -----------------------
2003 $ 15,715
2004 12,802
2005 10,300
2006 5,983
Letters of Credit:
At September 30, 2003, the Company had unused letters of credit of $2.2 million.
14. 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 $748.3
million and $743.6 million at December 31, 2002 and September 30, 2003,
respectively. U.S. Operations also provides accounts receivable management
services to Portfolio Management. U.S. Operations recorded revenue of $8.9
million and $12.4 million for these services for the three months ended
September 30, 2002 and 2003, respectively, and $25.3 million and $36.9 million
for these services for the nine months ended September 30, 2002 and 2003,
respectively.
-18-
14. Segment Reporting (continued):
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 $167.8 million and $160.7 million
at December 31, 2002 and September 30, 2003, respectively.
International Operations provides accounts receivable management services across
Canada and the United Kingdom. International Operations had total assets, net of
any intercompany balances, of $50.2 million and $62.5 million at December 31,
2002 and September 30, 2003, respectively. International Operations also
provides accounts receivable management services to U.S. Operations.
International Operations recorded revenue of $2.7 million and $7.2 million for
these services for the three months ended September 30, 2002 and 2003,
respectively, and $7.4 million and $19.8 million for these services for the nine
months ended September 30, 2002 and 2003, respectively.
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 September 30, 2002
(amounts in thousands)
-----------------------------------------------------------------------
Payroll and Selling,
Related General and
Revenue Expenses Admin. Expenses EBITDA
--------------- ---------------- ---------------- --------------
U.S. Operations $ 151,553 $ 76,857 $58,735 $ 15,961
Portfolio Management 16,338 328 10,045 5,965
International Operations 11,899 7,423 3,363 1,113
Eliminations (11,671) (2,739) (8,932) --
--------------- ---------------- ---------------- --------------
Total $ 168,119 $ 81,869 $ 63,211 $ 23,039
=============== ================ ================ ==============
For the Three Months Ended September 30, 2003
(amounts in thousands)
-----------------------------------------------------------------------
Payroll and Selling,
Related General and
Revenue Expenses Admin. Expenses EBITDA
--------------- ---------------- ---------------- --------------
U.S. Operations $ 172,097 $ 84,693 $ 65,531 $ 21,873
Portfolio Management 18,849 243 13,404 5,202
International Operations 17,322 10,163 4,116 3,043
Eliminations (19,649) (7,221) (12,428) --
--------------- ---------------- ---------------- --------------
Total $ 188,619 $ 87,878 $ 70,623 $ 30,118
=============== ================ ================ ==============
-19-
14. Segment Reporting (continued):
For the Nine Months Ended September 30, 2002
(amounts in thousands)
-----------------------------------------------------------------------
Payroll and Selling,
Related General and
Revenue Expenses Admin. Expenses EBITDA
--------------- ---------------- ---------------- --------------
U.S. Operations $ 482,667 $ 237,108 $ 172,597 $ 72,962
Portfolio Management 46,716 1,431 28,979 16,306
International Operations 34,499 20,291 9,347 4,861
Eliminations (32,657) (7,361) (25,296) --
--------------- ---------------- ---------------- --------------
Total $ 531,225 $ 251,469 $185,627 $ 94,129
=============== ================ ================ ==============
For the Nine Months Ended September 30, 2002
(amounts in thousands)
-----------------------------------------------------------------------
Payroll and Selling,
Related General and
Revenue Expenses Admin. Expenses EBITDA
--------------- ---------------- ---------------- --------------
U.S. Operations $ 517,236 $ 253,605 $ 195,155 $ 68,476
Portfolio Management 55,167 1,286 39,907 13,974
International Operations 50,437 29,375 12,107 8,955
Eliminations (56,630) (19,760) (36,870) --
--------------- ---------------- ---------------- --------------
Total $ 566,210 $ 264,506 $ 210,299 $ 91,405
=============== ================ ================ ==============
15. Net Loss Due to Flood and Relocation of Corporate Headquarters:
In June 2001, the first floor of the Company's Fort Washington, Pennsylvania,
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, Pennsylvania. The Company has filed a
lawsuit against the landlord of the Fort Washington facilities to terminate the
leases. 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 an
expense of $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)" for the nine months ended September 30, 2002.
-20-
16. Investments in Unconsolidated Subsidiaries:
NCO Portfolio owns a 100 percent 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 nonrecourse note that is due the earlier of January
2004 or satisfaction of the note from collections, carries an interest rate of
8.61 percent, and had an outstanding balance of $2.4 million and $585,000 as of
December 31, 2002 and September 30, 2003, respectively. 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 September 30, 2003, the investment in
securitization was $7.5 million, composed of $4.2 million in present value of
discounted residual cash flows plus $3.3 million in cash reserves. The
investment accrues noncash income at a rate of 8 percent per annum on the
residual cash flow component only. No income was recorded for the three and nine
months ended September 30, 2003, due to concerns related to the future
recoverability of the investment. The Company recorded income of $30,000 and
$105,000 on this investment during the three and nine months ended September 30,
2002, respectively. The off-balance sheet 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 (see note 9). The Company performs collection services
for Creditrust SPV 98-2, LLC and recorded service fee revenue of $422,000 and
$365,000 for the three months ended September 30, 2002 and 2003, respectively,
and $1.4 million and $1.3 million for the nine months ended September 30, 2002
and 2003, respectively.
NCO Portfolio has a 50 percent 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. Gains and losses are shared equally between NCO
Portfolio and IMNV. Included in "other assets" on the Balance Sheets was NCO
Portfolio's investment in the Joint Venture of $3.4 million and $4.1 million as
of December 31, 2002 and September 30, 2003, respectively. Included in the
Statements of Income, as "interest and investment income," for the three months
ended September 30, 2002 and 2003, was $72,000 and $715,000, respectively,
representing NCO Portfolio's 50 percent share of operating income from this
unconsolidated subsidiary. Income of $375,000 and $1.7 million was recorded from
this unconsolidated subsidiary for the nine months ended September 30, 2002 and
2003, respectively. The Company performs collection services for the Joint
Venture and recorded service fee revenue of $1.1 million and $1.3 million for
the three months ended September 30, 2002 and 2003, respectively, and $3.3
million and $4.1 million for the nine months ended September 30, 2002 and 2003,
respectively. The Joint Venture has access to capital through CFSC Capital Corp.
XXXIV ("Cargill Financial") who, at its option, lends 90 percent of the cost of
the purchased accounts receivable to the Joint Venture. Borrowings carry
interest at the prime rate plus 4.25 percent (prime rate was 4.00 percent as of
September 30, 2003). Debt service payments equal total collections less
servicing fees and expenses until each individual borrowing is fully repaid and
the Joint Venture's investment is returned, including interest. Thereafter,
Cargill Financial is paid a residual of 50 percent of collections less servicing
costs. Individual loans are required to be repaid based on collections, but not
more than two years from the date of borrowing. The debt is cross-collateralized
by all portfolios in which the lender participates, and is nonrecourse to NCO
Portfolio and NCO. The following tables summarize the financial information of
the Joint Venture (amounts in thousands):
As of
--------------------------------------------
December 31, 2002 September 30, 2003
-------------------- ---------------------
Total assets $ 11,638 $ 15,877
Total liabilities 4,944 7,712
For the Nine Months
Ended September 30,
--------------------------
2002 2003
------------ -----------
Revenue $ 6,732 $ 10,271
Operating income 750 3,333
-21-
17. Related Party Transactions:
The Company provides NCO Portfolio with a revolving line of credit with a
borrowing capacity of $28.8 million as of September 30, 2003. The borrowing
capacity is subject to a reduction of $3.75 million during the fourth quarter of
2003. As of December 31, 2003 and until its maturity on March 15, 2006, the
borrowing capacity will be $25 million. NCO Portfolio's borrowings bear interest
at a rate equal to NCO's interest rate under its credit facility plus 1.00
percent. As of December 31, 2002 and September 30, 2003, there was $36.9 million
and $25.0 million outstanding under the revolving line of credit, respectively.
Borrowings under the revolving line of credit are collateralized by certain
assets of NCO Portfolio. The revolving credit agreement contains certain
financial covenants such as maintaining funded debt to EBITDA requirements and
includes restrictions on, among other things, acquisitions and distributions to
shareholders. As of September 30, 2003, NCO Portfolio was in compliance with all
required covenants.
18. Subsequent Event:
On October 22, 2003, the Company announced that it proposed to acquire all of
the outstanding common stock of NCO Portfolio owned by the minority stockholders
of NCO Portfolio. Under the proposal, the Company would issue its common stock
with a fair market value of $7.05 to the minority stockholders of NCO Portfolio
for each share of NCO Portfolio common stock held, but not more than 0.3066
shares and not less than 0.2712 shares of NCO common stock per share of NCO
Portfolio common stock. The fair market value would be based on the average
closing prices of NCO common stock during the 20 trading-day period ending two
trading days prior to the closing date of the proposed transaction. The Board of
Directors of NCO Portfolio has formed a special committee of independent
directors of NCO Portfolio to evaluate the proposal. The special committee has
retained legal counsel and investment bankers to assist in the process.
-22-
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, fluctuations in
quarterly operating results, the long-term collection contract, the final
outcome of the environmental liability, the final outcome of the Company's
litigation with its former landlord, the final outcome of the Federal Trade
Commission investigation, the effects of terrorist attacks, war 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 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
related to possible impairments of goodwill and other intangible assets, risks
associated with technology, the Internet and the Company's e-commerce strategy,
risks related to the final outcome of the environmental liability, risks related
to the final outcome of the Company's litigation with its former landlord, risks
related to the final outcome of the Federal Trade Commission investigation,
risks relating to the Company's litigation and regulatory investigations, risks
related to past or possible future terrorist attacks, risks related to the
threat or outbreak of war or hostilities, risks related to the domestic and
international economy, risks related to the Company's international operations,
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, as amended, for the year ended December 31, 2002, can cause actual
results and developments to be materially different from those expressed or
implied by such forward-looking statements.
The Company disclaims any intent or obligation to publicly update or revise
any forward-looking statements, regardless of whether new information becomes
available, future developments occur, or otherwise.
The Company's website is www.ncogroup.com. The Company makes available,
free of charge, on its website, its Annual Report on Form 10-K, including all
amendments. In addition, the Company will provide additional paper or electronic
copies of its Annual Report on Form 10-K for 2002, as filed with the Securities
and Exchange Commission, without charge except for exhibits to the report.
Requests should be directed to: Steven L. Winokur, Executive Vice President of
Finance, Chief Financial Officer, and Chief Operating Officer of Shared
Services, NCO Group, Inc., 507 Prudential Rd., Horsham, PA 19044.
The information on the website listed above is not and should not be
considered part of this Quarterly Report on Form 10-Q and is not incorporated by
reference in this document. This website is and is only intended to be an
inactive textual reference.
Three Months Ended September 30, 2003, Compared to Three Months Ended
September 30, 2002
Revenue. Revenue increased $20.5 million, or 12.2 percent, to $188.6
million for the three months ended September 30, 2003, from $168.1 million for
the comparable period in 2002. U.S. Operations, Portfolio Management, and
International Operations accounted for $172.1 million, $18.8 million and $17.3
million, respectively, of the revenue for the three months ended September 30,
2003. U.S. Operations' revenue included $12.4 million of intercompany revenue
earned on services performed for Portfolio Management that was eliminated upon
consolidation. International Operations' revenue included $7.2 million of
intercompany revenue earned on services performed for U.S. Operations that was
eliminated upon consolidation.
-23-
U.S. Operations' revenue increased $20.5 million, or 13.6 percent, to
$172.1 million for the three months ended September 30, 2003, from $151.6
million for the comparable period in 2002. The increase in U.S. Operations
revenue was partially attributable to the addition of new clients and growth in
business from existing clients. The increase was also a result of the
acquisitions of Great Lakes Collection Bureau, Inc.'s ("Great Lakes") collection
operations in August 2002 and The Revenue Maximization Group ("RevGro") in
December 2002. Great Lakes contributed $4.6 million to U.S. Operations' third
quarter 2003 revenue compared to $2.9 million for the period from August 19,
2002 to September 30, 2002. RevGro contributed $4.9 million to U.S. Operations'
third quarter 2003 revenue. An increase in fees from collection services
performed for Portfolio Management also contributed to the increase. These
additional fees from Portfolio Management included the fees from servicing the
Great Lakes portfolio acquired by NCO Portfolio in August 2002. A portion of the
increase was from revenue recorded from a long-term collection contract. The
method of recognizing revenue for this long-term collection contract defers
certain revenues into future periods until collections exceed collection
guarantees. During the three months ended September 30, 2003, U.S. Operations
recognized $680,000 of previously deferred revenue, on a net basis, but during
the three months ended September 30, 2002, U.S. Operations deferred $1.6 million
of revenue, on a net basis, into future periods.
Portfolio Management's revenue increased $2.5 million, or 15.4 percent, to
$18.8 million for the three months ended September 30, 2003, from $16.3 million
for the comparable period in 2002. Portfolio Management's collections increased
$7.3 million, or 24.9 percent, to $36.7 million for the three months ended
September 30, 2003, from $29.4 million for the comparable period in 2002.
Portfolio Management's revenue represented 51 percent of collections for the
three months ended September 30, 2003, as compared to 56 percent of collections
for the same period in the prior year. Revenue increased due to the increase in
collections from new purchases, including the Great Lakes portfolio. The effect
of the increase in collections on revenue was partially offset by the decrease
in revenue recognition rate. Revenue as a percentage of collections declined
principally due to a number of factors including an increase in the average age
of the portfolios, timing of collections, and lower targeted returns on more
recent portfolios due to the current economic environment. The increase in the
average age contributed to the decrease because more of the collections on older
portfolios are applied to amortization. The increase in the average age of the
portfolios was a result of reduced purchase volumes due to higher prices of
portfolios during 2002 and 2003.
International Operations' revenue increased $5.4 million, or 45.6 percent,
to $17.3 million for the three months ended September 30, 2003, from $11.9
million for the comparable period in 2002. The increase in International
Operations' revenue was primarily attributable to new services provided for our
U.S. Operations and favorable changes in the foreign currency exchange rates
used to translate the International Operations' results of operations into U.S.
dollars. In addition, a portion of the increase was attributable to the addition
of new clients and growth in business from existing clients.
Payroll and related expenses. Payroll and related expenses increased $6.0
million to $87.9 million for the three months ended September 30, 2003, from
$81.9 million for the comparable period in 2002, but decreased as a percentage
of revenue to 46.6 percent from 48.7 percent.
U.S. Operations' payroll and related expenses increased $7.8 million to
$84.7 million for the three months ended September 30, 2003, from $76.9 million
for the comparable period in 2002, but decreased as a percentage of revenue to
49.2 percent from 50.7 percent. The decrease in payroll and related expenses as
a percentage of revenue was partially due to the shift of more of our collection
work to outside attorneys and other third party service providers and the
continued rationalization of staff. This shift was associated with the
continuing efforts to maximize collections for clients. The costs associated
with the increase in the use of outside attorneys and other third party service
providers are included in selling, general, and administrative expenses. A
portion of this decrease as a percentage of revenue was offset by the $680,000
of previously deferred revenue, on a net basis, from the long-term collection
contract that was recognized during the three months ended September 30, 2003,
as compared to the deferral of $1.6 million, on a net basis, that was recorded
during the three months ended September 30, 2002. Because the expenses
associated with this revenue are expensed as incurred, the recognition of
previously deferred revenue decreases the payroll and related expenses as a
percentage of revenue and the deferral of additional revenue increases the
payroll and related expenses as percentage of revenue.
-24-
Portfolio Management's payroll and related expenses decreased $85,000 to
$243,000 for the three months ended September 30, 2003, from $328,000 for the
comparable period in 2002, and decreased as a percentage of revenue to 1.3
percent from 2.0 percent. Portfolio Management outsources all of its collection
services to U.S. Operations and, therefore, has a relatively small fixed payroll
cost structure. However, the decrease in payroll and related expenses was
principally due to Portfolio Management's legal recovery group being transferred
to the U.S. Operations' attorney network during 2002.
International Operations' payroll and related expenses increased $2.8
million to $10.2 million for the three months ended September 30, 2003, from
$7.4 million for the comparable period in 2002, but decreased as a percentage of
revenue to 58.7 percent from 62.4 percent. The decrease as a percentage of
revenue was attributable to the continued focus on managing the amount of labor
required to attain revenue goals.
Selling, general, and administrative expenses. Selling, general, and
administrative expenses increased $7.4 million to $70.6 million for the three
months ended September 30, 2003, from $63.2 million for the comparable period in
2002, but decreased as a percentage of revenue to 37.4 percent from 37.6
percent. The decrease in the percentage of revenue was primarily attributable to
the $680,000 of previously deferred revenue, on a net basis, from the long-term
collection contract that was recognized during the three months ended September
30, 2003, as compared to the deferral of $1.6 million, on a net basis, that was
recorded during the three months ended September 30, 2002. Because the expenses
associated with this revenue are expensed as incurred, the recognition of
previously deferred revenue decreases the selling, general, and administrative
expenses as a percentage of revenue and the deferral of additional revenue
increases the selling, general, and administrative expenses as percentage of
revenue. A portion of the decrease in the percentage of revenue was also
attributable to continued reductions in collection expenses and purchased data
costs helped to offset the increased usage of outside attorneys and other third
party service providers.
Depreciation and amortization. Depreciation and amortization increased
$820,000 to $7.9 million for the three months ended September 30, 2003, from
$7.0 million for the comparable period in 2002. This increase was the result of
additional depreciation resulting from normal capital expenditures made in the
ordinary course of business during 2002 and 2003. These capital expenditures
included expenditures related to the relocation of our corporate headquarters
and predictive dialers and other equipment required to expand our infrastructure
to handle future growth. The increase was also attributable to the amortization
of the customer lists acquired in the Great Lakes and RevGro acquisitions.
Other income (expense). Interest and investment income increased $637,000
to $1.3 million for the three months ended September 30, 2003, from $690,000 for
the comparable period in 2002. This increase in interest and investment income
was primarily attributable to an increase in earnings from NCO Portfolio's
investment in a joint venture that purchases utility, medical, and various other
small balance accounts receivable. Interest expense increased to $5.6 million
for the three months ended September 30, 2003, from $5.3 million for the
comparable period in 2002. This increase in interest expense was due to
Portfolio Management's additional borrowings from CFSC Capital Corp. XXXIV to
purchase accounts receivable, including the $20.6 million of borrowings to
purchase Great Lakes' accounts receivable portfolios. This increase was
partially offset by lower interest rates and lower principal balances as a
result of debt repayments made in excess of borrowings against the credit
facility during 2002 and 2003. Other income for the three months ended September
30, 2003, included a $402,000 gain related to a benefit from a deferred
compensation plan assumed as part of the acquisition of FCA International Ltd.
in May 1998.
Income tax expense. Income tax expense for the three months ended September
30, 2003, increased to $7.0 million, or 37.9 percent of income before income tax
expense, from $4.3 million, or 37.9 percent of income before income tax expense,
for the comparable period in 2002.
Nine Months Ended September 30, 2003, Compared to Nine Months Ended
September 30, 2002
Revenue. Revenue increased $35.0 million, or 6.6 percent, to $566.2 million
for the nine months ended September 30, 2003, from $531.2 million for the
comparable period in 2002. U.S. Operations, Portfolio Management, and
International Operations accounted for $517.2 million, $55.2 million and $50.4
million, respectively, of the revenue for the nine months ended September 30,
2003. U.S. Operations' revenue included $36.9 million of intercompany revenue
earned on services performed for Portfolio Management that was eliminated upon
consolidation. International Operations' revenue included $19.7 million of
intercompany revenue earned on services performed for U.S. Operations that was
eliminated upon consolidation.
-25-
U.S. Operations' revenue increased $34.5 million, or 7.2 percent, to $517.2
million for the nine months ended September 30, 2003, from $482.7 million for
the comparable period in 2002. The increase in U.S. Operations' revenue was
partially attributable to the acquisitions of Great Lakes collection operations
in August 2002 and RevGro in December 2002. Great Lakes contributed $15.5
million to U.S. Operations' revenue for the nine months ended September 30, 2003
compared to $2.9 million for the period from August 19, 2002 to September 30,
2002. RevGro contributed $15.3 million to U.S. Operations' revenue for the nine
months ended September 30, 2003. The increase was also attributable to an
increase in fees from collection services performed for Portfolio Management.
These additional fees from Portfolio Management included the fees from servicing
the Great Lakes portfolio acquired by NCO Portfolio in August 2002. A portion of
the increase was due to the addition of new clients and growth in business from
existing clients. These increases were partially offset by a decrease in revenue
recorded from a long-term collection contract. The method of recognizing revenue
for this long-term collection contract defers certain revenues into future
periods until collections exceed collection guarantees. During the nine months
ended September 30, 2003, U.S. Operations deferred $2.0 million of revenue, on a
net basis, into future periods, but during the nine months ended September 30,
2002, U.S. Operations recognized $9.9 million of previously deferred revenue, on
a net basis. In addition, the increases in revenue were also partially offset by
a further weakening of consumer payment patterns that began during the second
half of 2002.
Portfolio Management's revenue increased $8.5 million, or 18.1 percent, to
$55.2 million for the nine months ended September 30, 2003, from $46.7 million
for the comparable period in 2002. Portfolio Management's collections increased
$26.0 million, or 31.3 percent, to $109.1 million for the nine months ended
September 30, 2003, from $83.1 million for the comparable period in 2002.
Portfolio Management's revenue represented 50 percent of collections for the
nine months ended September 30, 2003, as compared to 56 percent of collections
for the same period in the prior year. Revenue increased due to the increase in
collections from new purchases, including the Great Lakes portfolio. The effect
of the increase in collections on revenue was partially offset by the decrease
in revenue recognition rate. Revenue as a percentage of collections declined
principally due to a number of factors including an increase in the average age
of the portfolios, timing of collections, and lower targeted returns on more
recent portfolios due to the current economic environment. The increase in the
average age contributed to the decrease, because more of the collections on
older portfolios are applied to amortization. The increase in the average age of
the portfolios was a result of reduced purchase volumes due to higher prices of
portfolios during 2002 and 2003.
International Operations' revenue increased $15.9 million, or 46.2 percent,
to $50.4 million for the nine months ended September 30, 2003, from $34.5
million for the comparable period in 2002. The increase in International
Operations' revenue was primarily attributable to new services provided for our
U.S. Operations and favorable changes in the foreign currency exchange rates
used to translate the International Operations' results of operations into U.S.
dollars. In addition, a portion of the increase was attributable to the addition
of new clients and growth in business from existing clients.
Payroll and related expenses. Payroll and related expenses increased $13.0
million to $264.5 million for the nine months ended September 30, 2003, from
$251.5 million for the comparable period in 2002, but decreased as a percentage
of revenue to 46.7 percent from 47.3 percent.
U.S. Operations' payroll and related expenses increased $16.5 million to
$253.6 million for the nine months ended September 30, 2003, from $237.1 million
for the comparable period in 2002, but decreased as a percentage of revenue to
49.0 percent from 49.1 percent. The decrease in payroll and related expenses as
a percentage of revenue was partially due to the shift of more of our collection
work to outside attorneys and other third party service providers, and the
continued rationalization of staff. This shift was associated with the
continuing efforts to maximize collections for clients. The costs associated
with the increase in the use of outside attorneys and other third party service
providers are included in selling, general, and administrative expenses. A
portion of the increase in the percentage of revenue was offset by the $2.0
million of additional deferred revenue, on a net basis, that was recorded during
the nine months ended September 30, 2003, as compared to $9.9 million of
previously deferred revenue, on a net basis, from the long-term collection
contract that was recognized during the nine months ended September 30, 2002.
Since the expenses associated with this revenue are expensed as incurred, the
recognition of previously deferred revenue decreases the payroll and related
expenses as a percentage of revenue and the deferral of additional revenue
increases the payroll and related expenses as percentage of revenue.
-26-
Portfolio Management's payroll and related expenses decreased $145,000 to
$1.3 million for the nine months ended September 30, 2003, from $1.4 million for
the comparable period in 2002, and decreased as a percentage of revenue to 2.3
percent from 3.1 percent. Portfolio Management outsources all of its collection
services to U.S. Operations and, therefore, has a relatively small fixed payroll
cost structure. The decrease in payroll and related expenses was principally due
to Portfolio Management's legal recovery group being transferred to the U.S.
Operations' attorney network during 2002.
International Operations' payroll and related expenses increased $9.1
million to $29.4 million for the nine months ended September 30, 2003, from
$20.3 million for the comparable period in 2002, but decreased as a percentage
of revenue to 58.2 percent from 58.8 percent. The decrease as a percentage of
revenue was attributable to the continued focus on managing the amount of labor
required to attain revenue goals.
Selling, general, and administrative expenses. Selling, general, and
administrative expenses increased $24.7 million to $210.3 million for the nine
months ended September 30, 2003, from $185.6 million for the comparable period
in 2002, and increased as a percentage of revenue to 37.1 percent from 34.9
percent. The increase in the percentage of revenue was partially attributable to
the $2.0 million of additional deferred revenue, on a net basis, that was
recorded during the nine months ended September 30, 2003, as compared to $9.9
million of previously deferred revenue, on a net basis, from the long-term
collection contract that was recognized during the nine months ended September
30, 2002. Because the expenses associated with this revenue are expensed as
incurred, the recognition of previously deferred revenue decreases the selling,
general, and administrative expenses as a percentage of revenue and the deferral
of additional revenue increases the selling, general, and administrative
expenses as percentage of revenue. A portion of the increase in the percentage
of revenue was attributable to the shift of more of the collection work to
outside attorneys and other third party service providers.
Depreciation and amortization. Depreciation and amortization increased $3.9
million to $23.7 million for the nine months ended September 30, 2003, from
$19.8 million for the comparable period in 2002. This increase was the result of
additional depreciation resulting from normal capital expenditures made in the
ordinary course of business during 2002 and 2003. These capital expenditures
included expenditures related to the relocation of our corporate headquarters
and predictive dialers and other equipment required to expand our infrastructure
to handle future growth. The increase was also attributable to the amortization
of the customer lists acquired in the Great Lakes and RevGro acquisitions.
Other income (expense). Interest and investment income increased $808,000
to $3.0 million for the nine months ended September 30, 2003, from $2.1 million
for the comparable period in 2002. This increase in interest and investment
income was primarily attributable to an increase in earnings from NCO
Portfolio's investment in a joint venture that purchases utility, medical and
various other small balance accounts receivable. Interest expense increased to
$17.3 million for the nine months ended September 30, 2003, from $15.2 million
for the comparable period in 2002. This increase was due to Portfolio
Management's additional borrowings from CFSC Capital Corp. XXXIV to purchase
accounts receivable, including the $20.6 million of borrowings to purchase Great
Lakes' accounts receivable portfolios. This increase was partially offset by
lower interest rates and lower principal balances as a result of debt repayments
made in excess of borrowings against the credit facility during 2002 and 2003.
Other income for the nine months ended September 30, 2003, included: $476,000 of
income from our ownership interest in one of our insurance carriers that was
sold; $402,000 gain related to a benefit from a deferred compensation plan
assumed as part of the acquisition of FCA International Ltd. in May 1998; and
$250,000 of income from a partial recovery from a third party of an
environmental liability that was paid by us. 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. The operations that caused the
environment liability were unrelated to the accounts receivable outsourcing
business. Other expense for the nine months ended September 30, 2002, included:
an expense of $1.3 million from the estimated settlement of the environmental
liability, net of a $305,000 recovery from a third party; and a $1.0 million
insurance gain that 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.
-27-
Income tax expense. Income tax expense for the nine months ended September
30, 2003, decreased to $20.7 million, or 37.9 percent of income before income
tax expense, from $23.1 million, or 37.9 percent of income before income tax
expense, for the comparable period in 2002.
Liquidity and Capital Resources
Historically, our primary sources of cash have been bank borrowings, equity
and debt 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 $79.4 million for the nine months ended September 30, 2003, as compared to
$56.1 million for the same period in 2002. The increase in cash provided by
operations was primarily attributable to a $688,000 increase in accounts
payable and accrued expenses as compared to a $7.0 million decrease for the same
period in the prior year. The decrease in 2002 was primarily attributable to the
payment of certain accruals made in connection with the $23.8 million of
one-time charges incurred during the second and third quarter of 2001. The
increase in cash provided by operations was also attributable to a $6.0 million
deposit made in the first quarter of 2002 in connection with a long-term
collection contract. This deposit was part of the $10.2 million we received in
July 2003 in connection with the long-term collection contract. A portion of the
increases in cash provided by operations was offset by increases in other assets
and deferred income taxes.
Cash Flows from Investing Activities. Cash provided by investing activities
was $1.2 million for the nine months ended September 30, 2003, compared to cash
used in investing activities of $39.9 million for the same period in 2002. Cash
purchases of accounts receivable for the nine months ended September 30, 2003
were $41.2 million as compared to $50.2 million for the comparable period in
2002, and collections applied to principal of purchased accounts receivable were
$55.3 million as compared to $38.2 million. Purchases of property and equipment
were $14.0 million for the nine months ended September 30, 2003, compared to
$23.8 million for the same period in 2002. The additional purchases of property
and equipment for the nine months ended September 30, 2002 was primarily
attributable to the relocation of our corporate headquarters to Horsham,
Pennsylvania. Cash used in investing activities for the nine months ended
September 30, 2002 included net cash paid for acquisitions of $10.9 million from
the acquisition of Great Lakes.
Cash Flows from Financing Activities. Cash used in financing activities was
$62.7 million for the nine months ended September 30, 2003, compared to cash
used in financing activities of $17.3 million for the same period in 2002. The
cash used in financing activities during the nine months ended September 30,
2003, resulted from repayments of borrowings under our senior credit facility,
nonrecourse debt used to purchase large accounts receivable portfolios, and
securitized debt assumed as part of the Creditrust merger. These repayments were
partially offset by the $10.6 million borrowed from CFSC Capital Corp. XXXIV to
purchase accounts receivable. The cash used in financing activities during the
nine months ended September 30, 2002, resulted from repayments of borrowings
under our credit facility and repayments of securitized debt assumed as part of
the Creditrust merger. These repayments were partially offset by the $10.6
million borrowed under our senior credit facility to fund the purchase of Great
Lakes and the $20.6 million borrowed from CFSC Capital Corp. XXXIV to purchase
the Great Lakes portfolio and accounts receivable.
Credit Facility. On August 13, 2003, we amended our credit agreement with
Citizens Bank of Pennsylvania, formerly Mellon Bank, N.A., ("Citizens Bank"),
for itself and as administrative agent for other participating lenders. The
amendment extended the maturity date from May 20, 2004 to March 15, 2006 (the
"Maturity Date"). The amended credit facility is structured as a $150 million
term loan and a $50 million revolving credit facility. We are required to make
quarterly repayments of $6.3 million on the term loan beginning on September 30,
2003, and continuing until the Maturity Date. The remaining balance outstanding
under the term loan will become due on the Maturity Date. The balance under the
revolving credit facility will become due on the Maturity Date.
Until February 28, 2004, all borrowings bear interest at a rate equal to
either, at our option, Citizens Bank's prime rate plus a margin of 1.25 percent
(Citizens Bank's prime rate was 4.00 percent at September 30, 2003), or the
London InterBank Offered Rate ("LIBOR") plus a margin of 3.00 (LIBOR was 1.12
percent at September 30, 2003). After February 28, 2004, all borrowings bear
interest at a rate equal to either, at our option, Citizens Bank's prime rate
plus a margin of 0.75 percent to 1.25 percent, which is determined quarterly
based upon our consolidated funded debt to earnings before interest, taxes,
depreciation, and amortization ("EBITDA") ratio, or LIBOR plus a margin of 2.25
percent to 3.00 percent depending on our consolidated funded debt to EBITDA
ratio. We are charged a fee on the unused portion of the credit facility of 0.50
percent until February 28, 2004, and ranging from 0.38 percent to 0.50 percent
depending on our consolidated funded debt to EBITDA ratio after February 28,
2004.
-28-
Borrowings under the credit agreement are collateralized by substantially
all of our assets, including the common stock of NCO Portfolio that we own, and
our rights under the revolving credit agreement with NCO Portfolio (see note
17). 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 September 30, 2003, we were in compliance with all required
covenants.
Convertible Notes. In April 2001 we completed the sale of $125.0 million
aggregate principal amount of 4.75 percent 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 and are payable in
April 2006. We used the $121.3 million of net proceeds from this offering to
repay debt under our credit facility.
Other Nonrecourse Debt. In August 2002, NCO Portfolio entered into a
four-year exclusivity agreement with CFSC Capital Corp. XXXIV ("Cargill"). The
agreement stipulates that all purchases of accounts receivable by NCO Portfolio
with a purchase price in excess of $4 million must be first offered to Cargill
for financing at its discretion. The agreement has no minimum or maximum credit
authorization. NCO Portfolio may terminate the agreement at any time after two
years for a cost of $125,000 per month for each month of the remaining two
years, payable monthly. If Cargill chooses to participate in the financing of a
portfolio of accounts receivable, the financing will be at 90 percent of the
purchase price, unless otherwise negotiated, with floating interest at the prime
rate plus 3.25 percent (prime rate was 4.00 percent at September 30, 2003). Each
borrowing is due two years after the loan is made. Debt service payments equal
collections less servicing fees and interest expense. As additional interest,
Cargill will receive 40 percent of the residual cash flow, unless otherwise
negotiated, which is defined as all cash collections after servicing fees,
floating rate interest, repayment of the note and the initial investment by NCO
Portfolio, including imputed interest. Borrowings under this financing agreement
are nonrecourse to NCO Portfolio and NCO, except for the assets within the
special purpose entities established in connection with the financing agreement.
This loan agreement contains a collections performance requirement, among other
covenants, that, if not met, provides for cross-collateralization with any other
Cargill financed portfolios, in addition to other remedies. As of September 30,
2003, NCO Portfolio was in compliance with all required covenants.
Off-Balance Sheet Arrangements
NCO Portfolio owns a 100 percent 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 nonrecourse note that is due the
earlier of January 2004 or satisfaction of the note from collections, carries an
interest rate of 8.61 percent, and had an outstanding balance of $2.4 million
and $585,000 as of December 31, 2002 and September 30, 2003, respectively. 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 September 30, 2003, the investment
in securitization was $7.5 million, composed of $4.2 million in present value of
discounted residual cash flows plus $3.3 million in cash reserves. The
investment accrues noncash income at a rate of 8 percent per annum on the
residual cash flow component only. No income was recorded for the three and nine
months ended September 30, 2003, due to concerns related to the future
recoverability of the investment. We recorded income of $30,000 and $105,000 on
this investment during the three and nine months ended September 30, 2002,
respectively. The off-balance sheet 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.
-29-
NCO Portfolio has a 50 percent 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. Gains and losses are shared equally between NCO
Portfolio and IMNV. Included in "other assets" on the Balance Sheets was NCO
Portfolio's investment in the Joint Venture of $3.4 million and $4.1 million as
of December 31, 2002 and September 30, 2003, respectively. Included in the
Statements of Income, as "interest and investment income," for the three months
ended September 30, 2002 and 2003, was $72,000 and $715,000, respectively,
representing NCO Portfolio's 50 percent share of operating income from this
unconsolidated subsidiary. Income of $375,000 and $1.7 million was recorded from
this unconsolidated subsidiary for the nine months ended September 30, 2002 and
2003, respectively. The Joint Venture has access to capital through CFSC Capital
Corp. XXXIV ("Cargill Financial") who, at its option, lends 90 percent of the
cost of the purchased accounts receivable to the Joint Venture. Borrowings carry
interest at the prime rate plus 4.25 percent (prime rate was 4.00 percent as of
September 30, 2003). Debt service payments equal total collections less
servicing fees and expenses until each individual borrowing is fully repaid and
the Joint Venture's investment is returned, including interest. Thereafter,
Cargill Financial is paid a residual of 50 percent of collections less servicing
costs. Individual loans are required to be repaid based on collections, but not
more than two years from the date of borrowing. The debt is cross-collateralized
by all portfolios in which the lender participates, and is nonrecourse to NCO
Portfolio and NCO.
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. From time to time, 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. However, as of September 30, 2003, we were not party to
any derivative instruments.
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 our results of operations: revenue recognition for a long-term
collection contract and purchased accounts receivable, goodwill, 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
2002 financial statements contained in our Annual Report on Form 10-K, as
amended, for the year ended December 31, 2002.
Impact of Recently Issued and Proposed Accounting Pronouncements
During 2001, the Accounting Staff Executive Committee approved an exposure
draft on Accounting for Certain Purchased Loans or Debt Securities (formerly
known as Discounts Related to Credit Quality) (Exposure Draft-December 1998).
The proposal would apply to all companies that acquire loans for which it is
probable at the acquisition date that all contractual amounts due under the
acquired loans will not be collected. The proposal addresses accounting for
differences between contractual and expected future cash flows from an
investor's initial investment in certain loans when such differences are
attributable, in part, to credit quality. The scope also includes such loans
acquired in purchased business combinations. If adopted, the proposed Statement
of Position, referred to as SOP, would supersede Practice Bulletin 6,
Amortization of Discounts on Certain Acquired Loans. In June 2001, the Financial
Accounting Standards Board, referred to as FASB, cleared the SOP for issuance
subject to minor editorial changes and planned to issue a final SOP in early
2002. The SOP has not yet been issued. The proposed SOP would limit the revenue
that may be accrued to the excess of the estimate of expected future cash flows
over a portfolio'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,
referred to as 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
portfolio 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 portfolio's remaining life. The exposure draft provides that
previously issued annual financial statements would not need to be restated. The
proposed effective date for adoption of this standard is fiscal years beginning
after December 15, 2004. Until final issuance of this SOP, we cannot ascertain
its effect on our reporting.
-30-
Effective January 1, 2003, we adopted FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on
the disclosures required by guarantors in their interim and annual financial
statements. FIN 45 also requires a guarantor to recognize a liability at the
date of inception for the fair value of the obligation it assumes under the
guarantee. The disclosure requirements were effective for periods ending after
December 15, 2002. The initial recognition and measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31, 2002. We
have several guarantee arrangements for which a liability has not been
recognized as all such guarantees were issued prior to December 31, 2002.
Accordingly, the adoption of FIN 45 did not have a material impact on our
consolidated financial position, consolidated results of operations, or
liquidity.
In January 2003, FASB issued Interpretation No. 46 ("FIN" 46),
"Consolidation of Variable Interest Entities." The objective of FIN 46 is to
improve financial reporting by companies involved with variable interest
entities. FIN 46 defines variable interest entities and requires that variable
interest entities be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
is entitled to receive a majority of the entity's residual returns or both. We
adopted FIN 46 in the third quarter of 2003, and it did not have a material
impact on our financial position and results of operations.
In April 2003, the FASB indicated that it plans to have a new rule in place
by the end of 2004 that will require that stock based compensation be recorded
as a cost that is recognized in the financial statements.
-31-
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.
Item 4
Controls and Procedures
The Company, under the supervision and with the participation of its
management, including its principal executive officer and principal financial
officer, evaluated the effectiveness of the design and operation of its
disclosure controls and procedures as of the end of the period covered by this
report. Based on this evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective in reaching a reasonable level of assurance that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time period specified in the Securities and
Exchange Commission's rules and forms.
The principal executive officer and principal financial officer also
conducted an evaluation of internal control over financial reporting ("Internal
Control") to determine whether any changes in Internal Controls occurred during
the quarter that have materially affected or which are reasonably likely to
materially affect Internal Controls. Based on that evaluation, there has been no
such change during the quarter covered by this report.
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
-32-
Part II. Other Information
Item 1. Legal Proceedings
In October 2003, the Company was notified by the Federal Trade
Commission ("FTC") that it intends to pursue a claim against the Company
for violations of the Fair Credit Reporting Act ("FCRA") relating to
certain aspects of the Company's credit reporting practices during 1999 and
2000.
The allegations relate primarily to a large group of consumer accounts
from one client that were transitioned to the Company for servicing during
1999. The Company received incorrect information from the prior service
provider at the time of transition. The Company became aware of the
incorrect information during 2000 and ultimately removed the incorrect
information from the consumers' credit files. The Company does not believe
that it is liable for any monetary penalties under the FCRA. However, the
Company is currently negotiating a settlement of this matter with the FTC,
although no assurance can be given that a settlement will be reached.
The Company is also a party to a class action litigation regarding this
group of consumer accounts. A tentative settlement of the class action
litigation has been agreed to and is subject to court approval. The Company
believes that the class action litigation is covered by insurance, subject
to applicable deductibles.
The FTC is also alleging that certain reporting violations occurred on
a small subset of the Company's purchased accounts receivable.
The Company believes that the resolution of these matters will not have
a material adverse effect on its financial position, results of operations
or business.
In June 2001, the first floor of the Company's Fort Washington,
Pennsylvania, headquarters was severely damaged by a flood caused by
remnants of Tropical Storm Allison. As previously reported, during the
third quarter of 2001, the Company decided to relocate its corporate
headquarters to Horsham, Pennsylvania. The Company filed a lawsuit in the
Court of Common Pleas, Montgomery County, Pennsylvania (Civil Action No.
01-15576) against the current landlord and the former landlord of the Fort
Washington facilities to terminate the leases and to obtain other relief.
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.
In April 2003, the former landlord defendants filed a joinder complaint
against Michael J. Barrist, the Chairman, President and Chief Executive
Officer of the Company, Charles C. Piola, Jr., a director and former
Executive Vice President of the Company, and Bernard R, Miller, a former
Executive Vice President and director of the Company, to name such persons
as additional defendants (collectively, the "Joinder Defendants"). The
Joinder Defendants were partners in a partnership that owned real estate
(the "Prior Real Estate") that the Company leased at a market rent prior to
moving to the Fort Washington facility. The joinder complaint alleges that
the Joinder Defendants breached their statutory and common law duties of
care and loyalty to the Company and perpetrated a fraud upon the Company
and its shareholders by refraining or causing the Company to refrain from
further investigation into the issue of prior water intrusion at the Fort
Washington facility and that it was a condition to the lease of the Fort
Washington facility that the former landlord defendants purchase the Prior
Real Estate from the Joinder Defendants. The joinder complaint seeks to
impose liability on the Joinder Defendants for any damages suffered by the
Company as a result of the flood.
Based upon its initial review of the facts, the Company believes that
the Joinder Defendants did not breach any duties to, or commit a fraud upon
the Company or its shareholders and that the allegations of any wrongdoing
by the Joinder Defendants are without merit.
Pursuant to the Company's Bylaws and the Joinder Defendants' employment
agreements, the Joinder Defendants will be indemnified by the Company
against any expenses or awards incurred in this suit, subject to certain
exceptions.
-33-
The Company is involved in other legal proceedings and regulatory
investigations from time to time in the ordinary course of its business.
Management believes that none of these other legal proceedings or
regulatory investigations 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
None - not applicable
Item 5. Other Information
None - not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Section 1350 Certification
99.1 Consolidating Schedules
(b) Reports on Form 8-K
Date of
Filing / Furnishing Item Reported
------------------- -------------
8/8/03 Item 7 and Item 9 - Press release from the
earnings release for the second quarter of 2003
8/13/03 Item 7 and Item 9 - Conference call transcript
from the earnings release for the second quarter
of 2003
8/19/03 Item 7 and Item 9 - Press release announcing the
refinancing of the credit facility
-34-
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: November 14, 2003 By: Michael J. Barrist
------------------
Michael J. Barrist
Chairman of the Board, President
and Chief Executive Officer
(principal executive officer)
Date: November 14, 2003 By: Steven L. Winokur
-----------------
Steven L. Winokur
Executive Vice President of Finance,
Chief Financial Officer, Chief Operating
Officer of Shared Services and Treasurer
(principal financial and
accounting officer)
-35-