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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 March 31, 2004, 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 May 6, 2004 was: 31,472,272 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, 2003 and March 31, 2004 1
Condensed Consolidated Statements of Income -
Three months ended March 31, 2003 and 2004 2
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 2003 and 2004 3
Notes to Condensed Consolidated Financial Statements 4
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 25
Item 4 CONTROLS AND PROCEDURES 25
PART II - OTHER INFORMATION 26
Item 1. LEGAL PROCEEDINGS
Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Item 3. DEFAULTS UPON SENIOR SECURITIES
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
Item 5. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES 29
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NCO GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
MARCH 31,
DECEMBER 31, 2004
ASSETS 2003 (UNAUDITED)
------------ -----------
Current assets:
Cash and cash equivalents $ 45,644 $ 64,010
Restricted cash 5,850 1,382
Accounts receivable, trade, net of allowance for
doubtful accounts of $7,447 and $8,287, respectively 80,640 86,457
Purchased accounts receivable, current portion 59,371 51,244
Deferred income taxes 12,280 12,163
Bonus receivable, current portion 7,646 10,609
Prepaid expenses and other current assets 18,021 14,708
-------- --------
Total current assets 229,452 240,573
Funds held on behalf of clients
Property and equipment, net 74,085 74,848
Other assets:
Goodwill 506,370 520,710
Other intangibles, net of accumulated amortization 12,375 11,269
Purchased accounts receivable, net of current portion 93,242 87,604
Bonus receivable, net of current portion 320 1,407
Other assets 30,267 31,473
-------- --------
Total other assets 642,574 652,463
-------- --------
Total assets $946,111 $967,884
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 66,523 $ 65,966
Income taxes payable - 2,691
Accounts payable 4,281 5,235
Accrued expenses 25,901 30,579
Accrued compensation and related expenses 15,601 17,773
Deferred revenue, current portion 10,737 14,346
-------- --------
Total current liabilities 123,043 136,590
Funds held on behalf of clients
Long-term liabilities:
Long-term debt, net of current portion 248,964 231,140
Deferred revenue, net of current portion 13,819 12,622
Deferred income taxes 38,676 39,867
Other long-term liabilities 4,344 4,231
Minority interest 26,848 -
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,
25,988 and 27,866 shares issued and outstanding, respectively 323,511 364,916
Other comprehensive income 6,646 6,275
Retained earnings 160,260 172,243
-------- --------
Total shareholders' equity 490,417 543,434
-------- --------
Total liabilities and shareholders' equity $946,111 $967,884
======== ========
See accompanying notes.
-1-
NCO GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------
2003 2004
-------- --------
Revenue $189,017 $201,231
Operating costs and expenses:
Payroll and related expenses 88,298 91,039
Selling, general and administrative expenses 68,958 76,645
Depreciation and amortization expense 7,856 7,778
-------- --------
Total operating costs and expenses 165,112 175,462
-------- --------
Income from operations 23,905 25,769
Other income (expense):
Interest and investment income 836 996
Interest expense (5,819) (5,288)
-------- --------
Total other income (expense) (4,983) (4,292)
-------- --------
Income before income tax expense 18,922 21,477
Income tax expense 7,179 8,888
-------- --------
Income before minority interest 11,743 12,589
Minority interest (551) (606)
-------- --------
Net income $ 11,192 $ 11,983
======== ========
Net income per share:
Basic $ 0.43 $ 0.46
Diluted $ 0.41 $ 0.43
Weighted average shares outstanding:
Basic 25,908 26,125
Diluted 29,718 30,234
See accompanying notes.
-2-
NCO GROUP, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------
2003 2004
-------- --------
Cash flows from operating activities:
Net income $ 11,192 $ 11,983
Adjustments to reconcile income from operations
to net cash provided by operating activities:
Depreciation 6,658 6,669
Amortization of intangibles 1,198 1,109
Provision for doubtful accounts 1,345 1,269
Impairment of purchased accounts receivable 330 388
Accrued noncash interest 882 1,456
Gain on disposal of property and equipment - 38
Changes in non-operating income - (594)
Minority interest 551 606
Changes in operating assets and liabilities, net of acquisitions:
Restricted cash - 4,468
Accounts receivable, trade (8,626) (7,049)
Deferred income taxes 2,819 1,481
Bonus receivable (2,980) (4,050)
Other assets (3,362) 351
Accounts payable and accrued expenses 806 7,478
Income taxes payable 2,809 6,178
Deferred revenue 4,020 2,412
Other long-term liabilities (321) (714)
-------- --------
Net cash provided by operating activities 17,321 33,479
Cash flows from investing activities:
Purchases of accounts receivable (16,870) (6,586)
Collections applied to principal of purchased accounts receivable 19,109 22,110
Purchases of property and equipment (5,506) (7,485)
Net distribution from joint venture - 55
Proceeds from notes receivable - 305
Net cash paid for acquisitions and related costs - (2,552)
-------- --------
Net cash (used in) provided by investing activities (3,267) 5,847
Cash flows from financing activities:
Repayment of notes payable (6,717) (11,239)
Borrowings under notes payable 6,054 -
Borrowings under revolving credit agreement 1,000 -
Repayment of borrowings under revolving credit agreement (9,130) (11,250)
Payment of fees to acquire debt (15) (4)
Issuance of common stock, net - 1,445
-------- --------
Net cash used in financing activities (8,808) (21,048)
Effect of exchange rate on cash 287 88
-------- --------
Net increase in cash and cash equivalents 5,533 18,366
Cash and cash equivalents at beginning of the period 25,159 45,644
-------- --------
Cash and cash equivalents at end of the period $ 30,692 $ 64,010
======== ========
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 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, telecommunications, utilities,
education, and government sectors. These clients are primarily located
throughout the United States of America, Canada, the United Kingdom, and Puerto
Rico. The Company's largest client is in the financial services sector and
represented 13.3 percent of the consolidated revenue for the three months ended
March 31, 2004.
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 period ended March 31, 2004, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004, or for any other interim period. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 15, 2004.
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 (see note 13) and,
accordingly, its 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 that includes guaranteed collections, subject to limits. The
Company also earns a bonus to the extent collections are in excess of the
guarantees. The Company is required to pay the client, subject to limits, if
collections do not reach the guarantees. Any guarantees in excess of the limits
will only be satisfied with future collections. The Company is entitled to
recoup at least 90 percent of any such guarantee payments from subsequent
collections in excess of any remaining guarantees.
The Company defers all of the base service fees, subject to the limits, until
the collections exceed the collection guarantees. At the end of each reporting
period, the Company assesses the need to record an additional liability if
deferred fees are less than the estimated guarantee payments, if any, due to the
client, subject to the limits. There was no additional liability recorded as of
December 31, 2003 and March 31, 2004.
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 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.
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 are 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.
-5-
2. ACCOUNTING POLICIES (CONTINUED):
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.
Goodwill:
Goodwill represents the excess of purchase price over the fair market value of
the net assets of the acquired businesses based on their respective fair values
at the date of acquisition. The Company accounts for goodwill pursuant to
Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill is no longer amortized
but instead must be tested for impairment at least annually and as triggering
events occur, 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 subsequent annual impairment tests, and does not believe that
goodwill is impaired as of March 31, 2004. The annual impairment analysis is
completed on October 1st of each year (see note 7).
Other Intangible Assets:
Other intangible assets consist primarily of customer lists and deferred
financing costs, which relate to debt issuance costs incurred. Customer lists
are amortized over five years and deferred financing costs are amortized over
the term of the debt (see note 7).
-6-
2. ACCOUNTING POLICIES (CONTINUED):
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 the grant date. If the Company
had elected to recognize compensation cost based on the fair value of the
options granted at the 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
Ended March 31,
------------------
2003 2004
------- -------
Net income - as reported $11,192 $11,983
Pro forma compensation cost, net of taxes 986 846
------- -------
Net income - pro forma $10,206 $11,137
======= =======
Net income per share - as reported:
Basic $ 0.43 $ 0.46
Diluted $ 0.41 $ 0.43
Net income per share - pro forma:
Basic $ 0.39 $ 0.43
Diluted $ 0.37 $ 0.40
Income Taxes:
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires that deferred tax assets and
liabilities be recognized using enacted tax rates for the effect of temporary
differences between the book and tax bases of recorded assets and liabilities.
SFAS No. 109 also requires that deferred tax assets be reduced by a valuation
allowance, if it is more likely than not that some portion or all of the
deferred tax asset will not be realized. Deferred taxes have not been provided
on the cumulative undistributed earnings of foreign subsidiaries because such
amounts are expected to be reinvested indefinitely.
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 the 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.
-7-
2. ACCOUNTING POLICIES (CONTINUED):
Use of Estimates (continued):
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.
However, actual results will differ from these estimates and a material change
in these estimates could occur within one reporting period (see note 5).
Reclassifications:
Certain amounts for the three months ended March 31, 2003 have been reclassified
for comparative purposes.
3. BUSINESS COMBINATIONS:
The following acquisition has 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 and
other costs related to the acquisition.
On March 26, 2004, the Company completed the merger of NCO Portfolio Management,
Inc., referred to as NCO Portfolio, with a wholly owned subsidiary of the
Company. The Company owned approximately 63.3 percent of the outstanding stock
of NCO Portfolio prior to the merger and pursuant to the merger acquired all NCO
Portfolio shares that it did not own for 1.8 million shares of NCO common stock
valued at $39.9 million. The value of the stock issued was based on the average
closing price of the Company's common stock for the period beginning two days
before and ending two days after the announcement of the merger on December 15,
2003. The Company recorded goodwill of $14.8 million. The goodwill is not
deductible for tax purposes. The allocation of the fair market value to the
acquired assets and liabilities of NCO Portfolio was based on preliminary
estimates and may be subject to change. As a result of the acquisition, the
Company expects to expand its portfolio base and reduce the cost of operations
through economies of scale. Therefore, the Company believes the allocation of a
portion of the purchase price to goodwill is appropriate. The following is a
preliminary allocation of the net purchased assets of the minority interest of
NCO Portfolio (amounts in thousands):
As of
March 26, 2004
--------------
Purchase price $ 39,808
Transaction costs 2,136
Fair value adjustment to
purchased accounts receivable 288
Minority interest (27,454)
--------
Goodwill $ 14,778
========
-8-
3. BUSINESS COMBINATIONS (CONTINUED):
The following summarizes the unaudited pro forma results of operations, assuming
the NCO Portfolio merger occurred as of the beginning of the respective periods.
The pro forma information is provided for informational purposes only. It is
based on historical information, and does not necessarily reflect the actual
results that would have occurred, nor is it indicative of future results of
operations of the consolidated entities (amounts in thousands, except per share
data):
For the Three Months
Ended March 31,
--------------------
2003 2004
-------- --------
Revenue $189,017 $201,231
Net income $ 11,743 $ 12,589
Earnings per share - basic $ 0.42 $ 0.45
Earnings per share - diluted $ 0.40 $ 0.42
4. 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
Ended March 31,
-------------------
2003 2004
------- -------
Net income $11,192 $11,983
Other comprehensive income (expense):
Foreign currency translation adjustment 2,869 (371)
Unrealized gain on interest rate swap 168 -
------- -------
Comprehensive income $14,229 $11,612
======= =======
The foreign currency translation adjustment 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.
-9-
5. 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 Three
For the Year Ended Months Ended
December 31, 2003 March 31, 2004
------------------- ------------------
Balance at beginning of period $ 152,448 $ 152,613
Purchases of accounts receivable 74,299 8,989
Collections on purchased accounts receivable (154,121) (44,008)
Revenue recognized 76,735 21,898
Impairment of purchased accounts receivable (1,751) (388)
Residual purchased accounts receivable from
previously unconsolidated subsidiary 4,515 -
Noncash purchase accounting adjustment - (187)
Foreign currency translation adjustment 488 (69)
--------- ---------
Balance at end of period $ 152,613 $ 138,848
========= =========
During the three months ended March 31, 2003 and 2004, impairment charges of
$330,000 and $388,000, respectively, were recorded as charges to income on
portfolios where the carrying values exceeded the expected future cash flows. As
of December 31, 2003 and March 31, 2004, the combined carrying values on all
impaired portfolios aggregated $11.4 million and $7.7 million, respectively, or
7.5 percent and 5.5 percent of total purchased accounts receivable,
respectively, representing their net realizable value.
As of December 31, 2003 and March 31, 2004, one portfolio with a carrying value
of $4.2 million and $3.2 million, respectively, which was acquired in connection
with the dissolution of an off-balance sheet securitization, was also being
accounted for under the cost recovery method.
Included in collections for the three months ended March 31, 2003 was $1.5
million in proceeds from the sale of accounts. There were no sales proceeds
included in collections for the three months ended March 31, 2004.
6. 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 $59.3 million and $74.3 million at
December 31, 2003 and March 31, 2004, respectively, have been shown net of their
offsetting liability for financial statement presentation.
-10-
7. INTANGIBLE ASSETS:
Goodwill:
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, and had the following
goodwill (amounts in thousands):
December 31, 2003 March 31, 2004
--------------------- -------------------
U.S. Operations $ 471,558 $ 471,558
Portfolio Management - 14,778
International Operations 34,812 34,374
--------- ---------
Total $ 506,370 $ 520,710
========= =========
Portfolio Management's goodwill resulted from the purchase of the minority
interest of NCO Portfolio (see note 3). The change in International Operations'
goodwill balance from December 31, 2003 to March 31, 2004 was due to changes in
the exchange rates used for the foreign currency translation.
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, 2003 March 31, 2004
---------------------------------- ---------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
----------------- --------------- ---------------- ---------------
Deferred financing costs $ 15,321 $ 9,687 $ 15,325 $ 10,327
Customer lists 8,761 2,104 8,761 2,542
Other intangible assets 900 816 900 848
-------- -------- -------- --------
Total $ 24,982 $ 12,607 $ 24,986 $ 13,717
======== ======== ======== ========
The Company recorded amortization expense for all other intangible assets of
$1.2 million and $1.1 million during the three months ended March 31, 2003 and
2004, 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 Years Ended Estimated
December 31, Amortization Expense
----------------------- -----------------------
2004 $ 4,381
2005 4,255
2006 2,341
2007 1,402
-11-
8. LONG-TERM DEBT:
Long-term debt consisted of the following (amounts in thousands):
December 31, 2003 March 31, 2004
----------------- --------------
Credit facility $132,500 $121,250
Convertible notes 125,000 125,000
Securitized nonrecourse debt 33,210 28,225
Other nonrecourse debt 17,591 14,452
Capital leases and other 7,186 8,179
Less current portion (66,523) (65,966)
-------- --------
$248,964 231,140
======== ========
Credit Facility:
On August 13, 2003, the Company amended its credit agreement with Citizens Bank
of Pennsylvania ("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 until the Maturity Date. The remaining balance outstanding
under the term loan and the balance under the revolving credit facility will
become due on the Maturity Date. The availability of the revolving credit
facility is reduced by any unused letters of credit. As of March 31, 2004, the
Company had unused letters of credit of $2.1 million and $47.9 million remaining
availability under the revolving credit facility.
Prior to February 28, 2004, all borrowings carried interest at a rate equal to
either, at the option of the Company, Citizens Bank's prime rate plus a margin
of 1.25 percent (Citizens Bank's prime rate was 4.00 percent at March 31, 2004),
or the London InterBank Offered Rate ("LIBOR") plus a margin of 3.00 (LIBOR was
1.09 percent at March 31, 2004). After February 28, 2004, all borrowings carried
interest at a rate equal to either, at the option of the Company, 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 4.44 percent and 3.99 percent
for the three months ended March 31, 2003 and 2004.
Borrowings under the credit agreement are collateralized by substantially all
the assets of the Company. 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, the incurrence
of additional debt, the issuance of equity, and distributions to shareholders.
If an event of default, such as failure to perform covenants, material adverse
change, or change of control, were to occur under the credit agreement, the
lenders would be entitled to declare all amounts outstanding under it
immediately due and payable and foreclose on the pledged assets. As of March 31,
2004, the Company was in compliance with all required financial covenants and
the Company was not aware of any events of default.
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.
-12-
8. LONG-TERM DEBT (CONTINUED):
Securitized Nonrecourse Debt:
NCO Portfolio has two securitized nonrecourse notes that are reflected in
long-term debt, current portion. These notes were originally established to fund
the purchase of accounts receivable. Each of the notes payable is nonrecourse to
the Company, is secured by a portfolio of purchased accounts receivable, and is
bound by an indenture and servicing agreement. The Company is servicer for each
portfolio of purchased accounts receivable within these securitized notes. 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. The final due date of all payments under the
facility is the earlier of March 2005, or satisfaction of the note from
collections. A liquidity reserve of $5.4 million and $900,000 was included in
restricted cash as of December 31, 2003 and March 31, 2004, respectively. As of
December 31, 2003 and March 31, 2004, the amount outstanding on the facility was
$13.9 million and $9.1 million, respectively. The note issuer was guaranteed
against loss by NCO Portfolio for up to $4.5 million. In December 2003, the $4.5
million guarantee was funded using $3.3 million of restricted cash from another
securitization and $1.2 million of operating cash. In January 2004, the $4.5
million from the guarantee was used to pay down a portion of the securitized
note.
The second securitized note was established in August 1999 and carries interest
at 15.00 percent per annum. The final due date of all payments under the
facility is the earlier of December 2004, or satisfaction of the note from
collections. As of December 31, 2003 and March 31, 2004, the amount outstanding
on the facility was $19.3 million and $19.1 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 August 2004 for a cost
of $125,000 per month for each remaining month. 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 March 31, 2004). 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.
The effective interest rate on these notes, including the residual interest
component was approximately 24.6 percent and 34.8 percent for the three months
ended March 31, 2003 and 2004, respectively. Borrowings under this financing
agreement are nonrecourse to the Company, 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. Total debt
outstanding under this facility was $17.6 million and $14.5 million as of
December 31, 2003 and March 31, 2004, respectively, which included $4.7 million
and $5.5 million of accrued residual interest, respectively. As of March 31,
2004, NCO Portfolio was in compliance with all required covenants.
-13-
9. EARNINGS PER SHARE:
Basic earnings per share ("EPS") was computed by dividing the net income for the
three months ended March 31, 2003 and 2004, by the weighted average number of
common shares outstanding. Diluted EPS was computed by dividing the adjusted net
income for the three months ended March 31, 2003 and 2004, by the weighted
average number of common shares outstanding plus all common equivalent shares.
Net income is adjusted to add-back interest expense on the 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 and $905,000 for the three months ended March 31, 2003 and 2004,
respectively. Outstanding options, warrants, and convertible securities have
been utilized in calculating diluted amounts only when their effect would be
dilutive.
The reconciliation of basic to diluted weighted average shares outstanding was
as follows (amounts in thousands):
For the Three Months
Ended March 31,
-------------------
2003 2004
------ ------
Basic 25,908 26,125
Dilutive effect of convertible debt 3,797 3,797
Dilutive effect of options 13 312
------ ------
Diluted 29,718 30,234
====== ======
10. SUPPLEMENTAL CASH FLOW INFORMATION:
The following are supplemental disclosures of cash flow information (amounts in
thousands):
For the Three Months
Ended March 31,
--------------------
2003 2004
-------- -------
Noncash investing and financing activities:
Common stock issued for acquisitions $ - $39,808
Deferred portion of purchased accounts receivable 911 2,403
11. COMMITMENTS AND CONTINGENCIES:
Purchase Commitments:
The Company enters into noncancelable agreements with various telecommunications
and other vendors that require minimum purchase commitments. These agreements
expire between 2004 and 2007. The following represents the future minimum
payments, by year and in the aggregate, under noncancelable purchase commitments
(amounts in thousands):
2004 $ 19,196
2005 16,693
2006 12,053
2007 5,100
--------
$ 53,042
========
The Company incurred $3.2 million and $7.2 million of expense in connection with
these purchase commitments for the three months ended March 31, 2003 and 2004,
respectively.
-14-
11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Long-Term Collection Contract:
The Company has a long-term collection contract with a large client to provide
collection services that includes guaranteed collections, subject to limits. The
Company is required to pay the client the difference between actual collections
and the guaranteed collections on May 31, 2004 and May 31, 2005, subject to
limits of $6.0 million and $13.5 million, respectively. Any guarantees in excess
of the limits will only be satisfied with future collections. The Company is
entitled to recoup at least 90 percent of any such guarantee payments from
subsequent collections in excess of any remaining guarantees.
Forward-Flow Agreement:
In May 2003, NCO Portfolio renewed a fixed price agreement ("forward-flow") 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 March 31, 2004, 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 is included in long-term debt and
as of December 31, 2003 and March 31, 2004, was $6.5 million and $7.5 million,
respectively.
Litigation and Investigations:
The Company is party, from time to time, to various legal proceedings,
regulatory investigations and tax examinations incidental to its business. The
Company continually monitors these legal proceedings, regulatory investigations
and tax examinations 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. During the first quarter of 2004, the Company made a settlement offer for
this matter to the FTC, although no assurance can be given that a settlement
will be reached. In the event that the Company is required to pay an assessment,
it may assert certain claims for indemnification from the owners of the consumer
accounts. In connection with the proposed settlement offer made in the first
quarter of 2004, the Company recorded its expected exposure to this claim.
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 the above matters will not have a
material adverse effect on its financial position, results of operations or
business.
-15-
11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Litigation and Investigations (continued):
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. The landlord and the former landlord filed counter-claims
against the Company. 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 and
alleging, among other things, that they breached their fiduciary duties to the
Company.
In January 2004, the Court, in ruling on the preliminary objections, allowed the
former landlord defendants' suit to proceed, but struck from the complaint the
breach of fiduciary duty allegations asserting violations of duties owed by
individual officers to the Company.
Other:
The Company is involved in other legal proceedings, regulatory investigations
and tax examinations from time to time in the ordinary course of its business.
Management believes that none of these other legal proceedings, regulatory
investigations or tax examinations will have a materially adverse effect on the
financial condition or results of operations of the Company.
12. SEGMENT REPORTING:
As March 31, 2004, the Company's business consisted 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, telecommunications, utilities, education, and
government. The 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
$714.2 million and $745.4 million at December 31, 2003 and March 31, 2004,
respectively. U.S. Operations had capital expenditures of $4.6 million and $6.9
million for the three months ended March 31, 2003 and 2004, respectively. U.S.
Operations also provides accounts receivable management services to Portfolio
Management. U.S. Operations recorded revenue of $12.3 million and $15.1 million
for these services for the three months ended March 31, 2003 and 2004,
respectively. The accounting policies used to record the revenue from Portfolio
Management are the same as those described in note 2, "Accounting Policies."
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 $170.4 million and $160.2 million
at December 31, 2003 and March 31, 2004, respectively.
-16-
12. SEGMENT REPORTING (CONTINUED):
International Operations provides accounts receivable management services across
Canada and the United Kingdom. International Operations had total assets, net of
any intercompany balances, of $61.5 million and $62.3 million at December 31,
2003 and March 31, 2004, respectively. International Operations had capital
expenditures of $825,000 and $567,000 for the three months ended March 31, 2003
and 2004, respectively. International Operations also provides accounts
receivable management services to U.S. Operations. International Operations
recorded revenue of $5.8 million and $9.7 million for these services for the
three months ended March 31, 2003 and 2004, respectively. The accounting
policies used to record the revenue from U.S. Operations are the same as those
described in note 2, "Accounting Policies."
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 March 31, 2003
(amounts in thousands)
-------------------------------------------------------------
Payroll and Selling, General
Related and Admin.
Revenue Expenses Expenses EBITDA
-------- -------- -------------- -------
U.S. Operations $ 173,105 $ 84,501 $ 64,387 $ 24,217
Portfolio Management 18,232 480 13,121 4,631
International Operations 15,754 9,084 3,757 2,913
Eliminations (18,074) (5,767) (12,307) -
--------- -------- -------- --------
Total $ 189,017 $ 88,298 $ 68,958 $ 31,761
========= ======== ======== ========
For the Three Months Ended March 31, 2004
(amounts in thousands)
-------------------------------------------------------------
Payroll and Selling, General
Related and Admin.
Revenue Expenses Expenses EBITDA
-------- -------- -------------- -------
U.S. Operations $ 183,419 $ 87,779 $ 71,227 $ 24,413
Portfolio Management 21,602 647 16,091 4,864
International Operations 21,011 12,334 4,407 4,270
Eliminations (24,801) (9,721) (15,080) -
--------- -------- -------- --------
Total $ 201,231 $ 91,039 $ 76,645 $ 33,547
========= ======== ======== ========
-17-
13. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARY:
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. Included in "other assets" on the Balance
Sheets was NCO Portfolio's investment in the Joint Venture of $4.0 million and
$5.1 million as of December 31, 2003 and March 31, 2004, respectively. Included
in the Statements of Income, as "interest and investment income," was $473,000
and $594,000 for the three months ended March 31, 2003 and 2004, respectively,
representing NCO Portfolio's 50 percent share of operating income from this
unconsolidated subsidiary. NCO Portfolio received distributions of $55,000
during the three months ended March 31, 2004. NCO Portfolio's 50 percent share
of the Joint Venture's retained earnings was $1.3 million and $1.8 million as of
December 31, 2003 and March 31, 2004, respectively. The Company performs
collection services for the Joint Venture and recorded service fee revenue of
$1.5 million and $1.7 million for the three months ended March 31, 2003 and
2004, respectively. The Company had receivables of $269,000 and $377,000 on its
balance sheets as of December 31, 2003 and March 31, 2004, respectively, for
these service fees. The Company also performs collection services for an
affiliate of IMNV and recorded service fee revenue of $2.5 million and $3.1
million for the three months ended March 31, 2003 and 2004, respectively.
The following tables summarize the financial information of the Joint Venture
(amounts in thousands):
As of
--------------------------------------------
December 31, 2003 March 31, 2004
-------------------- ---------------------
Total assets $ 15,344 $ 15,755
Total liabilities 7,415 6,752
For the Three Months
Ended March 31,
--------------------------
2003 2004
------------ -----------
Revenue $ 3,360 $ 3,918
Net income 946 1,188
14. SUBSEQUENT EVENT:
On April 2, 2004, the Company completed the acquisition of RMH Teleservices,
Inc., referred to as RMH, a provider of customer relationship management
services. The Company issued 3.4 million shares of NCO common stock valued at
$82.9 million for all of the outstanding shares of RMH.
-18-
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 integration of acquisitions, 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 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, risks related to the ERP
implementation, 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, regulatory
investigations and tax examinations, 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 for the year
ended December 31, 2003, 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 2003, 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 MARCH 31, 2004, COMPARED TO THREE MONTHS ENDED
MARCH 31, 2003
Revenue. Revenue increased $12.2 million, or 6.5 percent, to $201.2 million
for the three months ended March 31, 2004, from $189.0 million for the three
months ended March 31, 2003. U.S. Operations, Portfolio Management, and
International Operations accounted for $183.4 million, $21.6 million, and $21.0
million, respectively, of the first quarter of 2004 revenue. U.S. Operations'
revenue included $15.1 million of intercompany revenue earned on services
performed for Portfolio Management that was eliminated upon consolidation.
International Operations' revenue included $9.7 million of intercompany revenue
earned on services performed for the U.S. Operations that was eliminated upon
consolidation.
-19-
U.S. Operations' revenue increased $10.3 million, or 6.0 percent, to $183.4
million for the three months ended March 31, 2004, from $173.1 million for the
three months ended March 31, 2003. The increase in U.S. Operations revenue was
partially attributable to growth in business from existing clients and the
addition of new clients. An increase in fees from collection services performed
for Portfolio Management also contributed to the increase.
U.S. Operations' revenue for the three months ended March 31, 2003 and 2004
included 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,
subject to limits. During the three months ended March 31, 2004, U.S. Operations
recognized $1.6 million of previously deferred revenue, on a net basis, compared
to an additional deferral of revenue of $1.0 million for the three months ended
March 31, 2003.
Portfolio Management's revenue increased $3.4 million, or 18.5 percent, to
$21.6 million for the three months ended March 31, 2004, from $18.2 million for
the three months ended March 31, 2003. Portfolio Management's collections
increased $6.8 million, or 18.6 percent, to $43.5 million for the three months
ended March 31, 2004, from $36.7 million for the three months ended March 31,
2003. Portfolio Management's revenue represented 50 percent of collections for
the three months ended March 31, 2004, as compared to 49 percent of collections
for the three months ended March 31, 2003. Collections for the three months
ended March 31, 2003, included sales proceeds of $1.5 million. Excluding these
proceeds, revenue would have represented 51 percent of collections. Revenue
increased due to the increase in collections from new purchases of receivables.
The effect of the increase in collections on revenue was partially offset by the
decrease in the percentage of collections recorded as revenue, excluding the
sales proceeds for the three months ended March 31, 2003. 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. In addition, portfolios with $10.3 million in
carrying value, or 7.6 percent of total purchased accounts receivable as of
March 31, 2004, were being accounted for under the cost recovery method,
compared to $6.7 million, or 4.6 percent as of March 31, 2003. Accordingly, no
revenue was recorded on these portfolios. Of the $10.3 million of portfolios,
$7.4 million represented impaired portfolios, and $2.9 million represented
portfolios acquired in connection with the dissolution of an off-balance sheet
securitization.
International Operations' revenue increased $5.3 million, or 33.4 percent,
to $21.0 million for the three months ended March 31, 2004, from $15.8 million
for the three months ended March 31, 2004. The increase in International
Operations' revenue was primarily attributable to an increase in the services
provided to 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 $2.7
million to $91.0 million for the three months ended March 31, 2004, from $88.3
million for the three months ended March 31, 2003, but decreased as a percentage
of revenue to 45.2 percent from 46.7 percent.
U.S Operations' payroll and related expenses increased $3.3 million to
$87.8 million for the three months ended March 31, 2004, from $84.5 million for
the three months ended March 31, 2003, but decreased as a percentage of revenue
to 47.9 percent from 48.8 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 decrease in the payroll and related expenses as a percentage of
revenue was attributable to the recognition of $1.6 million of previously
deferred revenue from the long-term collection contract for the three months
ended March 31, 2004, as compared to an additional deferral of revenue of $1.0
million that was recorded for the three months ended March 31, 2003. 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.
-20-
Portfolio Management's payroll and related expenses increased $167,000 to
$647,000 for the three months ended March 31, 2004, from $480,000 for the three
months ended March 31, 2003, and increased as a percentage of revenue to 3.0
percent from 2.6 percent. Portfolio Management outsources all of the collection
services to U.S. Operations and, therefore, has a relatively small fixed payroll
cost structure.
International Operations' payroll and related expenses increased $3.2
million to $12.3 million for the three months ended March 31, 2004, from $9.1
million for the three months ended March 31, 2003, and increased as a percentage
of revenue to 58.7 percent from 57.7 percent. The increase as a percentage of
revenue was primarily attributable to an increase in staff to handle an expected
increase in volume from certain existing clients that was experienced at the end
of the first quarter.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $7.6 million to $76.6 million for the three
months ended March 31, 2004, from $69.0 million for the three months ended March
31, 2003, and increased as a percentage of revenue to 38.1 percent from 36.5
percent. The increase in the percentage of revenue was primarily attributable to
the shift of more of the collection work to outside attorneys and other
third-party service providers. The increase in the percentage of revenue was
partially offset by the recognition of $1.6 million of previously deferred
revenue from the long-term collection contract for the three months ended March
31, 2004, as compared to an additional deferral of revenue of $1.0 million that
was recorded for the three months ended March 31, 2003. 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.
Depreciation and amortization. Depreciation and amortization decreased
slightly to $7.8 million for the three months ended March 31, 2004, from $7.9
million for the three months ended March 31, 2003. This decrease was the result
of lower depreciation resulting from less capital expenditures made during 2003
than in prior years. The lower capital expenditures in 2003 were due to
significant capital expenditures made in prior years that do not need to
repeated each year. These significant capital expenditures included expenditures
related to the relocation of our corporate headquarters and purchases of
predictive dialers and other equipment required to expand our infrastructure to
handle future growth.
Other income (expense). Interest and investment income included investment
income of $594,000 for the three months ended March 31, 2004, as compared to
$473,000 for the three months ended March 31, 2003, from the 50 percent
ownership interest in a joint venture that purchases utility, medical and other
various small balance accounts receivable. Interest expense decreased to $5.3
million for the three months ended March 31, 2004, from $5.8 million for the
three months ended March 31, 2003. This decrease was due to lower principal
balances as a result of debt repayments made in excess of borrowings against the
credit facility during 2003 and 2004, and lower interest rates. This decrease
was partially offset by Portfolio Management's additional nonrecourse borrowings
from CFSC Capital Corp. XXXIV to purchase accounts receivable.
Income tax expense. Income tax expense for the three months ended March 31,
2004, increased to $8.9 million, or 41.4 percent of income before income tax
expense, from $7.2 million, or 37.9 percent of income before income tax expense,
for the three months ended March 31, 2003. The increase in the effective tax
rate was primarily attributable to the liability recorded related to the
proposed settlement offer we made during the three months ended March 31, 2004
related to the Federal Trade Commission's claim against us for violations of the
Fair Credit Reporting Act relating to certain aspects of our credit reporting
practices during 1999 and 2000. The Company received incorrect information from
the prior service provider at the time of transition and we believe that we may
assert certain claims for indemnification from the owners of the consumer
accounts. The expense recorded for the claim is not deductible for taxes
purposes. However, the reimbursement from the indemnification, if any, may be
taxable. As a result, the nondeductible expense results in an increase in the
effective rate for the first quarter of 2004.
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.
-21-
We believe that funds generated from operations, together with existing
cash and available borrowings under our credit agreement, will be sufficient to
finance our current operations, planned capital expenditure requirements, and
internal growth at least through the next twelve months. However, we could
require additional debt or equity financing if we were to make any significant
acquisitions for cash during that period.
The cash flow from our contingency collection business and our purchased
portfolio business is dependent upon our ability to collect from consumers and
businesses. Many factors, including the economy and our ability to hire and
retain qualified collectors and managers, are essential to our ability to
generate cash flows. Fluctuations in these trends that cause a negative impact
on our business could have a material impact on our expected future cash flows.
Cash Flows from Operating Activities. Cash provided by operating activities
was $33.5 million for the three months ended March 31, 2004, compared to $17.3
million for the three months ended March 31, 2003. The increase in cash provided
by operations was partially attributable to a $7.5 million increase in accounts
payable and accrued expenses for the three months ended March 31, 2004, as
compared to an $806,000 increase for the same period in the prior year. A
portion of the increase was also attributable to the transfer of $4.5 million
out of restricted cash during the first quarter of 2004 to repay a portion of
the securitized nonrecourse debt. A portion of the increase in cash provided by
operations was partially attributable to a $6.2 million increase in income taxes
payable for the three months ended March 31, 2004, as compared to a $2.8 million
increase for the same period in the prior year. The increase in income taxes
payable for the three months ended March 31, 2004 was larger than the same
period in 2003 because there was an overpayment of income taxes as of December
31, 2003, due to favorable tax adjustments during 2003.
Cash Flows from Investing Activities. Cash provided by investing activities
was $5.8 million for the three months ended March 31, 2004, compared to cash
used in investing activities of $3.3 million for the three months ended March
31, 2003. The increase in cash from investing activities was primarily
attributable to a reduction in purchases of accounts receivable. The lower
purchases during the three months ended March 31, 2004, were primarily a result
of a purchase entered into during the first quarter of 2004 for $9.2 million
that was not completed until April 1, 2004. In addition, $2.4 million of the
purchase price of portfolios acquired during the first quarter of 2004 were
deferred into future periods, compared to $911,000 of purchase price deferrals
during the first quarter of 2003.
Cash Flows from Financing Activities. Cash used in financing activities was
$21.0 million for the three months ended March 31, 2004, compared to $8.8
million for the three months ended March 31, 2003. The increase in cash used in
financing activities the first quarter of 2004 resulted from higher repayments
of borrowings under our senior credit facility, nonrecourse debt used to
purchase large accounts receivable portfolios, and securitized nonrecourse debt.
The increase in cash used in financing activities was also attributable to
borrowings of nonrecourse debt during the first quarter of 2003 to fund
purchases of accounts receivable portfolios by NCO Portfolio.
Credit Facility. On August 13, 2003, we amended our credit agreement with
Citizens Bank of Pennsylvania, ("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, referred to as 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 until the Maturity Date. The
remaining balance outstanding under the term loan and the balance under the
revolving credit facility will become due on the Maturity Date. As of March 31,
2004, there was $47.9 million available under the revolving credit facility.
The credit agreement contains certain financial and other covenants, such
as maintaining net worth and funded debt to EBITDA requirements, and includes
restrictions on, among other things, acquisitions, the incurrence of additional
debt, the issuance of equity, and distributions to shareholders. If an event of
default, such as failure to comply with covenants, material adverse change, or
change of control, were to occur under the credit agreement, the lenders would
be entitled to declare all amounts outstanding under it immediately due and
payable. As of March 31, 2004, we were in compliance with all required financial
covenants and we were not aware of any events of default.
-22-
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, referred to as Notes, in a private placement pursuant to Rule 144A and
Regulation S under the Securities Act of 1933. The Notes are convertible into
our common stock at an initial conversion price of $32.92 per share. We used the
$121.3 million of net proceeds from this offering to repay debt under our credit
agreement.
Nonrecourse Debt. In August 2002, NCO Portfolio entered into a four-year
financing agreement with CFSC Capital Corp. XXXIV, referred to as Cargill, to
provide financing for larger purchases of accounts receivable at 90 percent of
the purchase price, unless otherwise negotiated. Cargill, at their sole
discretion, has the right to finance any purchase of $4.0 million or more.
Cargill may or may not choose to finance a transaction. This agreement gives NCO
Portfolio the financing to purchase larger portfolios that they may not
otherwise be able to purchase, and has no minimum or maximum credit
authorization. Borrowings carry interest at the prime rate plus 3.25 percent
(prime rate was 4.00 percent at March 31, 2004) and are nonrecourse to NCO
Portfolio and us, except for the assets financed through Cargill. Debt service
payments equal total collections less servicing fees and expenses until each
individual borrowing is fully repaid and NCO Portfolio's original investment is
returned, including interest. Thereafter, Cargill is paid a residual of 40
percent of collections, less servicing costs, unless otherwise negotiated.
Individual loans are required to be repaid based on collections, but not more
than two years from the date of borrowing. Total debt outstanding under this
facility as of March 31, 2004, was $14.5 million, including $5.5 million of
accrued residual interest. As of March 31, 2004, NCO Portfolio was in compliance
with all of the financial covenants.
OFF-BALANCE SHEET ARRANGEMENTS
NCO Portfolio has a 50 percent ownership interest in a joint venture,
InoVision-MEDCLR-NCOP Ventures, LLC, referred to as the Joint Venture, with IMNV
Holdings, LLC, referred to as IMNV. The Joint Venture was established in 2001 to
purchase utility, medical and other various small balance accounts receivable
and is accounted for using the equity method of accounting. Included in "other
assets" on the balance sheets was NCO Portfolio's investment in the Joint
Venture of $4.0 million and $5.1 million as of December 31, 2003 and March 31,
2004, respectively. Included in the statements of income, in "interest and
investment income," was $473,000 and $594,000 for the three months ended March
31, 2003 and 2004, respectively, representing NCO Portfolio's 50 percent share
of operating income from this unconsolidated subsidiary.
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. A 10 percent change in the foreign currency exchange rates
is not expected to have a material impact on our business. 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.
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: goodwill, revenue recognition for purchased
accounts receivable, allowance for doubtful accounts, notes receivable 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
2003 financial statements contained in our Annual Report on Form 10-K for the
year ended December 31, 2003. During the three months ended March 31, 2004, we
did not make any material changes to our estimates or methods by which estimates
are derived with regard to our critical accounting policies.
-23-
IMPACT OF RECENTLY ISSUED AND PROPOSED ACCOUNTING PRONOUNCEMENTS
SOP 03-3 Accounting for Certain Loans or Debt Securities Acquired in a
Transfer. We currently follow the accounting guidance in Practice Bulletin #6
for the accounting for purchased accounts receivable portfolios. Practice
Bulletin #6 has been superceded by SOP 03-3 - Accounting for Certain Loans or
Debt Securities Acquired in a Transfer. SOP 03-3 is effective for loans acquired
in fiscal years beginning after December 15, 2004, although early adoption is
permitted. SOP 03-3 applies 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. SOP 03-3 addresses accounting for
differences between contractual and expected cash flows from an investor's
initial investment in certain loans when such differences are attributable, in
part, to credit quality. SOP 03-3 also addresses such loans acquired in
purchased business combinations.
SOP 03-3 limits the revenue that may be accrued to the excess of the
estimate of expected cash flows over a portfolio's initial cost of accounts
receivable acquired. SOP 03-3 requires that the excess of the contractual cash
flows over expected cash flows not be recognized as an adjustment of revenue,
expense, or on the balance sheet. SOP 03-3 freezes the internal rate of return,
referred to as the 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 is written down to maintain the original IRR. Increases in expected
cash flows are to be recognized prospectively through adjustment of the IRR over
a portfolio's remaining life. Loans acquired in the same fiscal quarter with
common risk characteristics may be aggregated for the purpose of applying this
SOP. We are in the process of determining the effect SOP 03-3 will have on our
financial position and results of operations.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities".
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," referred to as FIN 46. 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. The
consolidation requirements apply immediately to variable interest entities
created after January 31, 2003, and apply to existing variable interest entities
in the first fiscal year or interim period beginning after June 15, 2003. On
January 1, 2004, we adopted FIN 46. We have a $10.9 million note receivable and
a $5.6 million note receivable included in our balance sheet under current and
long-term other assets as of March 31, 2004. These notes receivable are from two
separate companies that comprised our Market Strategy division that were sold
during 2000. Under FIN 46, the companies that issued these notes receivable are
considered variable interest entities. Based on our evaluation of these variable
interest entities, we are not required to consolidate theses entities under FIN
46.
-24-
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
Our management, with participation of our chief executive officer and chief
financial officer, conducted an evaluation as of the end of the period covered
by this report, of the effectiveness of our disclosure controls and procedures,
as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures were effective in reaching a reasonable level of
assurance that management is timely alerted to material information relating to
us during the period when our periodic reports are being prepared.
During the quarter ended March 31, 2004, there has not occurred any change
in our internal control over financial reporting, as defined in Exchange Act
Rule 13a-15(f), that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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.
-25-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
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. During the first quarter of
2004, the Company made a settlement offer for this matter to the FTC,
although no assurance can be given that a settlement will be reached. In
the event that the Company is required to pay an assessment, it may assert
certain claims for indemnification from the owners of the consumer
accounts. In connection with the proposed settlement offer made in the
first quarter of 2004, the Company recorded its expected exposure to this
claim.
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 the above 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.
The landlord and the former landlord filed counter-claims against the
Company. 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 and alleging, among other things, that they
breached their fiduciary duties to the Company.
In January 2004, the Court, in ruling on the preliminary objections,
allowed the former landlord defendants' suit to proceed, but struck from
the complaint the breach of fiduciary duty allegations asserting violations
of duties owed by individual officers to the Company.
-26-
Other:
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, Use of Proceeds, and Issuer Purchases of Equity
Securities
----------------------------------------------------------------------
None - not applicable
Item 3. Defaults Upon Senior Securities
-------------------------------
None - not applicable
Item 4. Submission of Matters to a Vote of Shareholders
-----------------------------------------------
A special meeting of shareholders of the Company was held on March 26,
2004. At this meeting, the shareholders approved the merger contemplated by
agreement dated December 12, 2003 among NCO Group, Inc., NCPM Acquisition
Corporation, a wholly-owned subsidiary of NCO Group, Inc., and NCO
Portfolio Management, Inc. as follows:
For Against Abstain
--- ------ -------
19,304,035 41,211 3,637
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 pursuant to Rule 13a-14(a)
promulgated under the Exchange Act.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
promulgated under the Exchange Act.
32.1 Certification of the Company's Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
-27-
(b) Reports on Form 8-K
Date of
Filing / Furnishing Item Reported
------------------- -------------
3/29/04 Item 5 and Item 7 - Press release announcing completion of the acquisition of the
minority interest of NCO Portfolio Management, Inc.
3/8/04 Item 7, Item 9 and Item 12 - Press release announcing presentation at the JMP
Securities Conference on March 10, 2004.
3/3/04 Item 5 and Item 7 - Announcement of the second amendment to the acquisition
agreement for RMH Teleservices, Inc.
2/13/04 Item 7, Item 9 and Item 12 - Conference call transcript from the earnings release for
the fourth quarter of 2003.
2/10/04 Item 7, Item 9 and Item 12 - Press release regarding earnings for the fourth quarter
of 2003.
1/23/04 Item 5 and Item 7 - Press release related to the first amendment to the acquisition
agreement for RMH Teleservices, Inc.
-28-
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: May 10, 2004 By: Michael J. Barrist
------------------
Michael J. Barrist
Chairman of the Board, President
and Chief Executive Officer
(principal executive officer)
Date: May 10, 2004 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)
-29-
Exhibit Index
Exhibit No. Description
- ----------- -----------
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) promulgated under the Exchange Act.
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) promulgated under the Exchange Act.
32.1 Certification of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.