-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CLoKEKYjYUsr9nspnuXEcyECMpdy1Y9whcxT3dEs/zuPpwqfJ68KCNryZdl5HzNG 4DLOmWIsvhmGm46nfx/kFA== 0000950116-96-001480.txt : 19961224 0000950116-96-001480.hdr.sgml : 19961224 ACCESSION NUMBER: 0000950116-96-001480 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961223 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NCO GROUP INC CENTRAL INDEX KEY: 0001022608 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-CONSUMER CREDIT REPORTING, COLLECTION AGENCIES [7320] IRS NUMBER: 232858652 STATE OF INCORPORATION: PA FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21639 FILM NUMBER: 96685183 BUSINESS ADDRESS: STREET 1: 1740 WALTON ROAD CITY: BLUE BELL STATE: PA ZIP: 19422-0987 BUSINESS PHONE: 6108321440 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1996, or / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to - ------------------------------------------------------------------------------- COMMISSION FILE NUMBER 0-21639 - ------------------------------------------------------------------------------- NCO GROUP, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) PENNSYLVANIA - ------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) 1740 Walton Road, Blue Bell, Pennsylvania - ------------------------------------------------------------------------------- (Address of principal executive offices) 23-2858652 - ------------------------------------------------------------------------------- (IRS Employer Identification Number) 19422 - ------------------------------------------------------------------------------- (Zip Code) 610-832-1440 - ------------------------------------------------------------------------------- (Registrant's telephone number including area code) NOT APPLICABLE - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes____ No _____X*____ The number of shares outstanding of each of the issuer's classes of common stock was 6,713,447 shares of common stock, no par value, outstanding as of December 18, 1996 * Registrant became subject to the filing requirements of Securities Exchange Act of 1934 on November 6, 1996 when its registration statement on Form S-1 (Registration no. 333-11745) was declared effective. - -------------------------------------------------------------------------------- NCO GROUP, INC. - -------------------------------------------------------------------------------- INDEX PAGE Part I FINANCIAL INFORMATION Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Consolidated Balance Sheets - September 30, 1996 and December 31, 1995 3 Consolidated Statements of Income - Three months and nine months ended September 30, 1996 and 1995 5 Consolidated Statements of Cash Flows - Nine months ended September 30, 1996 and 1995 6 Pro Forma Consolidated Balance Sheet - September 30, 1996 8 Pro Forma Consolidated Statement of Income - Nine months ended September 30, 1996 10 Notes to Consolidated Financial Statements 11 Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15 PART II OTHER INFORMATION 19 Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Shareholders Item 5. Other information Item 6. Exhibits and Reports on 8-K Part I - Financial Information Item 1. Financial Statements NCO GROUP, INC. Consolidated Balance Sheets (Unaudited) September 30, December 31, ------------- ------------ ASSETS 1996 1995 ----------- ----------- Current assets: Cash and cash equivalents $ 1,089,983 $ 804,550 Available-for-sale securities 331,163 299,488 Accounts receivable, trade, net of 4,378,670 1,394,801 allowance for doubtful accounts Accounts receivable, purchased 21,134 7,745 Notes receivable 100,000 Prepaid expenses and other current assets 343,813 118,793 ----------- ----------- Total current assets 6,164,763 2,725,377 Funds held in trust for clients Property and equipment, net 2,705,095 637,133 Other assets: Goodwill, net of accumulated amortization 14,449,868 2,636,271 Covenants, net of accumulated amortization 201,875 Acquired account inventory, net 60,538 138,623 Deferred tax benefit 68,382 Deferred financing costs 350,615 279,014 Other assets 246,641 227,826 ----------- ----------- Total other assets 15,377,919 3,281,734 ----------- ----------- $24,247,777 $ 6,644,244 =========== =========== The accompanying notes are an integral part of this statement NCO GROUP, INC. Consolidated Balance Sheets (Unaudited)
September 30, December 31, ------------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995 ------------ ------------ Current liabilities: Long term debt, current portion $ 342,610 $ 46,171 Capitalized lease obligations, current portion 113,759 Corporate taxes payable 167,753 Accounts payable 547,772 221,562 Accrued expenses 1,097,085 565,734 Accrued repayment guarantee 190,004 Accrued compensation and related expenses 1,018,493 777,985 Unearned revenue, net of related costs 57,132 302,384 ------------ ------------ Total current liabilities 3,534,608 1,913,836 Funds held in trust for clients Long-term liabilities: Long term debt, net of current portion 15,049,500 2,592,906 Unearned revenue, net of related costs 393,675 86,155 Convertible note 1,000,000 Capitalized lease obligations, net of current portion 258,464 Commitments and contingencies Shareholders' equity: Common Stock 537,326 537,326 Unexercised warrants 177,294 177,294 Unrealized gain on securities 41,001 41,339 Retained earnings 3,255,909 1,378,261 Note receivable, Shareholder (82,873) ------------ ------------ Total Shareholders' equity 4,011,530 2,051,347 ------------ ------------ $ 24,247,777 $ 6,644,244 ============ ============
The accompanying notes are an integral part of this statement NCO GROUP, INC. Consolidated Statements of Income (Unaudited)
For the Three Months Ended For the Nine Months Ended September 30, September 30, ------------------------------------ --------------------------------------- 1995 1996 1995 1996 ---------------- ---------------- ------------------ ----------------- Revenues $ 3,480,485 $ 7,714,803 $ 9,026,743 $ 20,257,467 Operating costs and expenses: Payroll and related expenses 1,849,043 3,630,042 4,809,942 9,583,937 Selling, general and administrative 1,044,403 2,501,251 2,785,061 6,595,877 expenses Depreciation and amortization expense 90,691 400,476 206,561 823,290 ---------------- ---------------- ------------------ ----------------- 2,984,137 6,531,769 7,801,564 17,003,104 ---------------- ---------------- ------------------ ----------------- Income from operations 496,348 1,183,034 1,225,179 3,254,363 Other income (expense): Interest and investment income 18,569 33,419 43,129 80,834 Interest expense (54,451) (249,405) (102,756) (606,899) Loss on disposal of assets (49,082) ---------------- ---------------- ------------------ ----------------- (35,882) (215,986) (108,709) (526,065) ---------------- ---------------- ------------------ ----------------- Income before provision for income taxes 460,466 967,048 1,116,470 2,728,298 Income tax benefit, net of expense 1,328 1,328 ---------------- ---------------- ------------------ ----------------- Net income $ 460,466 $ 968,376 $ 1,116,470 $ 2,729,626 ================ ================ ================== ================= Pro forma: Historical income before income taxes $ 460,466 $ 967,048 $ 1,116,470 $ 2,728,298 Pro forma provision for income taxes 184,186 388,409 446,588 1,092,409 ================ ================ ================== ================= Pro forma net income $ 276,280 $ 578,639 $ 669,882 $ 1,635,889 ================ ================ ================== ================= Pro forma net income per share $ 0.06 $ 0.12 $ 0.14 $ 0.34 ================ ================ ================== ================= Pro forma weighted average shares outstanding 4,752,780 4,752,780 4,747,718 4,752,780 ================ ================ ================== =================
The accompanying notes are an integral part of this statement NCO GROUP, INC Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, --------------------------------------- 1995 1996 ------------------ ----------------- Cash flows from operating activities: Net income $ 1,116,470 $ 2,729,626 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 130,075 284,459 Loss on disposal of equipment 49,082 Gain on sale of securities (2,353) (338) Amortization of goodwill and covenants 76,485 538,396 Amortization of deferred financing costs 10,389 58,399 Provision for doubtful accounts 3,808 383 Changes in assets and liabilities, net of acquisitions: Accounts receivable, trade (536,021) (1,459,651) Notes receivable (38,943) 155,856 Acquired accounts inventory 79,409 78,085 Accounts receivable, purchased 44,038 (13,389) Prepaid expenses 2,311 (151,986) Deferred tax benefit (152,306) Other assets (17,308) 52,467 Accounts payable 25,997 326,210 Corporate taxes payable 17,487 167,753 Accrued expenses 597,781 (749,551) Accrued repayment guarantee 190,004 Accrued compensation and related costs (34,738) 240,508 Unearned revenue 3,908 (72,943) ---------------- --------------- Net cash provided by operating activities 1,527,877 2,221,982 Cash flows from investing activities: Purchase of property and equipment (126,855) (708,121) Purchase of securities (107,171) (159,562) Proceeds from sale of securities 79,929 127,887 Purchase of covenants (201,875) Payment of deferred financing costs (130,000) Net cash paid for acquisitions (1,734,633) (12,520,307) ---------------- --------------- Net cash used in investing activities (1,888,730) (13,591,978)
The accompanying notes are an integral part of this statement NCO GROUP, INC Consolidated Statements of Cash Flows (Continued) (Unaudited)
For the Nine Months Ended September 30, --------------------------------------- 1995 1996 ------------------ ----------------- Cash flows from financing activities: Repayment of notes payable (1,059,696) (125,466) Borrowings under credit agreement 2,450,000 12,550,000 Payment of fees to acquire new debt (134,163) Issuance of common stock 188,000 Decrease in notes receivable - shareholders 82,873 Distributions to shareholders (1,036,014) (851,978) ---------------- --------------- Net cash provided by financing activities 408,127 11,655,429 ---------------- --------------- Net increase in cash 47,274 285,433 Cash and equivalents at beginning of period 526,018 804,550 ---------------- --------------- ================ =============== Cash and equivalents at end of period $ 573,292 $ 1,089,983 ================ =============== Supplemental disclosures of cash flow information: Cash paid for interest 99,586 519,499 Noncash investing and financing activities: Note receivable - shareholder 82,873 Fair value of assets acquired 2,145,578 4,087,253 Liabilities assumed from acquisitions 416,334 Warrants issued with debt 177,294 Property acquired under capital leases 348,586 Convertible note payable, issued for acquisition 1,000,000
The accompanying notes are an integral part of this statement NCO GROUP, INC. Pro Forma Consolidated Balance Sheet September 30, 1996 (Unaudited)
Historical Offering Pro Forma ASSETS NCO Adjustments (1) Adjusted ----------------- -------------------- ------------------- Current assets: Cash and cash equivalents $ 1,089,983 $ 10,887,584 $ 11,977,567 Available-for-sale securities 331,163 331,163 Accounts receivable, trade, net of allowance 4,378,670 4,378,670 for doubtful accounts Accounts receivable, purchased 21,134 21,134 Notes receivable Prepaid expenses and other current assets 343,813 (135,491) 208,322 ----------------- -------------------- ------------------- Total current assets 6,164,763 10,752,093 16,916,856 Funds held in trust for clients Property and equipment, net 2,705,095 2,705,095 Other assets: Goodwill, net of accumulated amortization 14,449,868 14,449,868 Covenants, net of accumulated amortization 201,875 201,875 Acquired account inventory, net 60,538 60,538 Deferred tax benefit 68,382 68,382 Deferred financing costs 350,615 350,615 Other assets 246,641 246,641 ----------------- -------------------- ------------------- Total other assets 15,377,919 15,377,919 ----------------- -------------------- ------------------- $ 24,247,777 $ 10,752,093 $ 34,999,870 ================= ==================== ===================
The accompanying notes are an integral part of this statement NCO GROUP, INC. Pro Forma Consolidated Balance Sheet September 30, 1996 (Unaudited)
Historical Offering Pro Forma LIABILITIES AND SHAREHOLDERS' EQUITY NCO Adjustments (1) Adjusted ----------------- -------------------- ------------------- Current liabilities: Long term debt, current portion $ 342,610 $ $ 342,610 Capitalized lease obligations, current portion 113,759 113,759 Corporate taxes payable 167,753 167,753 Accounts payable 547,772 547,772 Accrued expenses 1,097,085 1,097,085 Accrued repayment guarantee 190,004 190,004 Accrued compensation and related expenses 1,018,493 1,018,493 Unearned revenue, net of related costs 57,132 57,132 ----------------- -------------------- ------------------- Total current liabilities 3,534,608 3,534,608 Funds held in trust for clients Long-term liabilities: Long term debt, net of current portion 15,049,500 (18,246,851) 49,500 3,246,851 Unearned revenue, net of related costs 393,675 393,675 Convertible note 1,000,000 1,000,000 Capitalized lease obligations, net of current portion 258,464 258,464 Commitments and contingencies Shareholders' equity: Common Stock 537,326 28,998,944 29,260,851 (275,419) Unexercised warrants 177,294 177,294 Unrealized gain on securities 41,001 41,001 Retained earnings 3,255,909 (3,246,851) 284,477 275,419 ----------------- -------------------- ------------------- Total Shareholders' equity 4,011,530 25,752,093 29,763,623 ----------------- -------------------- ------------------- $ 24,247,777 $ 10,752,093 $ 34,999,870 ================= ==================== ===================
(1) Gives effect to: (i) the issuance of 2.5 million shares of common stock at $13 per share, net of commissions and offering expenses, utilized to repay acquisition-related debt of $15.0 million and to fund the distribution of undistributed S Corporation earnings of $3.2 million. The accompanying notes are an integral part of this statement NCO GROUP, INC. Pro Forma Consolidated Statements of Income Nine months ended September 30, 1996 (Unaudited)
Historical ---------------------------------- Acquisition NCO MAB Adjustments --------------- --------------- ------------------- Revenues $ 20,257,467 $ 9,162,744 $ Operating costs and expenses: Payroll and related expenses 9,583,937 5,870,416 (1,025,025)(1) Selling, general and administrative expenses 6,595,877 3,255,089 Depreciation and amortization expense 823,290 337,295 29,515 (1) --------------- --------------- ------------------- 17,003,104 9,462,800 (995,510) --------------- --------------- ------------------- Income from operations 3,254,363 (300,056) 995,510 Other income (expense): Interest and investment income 80,834 Interest expense (606,899) (50,974) --------------- --------------- ------------------- (526,065) (50,974) --------------- --------------- ------------------- Income before tax provision 2,728,298 (351,030) 995,510 Pro forma provision for taxes (2) 1,328 (83,924) --------------- --------------- ------------------- Pro forma net income $ 2,729,626 $ (434,954) $ 995,510 =============== =============== =================== Pro forma net income per share Pro forma weighted average shares outstanding
The accompanying notes are an integral part of this statement
Offering Pro Forma As Pro Forma Adjustments Adjusted ------------------ ------------------ --------------------- Revenues $ 29,420,211 $ $ 29,420,211 Operating costs and expenses: Payroll and related expenses 14,429,328 14,429,328 Selling, general and administrative expenses 9,850,966 9,850,966 Depreciation and amortization expense 1,190,100 1,190,100 ------------------ ------------------ --------------------- 25,470,394 25,470,394 ------------------ ------------------ --------------------- Income from operations 3,949,817 3,949,817 Other income (expense): Interest and investment income 80,834 80,834 Interest expense (657,873) 479,668 (1) (178,205) ------------------ ------------------ --------------------- (577,039) 479,668 (97,371) ------------------ ------------------ --------------------- Income before tax provision 3,372,778 479,668 3,852,446 Pro forma provision for taxes (2) 1,328 (1,554,978) (2) (1,637,574) ------------------ ------------------ --------------------- Pro forma net income $ 3,374,106 $ (1,075,310) $ 2,214,872 ================== ================== ===================== Pro forma net income per share $ 0.36 ===================== Pro forma weighted average shares outstanding 6,107,400 =====================
(1) Gives effect to: (i) the acquisition of Management Adjustment Bureau as if it occurred on January 1, 1996; (ii) the reduction of certain redundant operating costs and expenses that were immediately identifiable at the time of the MAB acquisition; (iii) the elimination of interest expense associated with acquisition-related debt assumed to be repaid with offering proceeds;(iv)the issuance of 1,604,620 shares of common stock at $13 per share, net of commissions and offering expenses, sufficient to repay acquisition-related debt of $15.0 million and to fund the distribution of undistributed S Corporation earnings of $3.2 million. (2) Historical provision for taxes includes $155,309 adjustment for a deferred tax asset in NCO and $83,928 adjustment for a deferred tax liability in MAB attributable to the termination of their respective S Corporation elections. Pro forma net income tax has been computed as if the Company had been fully subject to federal and state income taxes for all periods presented. NCO GROUP, INC. Notes to Financial Statements (Unaudited) 1. Nature of Operations: NCO Group, Inc. (the "Company") is a leading provider of accounts receivable management and related services utilizing an extensive teleservices infrastructure. The Company's client base is comprised of companies in the following industries: education, financial services, healthcare, telecommunications, utilities and government entities. Effective September 3, 1996, the Company reorganized its corporate structure. At September 3, 1996, the shareholders of NCO Financial Systems, Inc. contributed each of their shares of common stock in exchange for one share common stock of the Company, a recently formed corporation. The Company effected a 46.56 for 1 stock split in September 1996 and increased the number of authorized shares to 5,000,000 shares of preferred stock and 25,000,000 shares of common stock. All per share and related amounts have been adjusted to reflect the stock exchange and stock split. Simultaneously with the contribution of NCO Financial Systems, Inc. common stock, three additional subsidiaries of NCO Group, Inc. were formed. Prior to September 3, 1996, NCO Financial Systems, Inc. was the only company within NCO Group, Inc. to have operations. 2. Summary of Significant Accounting Policies: Revenue Recognition: The Company generates revenues from contingency fees and contractual services. Contingency fee revenue is recognized upon collection of funds on behalf of clients. Contractual services revenue is deferred and recognized as services are performed. Income Taxes: The Company had elected to be taxed as an "S Corporation" under the Internal Revenue Code and the Pennsylvania Tax Code. While this election was in effect, no provision was made for income taxes by the Company since all income was taxed directly to, and losses and tax credits were utilized directly by, the shareholders of the Company. The Company terminated its S Corporation status on September 3, 1996. Upon termination of its S Corporation status, the Company adopted SFAS No. 109, "Accounting for Income Taxes". This standard requires an asset and liability approach that takes into account changes in tax rates when valuing the deferred tax amounts to be reported in the balance sheet. Upon termination of the S Corporation status and upon adoption of SFAS 109, the Company recorded a net deferred tax asset of $155,309, offset by a deferred tax liability of approximately $83,924. The net deferred tax asset results primarily from differences in the treatment of unearned revenue and acquired account inventory. The deferred tax liability results primarily from Management Adjustment Bureau, Inc. using the cash basis of accounting for income tax purposes and the accrual basis of accounting for financial reporting purposes. Credit Policy: The Company has two types of arrangements under which it collects its contingency fee revenue. For certain clients, the Company remits funds collected on behalf of the client, net of the related contingency fees while, for other clients, the Company remits gross funds, collected on behalf of clients, and bills the client separately for its contingency fees. Management carefully monitors its client relationships in order to minimize its credit risk and generally does not require collateral. In the event of collection delays from clients, management may at its discretion change from the gross remittance method to the net remittance method. Goodwill and Acquisition Costs: Goodwill represents the excess of purchase price over the fair market value of the net assets of the acquired business. Goodwill is amortized on a straight-line basis over 15 to 25 years. The recoverability of goodwill is periodically reviewed by the Company. In making such determination with respect to goodwill, the Company evaluates the operating cash flows of the underlying business which gave rise to such amount. Deferred Financing Costs: Deferred financing costs relate to debt issuance costs incurred which are capitalized and amortized over the term of the debt. Estimates Utilized in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Earnings Per Share: On September 3, 1996, the shareholders of NCO Financial Systems, Inc. (Note 1) contributed each of their shares of common stock in exchange for one share of the Company's common stock. The Company effected a 46.56-for-1 stock split in September 1996. All per share and related amounts contained in these financial statements and notes have been adjusted to reflect the stock exchange and stock split. Pro forma net income per share was computed by dividing the pro forma net income for the nine months ended September 30, 1996 and 1995 by the pro forma weighted average number of shares outstanding. Pro forma weighted average shares outstanding are based on the weighted average number of shares outstanding including common equivalent shares giving retroactive effect as of January 1, 1995 to the stock split. All outstanding options and warrants have been treated as common equivalent shares in calculating pro forma net income per share, using the treasury stock method and the initial public offering price of $13.00 per share, only when their effect would be dilutive. The pro forma weighted average number of shares outstanding have also been adjusted to include the number of common shares (250,000) that the Company would have needed to issue at the initial public offering price of $13.00 per share to fund the distribution of previously taxed but undistributed S Corporation earnings through the date on which the Company terminated its S Corporation status ($3,246,851). Interim Financial Information: The accompanying 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 normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 30, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 11, 1996, as amended. 3. Acquisitions: On September 5, 1996, the Company purchased all the outstanding stock of Management Adjustment Bureau, Inc. ("MAB") for $8,000,000 in cash and a $1,000,000 convertible note. The purchase price was allocated based upon the estimated fair market value of the acquired assets and liabilities which resulted in goodwill of $8,050,000. On January 3, 1996, the Company purchased certain assets of Trans Union Corporation Collections Division ("TCD") for $4,750,000 in cash. The purchase price was allocated based upon the estimated fair market value of property, accounts receivable and an agreement not to compete which resulted in goodwill in the amount of $3,681,000. On August 1, 1995, the Company purchased certain assets of Eastern Business Services, Inc. ("Eastern") for approximately $2,041,000 comprised of $1,625,000 in cash and $416,000 of liabilities assumed. The purchase price was allocated primarily based upon the estimated fair market values of accounts receivable and equipment purchased less notes payable and funds due to clients which resulted in goodwill in the amount of $1,812,000. 4. Funds Held in Trust for Clients: In the course of the Company's regular business activities as an accounts receivable management company, 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 in trust for clients and their offsetting liability of $4,010,726 and $1,426,709 at September 30, 1996 and 1995, respectively, have been shown net for financial statement presentation purposes. 5. Long-Term Debt: In July 1995, the Company entered into a revolving credit agreement which provided for borrowings up to $7,000,000 to be utilized for working capital and qualified acquisition indebtedness of the Company. The line of credit is collateralized by substantially all the assets of the Company. The revolving credit agreement contains, among other provisions, requirements for maintaining defined levels of working capital, net worth and various financial ratios, and restrictions on capital expenditures, qualified acquisitions, and distributions to shareholders. The Company recorded deferred charges of approximately $311,000 in connection with the acquisition of the revolving credit agreement, which consisted primarily of bank charges, legal fees and warrants issued to the bank exercisable into an aggregate of 175,531 shares of the Company's common stock. The warrants expire on July 31, 2005 and are currently exercisable at a nominal exercise price. In August 1996 the credit agreement was increased to $15,000,000 to provide financing for the acquisition of MAB and the bank received a warrant for 46,560 shares, exercisable at the initial public offering price, as consideration. The bank agreed to increase the credit agreement to $25,000,000 upon completion of the Company's initial public offering and received, as consideration, a warrant for an additional 18,500 shares, exercisable at the initial public offering price of $13.00 per share. The increase in the credit agreement to $25,000,000 was completed in December 1996. 6. Subsequent Events: On November 13, 1996, the Company completed its initial public offering, selling 2,875,000 shares of common stock including 375,000 over-allotment shares sold by existing shareholders. The Offering raised net proceeds of approximately $30.2 million for the Company. The Company used or intends to use the proceeds to reduce its long-term debt, pay S Corporation earnings to the shareholders as of September 3, 1996, and for working capital and other general corporate purposes including possible acquisitions. 7. Investment Considerations In analyzing whether to make, or to continue, an investment in the Company investors should consider, among other factors, the information contained in this Report on Form 10-Q and certain risk factors and other information more particularly described in the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 11, 1996, as amended. Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations The information contained in this Report on Form 10-Q, other than historical facts, contains forward-looking statements (as such term is defined in the Securities Exchange Act of 1934, and the regulations thereunder) including, without limitation, statements as to the Company's objective to grow through strategic acquisitions, the Company's ability to realize operating efficiencies in the integration of MAB, trends in the Company's future operating performance, the classification of the Company's investment portfolio, and statements as to 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 which 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 realize operating efficiencies in the integration of MAB, risks associated with growth and future acquisitions, fluctuations in quarterly operating results, and the other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission, including its Registration Statement on Form S-1, filed on September 11, 1996, as amended, can cause actual results and developments to be materially different from those expressed or implied by such forward-looking statements. Pro Forma Compared to Actual Results of Operations Pro forma operating data for the quarter ended September 30, 1996 and the nine months ended September 30, 1996 assume that the Management Adjustment Bureau, Inc. ("MAB") acquisition was consummated on January 1, 1996. Pro forma adjustments have been made to reflect the elimination of certain expenses that were immediately identifiable at the time of the acquisitions, including the immediate elimination of certain redundant collection and administrative personnel. At the time of the acquisition, MAB had a higher cost structure than the Company. The Company intends to leverage its infrastructure to realize additional operating efficiencies in order to bring the cost structure of MAB in line with NCO's current operating results. These other costs savings include (i) further reduction in payroll and related expenses relating primarily to redundant collections and administrative personnel, (ii) further reductions in facilities costs, and (iii) reduction of certain expenses such as telephone, mailing and data processing. Management believes it will realize these cost savings, although no assurances can be given that such cost savings will be realized. Due to the higher cost structures of the acquired business and the fact that all expected expense savings are not reflected in pro forma adjustments, certain pro forma operating percentages compare unfavorably to actual operating percentages for the periods under consideration. Quarter ended September 30, 1996 Compared to Quarter ended September 30, 1995 Revenue. Revenue increased $4.2 million or 121.7% to $7.7 million for the nine-month period ended September 30, 1996 from $3.5 million for the comparable period in 1995. Of this increase, $1.2 million was attributable to the MAB acquisition completed in September 1996, $1.8 million was attributable to the Collection Division of Trans Union Corporation ("TCD") acquisition, and $218,000 was attributable to the Eastern Business Services ("Eastern") acquisition. Additionally, the Company experienced 35.8% internal growth from the addition of new clients and a growth in business from existing clients. Revenue from other related services, which became an area of focus in 1996, increased $232,000 to $238,000 for the quarter ended September 30, 1996 from $6,000 for the comparable period in 1995. Payroll and related expenses. Payroll and related expenses increased $1.8 million to $3.6 million for the quarter ended September 30, 1996 from $1.8 million for the comparable period in 1995, but decreased as a percentage of revenue to 47.1% from 53.1%. The decrease in payroll and related expenses as a percentage of revenue was primarily the result of spreading the cost of management and administrative personnel over a larger revenue base and the increased utilization of "on-line" computer services and other outside services, as well as the elimination of duplicative administrative staff following the TCD and Eastern acquisitions. These efficiencies were offset in part by higher payroll and related expenses of MAB as a percentage of its revenue. The effect was minimal due to only one month of the operations of MAB being included in the income statements. Selling, general and administrative expenses. Selling, general and administrative expenses increased $1.5 million to $2.5 million for the quarter ended September 30, 1996, from $1.0 million for the comparable period in 1995, and increased as a percentage of revenue to 32.4% from 30.0%. A large part of the increase in selling, general and administrative expenses as a percentage of revenue was due to the increased costs associated with litigation management services performed by the Company on behalf of its clients in states where the laws are more conducive to the utilization of the legal process for recovery of debts. The Company also experienced increased costs as a result of the increased use of national data bases and credit reporting services associated with an increase in contingency based revenues. These increases were offset in part by operating efficiencies resulting from the TCD acquisition. The effect of the operations of MAB were minimal due to only one month of operations being included in the income statements. Depreciation and amortization. Depreciation and amortization increased to $400,000 for the quarter ended September 30, 1996 from $91,000 for the comparable period in 1995. Of this increase, $143,000 was a result of the MAB and TCD and Eastern acquisitions. The remaining $166,000 consisted of amortization of deferred financing charges and depreciation resulting from normal capital expenditures. Other income (expense). Interest expense increased $195,000 for the quarter ended September 30, 1996 from the comparable period in 1995, primarily due to increased borrowings associated with the acquisitions of MAB and TCD. Income tax benefit, net of expense. Income tax expense for the quarter ended September 30, 1996 was $154,000, of which $151,000 was current and $3,000 was deferred. This was offset by the recognition of a deferred tax benefit of $155,000 attributable to the termination of the S Corporation election by the Company. Net income. Net income was $968,000 and $460,000 for the quarter ended September 30, 1996 and 1995, respectively. Net income pro forma for taxes increased to $579,000 for the quarter ended September 30, 1996 from $276,000 for the comparable period in 1995, a 109.4% increase. Net income pro forma for taxes includes a provision for federal and state income taxes at an assumed rate of 40% for the quarters ended September 30, 1996 and 1995. Nine months ended September 30, 1996 Compared to Nine months ended September 30, 1995 Revenue. Revenue increased $11.2 million or 124.4% to $20.3 million for the nine-month period ended September 30, 1996 from $9.0 million for the comparable period in 1995. Of this increase, $1.2 million was attributable to the MAB acquisition completed in September 1996, $5.5 million was attributable to the TCD acquisition completed in January 1996, and $1.2 million was attributable to a full nine months of revenue from the Eastern acquisition in 1996 versus three months in 1995. This was partially offset by a decrease in revenue from the BRM acquisition to $938,000 for the nine months ended September 30, 1996 from $1.1 million for the comparable period in 1995. Additionally, the Company experienced 44.9% internal growth from the addition of new clients and a growth in business from existing clients. Of this internal growth, $1.3 million of the increase was due to a full nine months of revenue in 1996 from a government contract awarded in April 1995. Revenue from other related services, which became an area of focus in 1996, increased $819,000 to $921,000 for the nine months ended September 30, 1996 from $102,000 for the comparable period in 1995. Payroll and related expenses. Payroll and related expenses increased $4.8 million to $9.6 million for the nine months ended September 30, 1996 from $4.8 million for the comparable period in 1995, but decreased as a percentage of revenue to 47.3% from 53.3%. The decrease in payroll and related expenses as a percentage of revenue was primarily the result of spreading the cost of management and administrative personnel over a larger revenue base and the increased utilization of "on-line" computer services and other outside services, as well as the elimination of duplicative administrative staff following the TCD and Eastern acquisitions. These efficiencies were offset in part by higher payroll and related expenses of MAB as a percentage of its revenue. The effect was minimal due to only one month of the operations of MAB being included in the income statements. Selling, general and administrative expenses. Selling, general and administrative expenses increased $3.8 million to $6.6 million for the nine months ended September 30, 1996, from $2.8 million for the comparable period in 1995, and increased as a percentage of revenue to 32.6% from 30.9%. A large part of the increase in selling, general and administrative expenses as a percentage of revenue was due to the increased costs associated with litigation management services performed by the Company on behalf of its clients in states where the laws are more conducive to the utilization of the legal process for recovery of debts. In addition, the Company experienced increased costs as a result of the increased use of national data bases and credit reporting services associated with an increase in contingency based revenues. These increases were offset in part by operating efficiencies resulting from the TCD acquisition. The effect of the operations of MAB were minimal due to only one month of operations being included in the income statements. Depreciation and amortization. Depreciation and amortization increased to $823,000 for the nine months ended September 30, 1996 from $207,000 for the comparable period in 1995. Of this increase, $408,000 was a result of the MAB, TCD and Eastern acquisitions. The remaining $208,000 consisted of amortization of deferred financing charges and depreciation resulting from normal capital expenditures. Other income (expense). Interest expense increased $504,000 for the nine months ended September 30, 1996 from the comparable period in 1995, primarily due to increased borrowings associated with the acquisitions of MAB, TCD and Eastern. Also included in other income (expense) for nine months ended September 30, 1995 was a loss from the disposal of assets of $49,000. Income tax benefit, net of expense. Income tax expense for the nine months ended September 30, 1996 was $154,000, of which $151,000 was current and $3,000 was deferred. This was offset by the recognition of a deferred tax benefit of $155,000 attributable to the termination of the S Corporation election by the Company. Net income. Net income was $2.7 million and $1.1 million for the quarter ended September 30, 1996 and 1995, respectively. Net income pro forma for taxes increased to $1.6 million for the nine months ended September 30, 1996 from $670,000 for the comparable period in 1995, a 144.2% increase. Net income pro forma for taxes includes a provision for federal and state income taxes at an assumed rate of 40% for the quarters ended September 30, 1996 and 1995. Liquidity and Capital Resources Cash provided by operating activities was $2.2 million for the quarter ended September 30, 1996, and $1.5 million for the same period last year. The increase in cash provided by operations was primarily due to the increase in net income for the period to $2.7 million for the nine months ended September 30, 1996 compared to $1.1 million for the same period last year, and the increase in non-cash charges, primarily depreciation and amortization, to $881,000 for the nine months ended September 30, 1996 compared to $267,000 for the same period last year. These increases were offset by a $1.5 million increase in accounts receivable for the nine months ended September 30, 1996 compared to a $536,000 increase for the same period last year and a $102,000 increase in accounts payable and accrued expenses for the nine months ended September 30, 1996 compared to a $610,000 increase for the same period last year. Cash used in investing activities was $13.6 million for the nine months ended September 30, 1996 compared to $1.8 million for the same period last year. The increase in each period was primarily due to the acquisition of MAB, TCD and Eastern. In September 1996, the Company purchased all the outstanding stock of MAB at a cost of $8.0 million in cash and the issuance of a $1.0 million, five-year convertible note to the principal shareholder of MAB. The note is convertible into the Common Stock of the Company at the initial public offering price of $13.00 per share, and bears interest payable monthly at a rate of 8% per annum. In January 1996, the Company purchased all the assets of TCD at a cost of $4.8 million in cash. In August 1995, the Company purchased certain assets of Eastern for $1.6 million in cash and the assumption of a non-interest bearing note payable of $252,000 and certain other accounts payable in the amount of $209,000. The Company financed the cash portion of these acquisitions with bank borrowings. These acquisitions collectively resulted in goodwill of $13.5 million. Cash provided by financing activities was $11.7 million for the quarter ended September 30, 1996 compared with $386,000 for the same period last year. Bank borrowings have been the Company's primary source of cash from financing activities and have been used for the acquisition of MAB, TCD and Eastern and, along with cash provided by operations, for distributions to shareholders. The Company borrowed $12.6 million from its bank for the quarter ended September 30, 1996 and $2.5 million for the same period last year. Distributions to shareholders were $852,000 for the nine months ended September 30, 1996 and $1.0 million for the same period last year. In November 1996, the Company distributed undistributed S Corporation earnings of approximately $3.2 million using a portion of the net proceeds from the Company's initial public offering (the "Offering"). In July 1995 the Company entered into a revolving credit agreement which provided for borrowings up to $7.0 million at an interest rate equal to prime plus 1.375%, which was subsequently increased to $15 million, to be utilized for working capital and qualified acquisitions. As of September 30, 1996 and 1995, the outstanding balance under the revolving credit line was $15.0 million and $2.5 million, respectively. The balance of $15.0 million was subsequently paid off with a portion of the proceeds of the Offering. The revolving credit line is collateralized by substantially all the assets of the Company and includes certain financial covenants such as maintaining minimum levels of working capital, net worth and other financial ratios, and includes restrictions on, among other things, capital expenditures, qualified acquisitions, and distributions to shareholders. Subsequent to the Offering, the bank increased the revolving credit facility to $25.0 million and decreased the rate of interest to 2.5% over LIBOR. In connection with entering into the revolving credit agreement in July 1995, the Company recorded deferred charges of approximately $135,000 relating primarily to bank and legal fees. The Company also issued a warrant to the bank exercisable for an aggregate of 175,531 shares of the Company's common stock. The warrant expires on July 31, 2005 and is exercisable for nominal consideration. The warrant has been capitalized on the balance sheet as a deferred charge and is being amortized over the four-year life of the credit facility. In connection with the expansion of the line of credit in September 1996, the Company recorded deferred charges of $120,000 primarily relating to bank charges and legal fees. In addition, the Company issued an additional warrant to the bank for 46,560 shares of Common Stock at the initial public offering price of $13.00 per share. The Company also granted an additional warrant to purchase 18,500 shares of Common Stock at the initial public offering price of $13.00 per share in consideration for the commitment to increase the revolving credit facility to $25.0 million. The increase in the revolving credit facility was completed in December 1996. All the warrants are currently exercisable. On November 13, 1996, the Company completed its initial public offering, selling 2,875,000 shares of common stock including 375,000 over-allotment shares sold by existing shareholders. The Offering raised net proceeds of approximately $30.2 million for the Company. After offering expenses, repayment of acquisition debt and the distribution of S Corporation earnings, the Company has available for working capital and general corporate purposes, as well as possible future acquisitions, proceeds of approximately $10.9 million, in addition to existing cash of $1.1 million, as well as $25 million available for borrowing from the bank on the revolving credit facility. The Company believes that funds generated from operations, together with existing cash, the net proceeds from the Offering and available credit under its revolving credit line will be sufficient to finance its current operations and planned capital expenditure requirements and internal growth at least through 1997. However, the Company could require additional debt or equity financing if it were to make any significant acquisitions for cash. The Company has no current commitments or agreements with respect to any acquisitions, and there can be no assurance that any acquisitions will be consummated The Company accounts for corporate income taxes in accordance with the Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"). Upon the termination of the S Corporation election by NCO Financial Systems, Inc. on September 1, 1996 and upon application of SFAS No. 109, the Company recorded a deferred tax asset of $155,000, representing cumulative temporary differences. This deferred tax asset is offset by the $84,000 deferred tax liability recorded by MAB upon termination of its S Corporation election immediately prior to its acquisition by NCO Group, Inc. Part II. Other Information Item 1. Legal Proceedings None - not applicable Item 2. Changes in Securities Previously reported in the Company's Registration Statement on Form S-1 (Registration no. 333-11745) filed with the Securities and Exchange Commission on September 11, 1996, as amended. Item 3. Defaults Upon Senior Securities None - not applicable Item 4. Submission of Matters to a Vote of Shareholders By written consent dated September 27, 1996, shareholders unanimously approved: (i) the Amended and Restated Articles of Incorporation of the Company; (ii) the Amended and Restated Bylaws of the Company; (iii) the Company's Amended and Restated 1995 Stock Option Plan; (iv) the Company's 1996 Stock Option Plan; and (v) the Company's 1996 Stock Option Plan for Non-Employee Directors. Item 5. Other Information None - not applicable Item 6. Exhibits and Reports on 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K None 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: December 20, 1996 By: /s/ Michael J. Barrist ----------------------- Michael J. Barrist Chairman and Chief Executive Officer Date: December 20, 1996 By: /s/ Steven L. Winokur --------------------- Steven L. Winokur Vice President, Finance and Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1,089,983 331,163 4,492,341 92,537 0 6,164,764 3,574,465 868,370 24,247,777 3,534,608 0 0 0 537,326 3,474,204 24,247,777 20,257,467 20,257,467 0 0 16,922,024 81,080 526,065 2,728,298 (1,328) 2,729,626 0 0 0 2,729,626 .34 .34
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