-----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, F4WqhRczIr7/6FALX85gPXmQDl6DGkVgDV7Fj3cwl3O9g/NS/OY+pkBoy/Ax8ERN cSOswuzBdKcd/ftXXsWljA== 0000950116-97-000689.txt : 19970409 0000950116-97-000689.hdr.sgml : 19970409 ACCESSION NUMBER: 0000950116-97-000689 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970122 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970408 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 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-21639 FILM NUMBER: 97576602 BUSINESS ADDRESS: STREET 1: 1740 WALTON RD CITY: BLUE BELL STATE: PA ZIP: 19422-0987 BUSINESS PHONE: 6108321440 8-K/A 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ----------------------------------- Date of Report (Date of earliest event reported): January 22, 1997 NCO Group, Inc. ------------------------------------------------------ (Exact name of Registrant as specified in its charter)
Pennsylvania 0-21639 23-2858652 - ------------------------------------ ------------------------------- --------------------------------- (State or other jurisdiction of (Commission File Number) (I.R.S. Employer incorporation or organization) Identification Number)
1740 Walton Road Blue Bell, Pennsylvania 19422-0987 ---------------------------------------------------------- (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (610) 832-1440 -------------- =============================================================================== NCO Group, Inc. is amending Item 7(a) and Item 7(b) of: (i) its Current Report on Form 8-K filed with the Securities and Exchange Commission on February 6, 1997 with respect to the acquisition of the stock of Goodyear & Associates, Inc. ("Goodyear") to supply certain financial statements and pro forma financial information; (ii) its Current Report on Form 8-K filed with the Securities and Exchange Commission on February 14, 1997 with respect to the acquisition of substantially all of the assets of Tele-Research Center, Inc. and Strategic Information, Inc. (collectively, "TRC") to supply certain pro forma financial information and to indicate that no financial statements are required or are being filed with respect to such acquisition; and (iii) its Current Report on Form 8-K filed with the Securities and Exchange Commission on February 18, 1997 with respect to the acquisition of substantially all of the assets of CMSA/R Services, Inc. ("CMSA/R") to supply certain financial statements and pro forma financial information. Based on a review of the requirements of Form 8-K and Regulation S-X, the Company believes that financial statements and pro-forma financial information with respect to the Goodyear, TRC and CMSA/R acquisitions are not required; however, the Company is voluntarily providing the information contained herein. Item 7. Financial Statements and Exhibits. The following financial statements and pro forma financial information are being filed as part of this report: (a) Financial Statements of Businesses Acquired. Financial Statements of Goodyear: Report of Independent Accountants Balance Sheets as of December 31, 1996 and 1995 Statements of Operations and Retained Earnings for the years ended December 31, 1996 and 1995 Statements of Cash Flows for the years ended December 31, 1996 and 1995 Notes to Financial Statements Financial Statements of CMSA/R: Report of Independent Accountants Balance Sheets as of December 31, 1996 and 1995 Statements of Income for the years ended December 31, 1996 and 1995 Statements of Common Stockholder's Equity for the years ended December 31, 1996 and 1995 Statements of Cash Flows for the years ended December 31, 1996 and 1995 Notes to Financial Statements -1- (b) Pro Forma Financial Information. Basis of Presentation Pro Forma Consolidated Balance Sheets as of December 31, 1996 Pro Forma Consolidated Statements of Income for the year ended December 31, 1996 Notes to Consolidated Pro Forma Financial Statements -2- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NCO GROUP, INC. By: /s/ Steven L. Winokur ---------------------------- Vice President, Finance and Chief Financial Officer Date: April 7, 1997 -3- Coopers Coopers & Lybrand L.L.P. & Lybrand a professional services firm REPORT ON AUDITS OF FINANCIAL STATEMENTS OF GOODYEAR & ASSOCIATES, INC. as of December 31, 1996 and 1995 F-1 Coopers Coopers & Lybrand L.L.P. & Lybrand a professional services firm REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Stockholder Goodyear & Associates, Inc.: We have audited the accompanying balance sheets of Goodyear & Associates, Inc. (the "Company") as of December 31, 1996 and 1995, and related statements of operations and retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Goodyear & Associates, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand, LLP Charlotte, North Carolina January 10, 1997 F-2 GOODYEAR & ASSOCIATES, INC. BALANCE SHEETS December 31, 1996 and 1995 ---------- ASSETS 1996 1995 ------ ---- ---- Current assets: Cash $161,490 $ 4,975 Cash held for clients 83,124 437,430 Accounts receivable 435,774 428,112 Prepaid expenses 53,964 51,219 ---------- ---------- Total current assets 734,352 921,736 Furniture and equipment, net 514,110 461,485 Cash surrender value of life insurance policies 26,777 24,119 ---------- ---------- $1,275,239 $1,407,340 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current portion of capital lease obligations $ 82,117 $ 68,249 Current portion of long-term debt 33,590 Accounts payable 52,252 19,476 Accrued liabilities 157,431 126,783 Income taxes payable 11,200 9,900 Collections due to clients 83,124 437,430 ---------- ---------- Total current liabilities 386,124 695,428 Capital lease obligations, net of current portion 95,041 113,035 Long-term debt, net of current portion 5,912 Deferred income taxes 53,306 35,306 ---------- ---------- Total liabilities 534,471 849,681 ---------- ---------- Stockholder's equity: Common stock, $10 par value; 10,000 shares authorized; 500 shares issued and outstanding 5,000 5,000 ---------- ---------- Retained earnings 735,768 552,659 ---------- ---------- Total stockholder's equity 740,768 557,659 ---------- ---------- $1,275,239 $1,407,340 ========== ========== The accompanying notes are an integral part of the financial statements. F-3 GOODYEAR & ASSOCIATES, INC. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS for the years ended December 31, 1996 and 1995 ---------- 1996 1995 ---- ---- Operating revenue $5,454,500 $4,030,557 Operating expenses 5,128,774 3,747,742 ---------- ---------- Operating income 325,726 282,815 ---------- ---------- Other income (expense): Loss on disposition of assets (41,901) Interest expense (27,253) (25,099) Other income 1,636 34,353 ---------- ---------- (25,617) (32,647) ---------- ---------- Income before income taxes 300,109 250,168 Provision for income taxes 117,000 100,000 ---------- ---------- Net income 183,109 150,168 Retained earnings, beginning of year 552,659 402,491 ---------- ---------- Retained earnings, end of year $ 735,768 $ 552,659 ========== ========== The accompanying notes are an integral part of the financial statements. F-4 GOODYEAR & ASSOCIATES, INC. STATEMENTS OF CASH FLOWS for the years ended December 31, 1996 and 1995 ----------- 1996 1995 ---- ---- Cash flows from operating activities: Net income $183,109 $150,168 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 169,323 106,820 Deferred income taxes 18,000 12,100 Loss on disposition of furniture and equipment 41,901 Changes in operating assets and liabilities: Accounts receivable (7,662) (26,214) Prepaid expenses (2,745) (35,094) Accounts payable 32,776 19,476 Accrued liabilities 30,648 3,097 Income taxes payable 1,300 (135,668) -------- -------- Net cash provided by operating activities 424,749 136,586 -------- -------- Cash flows from investing activities: Additions to furniture and equipment (114,129) (184,386) Increase in cash surrender value of life insurance policies (2,658) (3,581) Proceeds from sale of furniture and equipment 15,441 -------- -------- Net cash used in investing activities (116,787) (172,526) -------- -------- Cash flows from financing activities: Cash overdraft 22,968 Proceeds from long-term debt 75,000 50,000 Repayment of long-term debt (114,502) (10,498) Repayment of capitalized lease obligations (111,945) (59,851) -------- -------- Net cash provided by (used in) by financing activities (151,447) 2,619 -------- -------- Net increase (decrease) in cash 156,515 (33,321) Cash, beginning of year 4,975 38,296 -------- -------- Cash, end of year $ 161,490 $ 4,975 ========= ======== Supplemental disclosure of cash flow information: Cash paid for interest $ 27,253 $ 25,099 ========= ======== Cash paid for income taxes $ 98,326 $193,647 ========= ======== Noncash transaction, lease obligation incurred for equipment $ 107,819 $186,986 ========= ======== The accompanying notes are an integral part of the financial statements. F-5 GOODYEAR & ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS ------------ 1. Description of Organization and Summary of Significant Accounting Policies: ORGANIZATION -- Goodyear & Associates, Inc. (The "Company") was incorporated, under the laws of the State of North Carolina, on July 29, 1974. The Company is engaged principally in the collection of past due accounts for corporate customers principally located in the southeastern United States. Approximately forty-six percent of the Company's accounts receivable at December 31, 1996 were due from four customers who are owned by a common parent. USE OF ESTIMATES -- 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 periods. Actual results could differ from those estimates. CASH -- Cash consists principally of demand deposits which are held by two high-quality financial institutions. CASH HELD FOR CLIENTS -- Cash held for clients consists primarily of demand deposits resulting from cash collected on behalf of and payable to the Company's clients. FURNITURE AND EQUIPMENT -- Furniture and equipment are carried at cost, net of accumulated depreciation and amortization. Depreciation is provided primarily using the straight-line method over the estimated useful lives of the assets or lease term, if shorter. Additions and improvements are capitalized and repair and maintenance costs are charged to expenses as incurred. INCOME TAXES -- The Company has adopted the provisions of Financial Accounting Standard (FAS) 109, "Accounting for Income Taxes", for the purposes of reporting deferred income tax liabilities. Deferred income tax liabilities result principally from temporary differences in depreciation and amortization reported for income tax and financial reporting purposes. F-6 GOODYEAR & ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------------- 2. Furniture and Equipment: Furniture and equipment consist of the following at December 31: 1996 1995 ---- ---- Office furniture and equipment $ 730,272 $605,466 Vehicles 6,772 12,730 Equipment under capital lease 348,150 249,326 ---------- -------- 1,085,194 867,522 Less accumulated depreciation and amortization 571,084 406,037 ---------- -------- $ 514,110 $461,485 ========== ======== Depreciation expense was $105,390 and $69,060 in 1996 and 1995, respectively. Amortization expense on equipment under capital lease was $63,933 and $39,760 in 1996 and 1995, respectively. Accumulated amortization on equipment under capital lease was $112,352 and $48,418 at December 31, 1996 and 1995, respectively. 3. Lease Obligations: The Company leases certain equipment under capital leases. The lease obligations are collateralized by the related leased equipment. Future minimum leases payments at December 31, 1996 under the capital lease are as follows: 1997 $93,884 1998 75,906 1999 27,284 ------- 197,074 Less amounts representing interest 19,916 ------- Present value of net minimum lease payments 177,158 Less current portion 82,117 ------- $ 95,041 ======== F-7 GOODYEAR & ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------------ 3. Lease Obligations, continued: The Company leases office space and automobiles under noncancelable operating leases. Future minimum payments at December 31, 1996 under noncancelable operating leases as follows: 1997 $224,738 1998 215,678 1999 209,187 2000 34,864 ------- Total $684,467 ======== Total rental expense under the leases was $221,590 in 1996 and $171,761 in 1995. 4. Financing Arrangements: The Company has a line of credit of $200,000 expiring in March 31, 1997, with an interest rate of prime plus .50% at December 31, 1996. There were no borrowings under the line of credit at December 31, 1996. The Company intends to renew the line of credit under similar terms and conditions during 1997. 5. Income Taxes. The income tax provision for the years ended December 31 consisted of the following: 1996 1995 ---- ---- Current $ 99,000 $ 87,900 Deferred 18,000 12,100 -------- -------- $117,000 $100,000 ======== ======== Deferred income tax liabilities of $53,306 and $35,306 at December 31, 1996 and 1995, respectively, result principally from temporary differences in capital lease amortization and depreciation reported for income tax and financial reporting purposes. F-8 GOODYEAR & ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------------ 6. Related Party Transactions: As of December 31, 1995, the Company had a receivable from its stockholder included in accounts receivable in the amount of $16,127. During 1995, the Company paid $8,250 to its stockholder for rent of office space. 7. Retirement Plan: The Company sponsors a deferred 401(k) savings plan benefitting substantially all employees. In 1996 and 1995, the Company matched employee contributions at a rate of fifty (50) percent to a maximum of four (4) percent of employee annual salary. The Company's 401(k) contribution totaled approximately $41,000 in 1996 and $32,300 in 1995. F-9 ARTHUR ANDERSEN LLP CMS A/R SERVICES, INC. FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995 TOGETHER WITH AUDITORS' REPORT F-10 ARTHUR ANDERSEN LLP Report of Independent Public Accountants To the Board of Directors CMS A/R Services, Inc.: We have audited the accompanying balance sheets of CMS A/R SERVICES, INC. (a Michigan corporation and wholly owned subsidiary of CMS Utility Services, Inc.) as of December 31, 1996 and 1995, and the related statements of income, common stockholder's equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CMS A/R Services, Inc. as of December 31, 1996 and 1995 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Arthur Andersen, LLP Detroit, Michigan February 21, 1997 F-11 CMS A/R SERVICES, INC. BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995 ASSETS 1996 1995 ------ ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 356,078 $ 84,194 Accounts receivable: Affiliates 148,180 154,240 Customers 983,755 641,538 Other 78,033 88,122 ---------- ---------- Total current assets 1,566,046 968,094 ---------- ---------- PROPERTY AND EQUIPMENT: Furniture and fixtures 290,705 241,411 Office equipment 2,437,638 2,355,056 Capital leases 887,217 891,880 ---------- ---------- 3,615,560 3,488,347 Less -- accumulated depreciation and amortization (2,576,925) (2,682,570) ---------- ---------- Net property and equipment 1,038,635 805,777 ---------- ---------- OTHER ASSETS: Deferred taxes 876,000 967,000 Other 90,567 87,164 ---------- ---------- Total other assets 966,567 1,054,164 ---------- ---------- Total assets $3,571,248 $2,828,035 ========== ========== LIABILITIES AND COMMON STOCKHOLDER'S EQUITY 1996 1995 ------ ---- ---- CURRENT LIABILITIES: Accounts payable: Affiliates $ 254,773 $ 33,425 Trade 371,191 114,697 Note payable to affiliate 83,000 372,000 Capital lease obligations 183,862 190,835 Accrued expenses 448,808 378,877 ---------- ---------- Total current liabilities 1,341,634 1,089,834 ---------- ---------- NON-CURRENT LIABILITIES: Capital lease obligations 520,940 330,573 Deferred taxes 5,895 -- Postretirement benefits 697,022 784,716 Other 4,008 4,674 ---------- ---------- Total non-current liabilities 1,227,865 1,119,963 --------- --------- COMMON STOCKHOLDER'S EQUITY: Common stock, $1 par value; 100,000 shares authorized; 51,510 shares issued and outstanding 51,510 51,510 Additional paid-in capital 4,618,490 4,618,490 Revaluation capital 1,848 -- Accumulated deficit (3,670,099) (4,051,762) ---------- ---------- Total common stockholder's equity 1,001,749 618,238 ---------- ---------- Total liabilities and common stockholder's equity $3,571,248 $2,828,035 ========== ========== The accompanying notes are an integral part of the financial statements. F-12 CMS A/R SERVICES, INC. STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 1996 1995 ------ ------ OPERATING REVENUES $6,790,849 $5,031,023 OPERATING EXPENSES: Operating 5,618,532 4,279,390 Depreciation and amortization 295,021 263,213 General taxes 242,809 213,580 ---------- ---------- Total operating expenses 6,156,362 4,756,183 ---------- ---------- PRETAX OPERATING INCOME 634,487 274,840 OTHER INCOME (EXPENSE): Interest income 20,473 33,829 Interest expense (66,193) (37,039) ---------- ---------- Total other income (expense) (45,720) (3,210) ---------- ---------- INCOME BEFORE INCOME TAXES 588,767 271,630 PROVISION FOR INCOME TAXES 207,104 95,907 ---------- ---------- NET INCOME $ 381,663 $ 175,723 ========== ========== The accompanying notes are an integral part of the financial statements. F-13 CMS A/R SERVICES, INC. STATEMENTS OF COMMON STOCKHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 Additional Common Paid-in Revaluation Accumulated Stock Capital Capital Deficit ------ ---------- ----------- ----------- BALANCE AT JANUARY 1, 1995 $51,510 $4,618,490 $ -- $(4,227,485) Net income -- -- -- 175,723 ------- ---------- ------ ----------- BALANCE AT DECEMBER 31, 1995 51,510 4,618,490 -- (4,051,762) Net income -- -- -- 381,663 Change in unrealized investment -- gain -- -- 1,848 -- ------- ---------- ------ ----------- BALANCE AT DECEMBER 31, 1996 $51,510 $4,618,490 $1,848 $(3,670,099) ======= ========== ====== =========== The accompanying notes are an integral part of the financial statements. F-14 CMS A/R SERVICES, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 1996 1995 ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 381,663 $ 175,723 Adjustments to reconcile net income to net cash provided from operations-- Depreciation 295,021 263,213 Unrealized gain 1,848 -- Deferred taxes 96,895 70,000 Changes in assets and liabilities that provided (used) cash-- Accounts receivable (336,157) (411,462) Other current assets 10,089 (46,978) Other non-current assets (3,403) (1,237) Accounts payable 477,842 (43,333) Accrued expenses 69,931 287,941 Other non-current liabilities (88,360) (98,329) --------- --------- Net cash flows provided by operating activities 905,369 195,538 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES-- Purchases of property and equipment, net (133,380) (226,750) Proceeds from sale of equipment -- 21,094 --------- --------- Net cash flows used in investing activities (133,380) (205,656) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Capital lease payments of long-term debt (211,105) (111,340) Borrowings (payments) on note payable to affiliate, net (289,000) 167,000 --------- --------- Net cash flows provided by (used in) financing activities (500,105) 55,660 --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 271,884 45,542 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 84,194 38,652 --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 356,078 $ 84,194 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for-- Interest $ 66,193 $ 37,039 ========= ========= Income taxes $ 100,000 $ 78,000 ========= ========= SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS -- Property and equipment acquired through capital leases $ 394,499 $ 431,183 ========= ========= The accompanying notes are an integral part of the financial statements. F-15 CMS A/R SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (1) SIGNIFICANT ACCOUNTING POLICIES CMS A/R Services, Inc. (the "Company"), a Michigan corporation, is a wholly owned subsidiary of CMS Utility Services, Inc. (the "Parent") and a second-tier subsidiary of CMS Enterprises Company which is a wholly owned subsidiary of CMS Energy Corporation (the "Ultimate Parent"). The Company is engaged in the business of providing receivables management, teleservices and accounts collection services. Revenue Recognition Revenues are generally recognized at the time the related service is provided to the customer. During the years ended December 31, 1996 and 1995, 53% and 55%, respectively, of operating revenues and as of December 31, 1996 and 1995, 68% and 28%, respectively, of outstanding accounts receivable were from two customers (Consumers Energy Company and Commonwealth Edison Company). Income Taxes Pursuant to a Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", deferred tax assets and liabilities are determined at the end of each period based on differences between the financial statement bases of assets and liabilities and the tax bases of those same assets and liabilities, using the currently enacted statutory tax rates. Deferred income tax expense is measured by the change in the net deferred income tax assets or liabilities during the year. Property and Equipment Property and equipment consists of furniture, fixtures, equipment and capital leases (see Note 2), which are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the respective assets. Asset lives range from 5 to 7 years for furniture, fixtures and equipment. F-16 CMS A/R SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) Basis of Presentation The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumption 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. Cash Flows All highly liquid investments purchased with original maturities of three months or less are considered to be cash equivalents. (2) LEASES The Company leases certain property and equipment used in its operations. As of December 31, 1996, the future minimum lease payments under noncancelable capital and operating leases are as follows: Capital Operating Leases Leases ------ ------ 1997 $232,464 $171,456 1998 218,064 13,728 1999 203,664 -- 2000 158,709 -- -------- -------- Total minimum lease payments 812,901 $185,184 ======== Less -- amount representing interest 108,099 ------- Capital lease obligations $704,802 ======== Rent expense under operating leases amounted to $230,308 and $216,636 for the years ended December 31, 1996 and 1995, respectively. F-17 CMS A/R SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) (3) BENEFIT PLANS Pension The Company participates in the Ultimate Parent's trusted non-contributory defined benefit pension plan ("the Plan"). The Company's assets and accumulated and projected benefit obligations are not distinguishable from the aggregate amounts of such assets and obligations in the Plan. As of December 31, 1996 and 1995, the fair value of the Plan's assets exceed both the accumulated and projected benefit obligation. Pension expense for the years ended December 31, 1996 and 1995 was approximately $23,000 and $32,000, respectively. For the years ended December 31, 1996 and 1995, the weighted average discount rate was 7.75% and 7.5%, respectively, the assumed rate of compensation increase was 4.0% and 4.5%, respectively, and the expected long-term rate of return on assets was 9.25% for both years. Other Postretirement Benefits The Company provides health care and life insurance benefit plans for its employees and retirees through its participation in the Ultimate Parent's plans ("the postretirement plans"). The postretirement plans are noncontributory and are being funded under the Internal Revenue Code guidelines. As of December 31, 1996, the actuary assumed that retiree health care costs would increase 8.5 percent in 1997 then decrease gradually to 6 percent in 2004 and thereafter. The health care cost trend rate assumption significantly affects the amounts reported. For example, a 1 percentage point increase in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by approximately 16% and the aggregate of the service and interest cost components of net periodic postretirement benefits costs for 1996 by approximately 22%. F-18 CMS A/R SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) The weighted average discount rate used for the years ended December 31, 1996 and 1995 was 7.75% and 7.5%, respectively. The expected long-term rate on plan assets for the years ended December 31, 1996 and 1995 was 7.0% for both years. The 1996 and 1995 net postretirement benefits costs for the health care benefits and life insurance benefits were comprised of $24,152 and $30,346 for service, respectively, and $78,032 and $110,349 for interest, respectively. The Company's accumulated and projected benefit obligations are not distinguishable from the aggregate amounts of the postretirement plans. The recorded liability included in the accompanying Balance Sheets is based on an allocation of the Ultimate Parent's obligations under the postretirement plans. The obligations have been allocated to the Company primarily based on the number of its employees compared to the total number of employees of the Ultimate Parent. Supplemental Executive Retirement Plan ("SERP") Certain management employees qualify for benefits under the Ultimate Parent's SERP. The SERP expense for the years ended December 31, 1996 and 1995 was $6,785 and $290, respectively. In 1988, a trust was established and partially funded. The SERP is a non-qualified plan under the Internal Revenue Code and the trust assets are included in the consolidated assets of the Company. As of December 31, 1996 and 1995, the Company's trust assets were $90,567 and $87,614, respectively, and the projected benefit obligation was $57,239 and $50,454, respectively. An unrealized gain on the trust assets of $1,848 was recognized in 1996. (4) INCOME TAXES The Company joins the Ultimate Parent in filing a consolidated tax return. Income taxes are generally allocated to each subsidiary based on their separate taxable amount. The Company practices full deferred accounting for temporary differences. Any alternative minimum tax ("AMT") paid generally becomes a tax credit that can be carried forward indefinitely to reduce regular tax liabilities in future periods when regular taxes paid exceed the tax calculated for AMT. F-19 CMS A/R SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) The principal components of the Company's deferred tax assets (liabilities) recognized in the accompanying Balance Sheets as of December 31 are as follows: 1996 1995 --------- -------- Property and equipment $ 16,000 $ 35,000 AMT carryforward 639,000 685,000 Employee benefit obligations (includes postretirement benefits) 221,000 246,000 Other (5,895) 1,000 --------- -------- Total deferred tax assets, net $870,105 $967,000 ========= ======== Gross deferred tax assets $876,000 $967,000 Gross deferred tax liabilities (5,895) -- --------- -------- Total deferred tax assets, net $870,105 $967,000 ========= ======== The components of the Company's provision for income taxes for the years ended December 31 are as follows: 1996 1995 --------- -------- Current federal income taxes $110,209 $ 25,907 Deferred income taxes 96,895 70,000 --------- -------- Provision for income taxes $207,104 $ 95,907 ========= ======== F-20 CMS A/R SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) (5) RELATED PARTY TRANSACTIONS During the years ended December 31, 1996 and 1995, the Company transacted with several companies affiliated by common ownership. The Company invoiced Consumers Energy Company, an affiliate owned by the Ultimate Parent, $2,412,409 and $2,399,499 for collection and credit card services provided during the years ended December 31, 1996 and 1995, respectively. As of December 31, 1996 and 1995, $134,885 and $115,184, respectively, were included in accounts receivable - affiliates in the accompanying Balance Sheets. The Company funds its obligation under its postretirement benefit plan through the Ultimate Parent. For the year ended December 31, 1996, the Ultimate Parent had funded for the Company $189,878 of this obligation. This amount is included in accounts payable - affiliates as of December 31, 1996 in the accompanying Balance Sheets. (6) NOTE PAYABLE TO AFFILIATE The Company funds its working capital requirements through intercompany borrowings from the Parent and invests any cash in excess of current working capital requirements with the Parent. The Company was in a borrowing position of $83,000 and $372,000 as of December 31, 1996 and 1995, respectively. These are reflected in the accompanying Balance Sheets as note payable to affiliate. (7) SUBSEQUENT EVENT On January 21, 1997, the Company entered into an asset purchase agreement with an unrelated third party providing for the sale of substantially all of the Company's assets exclusively associated with its receivables management, teleservices and accounts collection business. F-21 Pro Forma Consolidated Financial Statements Basis of Presentation The Pro Forma Consolidated Balance Sheet as of December 31, 1996 and the Pro Forma Consolidated Statement of Income for the year ended December 31, 1996 are based on the historical financial statements of NCO Group, Inc. (NCO), Management Adjustment Bureau, Inc. (MAB), Goodyear & Associates, Inc. (Goodyear), CMS A/R Services (CMSA/R), and Tele-Research Center, Inc. (TRC). The Pro Forma Consolidated Balance Sheet has been prepared assuming the Goodyear, CMSA/R and TRC acquisitions occurred on December 31, 1996. The Pro Forma Consolidated Statement of Income for the year ended December 31, 1996 has been prepared assuming the MAB, Goodyear, CMSA/R and TRC acquisitions occurred on January 1, 1996. The Pro Forma Consolidated Financial Statements do not purport to represent what NCO's actual results of operations or financial position would have been had the acquisitions occurred as of such dates, or to project NCO's results of operations or financial position for any period or date, nor does it give effect to any matters other than those described in the notes thereto. In addition, the allocations of purchase price to the assets and liabilities of Goodyear, CMSA/R and TRC are preliminary and the final allocations may differ from the amounts reflected herein. The unaudited Pro Forma Consolidated Financial Statements should be read in conjunction with the other financial statements and notes thereto filed in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. F-22 NCO GROUP, INC. Pro Forma Consolidated Balance Sheets December 31, 1996 (Unaudited)
NCO Group, Goodyear & CMS A/R Tele-Research Acquisition Pro Forma ASSETS Inc. Associates Services Inc. Adjustments Combined ------------- ------------ ------------ -------------- ------------ ---------- Current assets: Cash and cash equivalents $12,058,798 $ 161,490 $ 356,078 $ 13,741 $ (4,500,000)(1) $ 4,609,457 (30,000)(1) (3,100,000)(2) (30,000)(2) (298,909)(2) (13,741)(3) (8,000)(3) Accounts receivable, trade, net of allowance for doubtful accounts 4,701,364 435,774 1,131,935 71,422 129,755 (2) 6,398,828 (71,422)(3) Other current assets 499,815 53,964 78,033 16,981 (48,266)(2) 583,546 (16,981)(3) ------------ ----------- ----------- ---------- ------------- ---------- Total current assets 17,259,977 651,228 1,566,046 102,144 (7,987,564) 11,591,831 Funds held in trust for clients Property and equipment, net 2,830,062 514,110 1,038,635 8,854 (264,110)(1) 3,615,329 (523,368)(2) 11,146 (3) Other assets: Intangibles, net of accumulated amortization 14,673,155 5,223,342 (1) 25,062,604 3,486,107 (2) 1,680,000 (3) Deferred taxes 70,760 876,000 (876,000)(2) 70,760 Deferred financing costs 684,390 684,390 Other assets 308,011 26,777 90,567 (90,567)(2) 334,788 ------------- ------------ ------------ ---------- --------------- ----------- Total other assets 15,736,316 26,777 966,567 - 9,422,882 26,152,542 ------------- ------------ ------------ ---------- --------------- ----------- Total assets $35,826,355 $1,192,115 $3,571,248 $ 110,998 $ 658,986 $41,359,702 ============= ============ ============ ========== =============== ===========
The accompanying notes are an integral part of this consolidated statement. F-23 NCO GROUP, INC. Pro Forma Consolidated Balance Sheets December 31, 1996 (Unaudited)
NCO Group, Goodyear & CMS A/R Tele-Research Acquisition Pro Forma LIABILITIES AND SHAREHOLDERS' EQUITY Inc. Associates Services Inc. Adjustments Combined ----------- ----------- --------- ------------- ------------ ---------- Current liabilities: Long-term debt, current portion $ 46,946 $ - $ - $ - $ - $ 46,946 Capitalized lease obligations, current portion 62,131 82,117 183,862 (183,862)(2) 144,248 Corporate taxes payable 216,709 11,200 227,909 Accounts payable 657,647 52,252 625,964 (625,964)(2) 709,899 Accrued expenses 1,044,536 157,431 448,808 38,425 270,000 (1) 1,783,967 220,000 (2) (448,808)(2) 92,000 (3) (38,425)(3) Accrued compensation and related expenses 1,376,982 26,496 (26,496)(3) 1,376,982 Unearned revenue, net of related costs 225,817 225,817 Other current liabilities 83,000 (83,000)(2) - ----------- ---------- -------- ----------- -------------- ---------- Total current liabilities 3,630,768 303,000 1,341,634 64,921 (824,555) 4,515,768 Long-term liabilities: Long term debt, net of current portion 1,091,901 900,000 (1) 5,591,901 2,000,000 (2) 1,600,000 (3) Capitalized lease obligations, net of current portion 385,683 95,041 520,940 (520,940)(2) 480,724 Other liabilities 53,306 706,925 (706,925)(2) 53,306 Unearned revenue, net of related costs 70,385 70,385 Commitments and contingencies Shareholders' equity: Preferred stock, no par value, 5,000,000 shares authorized, no shares issued and outstanding Common stock, no par value, 25,000,000 shares authorized, 6,713,447 and 4,213,447 shares issued and outstanding at December 31, 1996 and 1995 respectively 29,362,326 5,000 51,510 1,000 (5,000)(1) 29,362,326 (51,000)(2) (1,000)(3) Additional paid in capital 4,620,338 (4,620,338)(2) Unexercised warrants 396,054 396,054 Retained earnings 889,238 735,768 (3,670,099) 45,077 (735,768)(1) 889,238 3,670,099 (2) (45,077)(3) ----------- ---------- -------- ----------- -------------- ---------- Total shareholders' equity 30,647,618 740,768 1,001,749 46,077 (1,788,594) 30,647,618 ----------- ---------- -------- ----------- -------------- ---------- Total liabilities and shareholders' equity $35,826,355 $1,192,115 $3,571,248 $ 110,998 $ 658,986 $41,359,702 =========== ========== ========== ============ =========== ===========
The accompanying notes are an integral part of this consolidated statement. F-24 NCO GROUP, INC. Pro Forma Consolidated Statements of Income For the Year Ended December 31, 1996 (Unaudited)
Historical -------------------------------------------------------------------------- NCO Group, Management Goodyear & CMS A/R Tele-Research Inc. Adj. Bureau(4) Associates Services Inc. ------------- -------------------- ------ ------------- -------------- Revenue $30,760,452 $ 9,162,744 $5,454,500 $ 6,790,849 $ 1,917,607 Operating costs and expenses: Payroll and related expenses 14,651,384 5,870,416 3,339,926 2,933,754 1,139,791 Selling, general and administrative expenses 10,032,216 3,255,089 1,619,526 2,927,587 633,426 Depreciation and amortization expense 1,253,867 337,295 169,322 295,021 11,341 ----------- ------------- ---------- ------------ ------------ Total operating costs and expense 25,937,467 9,462,800 5,128,774 6,156,362 1,784,558 ----------- ------------- ---------- ------------ ------------ Income from operations 4,822,985 (300,056) 325,726 634,487 133,049 Other income (expense): Interest and investment income 242,380 20,473 Interest expense (817,951) (50,974) (27,253) (66,193) (75) Other 1,636 ----------- ------------- ---------- ------------ ------------ (575,571) (50,974) (25,617) (45,720) (75) ----------- ------------- ---------- ------------ ------------ Income before provision for income taxes 4,247,414 (351,030) 300,109 588,767 132,974 Income tax expense 612,748 83,924 117,000 207,104 ----------- ------------- ---------- ------------ ------------ Net income (loss) $ 3,634,666 $ (434,954) $ 183,109 $ 381,663 $ 132,974 =========== ============ ========= =========== ============ Pro forma: Historical income before income taxes Pro forma provision for income taxes Pro forma net income Pro forma net income per share Pro forma weighted average shares outstanding
RESTUBBED TABLE
Acquisition Pro Forma Adjustments Combined ----------- ---------- Revenue $54,086,152 Operating costs and expenses: Payroll and related expenses (376,175)(5) 26,358,496 (543,200)(6) (451,400)(8) (84,000)(9) (122,000) Selling, general and administrative expenses 18,467,844(7) Depreciation and amortization expense 126,462 (11) 2,193,308 ---------- ---------- Total operating costs and expense (1,353,366) 47,019,648 ---------- ---------- Income from operations 1,353,366 7,066,504 Other income (expense): Interest and investment income 262,853 Interest expense 359,470 (12) (602,976) Other 1,636 ---------- ---------- 359,470 (338,487) ---------- ---------- Income before provision for income taxes 1,712,836 6,728,017 Income tax expense 1,020,776 ---------- ---------- Net income (loss) $1,712,836 $5,707,241 ========== ========== Pro forma: Historical income before income taxes $6,728,017 Pro forma provision for income taxes 2,903,345(13) ---------- Pro forma net income $3,824,672 ========== Pro forma net income per share $ 0.61(14) ========== Pro forma weighted average shares outstanding 6,242,660 ==========
The accompanying notes are an integral part of this consolidated statement. F-25 Notes to Consolidated Pro Forma Financial Statements (Unaudited) To date, all of the Company's acquisitions have been accounted for under the purchase method of accounting with the results of the acquired companies included in the Company's statements of income beginning on the date of acquisition. (1) Gives effect to the acquisition of Goodyear, as if it occurred on December 31, 1996, for $4.5 million in cash and the issuance of a $900,000 convertible note payable to Goodyear's principal shareholder. In addition, the Company recognized $30,000 of direct closing costs related to the acquisition and accrued $270,000 of costs related to the termination of employees and other items. After allocating the purchase price to the estimated fair market value of the assets acquired and liabilities assumed, the Company recognized $5,223,342 of goodwill. (2) Gives effect to the acquisition of CMSA/R, as if it occurred on December 31, 1996, for $5.1 million in cash of which $2,000,000 was borrowed from the Company's credit facility. In addition, the Company recognized $30,000 of direct closing costs related to the acquisition and accrued $220,000 of costs related to the termination of employees and other items. After allocating the purchase price to the estimated fair market value of the assets acquired and liabilities assumed, the Company recognized $3,486,107 of goodwill. The historical balance sheet presented for CMSA/R includes assets and liabilities of the acquired company which were not acquired in this transaction. These assets and liabilities have been eliminated for pro forma purposes. (3) Gives effect to the acquisition of TRC, as if it occurred on December 31, 1996 for $1.6 million in cash which was borrowed from the Company's credit facility. In addition, the Company recognized $8,000 of direct closing costs related to the acquisition and accrued $92,000 of costs related to the acquisition. After allocating the purchase price to the estimated fair market value of the assets acquired and liabilities assumed, the Company recognized $1,680,000 of goodwill. The historical balance sheet presented for TRC includes assets and liabilities of the acquired company which were not acquired in this transaction. These assets and liabilities have been eliminated for pro forma purposes. (4) Represents the results of operations prior to the acquisition of MAB in September 1996. (5) Reflects the reduction in salary of MAB's principal shareholder (who is no longer active in the day-to-day operations of MAB's business), pursuant to a new employment agreement. (6) Reflects the elimination of payroll and related expenses relating to the elimination of certain redundant collection and administration personnel costs immediately identifiable at the time of the acquisition of MAB. F-26 Notes to Consolidated Pro Forma Financial Statements (Unaudited) (7) Includes a non-recurring charge of $190,000 recorded by MAB to account for potential losses related to certain repayment guarantees made on behalf of third parties. (8) Reflects the reduction in salary of Goodyear's principal shareholders (who are no longer active in the day-to-day operations of Goodyear's business), pursuant to a new employment agreement. (9) Reflects the elimination of payroll and related expenses relating to the elimination of certain redundant administration personnel costs immediately identifiable at the time of the acquisition of Goodyear. (10) Reflects the elimination of payroll and related expenses relating to the elimination of certain redundant administration personnel costs immediately identifiable at the time of the acquisition of CMSA/R. (11) Reflects amortization expense assuming MAB, Goodyear, CMSA/R and TRC had been acquired on January 1, 1996. In addition, reflects the elimination of depreciation and amortization expense related to assets revalued or not acquired by NCO as part of the acquisition of CMSA/R and TRC. (12) Reflects the elimination of interest expense on current and long-term debt which was not assumed with the acquisitions, or was repaid with the proceeds of the Company's initial public offering as if the repayment had occurred on January 1, 1996. Also reflects the interest expense attributable to additional borrowings on the Company's credit facility in connection with the acquisition of CMSA/R and TRC. (13) Reflects estimated provision for income taxes, at an assumed rate of 40% after giving consideration to non-deductible goodwill expenses, assuming the Company had converted from an S Corporation to a C Corporation on January 1, 1996. (14) Pro forma net income per share was computed by dividing the pro forma net income for the year ended December 31, 1996 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 share equivalents giving retroactive effect as of January 1, 1996 to the 46.56-for-one stock split and the issuance of 1,604,620 shares of common stock (at $13.00 per share) net of estimated underwriting discounts and offering expenses payable by the Company, to result in net proceeds sufficient to finance the $3.2 million S Corporation distribution and repay $15,000,000 of acquisition-related debt. F-27 -----END PRIVACY-ENHANCED MESSAGE-----