-----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, JK9VNT5FKZdVktHVaOYFpoJ0l5tCfHN8Td95/WgDEM9hml05TUEEfA1LUNi9Zo22 rlZYtJrVIpIZ+73oMr2tdA== 0000950116-97-000998.txt : 19970520 0000950116-97-000998.hdr.sgml : 19970520 ACCESSION NUMBER: 0000950116-97-000998 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21639 FILM NUMBER: 97609247 BUSINESS ADDRESS: STREET 1: 1740 WALTON RD 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 March 31, 1997, 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 [X] No [ ] The number of shares outstanding of each of the issuer's classes of common stock was 7,058,625 shares of common stock, no par value, outstanding as of May 12, 1997 -1- NCO GROUP, INC. INDEX
PAGE Part I FINANCIAL INFORMATION Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Consolidated Balance Sheets - March 31, 1997 and December 31, 1996 3 Consolidated Statements of Income - Three months ended March 31, 1997 and 1996 4 Consolidated Statements of Cash Flows - Three months ended March 31, 1997 and 1996 5 Pro Forma Consolidated Statement of Income - Three months ended March 31, 1997 6 Notes to Consolidated Financial Statements 7 Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 PART II 14 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
-2- Part 1 - Financial Information Item 1 - Financial Statements NCO GROUP, INC. Consolidated Balance Sheets (Unaudited)
March 31, December 31, ASSETS 1997 1996 ------------- ------------ Current assets: Cash and cash equivalents $ 5,793,016 $ 12,058,798 Accounts receivable, trade, net of allowance for doubtful accounts of $279,300 and $79,000, respectively 11,122,643 4,701,364 Other current assets 631,284 499,815 ------------- ------------ Total current assets 17,546,943 17,259,977 Funds held in trust for clients Property and equipment, net 5,365,069 2,830,062 Other assets: Intangibles, net of accumulated amortization 37,089,886 14,673,155 Deferred taxes 8,666 70,760 Deferred financing costs 653,213 684,390 Other assets 771,766 308,011 ------------- ------------ Total other assets 38,523,531 15,736,316 ------------- ------------ Total assets $ 61,435,543 $ 35,826,355 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion $ 52,727 $ 46,946 Capitalized lease obligations, current portion 129,048 62,131 Corporate taxes payable 1,081,382 216,709 Accounts payable 2,011,363 657,647 Accrued expenses 4,104,255 1,044,536 Accrued compensation and related expenses 2,018,959 1,376,982 Unearned revenue, net of related costs 153,450 225,817 ------------- ------------ Total current liabilities 9,551,184 3,630,768 Funds held in trust for clients Long-term liabilities: Long term debt, net of current portion 10,328,989 1,091,901 Capitalized lease obligations, net of current portion 403,691 385,683 Unearned revenue, net of related costs 107,388 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, 7,058,625 and 6,713,447 shares issued and outstanding at March 31, 1997 and December 31, 1996 respectively. 37,577,206 29,362,326 Unexercised warrants 1,271,054 396,054 Retained earnings 2,196,031 889,238 ------------- ------------ Total shareholders' equity 41,044,291 30,647,618 ------------- ------------ Total liabilities and shareholders' equity $ 61,435,543 $ 35,826,355 ============= ============
The accompanying notes are an integral part of this consolidated statement. NCO GROUP, INC. Consolidated Statements of Income (Unaudited)
For the Three Months Ended March 31, ---------------------------------- 1997 1996 ---------------------------------- Revenue $ 18,076,757 $ 6,043,960 Operating costs and expenses: Payroll and related expenses 9,046,110 2,997,478 Selling, general and administrative expenses 5,931,574 1,931,278 Depreciation and amortization expense 716,467 200,275 -------------- -------------- Total operating costs and expenses 15,694,151 5,129,031 -------------- -------------- Income from operations 2,382,606 914,929 Other income (expense): Interest and investment income 93,308 17,024 Interest expense (175,150) (172,123) -------------- -------------- (81,842) (155,099) -------------- -------------- Income before provision for income taxes 2,300,764 759,830 Income tax expense 993,974 - -------------- -------------- Net income $ 1,306,790 $ 759,830 ============== ============== Pro Forma -------------- Historical income before income taxes $ 759,830 Pro forma provision for income taxes 303,932 ============== Pro forma net income $ 455,898 ============== Net income per share $ 0.18 $ 0.10 ============== ============== Weighted average shares outstanding 7,371,157 4,733,549 ============== ==============
The accompanying notes are an integral part of this consolidated statement. NCO GROUP, INC Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, ---------------------------------- 1997 1996 -------------- ---------------- Cash flows from operating activities: Net income $ 1,306,793 $ 759,830 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 269,158 65,582 Amortization of intangibles 403,975 106,898 Amortization of deferred financing costs 43,334 27,795 Provision for doubtful accounts 91,828 9,982 Changes in assets and liabilities, net of acquisitions: Accounts receivable, trade (1,978,519) (810,920) Notes receivable 100,000 Other current assets 126,694 (33,887) Deferred taxes 39,644 Other assets 50,568 4,563 Accounts payable (1,073,492) 307,539 Corporate taxes payable 822,617 41,309 Accrued expenses 1,310,644 626,278 Accrued compensation and related costs 17,017 (387,202) Unearned revenue (35,364) (29,005) ------------- ------------ Net cash provided by operating activities 1,394,897 788,762 Cash flows from investing activities: Purchase of property and equipment (311,503) (280,391) Purchase of securities (16,063) Proceeds from sale of securities 24,636 Net cash paid for acquisitions (15,556,862) (4,515,534) ------------- ------------ Net cash used in investing activities (15,868,365) (4,787,352) Cash flows from financing activities: Repayment of notes payable (130,157) (17,067) Borrowings under credit agreement 8,350,000 4,550,000 Payment of fees to acquire new debt (12,157) (10,916) Decrease in notes receivable, shareholders 82,873 ------------- ------------ Net cash provided by financing activities 8,207,686 4,604,890 ------------- ------------ Net increase (decrease) in cash and cash equivalents (6,265,782) 606,300 Cash and cash equivalents at beginning of period 12,058,798 804,550 ------------- ------------ Cash and cash equivalents at end of period $ 5,793,016 $ 1,410,850 ============= ============ Supplemental disclosures of cash flow information: Cash paid for interest $ 141,600 $ 137,727 Cash paid for income taxes 181,206 Noncash investing and financing activities: Fair value of assets acquired 7,986,816 680,983 Liabilities assumed from acquisitions 3,400,271 Warrants issued for acquisitions 875,000 Common stock issued for acquisitions 8,214,880 Convertible note payable, issued for acquisition 900,000
The accompanying notes are an integral part of this consolidated statement. NCO Group, Inc. Pro Forma Consolidated Statements of Income For the Three Months Ended March 31, 1997 (Unaudited)
Historical ---------------------------------- NCO Group, Acquired Acquisition Pro Forma Inc. Companies (1) Adjustments (1) Combined ---------------- ---------------- ------------------ ---------------- Revenue $ 18,076,757 $ 2,841,578 $ - $ 20,918,335 Operating costs and expenses: Payroll and related expenses 9,046,110 1,381,883 (103,258) 10,324,735 Selling, general and administrative expenses 5,931,574 1,159,470 (54,093) 7,036,951 Depreciation and amortization expense 716,467 156,915 (27,378) 846,004 -------------- -------------- -------------- ------------- Total operating costs and expenses 15,694,151 2,698,268 (184,729) 18,207,690 -------------- -------------- -------------- ------------- Income from operations 2,382,606 143,310 184,729 2,710,645 Other income (expense): Interest and investment income 93,308 93,308 Interest expense (175,150) (273) (49,000) (224,423) -------------- -------------- -------------- ------------- (81,842) (273) (49,000) (131,115) -------------- -------------- -------------- ------------- Income before provision for income taxes 2,300,764 143,037 135,729 2,579,530 Income tax expense 993,974 120,431 1,114,405 -------------- -------------- -------------- ------------- Net income $ 1,306,790 $ 143,037 $ 15,298 $ 1,465,125 ============== ============== ============== ============= Net income per share $ 0.18 $ 0.20 ============== ============= Weighted average shares outstanding 7,371,157 7,432,522 ============== =============
(1) Gives effect to: (i) the acquisitions of Goodyear & Associates, CMS A/R Services, Tele-Research Center and CRW Financial, Inc., Collections Division as if they had occurred on January 1, 1997; (ii) the reduction of certain redundant operating costs and expenses that were immediately identifiable at the time of the acquisitions; (iii) the increase in amortization expense as if the acquisitions had occurred on January 1, 1997 ; (iv) the elimination of depreciation and amortization expense related to assets revalued or not acquired by NCO as part of the acquisitions; and (v) the additional interest expense associated with acquisition-related debt . The accompanying notes are an integral part of this consolidated statement. -6- 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: financial services, government entities, education, healthcare, telecommunications, utilities, and commercial and retail 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. 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. 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 businesses. 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. -7- 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. Earnings per share were computed by dividing the pro forma net income for the three months ended March 31, 1997 and 1996 by the pro forma weighted average number of shares outstanding. Pro forma net income amounts are used because the 1996 historical net income does not include the impact of federal and state income taxes as if the Company had been subject to income taxes. Pro forma weighted average shares outstanding are based on the weighted average number of shares outstanding including common equivalent shares. The pro forma weighted average number of shares outstanding have also been adjusted to include the number of shares of common stock (250,000 shares) that the Company would have needed to issue at the initial public offering price of $13.00 per share to finance the distribution of undistributed S Corporation earnings through the date on which the Company terminated its S Corporation status. 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 for the three month period ending March 31, 1996, only when their effect would be dilutive. Fully diluted earnings per share are not materially different from primary earnings per share. In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share." This Statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This Statement is effective for financial statements issued for periods ending after December 15, 1997; earlier application is not permitted. This Statement requires restatement of all prior-period EPS data presented. The Company is currently evaluating the impact, if any, adoption of SFAS No. 128 will have on its financial statements. 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 month period ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K, as amended, filed with the Securities and Exchange Commission on March 31, 1997. -8- 3. Acquisitions: On January 3, 1996 the Company purchased certain assets of Trans Union Corporation Collections Division ("TCD") for $4,750,000 in cash. TCD provided accounts receivable management services, principally to the telecommunications, utility and healthcare industries from offices in Pennsylvania, Ohio and Kansas. This acquisition resulted in goodwill of $3.7 million. On September 5, 1996 the Company purchased the outstanding stock of Management Adjustment Bureau, Inc. ("MAB") for $9,000,000 comprised of $8,000,000 in cash and a $1,000,000 convertible note. The note is convertible into the Company's Common Stock, at any time, at $13.00 per share and bears interest payable monthly at a rate of 8.0% per annum with principal due in September 2001. MAB, based in Buffalo, New York, provided accounts receivable management services, principally to the education, financial services, telecommunications and utility industries. This acquisition resulted in goodwill of $8,511,000. On January 22, 1997, NCO purchased all of the outstanding stock of Goodyear & Associates, Inc. ("Goodyear") for $4.5 million in cash and a $900,000 convertible note. The note is convertible into the Company's Common Stock, at any time, at $21.175 per share and bears interest payable monthly at a rate of 8.0% per annum with principal due in January 2002. Goodyear, based in Charlotte, North Carolina, provided accounts receivable management services principally to the telecommunications, education, and utility industries. Goodyear's revenues in 1996 were $5.5 million. This acquisition resulted in goodwill of $5.1 million. On January 30, 1997, NCO purchased certain assets of Tele-Research Center, Inc. ("TRC") for $1.6 million in cash. TRC, located in Philadelphia, Pennsylvania, provided market research, data collection, and other teleservices to market research companies as well as end-users. TRC's revenues in 1996 were $1.8 million. This acquisition resulted in goodwill of $1.6 million. On January 31, 1997, NCO purchased certain assets of CMS A/R Services ("CMSA/R"), formerly a division of CMS Energy Corporation, owner of Consumers Energy, one of the nation's largest utility companies, for $5.1 million in cash. Specializing in the utility industry, CMSA/R, located in Jackson, Michigan, provided a wide range of accounts receivable management services in addition to traditional recovery of delinquent accounts including project outsourcing, early intervention, and database management services. CMSA/R's revenues in 1996 were $6.8 million. This acquisition resulted in goodwill of $3.3 million. On February 2, 1997, NCO purchased certain assets of CRW Financial, Inc. Collections Division ("CRWCD") for $3.75 million in cash, 345,178 shares of its Common Stock and warrants for 250,000 shares of common stock. The purchase price was valued at approximately $12.8 million. CRWCD provided accounts receivable management services principally to the telecommunications, education, financial, government and utility industries from 14 offices located throughout the United States. In addition, CRWCD had a commercial collections division. CRWCD's revenues in 1996 were $25.9 million. Due to the consolidation or closing of certain CRWCD branch offices, and the loss of certain contracts during 1996, revenue for CRWCD for 1997 is anticipated to be 10-15% lower than the revenue shown on the historical financial statements. This acquisition resulted in goodwill of $11.0 million. 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 of $5,832,231 and $3,835,409 at March 31, 1997 and December 31, 1996, respectively, have been shown net of their offsetting liability for financial statement presentation purposes. 5. Long-term debt In July 1995, the Company entered into a $7,000,000 revolving credit agreement. In connection with the agreement, the bank received a warrant for 175,531 shares of Common Stock, exercisable at a nominal value. The -9- line of credit is collateralized by substantially all the assets of the Company and contains, among other provisions, requirements for maintaining defined levels of working capital, net worth, capital expenditures, various financial ratios and restrictions of distributions to shareholders. In September 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 $13.00 per share. In December 1996, the bank increased the credit agreement to $25,000,000 and received a warrant to purchase an additional 18,500 shares, exercisable at $13.00 per share. The Company financed the acquisitions of Goodyear, CMSA/R, TRC and CRWCD, by borrowing $7.35 million on its revolving credit facility and financed the remainder through funds raised in the initial public offering and through its existing working capital. During March 1997, the Company borrowed an additional $1.0 million to fund the reduction of accounts payable assumed as part of the CRWCD acquisition. 6. Investment Considerations In analyzing whether to make, or to continue, an investment in the Company investors should consider, among other factors, certain risk factors and other information contained in the Company's filings with the Securities and Exchange Commission, including, without limitation, the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 1997, as amended, and the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 11, 1996, as amended. -10- 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 its acquisitions, 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 its acquisitions, 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 the Company's Annual Report on Form 10-K, filed on March 31, 1997, 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 March 31, 1997 assume that the Goodyear & Associates, Inc. ("Goodyear"), CMS A/R Services, Inc. ("CMSA/R"), Tele-Research Center, Inc. ("TRC") and CRW Financial, Inc. Collections Division ("CRWCD") acquisitions were consummated on January 1, 1997. 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 acquisitions, the acquired companies had a higher cost structure than that of the NCO core business. The Company intends to leverage its infrastructure to realize additional operating efficiencies in order to bring the cost structure of the acquired companies 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 businesses 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 March 31, 1997 Compared to Quarter ended March 31, 1996 Revenue. Revenue increased $12.0 million or 199.1% to $18.1 million for the three-month period ended March 31, 1997 from $6.1 million for the comparable period in 1996. The addition of new clients and growth in business from existing clients represented $1.3 million of the additional revenue. In addition, $3.4 million of revenue was attributable to the MAB acquisition completed in September 1996, $4.1 million of was attributable to the CRWCD acquisition completed in February 1997, and $3.2 million was attributable to the Goodyear, CMSA/R, and TRC acquisitions completed in January 1997. Due to the consolidation or closing of certain CRWCD branch offices, and the loss of certain contracts during 1996, revenue for CRWCD for 1997 is anticipated to be 10-15% lower than the revenue shown on the historical financial statements. Payroll and related expenses. Payroll and related expenses increased $6.0 million to $9.0 million for the quarter ended March 31, 1997 from $3.0 million for the comparable period in 1996, and increased as a percentage of revenue to 50.0% from 49.6%. Payroll and related expenses increased as a percentage of revenue primarily as a result of the recent acquisitions having a higher cost structure than that of the Company. This increase was partially offset by spreading the cost of management and administrative personnel over a larger revenue base. -11- Selling, general and administrative expenses. Selling, general and administrative expenses increased $4.0 million to $5.9 million for the quarter ended March 31, 1997 from $1.9 million for the comparable period in 1996, and increased as a percentage of revenue to 32.8% from 32.0%. Selling, general and administrative expenses increased as a percentage of revenue primarily as a result of the recent acquisitions having a higher cost structure than that of the Company. 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. Depreciation and amortization. Depreciation and amortization increased to $716,000 for the quarter ended March 31, 1997 from $200,000 for the comparable period in 1996. Of this increase, $394,000 was a result of the MAB, Goodyear, CMSA/R, TRC, and CRWCD acquisitions. The remaining $122,000 consisted of amortization of deferred financing charges and depreciation resulting from normal capital expenditures. Other income (expense). Interest expense increased $3,000 to $175,000 for the quarter ended March 31, 1997 from the comparable period in 1996. Although all debt had been repaid after the Company's initial public offering in November 1996, there were borrowings of $8.35 million attributable to the acquisitions of CMSA/R, TRC and CRWCD during the quarter ended March 31, 1997. Investment income increased $76,000 to $93,000 for the quarter ended March 31, 1997 from the comparable period in 1996. This increase was primarily attributable to the investment of funds remaining from the initial public offering as well as an increase in funds held in trust for clients. Income tax expense. Income tax expense for the quarter ended March 31, 1997 was $994,000. The Company was an S Corporation as of March 31, 1996 and, accordingly, there was no provision for income taxes. The pro forma provision for income taxes has been computed utilizing an assumed rate of 40% for the quarter ended March 31, 1996. Income tax expense for the quarter ended March 31, 1997 was higher than the assumed rate of 40% due to the non-deductible goodwill associated with certain of the acquisitions. Net income. Pro forma net income increased to $1.3 million for the quarter ended March 31, 1997 from $456,000 for the comparable period in 1996, a 186.6% increase. Liquidity and Capital Resources The Company's primary sources of cash have historically been cash flow from operations and bank borrowings. Cash has been used for acquisitions of accounts receivable management companies and S Corporation distributions to shareholders, and for purchases of equipment and working capital to support the Company's growth. Cash provided by operating activities was $1.4 million during the first quarter of 1997, and $800,000 million for the comparable period in 1996. The increase in cash provided by operations was primarily due to the increase in net income to $1.3 million in 1996 compared to $760,000 in 1996, and the increase in non-cash charges, primarily depreciation and amortization, to $808,000 during the first quarter of 1997 compared to $210,000 for the comparable quarter in 1996. These increases were offset by a $2.0 million increase in accounts receivable in 1997 compared to a $811,000 increase in 1996 and a $254,000 decrease in accounts payable and accrued expenses in 1997 compared to a $547,000 increase in 1996. Approximately $1.0 million of accounts payable and accrued expenses in acquired companies were reduced in order to bring the balances in line with NCO's payment policies. Cash used in investing activities was $15.9 million during the first quarter of 1997 compared to $4.8 million for the comparable period in 1996. The increase was primarily due to the acquisitions of Goodyear, CMSA/R, TRC and CRWCD during the first quarter of 1997 versus the acquisition of TCD during the first quarter of 1996. On January 3, 1996 the Company purchased certain assets of Trans Union Corporation Collections Division ("TCD") for $4,750,000 in cash. TCD provided accounts receivable management services, principally to the telecommunications, utility and healthcare industries from offices in Pennsylvania, Ohio and Kansas. This acquisition resulted in goodwill of $3.7 million. -12- On January 22, 1997, NCO purchased all of the outstanding stock of Goodyear for $4.5 million in cash and a $900,000 convertible note. The note is convertible into the Company's Common Stock, at any time, at $21.175 per share and bears interest payable monthly at a rate of 8.0% per annum with principal due in January 2002. Goodyear, based in Charlotte, North Carolina provides accounts receivable management services principally to the telecommunications, education, and utility industries. Goodyear's revenues in 1996 were $5.5 million. This acquisition resulted in goodwill of $5.1 million. On January 30, 1997, NCO purchased certain assets of TRC, for $1.6 million in cash. TRC, located in Philadelphia, Pennsylvania, provides market research, data collection, and other teleservices to market research companies as well as end-users. TRC's revenues in 1996 were $1.8 million. This acquisition resulted in goodwill of $1.6 million. On January 31, 1997, NCO purchased certain assets of CMSA/R, formerly a division of CMS Energy Corporation, owner of Consumers Energy, one of the nation's largest utility companies, for $5.1 million in cash. Specializing in the utility industry, CMSA/R, located in Jackson, Michigan, provided a wide range of accounts receivable management services in addition to traditional recovery of delinquent accounts including project outsourcing, early intervention, and database management services. CMSA/R's revenues in 1996 were $6.8 million. This acquisition resulted in goodwill of $3.3 million. On February 2, 1997, NCO purchased certain assets of CRWCD for $3.75 million in cash, 345,178 shares of its Common Stock and warrants for 250,000 shares of common stock. The acquisition was valued at approximately $12.8 million. CRWCD provided accounts receivable management services principally to the telecommunications, education, financial, government and utility industries from 14 offices located throughout the United States. In addition, CRWCD had a commercial collections division. CRWCD's revenues in 1996 were $25.9 million. This acquisition resulted in goodwill of $11.0 million. The Company has begun to realize operating efficiencies from the Goodyear, CMSA/R, TRC and CRWCD acquisitions and has begun to eliminate redundant collection and administrative personnel, consolidate office locations, and reduce selling, general and administrative expenses to levels more consistent with NCO's current operating results. In addition, the Company has reduced the payroll and related expenses associated with the former principal shareholder of Goodyear. Cash provided by financing activities was $8.2 million during the first quarter of 1997 compared with $4.6 for the comparable period in 1996. During the first quarter of 1996, bank borrowings were the Company's primary source of cash from financing activities and were used for the acquisition of TCD and, along with cash provided by operations, for S Corporation distributions to shareholders. Following the completion of the Company's initial public offering in November 1996, the Company used a portion of the proceeds to repay the outstanding bank debt. The Company financed the acquisitions of Goodyear, CMS A/R Services, TRC and CRWCD, by borrowing $7.35 million on its revolving credit facility and financed the remainder through funds raised in the initial public offering and through its existing working capital. During March 1997, the Company borrowed an additional $1.0 million to fund the reduction of accounts payable assumed as part of the CRWCD acquisition. The Company believes that funds generated from operations, together with existing cash, the remaining 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 may raise additional debt or equity financing to fund any future acquisitions. -13- Part II. Other Information Item 1. Legal Proceedings ----------------- The Company is involved in legal proceedings from time to time in the ordinary course of its business. Management believes that none of these legal proceedings will have a materially adverse effect on the financial condition or results of operations of the Company. Item 2. Changes in Securities --------------------- Previously reported in the Company's Annual Report on Form 10-K, filed on March 31, 1997, as amended. Item 3. Defaults Upon Senior Securities ------------------------------- None - not applicable Item 4. Submission of Matters to a Vote of Shareholders ----------------------------------------------- None - not applicable Item 5. Other Information ----------------- None - not applicable Item 6. Exhibits and Reports on 8-K --------------------------- (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K Date of Report Item Reported -------------- ------------- 2/06/97 Item 2 - Goodyear Acquisition 2/14/97 Item 2 - TRC Acquisition 2/18/97 Item 2 - CMSA/R and CRWCD Acquisitions 2/18/97 Item 2 - TRC Acquisition (Amendment) -14- Signatures Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 12, 1997 By: /s/ Michael J. Barrist ---------------------- Michael J. Barrist Chairman and Chief Executive Officer Date: May 12, 1997 By: /s/ Steven L. Winokur --------------------- Steven L. Winokur Vice President, Finance and Chief Financial Officer -15- EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 5,793,016 0 11,401,943 279,300 0 17,546,943 6,684,924 1,319,855 61,435,543 9,551,184 0 0 0 37,577,206 3,467,085 61,435,543 18,076,757 18,076,757 0 0 15,632,366 61,785 81,842 2,300,764 993,974 1,306,790 0 0 0 1,306,790 .18 .18
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