-----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, Cwp2NqfnBpnRUmxLo5cSIwJ0FHyIEv8FLgShtO5+a0NovpRYI0JGz92rfkyuhU9M 4pV8N5c0Fr8EdJMlP3g3CA== 0000950116-00-000812.txt : 20000412 0000950116-00-000812.hdr.sgml : 20000412 ACCESSION NUMBER: 0000950116-00-000812 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000411 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-K/A SEC ACT: SEC FILE NUMBER: 000-21639 FILM NUMBER: 598892 BUSINESS ADDRESS: STREET 1: 515 PENNSYLVANIA AVE CITY: FT WASHINGTON STATE: PA ZIP: 19034 BUSINESS PHONE: 2157939300 10-K/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K/A (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended December 31, 1999 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 No. 0-21639 NCO GROUP, INC. --------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Pennsylvania 23-2858652 ------------ ---------- (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 515 Pennsylvania Ave. Ft. Washington, Pennsylvania 19034-3313 ---------------------------- ---------- (Address of principal (Zip Code) executive offices) Registrant's Telephone Number, Including Area Code (215) 793-9300 -------------- Securities Registered Pursuant to Section 12(b) of the Act: None ---- Securities Registered Pursuant to Section 12(g) of the Act: Common stock, no par value 25,547,631 --------------------------- ---------- (Title of Class) (Number of Shares Outstanding as of April 7, 2000) Indicate by check mark whether the Registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the Registrant is $582,502,000 (1) ----------------- (1) The aggregate dollar amount of the voting stock set forth equals the number of shares of the Company's common stock outstanding, reduced by the amount of common stock held by officers, directors and shareholders owning 10% or more of the Company's common stock, multiplied by $29.938, the last reported sale price for the Company's common stock on April 7, 2000. The information provided shall in no way be construed as an admission that any officer, director or 10% shareholder in the Company may be deemed an affiliate of the Company or that he is the beneficial owner of the shares reported as being held by him, and any such inference is hereby disclaimed. The information provided herein is included solely for record keeping purposes of the Securities and Exchange Commission. Purpose of Amendment The registrant hereby amends the following items, financial statement exhibits, or other portions of its Annual Report on Form 10-K for the year ended December 31, 1999, as set forth in the pages attached hereto. Item 8. - Financial Statements and Supplementary Data (see page F-1) ------------------------------------------- The registrant is filing this amendment to amend the 1999 amounts designated as "Cash paid for interest" and "Cash paid for income taxes" included in note 16 to NCO Group, Inc.'s Consolidated Financial Statements (see page F-24) Exhibit No. 23.1 - Consent of PricewaterhouseCoopers LLP. ------------------------------------- Exhibit No. 23.2 - Consent of Arthur Andersen LLP. ------------------------------ SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized. NCO GROUP, INC. Date: April 11, 2000 By: /s/ Michael J. Barrist ------------------------- Michael J. Barrist, Chairman of the Board, President and Chief Executive Officer INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements: Report of Independent Accountants...............................................................................F-2 Consolidated Balance Sheets as of December 31, 1998 and 1999 ...................................................F-4 Consolidated Statements of Income for each of the three years in the period ended December 31, 1999......................................................................F-5 Consolidated Statements of Redeemable Preferred Stock and Shareholders' Equity for each of the three years in the period ended December 31, 1999......................................................................F-6 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1999......................................................................F-7 Notes to Consolidated Financial Statements......................................................................F-8 Financial Statement Schedules: For the years ended December 31, 1997, 1998 and 1999: II - Valuation and Qualifying Accounts......................................................................S-1
F-1 Report of Independent Accountants To the Board of Directors and Shareholders of NCO Group, Inc.: In our opinion, based on our audits and the report of other auditors, the consolidated financial statements listed in the index appearing under Item 14(a)(1) present fairly, in all material respects, the financial position of NCO Group, Inc. and its subsidiaries at December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. The consolidated financial statements and the financial statement schedule give retroactive effect to the merger of JDR Holdings, Inc. on March 31, 1999 in a transaction accounted for as a pooling of interests, as described in Note 3 to the consolidated financial statements. We did not audit the financial statements of JDR Holdings, Inc., which statements reflect total assets of $35,145,119 as of December 31, 1998 and total revenues of $22,788,523 and $50,976,251 for the period from May 29, 1997 to December 31, 1997 and for the year ended December 31, 1998, respectively. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for JDR Holdings, Inc., is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP - ------------------------------- PricewaterhouseCoopers LLP Philadelphia, PA February 16, 2000 F-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To JDR Holdings, Inc.: We have audited the accompanying consolidated balance sheets of JDR Holdings, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations, redeemable preferred and common stock and stockholders' equity (deficit), and cash flows for the period from May 29, 1997 to December 31, 1997 and for the year ended December 31, 1998. 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 JDR Holdings, Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for the period from May 29, 1997 to December 31, 1997 and for the year ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ----------------------- Philadelphia, Pa., January 29, 1999 F-3 Part 1 - Financial Information Item 1 - Financial Statements NCO GROUP, INC. Consolidated Balance Sheets (Amounts in thousands)
December 31, ----------------------------- ASSETS 1998 1999 --------- --------- Current assets: Cash and cash equivalents $ 23,560 $ 52,380 Accounts receivable, trade, net of allowance for doubtful accounts of $3,998 and $6,425, respectively 54,443 82,207 Purchased accounts receivable 1,597 6,719 Deferred taxes 1,348 2,965 Other current assets 2,930 5,890 --------- --------- Total current assets 83,878 150,161 Funds held on behalf of clients Property and equipment, net 27,062 56,823 Other assets: Intangibles, net of accumulated amortization 297,347 584,702 Other assets 6,522 6,254 --------- --------- Total other assets 303,869 590,956 --------- --------- Total assets $ 414,809 $ 797,940 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion $ 8,288 $ 1,672 Corporate taxes payable 7,737 11,490 Accounts payable 8,485 9,284 Accrued expenses 13,346 34,447 Accrued compensation and related expenses 10,507 15,643 --------- --------- Total current liabilities 48,363 72,536 Funds held on behalf of clients Long-term liabilities: Long-term debt, net of current portion 143,910 323,949 Deferred taxes 6,832 25,747 Other long-term liabilities 4,357 10,820 Redeemable preferred stock 11,882 - Commitments and contingencies Shareholders' equity: Preferred stock 1,853 - Common stock, no par value, 37,500 shares authorized, 20,100 and 25,533 shares issued, respectively, and 19,744 and 25,533 shares outstanding, respectively 177,835 313,558 Unexercised warrants 5,450 1,043 Treasury stock, at cost (4,108) - Foreign currency translation adjustment (2,169) 694 Retained earnings 20,604 49,593 --------- --------- Total shareholders' equity 199,465 364,888 --------- --------- Total liabilities and shareholders' equity $ 414,809 $ 797,940 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-4 NCO GROUP, INC. Consolidated Statements of Income (Amounts in thousands, except per share data)
For the Years Ended December 31, ------------------------------------------------- 1997 1998 1999 --------- --------- --------- Revenue $ 108,073 $ 229,952 $ 492,354 Operating costs and expenses: Payroll and related expenses 56,949 119,314 257,877 Selling, general and administrative expenses 36,372 66,588 135,508 Depreciation and amortization expense 4,564 9,851 23,311 Non-recurring acquisition costs - - 4,601 --------- --------- --------- Total operating costs and expenses 97,885 195,753 421,297 --------- --------- --------- Income from operations 10,188 34,199 71,057 Other income (expense): Interest and investment income 1,025 1,135 1,365 Interest expense (1,781) (3,858) (19,362) Other income (expense) (41) - - --------- --------- --------- Total other income (expense) (797) (2,723) (17,997) --------- --------- --------- Income before provision for income taxes 9,391 31,476 53,060 Income tax expense 4,800 13,131 23,694 --------- --------- --------- Net income 4,591 18,345 29,366 Accretion of preferred stock to redemption value (1,617) (1,604) (377) --------- --------- --------- Net income applicable to common shareholders $ 2,974 $ 16,741 $ 28,989 ========= ========== ========== Net income per share: Basic $ 0.22 $ 0.91 $ 1.27 Diluted $ 0.20 $ 0.85 $ 1.22 Weighted average shares outstanding: Basic 13,736 18,324 22,873 Diluted 14,808 19,758 23,799
The accompanying notes are an integral part of these consolidated financial statements. F-5 NCO GROUP, INC. Consolidated Statements of Redeemable Preferred Stock and Shareholders' Equity For the Years Ended December 31, 1997, 1998 and 1999 (Amounts in thousands)
Shareholders' Equity ------------------------------------------------- Redeemable Preferred Stock Preferred Stock Common Stock -------------------------- --------------------- ---------------------- Number of Number of Number of Shares Amount Shares Amount Shares Amount ------ ------ ------ ------ ------ ------ Balance, January 1, 1997 - $ - - $ - 10,070 $ 29,363 Capital contribution 13 157 - - 590 (3,137) Issuance of common stock - - - - 3,146 50,886 Issuance of series C preferred, voting common and nonvoting common in connection with acquisitions - - 146 1,686 1,455 16,799 Reclass of carryover basis adjustment - - - - - (11,065) Conversion of loan into and sale of preferred stock 434 8,934 - - - - Issuance of warrants in conjunction with the issuances of common stock and debt - (4,126) - - - - Issuance of warrants in conjunction with acquisitions - - - - - - Exercise of nonvoting common options - - - - 36 418 Redemption of nonvoting common - - - - (36) - Redemption of nonvoting common and issuance of nonvoting common in private placement - - - - 16 - Accretion of preferred to redemption value 4 1,557 3 60 - - Net income - - - - - - --------- -------- --------- ------- --------- --------- Balance, December 31, 1997 451 6,522 149 1,746 15,277 83,264 Issuance of common stock - - - - 4,802 93,884 Exercise of voting and nonvoting common conversion options 334 3,863 - - (334) - Accretion of preferred to redemption value - 1,497 - 107 - - Common stock options granted to consultant - - - - - 687 Redemption of nonvoting common - - - - (1) - Comprehensive income: Net income - - - - - - Other comprehensive income: Foreign currency translation adjustment - - - - - - Total comprehensive income --------- -------- --------- ------- --------- --------- Balance, December 31, 1998 785 11,882 149 1,853 19,744 177,835 Issuance of common stock - - - - 4,747 125,719 Issuance of warrants in conjunction with acquisitions - - - - - - Accretion of preferred to redemption value 93 349 15 28 - - Exchange of redeemable preferred stock for common stock (878) (12,231) - - 878 12,231 Exchange of convertible preferred stock for common stock - - (164) (1,881) 164 1,881 Retirement of treasury stock - - - - - (4,108) Comprehensive income: Net income - - - - - - Other comprehensive income: Foreign currency translation adjustment - - - - - - Total comprehensive income --------- -------- --------- ------- --------- --------- Balance, December 31, 1999 - $ - - $ - 25,533 $ 313,558 ========= ======== ========= ======= ========= =========
(RESTUBBED TABLE)
Shareholders' Equity --------------------------------------------------------------- Treasury Stock Carryover ------------------------ Unexercised Basis Number of Warrants Adjustment Shares Amount -------- ---------- ------ ------ Balance, January 1, 1997 $ 396 $ - - $ - Capital contribution - - - - Issuance of common stock (149) - - - Issuance of series C preferred, voting common and nonvoting common in connection with acquisitions - (11,065) - - Reclass of carryover basis adjustment - 11,065 - - Conversion of loan into and sale of preferred stock - - - - Issuance of warrants in conjunction with the issuances of common stock and debt 4,575 - - - Issuance of warrants in conjunction with acquisitions 875 - - - Exercise of nonvoting common options - - - - Redemption of nonvoting common - - 36 (418) Redemption of nonvoting common and issuance of nonvoting common in private placement - - (16) 184 Accretion of preferred to redemption value - - - - Net income - - - - ------- -------- --------- ------- Balance, December 31, 1997 5,697 - 20 (234) Issuance of common stock (247) - - - Exercise of voting and nonvoting common conversion options - - 335 (3,863) Accretion of preferred to redemption value - - - - Common stock options granted to consultant - - - - Redemption of nonvoting common - - 1 (11) Comprehensive income: Net income - - - - Other comprehensive income: Foreign currency translation adjustment - - - - Total comprehensive income ------- -------- --------- ------- Balance, December 31, 1998 5,450 - 356 (4,108) Issuance of common stock (6,332) - - - Issuance of warrants in conjunction with acquisitions 1,925 - - - Accretion of preferred to redemption value - - - - Exchange of redeemable preferred stock for common stock - - - - Exchange of convertible preferred stock for common stock - - - - Retirement of treasury stock - - (356) 4,108 Comprehensive income: Net income - - - - Other comprehensive income: Foreign currency translation adjustment - - - - Total comprehensive income ------- -------- --------- ------- Balance, December 31, 1999 $ 1,043 $ - - $ - ======= ======== ========= =======
(RESTUBBED TABLE)
Shareholders' Equity -------------------------------------------------------------- Accumulated Other Comprehensive Retained Comprehensive Income Earnings Income Total ------ -------- ------ ----- Balance, January 1, 1997 $ - $ 889 $ 30,648 Capital contribution - - (3,137) Issuance of common stock - - 50,737 Issuance of series C preferred, voting common and nonvoting common in connection with acquisitions - - 7,420 Reclass of carryover basis adjustment - - - Conversion of loan into and sale of preferred stock - - - Issuance of warrants in conjunction with the issuances of common stock and debt - - 4,575 Issuance of warrants in conjunction with acquisitions - - 875 Exercise of nonvoting common options - - 418 Redemption of nonvoting common - - (418) Redemption of nonvoting common and issuance of nonvoting common in private placement - - 184 Accretion of preferred to redemption value - (1,617) (1,557) Net income - 4,591 4,591 ------- ------- --------- Balance, December 31, 1997 - 3,863 94,336 Issuance of common stock - - 93,637 Exercise of voting and nonvoting common conversion options - - (3,863) Accretion of preferred to redemption value - (1,604) (1,497) Common stock options granted to consultant - - 687 Redemption of nonvoting common - - (11) Comprehensive income: Net income - 18,345 $ 18,345 18,345 Other comprehensive income: Foreign currency translation adjustment (2,169) - (2,169) (2,169) --------- Total comprehensive income $ 16,176 ------- ------- ========= --------- Balance, December 31, 1998 (2,169) 20,604 199,465 Issuance of common stock - - 119,387 Issuance of warrants in conjunction with acquisitions - - 1,925 Accretion of preferred to redemption value - (377) (349) Exchange of redeemable preferred stock for common stock - - 12,231 Exchange of convertible preferred stock for common stock - - - Retirement of treasury stock - - - Comprehensive income: Net income - 29,366 $ 29,366 29,366 Other comprehensive income: Foreign currency translation adjustment 2,863 - 2,863 2,863 --------- Total comprehensive income $ 32,229 ------- ------- ========= --------- Balance, December 31, 1999 $ 694 $49,593 $ 364,888 ======= ======= =========
The accompanying notes are an integral part of these consolidated financial statements. F-6 NCO GROUP, INC Consolidated Statements of Cash Flows (Amounts in thousands)
For the Years Ended December 31, ------------------------------------------------ 1997 1998 1999 -------- -------- -------- Cash flows from operating activities: Net income $ 4,591 $ 18,345 $ 29,366 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,140 3,945 8,808 Amortization of intangibles 2,424 5,906 14,503 Write-off of defered financing costs - - 353 Loss on disposal of fixed assets 41 - - Provision for doubtful accounts 356 1,187 2,629 Compensation expense on stock options granted 418 686 34 Changes in assets and liabilities, net of acquisitions: Accounts receivable, trade (4,565) (10,767) (17,536) Purchased accounts receivable - 115 (5,122) Deferred taxes 1,781 3,090 16,980 Other assets (1,728) (698) (1,279) Accounts payable and accrued expenses (140) 1,483 (5,348) Corporate taxes payable 68 59 (1,644) Other long-term liabilities - - 1,711 -------- -------- -------- Net cash provided by operating activities 5,386 23,351 43,455 Cash flows from investing activities: Purchase of property and equipment (4,849) (10,292) (29,631) Net cash paid for acquisitions (25,399) (222,843) (135,237) -------- -------- -------- Net cash used in investing activities (30,248) (233,135) (164,868) Cash flows from financing activities: Repayment of notes payable (7,012) (1,256) (1,574) Repayment of acquired notes payable - (21,919) (42,000) Borrowings under revolving credit agreement 32,686 94,789 190,715 Repayment of borrowings under revolving credit agreement (18,165) (84,193) (4,000) Borrowings under term loan - 125,000 - Payment of fees to acquire new debt (401) (3,015) (3,565) Issuance of common stock, net 40,428 93,637 10,079 Proceeds from issuance of preferred and common stock and exercise of common stock options 1,068 - - Redemption of common stock (5,931) (11) - Payment of dividends (188) - - Capital contributions 697 - - -------- -------- -------- Net cash provided by financing activities 43,182 203,032 149,655 Effect of exchange rate on cash - (67) 578 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 18,320 (6,819) 28,820 Cash and cash equivalents at beginning of period 12,059 30,379 23,560 -------- -------- -------- Cash and cash equivalents at end of period $ 30,379 $ 23,560 $ 52,380 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-7 NCO GROUP, INC. Notes to Consolidated Financial Statements 1. Nature of operations: NCO Group, Inc. (the "Company") is a leading provider of accounts receivable management and other outsourced revenue cycle management services. The Company's client base is comprised of companies located throughout North America and in the United Kingdom and Puerto Rico in the financial services, healthcare, retail, commercial, education, utilities, government, and telecommunications sectors. 2. Summary of significant accounting policies: Principles of Consolidation: The consolidated financial statements include the accounts of NCO Group, Inc. and its wholly-owned subsidiaries after elimination of significant intercompany accounts and transactions. Revenue Recognition: The Company generates revenues from contingent fees and contractual services. Contingent fee revenue is recognized upon collection of funds on behalf of clients. Contractual services revenue is recognized as services are performed. Credit Policy: The Company has two types of arrangements under which it collects its contingent fee revenue. For certain clients, the Company remits funds collected on behalf of the client net of the related contingent fees while, for other clients, the Company remits gross funds collected on behalf of clients and bills the client separately for its contingent fees. Management carefully monitors its client relationships in order to minimize its credit risk and generally does not require collateral. In many cases, in the event of collection delays from clients, management may, at its discretion, change from the gross remittance method to the net remittance method. Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. These financial instruments potentially subject the Company to concentrations of credit risk. Property and Equipment: Property and equipment is stated at cost, less accumulated depreciation. Depreciation is provided over the estimated useful life of each class of assets using the straight-line method. Expenditures for maintenance and repairs are charged to expense as incurred. Renewals and betterments are capitalized. When property is sold or retired, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss on the transaction is included in the statement of income. Effective January 1, 1999, the Company adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 identified the characteristics of internal use software and established guidelines for identifying which costs must be expensed as incurred and which costs must be capitalized. F-8 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 2. Summary of significant accounting policies (continued): Property and Equipment (continued: The Company reviews long-lived assets and certain identifiable intangibles for impairment, based on the estimated future cash flows, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Intangibles: Intangibles consists primarily of goodwill and deferred financing costs. Goodwill represents the excess of purchase price over the fair market value of the net assets of the acquired businesses based on their respective fair values at the date of acquisition. Goodwill is amortized on a straight-line basis over 15 to 40 years. For certain acquisitions, such allocations have been based on estimates that may be revised at a later date. The Company reviews the recoverability of its goodwill whenever events or changes in circumstances indicate that the carrying amount of the goodwill may not be recoverable. In making such a determination with respect to goodwill, the Company evaluates the operating results of the underlying business that gave rise to such amount. Deferred financing costs relate to debt issuance costs incurred, which are capitalized and amortized over the term of the debt. Accumulated amortization at December 31, 1998 and 1999 totaled $9.1 million and $24.1 million, respectively. Income Taxes: The Company accounts for income taxes using an asset and liability approach. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting basis and the tax basis of assets and liabilities. Income taxes were computed after giving effect to the non-deductible portion of goodwill expenses attributable to certain acquisitions and non-recurring acquisition costs attributable to the acquisition of JDR Holdings, Inc. ("JDR") on March 31, 1999. Foreign Currency Translation: The Company has foreign subsidiaries whose local currency has been determined to be the functional currency. For these foreign subsidiaries, the assets and liabilities have been translated using the current exchange rates, and the income and expenses have been translated using historical exchange rates. The adjustments resulting from translation have been recorded as a separate component of shareholders' equity and are not included in determining consolidated net income. 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. Comprehensive Income: Comprehensive income consists of net income from operations plus certain changes in assets and liabilities that are not included in net income but are reported as a separate component of shareholders' equity under generally accepted accounting principles. F-9 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 2. Summary of significant accounting policies (continued): Reclassifications: Certain amounts for December 31, 1997 and 1998, and for the years then ended have been reclassified for comparative purposes. 3. Acquisitions: Pooling-of-Interests Transaction: On March 31, 1999, the Company acquired all of the outstanding shares of JDR Holdings, Inc. ("JDR") for approximately 3.4 million shares of NCO common stock. The transaction was accounted for as a pooling-of-interests and a tax-free reorganization. Accordingly, the historical financial information of the Company has been restated to include the historical information of JDR. The following reconciles the amounts originally reported for revenue, net income applicable to common shareholders, and diluted net income per common share for the years ended December 31, 1997 and 1998 to the restated amounts and discloses the amount of revenue and net income applicable to common shareholders separately for each company for the period prior to the acquisition for the year ended December 31, 1999 (amounts in thousands, except per share data):
1997 1998 1999 --------- --------- --------- Revenue: NCO (as originally reported for 1997 and 1998) $ 85,284 $ 178,976 $ 477,877 JDR (for the period prior to the acquisition for 1999) (1) 22,789 50,976 14,477 --------- --------- --------- Combined $ 108,073 $ 229,952 $ 492,354 ========= ========= ========= Net income applicable to common shareholders: NCO (as originally reported for 1997 and 1998) $ 7,074 $ 14,716 $ 32,105 JDR (for the period prior to the acquisition for 1999) (1) (4,100) 2,025 578 Non-recurring acquisition costs, net of taxes - - (3,694) --------- --------- --------- Combined $ 2,974 $ 16,741 $ 28,989 ========= ========= ========= Diluted net income per share: NCO (as originally reported) $ 0.57 $ 0.89 JDR (1) (0.37) (0.04) --------- --------- Combined $ 0.20 $ 0.85 ========= =========
(1) On May 29, 1997, JDR completed a recapitalization, which established a new basis of accounting (see Note 9). As a result, the results of JDR for the year ended December 31, 1997 represent the period from May 29, 1997 to December 31, 1997. For the year ended December 31, 1999, the Company incurred $4.6 million of non-recurring acquisition costs in connection with the JDR acquisition. These costs consisted primarily of investment banking fees, legal and accounting fees, and printing costs. F-10 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 3. Acquisitions (continued): Purchase Transactions: All of the following acquisitions have been accounted for under the purchase method of accounting. As part of the purchase accounting, the Company recorded accruals for acquisition related expenses. These accruals included professional fees related to the acquisition, termination costs related to certain redundant personnel immediately eliminated at the time of the acquisitions, and certain future rental obligations attributable to facilities which were closed at the time of the acquisitions. On January 1, 1998, the Company purchased the net assets of the Collections Division of American Financial Enterprises, Inc. for $1.7 million in cash. The Company recognized goodwill of $2.2 million and is amortizing the goodwill on a straight-line basis over 25 years. On February 6, 1998, the Company purchased the net assets of The Response Center, which was an operating division of TeleSpectrum Worldwide, Inc., for $15.0 million in cash. The Company recognized goodwill of $14.3 million and is amortizing the goodwill on a straight-line basis over 25 years. On May 5, 1998, the Company purchased all of the outstanding common shares of FCA International Ltd. ("FCA") for $69.9 million in cash. The Company recognized goodwill of $93.2 million and is amortizing the goodwill on a straight-line basis over 40 years. Included in this goodwill is an accrual of $15.2 million for acquisition related expenses. As of December 31, 1999, there was $3.6 million remaining from this accrual for acquisition related expenses. On July 1, 1998, the Company purchased all of the outstanding stock of MedSource, Inc. for $18.4 million in cash. In connection with the acquisition, the Company repaid debt of $17.3 million. The Company recognized goodwill of $37.2 million and is amortizing the goodwill on a straight-line basis over 25 years. Included in this goodwill is an accrual of $5.8 million for acquisition related expenses. As of December 31, 1999, there was $551,000 remaining from this accrual for acquisition related expenses. On November 30, 1998, the Company acquired all of the outstanding stock of Medaphis Services Corporation ("MSC"), a wholly owned subsidiary of Medaphis Corporation, for $107.5 million in cash, plus an earn-out of up to $10.0 million based on MSC achieving certain operational targets during 1999. The Company recognized goodwill of $115.7 million and is amortizing the goodwill on a straight-line basis over 40 years. Included in this goodwill is an accrual of $3.3 million for acquisition related expenses. As of December 31, 1999, there was $2.5 million remaining from this accrual for acquisition related expenses. F-11 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 3. Acquisitions (continued): Purchase Transactions (continued): On May 21, 1999, the Company acquired all of the outstanding stock of Co-Source Corporation ("Co-Source") for approximately $122.7 million in cash plus a warrant to purchase 250,000 shares of NCO common stock. The purchase price was valued at approximately $124.6 million. The Company recognized goodwill of $128.6 million and is amortizing the goodwill on a straight-line basis over 40 years. Included in this goodwill is an accrual of $2.2 million for acquisition related expenses. As of December 31, 1999, there was $800,000 remaining from this accrual for acquisition related expenses. The allocation of the fair market value to the acquired assets and liabilities of Co-Source was based on preliminary estimates and may be subject to change. On August 20, 1999, the Company acquired all of the outstanding shares of Compass International Services Corporation ("Compass") for approximately 3.3 million shares of NCO common stock. In connection with the acquisition, the Company assumed outstanding stock options to purchase approximately 200,000 shares of NCO common stock. The purchase price was valued at approximately $104.1 million. The Company recognized goodwill of $139.1 million and is amortizing the goodwill on a straight-line basis over 40 years. Included in this goodwill is an accrual of $12.5 million for acquisition related expenses. As of December 31, 1999, there was $3.6 million remaining from this accrual for acquisition related expenses. The allocation of the fair market value to the acquired assets and liabilities of Compass was based on preliminary estimates and may be subject to change. The following summarizes the unaudited pro forma results of operations for the years ended December 31, 1998 and 1999, assuming the above acquisitions had occurred as of the beginning of the respective periods. The pro forma information is provided for informational purposes only. It is based on historical information and does not necessarily reflect the actual results that would have occurred, nor is it indicative of future results of operations of the consolidated entities: 1998 1999 --------- --------- (Unaudited) Revenue $ 519,874 $ 581,987 Net income $ 13,253 $ 27,387 Earnings per share - basic $ 0.48 $ 1.10 Earnings per share - diluted $ 0.45 $ 1.06 4. Funds held on behalf of 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 on behalf of clients of $32.2 million and $47.7 million at December 31, 1998 and 1999, respectively, have been shown net of their offsetting liability for financial statement presentation. F-12 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 5. Property and equipment: At December 31, 1998 and 1999, property and equipment, at cost, consisted of the following:
Estimated Useful Life 1998 1999 -------------- ------------ ------------ Computer equipment 5 years $ 23,794,000 $ 47,423,000 Furniture and fixtures 5 to 10 years 6,250,000 9,325,000 Computer software developed for internal use 5 years - 8,750,000 Leasehold improvements 5 to 12 years 1,908,000 4,471,000 Leased assets 2 to 5 years 1,983,000 2,465,000 ------------ ------------ 33,935,000 72,434,000 Less accumulated depreciation 6,873,000 15,611,000 ------------ ------------ $ 27,062,000 $ 56,823,000 ============ ============
Depreciation charged to operations amounted to $2.1 million, $3.9 million and $8.8 million for the years ended 1997, 1998, and 1999, respectively. 6. Long-term debt:
1998 1999 ------------- ------------- Revolving credit loan $ 11,035,000 $ 322,750,000 Term loan; 7.37%, payable in quarterly installments, ranging from $3.0 to $5.3 million, through November 2003 when the remaining balance becomes payable 125,000,000 - JDR revolving credit agreement 12,500,000 - Subordinated seller notes payable; interest rates ranging from 7.16% to 8.00%, $750,000 due May 2000 through August 2000 and $130,000 due May 2001 - 880,000 Subordinated seller note payable; 8.00%, due February 2002, converted to common stock at $14.12 per share on February 15, 1999 900,000 - Subordinated seller notes payable; 8.00%, due January 1999 500,000 - Other 36,000 - Capital leases 2,227,000 1,991,000 Less current portion (8,288,000) (1,672,000) ------------- ------------- $ 143,910,000 $ 323,949,000 ============= =============
F-13 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 6. Long-term debt (continued): The following summarizes the Company's required debt payments for the next five years: 2000 $ 1,672,000 2001 680,000 2002 261,000 2003 97,000 2004 322,911,000 In May 1999, the Company's credit agreement with Mellon Bank, N.A. ("Mellon Bank"), for itself and as administrative agent for other participating lenders, was amended to, among other things, increase the Company's credit facility to provide for borrowings up to $350.0 million, structured as a $350.0 million revolving credit facility. Prior to this amendment, the credit facility was structured as a $125.0 million term loan and a $75.0 million revolving credit facility. At the option of NCO, the borrowings bear interest at a rate equal to either Mellon Bank's prime rate plus a margin ranging from 0.25% to 0.50% that is determined quarterly based upon the Company's consolidated funded debt to EBITDA ratio (Mellon Bank's prime rate was 8.50% at December 31, 1999), or LIBOR plus a margin ranging from 1.25% to 2.25% depending on the Company's consolidated funded debt to EBITDA ratio (LIBOR was 5.83% at December 31, 1999). Borrowings are collateralized by substantially all the assets of the Company. The balance under the revolving credit facility will be due upon the expiration of the five-year term. The credit agreement contains certain financial covenants such as maintaining net worth and funded debt to EBITDA requirements and includes restrictions on, among other things, acquisitions, capital expenditures, and distributions to shareholders. Mellon Bank received warrants to purchase an aggregate of 361,000 shares of the Company's common stock for establishing the credit facility initially in 1995 and for subsequent amendments to increase the Company's borrowing capacity under the credit facility. In July 1997, the bank exercised and sold 225,000 warrants for common stock. The remainder of the warrants were exercised in January 1998. As of December 31, 1998, JDR had $12.5 million of borrowings outstanding against its revolving credit facility (the "JDR Credit Facility"). On March 31, 1999, the Company repaid the outstanding balance on the JDR Credit Facility with borrowings from its revolving credit agreement with Mellon Bank and cancelled the JDR Credit Facility. Deferred financing costs of $353,000 were written-off on March 31, 1999 as a result of the cancellation of the JDR Credit Facility. Under the terms of the JDR Credit Facility, JDR could borrow up to $20.0 million. Advances under the JDR Credit Facility bore interest at optional borrowing rates of either the then current prime rate plus a margin that ranged from 0.50% to 1.50 % or LIBOR, plus a margin that ranged from 2.00% to 3.00%, depending on certain conditions specified in the JDR Credit Facility agreement. JDR also paid a commitment fee of 0.375% on the unused borrowing capacity. Borrowings under the JDR Credit Facility were collateralized by substantially all of the assets of JDR. On May 29, 1997, JDR entered into a credit agreement (the "JDR Bridge Loan") whereby JDR borrowed $11.0 million to redeem common stock owned by two stockholders and repay all outstanding indebtedness of JDR. Borrowings under the JDR Bridge Loan bore interest at 10%. On May 30, 1997, $8.3 million of borrowings under the JDR Bridge Loan were converted into redeemable preferred stock (see Notes 9 and 10) and $2.7 million was repaid with borrowings under the JDR Credit Facility. In connection with the JDR Bridge Loan, JDR recorded debt issuance costs of $185,000, which were fully amortized upon conversion and repayment of the JDR Bridge Loan. In connection with the JDR Credit Facility, the lender purchased 18,000 shares of JDR Redeemable Series A and 11,000 shares of JDR Series B Preferred for $603,000 (see Notes 9 and 10). At December 31, 1999, the Company had unused letters of credit of $1.7 million. F-14 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 6. Long-term debt (continued): On February 15, 1999, the $900,000 convertible note issued in connection with the 1997 acquisition of Goodyear & Associates, Inc. ("Goodyear") was converted into 64,000 shares of NCO common stock. The Company leases certain equipment under agreements which are classified as capital leases. The equipment leases have original terms ranging from 24 to 120 months and have purchase options at the end of the original lease term. 7. Operating leases: The Company leases certain equipment and real estate facilities under non-cancelable operating leases. Future minimum payments, by year and in the aggregate, under non-cancelable operating leases with initial or remaining terms of one year or more consisted of the following at December 31, 1999: 2000 $ 17,928,000 2001 14,491,000 2002 9,709,000 2003 7,084,000 2004 5,517,000 Thereafter 10,853,000 ------------ $ 65,582,000 ============ Rent expense was $3.7 million, $7.8 million and $15.0 million for the years ended December 31, 1997, 1998, and 1999, respectively. The total amount of base rent payments is being charged to expense on the straight-line method over the term of the lease. 8. Income taxes: A summary of the components of the tax provision at December 31, 1997, 1998, and 1999 is as follows:
1997 1998 1999 ------------ ------------ ------------ Currently payable: Federal $ 2,233,000 $ 7,699,000 $ 9,574,000 State 484,000 1,355,000 576,000 Foreign - 331,000 500,000 Deferred: Federal 1,752,000 3,035,000 10,699,000 State 29,000 711,000 2,345,000 Valuation allowance 302,000 - - ----------- ------------ ------------ Provision for income taxes $ 4,800,000 $ 13,131,000 $ 23,694,000 =========== ============ ============
Deferred tax assets (liabilities) at December 31, 1998 and 1999 consisted of the following:
1998 1999 ------------ ------------- Deferred tax assets: Net operating loss carryforwards $ 569,000 $ - Contractual revenue recognition - - Accrued expenses 1,056,000 2,965,000 ------------ ------------- 1,625,000 2,965,000 Deferred tax liabilities: Amortization 4,999,000 21,310,000 Depreciation 1,735,000 4,437,000 Cash basis of accounting 375,000 - ------------ ------------- 7,109,000 25,747,000 ------------ ------------- Net deferred tax liability $ (5,484,000) $ (22,782,000) ============ =============
F-15 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 8. Income taxes (continued): A reconciliation of the U.S. statutory income tax rate to the effective rate (excluding the effect of the change in tax status) is as follows:
1997 1998 1999 -------- --------- --------- U.S. statutory income tax rate 34% 35% 35% Non-deductible goodwill and other expenses 3% 2% 6% State taxes, net of federal 5% 6% 4% Utilization of net operating loss carryforwards - (1%) - JDR operating losses not tax deductible 9% - - -------- --------- --------- Effective tax rate 51% 42% 45% ======== ========= =========
9. JDR Recapitalization: On May 29 and 30, 1997, JDR completed a series of transactions that substantially changed its size and capital structure. These transactions, which are described further below, included the repayment of outstanding debt, the repurchase of all capital stock held by two former institutional investors, certain executive officers of JDR and an individual investor, the issuance of new preferred shares, the purchase of several companies that were previously partially-owned by JDR's majority stockholder and President, and a recapitalization of JDR. After the repurchase of capital stock, JDR's President became the only holder of Voting Common ("JDR's Sole Stockholder"). At that point, the Sole Stockholder's basis in his investment was "pushed down" to the JDR's books, as required by Staff Accounting Bulletin No. 54. This established a new basis of accounting for JDR on May 29, 1997 and NCO's financial statements, therefore, include the period from that date to the Company's fiscal year end, December 31, 1997. On May 29, 1997, JDR amended and restated its certificate of incorporation to authorize the issuance of 17,955,000 shares of stock, consisting of: (i) 9,794,000 shares of common stock ("JDR Common") consisting of 4,897,000 shares of voting common stock ("Voting Common") and 4,897,000 shares of nonvoting common stock ("Nonvoting Common"); and (ii) 8,161,000 shares of preferred stock ("Preferred"), of which 417,000 shares were designated as Redeemable Series A Preferred stock, no par value ("Redeemable Series A"), 555,000 shares were designated as Convertible Series A Preferred stock, no par value ("Series A Preferred"), 204,000 were designated as Convertible Series B Preferred stock, no par value ("Series B Preferred") and 237,000 were designated as Convertible Series C Preferred stock, no par value ("Series C Preferred") (see Notes 10 and 11). Also on May 29, 1997, JDR received a bridge loan of $11.0 million (see Note 6), the proceeds of which were used to repay $5.4 million of outstanding long-term debt, to pay debt issuance costs of $185,000 (see Note 6) and to repurchase for $5.4 million all of the Voting Common held by shareholders other than JDR's Sole Stockholder and certain shares of Redeemable Series A and Series B Preferred stock. This transaction resulted in the push down of JDR's Sole Stockholder's basis in his investment in JDR's stock onto JDR's books. The establishment of this new basis of accounting resulted in JDR recording an increase in equity of $6.7 million, which represented the difference between JDR's net book value at May 29, 1997 and JDR's Sole Stockholder's accounting basis. The entire amount of the increase in equity was allocated to goodwill, which is being amortized over 40 years on a straight-line basis. F-16 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 9. JDR Recapitalization (continued):
The repurchase and exchange of stock included the following: Repurchase of 401,000 shares of Voting Common $ 4,624,000 Repurchase of 92,000 shares of Redeemable Series A and Series B Preferred stock plus accrued dividends of $165,000 802,000 Exchange of 40,000 shares of Redeemable Series A and Series B Preferred stock, plus accrued dividends of $23,000 for 13,000 shares of Series A Preferred 146,000 Exchange of 129,000 shares of Voting Common for 129,000 shares of Nonvoting Common 1,493,000 Exchange of 1,000 shares of Voting Common for 1,000 shares of Series B Preferred 11,000 ----------- Total value of shares repurchased and exchanged $ 7,076,000 ===========
On May 30, 1997, JDR issued preferred stock to two new institutional investors (see Note 10) as follows:
Issued 271,000 shares of Redeemable Series A $ 7,050,000 Issued 38,000 shares of Series A Preferred 439,000 Issued 125,000 shares of Series B Preferred 1,445,000 ----------- $ 8,934,000 ===========
10. Redeemable preferred stock: All of the Redeemable Series A Preferred stock, the Convertible Series A Preferred stock and the Convertible Series B Preferred stock was exchanged for NCO common stock on March 31, 1999.
December 31, 1998 ----------------- Redeemable Series A Preferred stock, no par value, 417,000 shares authorized, 271,000 shares issued and outstanding $ 5,394,000 Convertible Series A Preferred stock, no par value, 555,000 shares authorized, 365,000 shares issued and outstanding 4,601,000 Convertible Series B Preferred stock, no par value, 204,000 shares authorized, 149,000 shares issued and outstanding 1,887,000 ------------ $ 11,882,000 ============
JDR issued 271,000 shares of Redeemable Series A stock to repay $6.6 million of borrowings under the JDR Bridge Loan (see Notes 6 and 9) and for cash proceeds of $476,000. The Redeemable Series A stock required a dividend (payable in kind) of 7.0% per year. The holders of the Redeemable Series A stock could have redeemed these shares for their liquidation value beginning on May 30, 2003. JDR would have been obligated to redeem these shares on May 30, 2004. The Redeemable Series A stock had limited voting rights, was senior to the Series C Preferred stock and common stock. JDR issued 38,000 shares of Series A Preferred stock to repay $439,000 of borrowings under the JDR Bridge Loan (see Notes 6 and 9). In addition, JDR issued 13,000 shares of Series A Preferred stock in exchange for certain Redeemable Series A and Series B Preferred stock. The Series A Preferred required a dividend (payable in kind) of 6.0% per year. The holders of the Series A Preferred stock could have converted their shares at any time into voting common stock. In addition, the holders of the Series A Preferred stock could have redeemed their shares for their liquidation value beginning on May 30, 2002. The Series A Preferred stock had limited voting rights, was senior to the Series C Preferred stock and common stock. F-17 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 10. Redeemable preferred stock (continued): JDR issued 125,000 shares of Series B Preferred stock to repay $1.3 million of borrowings under the JDR Bridge Loan (see Notes 6 and 9) and for cash proceeds of $127,000. The Series B Preferred stock required a dividend (payable in kind) of 6.0% per year. The holders of the Series B Preferred stock could have converted their shares at any time into nonvoting common stock. In addition, the holders of the Series B Preferred stock could have redeemed these shares for their liquidation value beginning on May 30, 2002. The Series B Preferred stock had limited voting rights, was senior to the Series C Preferred stock and common stock. 11. Shareholders' equity: Preferred Stock At December 31, 1998, JDR had 237,000 shares designated as Series C Preferred stock, of which 149,000 shares were issued and outstanding. The Series C Preferred stock required a dividend (payable in kind) of 6.0% per year. JDR could have redeemed the Series C Preferred, at any time, for its liquidation value. The holders of the Series C Preferred stock could have converted their shares at any time after May 30, 2000, or at the time any shares of Series A Preferred stock or Series B Preferred stock were converted into common stock, into nonvoting common stock. The Series C Preferred stock had a liquidation value of $1.9 million, including dividends of $167,000, at December 31, 1998. All of the Series C Preferred stock was converted into NCO common stock on March 31, 1999. Common Stock In December 1997, the Company effected a three-for-two stock split and increased the authorized shares of common stock to 37,500,000. All per share and related amounts have been adjusted to reflect the stock exchange and stock splits. In July 1997, the Company completed a public offering, selling 2,166,000 shares of common stock at a price to the public of $19.67 per share. The Company received net proceeds, after underwriting discounts and expenses, of approximately $40.4 million. In June 1998, the Company completed a public offering, selling 4,469,000 shares of common stock (469,000 of which were over-allotment shares exercised in July 1998) at a price to the public of $21.50 per share. The Company received net proceeds, after underwriting discounts and expenses, of approximately $91.3 million. Nonvoting Common Stock At December 31, 1998, JDR had 4,897,000 shares of nonvoting common stock authorized, of which 1,088,000 shares were issued and 1,044,000 shares were outstanding. All of the nonvoting common stock was exchanged for NCO common stock on March 31, 1999. Common Stock Warrants On May 30, 1997, JDR issued warrants to purchase 621,000 shares of nonvoting common stock at a nominal value in connection with the sale of capital stock and the JDR Credit Facility (see Note 8). All of the warrants were exercised and exchanged for NCO common stock on March 31, 1999. On May 21, 1999, NCO issued warrants to purchase 250,000 shares of NCO common stock in connection with the acquisition of Co-Source. During 1999, warrants to issue 228,000 shares of NCO common stock were exercised. The holders of the warrants elected to use the option of forfeiting a portion of their warrants to cover the exercise price. These exercises resulted in the net issuance of 67,000 shares of NCO common stock. Warrants to purchase 22,000 shares of NCO common stock were still were outstanding as of December 31, 1999. F-18 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 11. Shareholders' equity (continued): Treasury Stock JDR had 44,000 shares of nonvoting common stock and 312,000 shares of voting common stock in Treasury at December 31, 1998. All of the treasury shares were retired on March 31, 1999. 12. Earnings per share: Basic earnings per share were computed by dividing the net income for the years ended December 31, 1997, 1998, and 1999 by the weighted average number of shares outstanding. Diluted earnings per share were computed by dividing the net income, adjusted for the effects of interest expense attributable to convertible debt, for the years ended December 31, 1997, 1998, and 1999, by the weighted average number of shares outstanding, including common equivalent shares. All outstanding options, warrants and convertible securities have been utilized in calculating diluted net income per share only when their effect would be dilutive. The reconciliation of basic to diluted earnings per share ("EPS") consists of the following (amounts in thousands, except EPS amounts):
1997 1998 1999 -------------------- ------------------ -------------------- Shares EPS Shares EPS Shares EPS --------- --------- -------- -------- --------- --------- Basic 13,736 $ 0.22 18,324 $ 0.91 22,873 $ 1.27 Dilutive effect of warrants 459 (0.01) 725 (0.03) 206 (0.01) Dilutive effect of options 491 (0.01) 615 (0.03) 712 (0.04) Other 122 - 94 - 8 - ------ ------ ------ ------ ------ ------ Diluted 14,808 $ 0.20 19,758 $ 0.85 23,799 $ 1.22 ====== ====== ====== ====== ====== ======
13. Stock options: In June 1995, the Company adopted the 1995 Stock Option Plan (the "1995 Plan"). In September 1996, the Company adopted the 1996 Stock Option Plan (the "1996 Plan") and the 1996 Non-Employee Director Stock Option Plan (the "Director Plan"). The 1995 Plan and 1996 Plan, as amended, authorized 333,000 and 2,717,000 shares, respectively, of incentive or non-qualified stock options. The Director Plan, as amended, authorized 150,000 shares. The vesting periods for the outstanding options under the 1995 Plan, the 1996 Plan, and the Director Plan are three years, three years and one year, respectively. The maximum exercise period is ten years after the date of grant. F-19 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 13. Stock options (continued): In June 1997, JDR established the JDR Holdings, Inc. 1997 Stock Option Plan (the "JDR Plan") and reserved 69,000 shares of common stock. All options that were issued and outstanding under the JDR Plan as of March 31, 1999 became fully vested as a result of the acquisition of JDR by NCO. The options expire no later than ten years from the date of grant. On August 20, 1999, as part of the acquisition of Compass, NCO assumed the Compass Employee Incentive Compensation Plan (the "Compass Plan"). The Compass Plan authorized up to 475,000 shares of non-qualified stock options. The vesting periods for the outstanding options under the Compass Plan are one to three years. The maximum exercise period is ten years after the date of grant. A summary of stock option activity of the 1995 Plan, the 1996 Plan, the Director Plan, the JDR Plan and the Compass Plan is as follows:
Weighted Average Number of Exercise Price Options Per Share ------------- --------------- Outstanding at January 1, 1997 658,000 $ 6.80 Granted 493,000 21.21 Exercised (50,000) 4.20 Forfeited (36,000) 10.72 ----------- ------- Outstanding at December 31, 1997 1,065,000 13.95 Granted 776,000 27.32 Exercised (230,000) 5.98 Forfeited (32,000) 19.78 ----------- ------- Outstanding at December 31, 1998 1,579,000 21.44 Granted 1,497,000 32.58 Exercised (441,000) 16.89 Forfeited (24,000) 26.76 ----------- ------- Outstanding at December 31, 1999 2,611,000 $ 28.27 =========== ======= Stock options exercisable at December 31, 1999 695,000 $ 25.55 =========== =======
F-20 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 13. Stock options (continued): The following table summarizes information about fixed stock options outstanding as of December 31, 1999:
Stock Options Outstanding Stock Options Exercisable ------------------------------------------------- ----------------------------- Weighted Weighted Weighted Range of Average Average Average Exercise Prices Shares Remaining Life Exercise Price Shares Exercise Price --------------------- ------------ ----------------- --------------- ----------- --------------- $ 1.82 to $19.42 311,000 7.08 years $ 13.55 246,000 $ 12.72 $21.00 to $24.75 497,000 8.33 years 22.51 194,000 23.14 $28.44 to $29.94 1,170,000 9.84 years 29.83 27,000 29.14 $30.75 to $37.00 449,000 9.11 years 33.70 89,000 33.70 $43.81 to $61.09 184,000 8.36 years 45.47 139,000 45.80 --------- ---------- ------- ------- ------- 2,611,000 9.00 years $ 28.27 695,000 $ 25.55 ========= ========== ======= ======= =======
The Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost based on the fair value of the options granted at grant date. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date, net income and earnings per share for 1997, 1998, and 1999 would have been reduced to the unaudited, pro forma amounts indicated in the following table:
1997 1998 1999 ------------ ------------ ------------ Net income - as reported $ 4,591,000 $ 18,345,000 $ 29,366,000 Net income - pro forma $ 4,115,000 $ 17,264,000 $ 27,050,000 Net income per share: Basic - as reported $ 0.22 $ 0.91 $ 1.27 Basic - pro forma $ 0.18 $ 0.85 $ 1.17 Diluted - as reported $ 0.20 $ 0.85 $ 1.22 Diluted - pro forma $ 0.17 $ 0.79 $ 1.12
The estimated weighted average, grant-date fair values of the options granted during the years ended December 31, 1997, 1998, and 1999 were $6.53, $9.86, and $12.43, respectively. All options granted were at the market price of the stock on the grant date. For valuation purposes, the Company utilized the Black-Scholes option pricing model using the following assumptions on a weighted average basis:
1997 1998 1999 ---------- ---------- ---------- Risk-free interest rate 6.19% 4.98% 5.73% Expected life in years 3.25 3.25 3.25 Volatility factor 40.42% 43.38% 44.04% Dividend yield None None None Forfeiture rate 5.00% 5.00% 5.00%
F-21 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 13. Stock options (continued): For valuation purposes, JDR utilized the Black-Scholes option pricing model using the following assumptions on a weighted average basis for the options granted under the JDR Plan: dividend yield of 0%, expected volatility of 0%, risk-free interest rate of 6.6%, and an expected life of ten years. At December 31, 1998, the Company had 36,000 options outstanding to purchase JDR Nonvoting Common stock at $0.02 per share. On March 31, 1999, the 36,000 outstanding options to purchase JDR Nonvoting Common stock at $0.02 per share were converted into 36,000 options to purchase NCO common stock at $0.02 per share. During 1999, 22,000 of these options were exercised to purchase NCO common stock. At December 31, 1999, the Company had 14,000 options outstanding to purchase NCO common stock at $0.02 per share. On July 1997, a consultant, who also served as a director of JDR, received options to purchase 228,000 shares of JDR Nonvoting Common stock at $11.54 per share. The original vesting schedule of these options was 58% on January 1, 1998 and 14% on January 1, 1999, 2000 and 2001. The Company recorded the $961,000 value as expense as the options vested. For the year ended December 31, 1998 and the first quarter of 1999, the Company recorded $686,000 and $34,000, respectively, as consulting expense for these options. The remaining value of the options was recorded when the they became fully vested upon the completion of the acquisition of JDR on March 31, 1999. 14. Derivative financial instruments: The Company selectively uses derivative financial instruments to manage interest costs and minimize currency exchange risk. The Company does not hold derivatives for trading purposes. While these derivative financial instruments are subject to fluctuations in value, these fluctuations are generally offset by the value of the underlying exposures being hedged. The Company minimizes the risk of credit loss by entering into these agreements with major financial institutions that have high credit ratings. Interest Rate Collar and Interest Rate Swap Agreements: During 1998 and 1999, the Company entered into interest rate collar agreements and an interest rate swap agreement to reduce the impact of changes in interest rates on portions of the debt borrowed from its revolving credit facility. As of December 31, 1999, the Company was party to three interest rate collar agreements that consisted of a rate ceiling and floor that is based on different notional amounts. The first interest rate collar agreement consisted of a ceiling portion with a rate of 7.75%, covering a notional amount of $30.0 million, and a floor portion with a rate of 4.75%, covering a notional amount of $15.0 million. This interest rate collar agreement expires in September of 2001. The other two interest rate collar agreements consisted of a ceiling portion with a rate of 7.50%, covering a total notional amount of $120.0 million, and a floor portion with a rate of 5.50%, covering a total notional amount of $120.0 million. These interest rate collar agreements expire in October of 2001. The notional amounts of these interest rate collar agreements are used to measure the interest to be paid or received and do not represent the amount of exposure due to credit loss. The net cash amounts paid or received on the interest rate collar agreements are accrued and recognized as an adjustment to interest expense. The interest rate swap agreement, which expired in June 1999, exchanged the floating rate on the Company's outstanding debt from its revolving credit facility for a fixed interest rate of 5.12%. This agreement covered a notional amount of approximately $136.0 million. Foreign Exchange Contracts: As part of the acquisition of FCA International Ltd. ("FCA"), the Company obtained forward exchange contracts which where entered into by FCA. These forward exchange contracts were used by the Company to minimize the impact of currency fluctuations on transactions, cash flows and firm commitments. The Company had approximately $3.4 million of contracts outstanding at December 31, 1998. These contracts were for the purchase of Canadian dollars and matured within one to 30 months. In April 1999, the Company elected to finalize its forward position under these contracts at a cost of approximately $148,000. F-22 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 15. Fair value of financial instruments: The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value: Cash and Cash Equivalents: The carrying amount reported in the balance sheet approximates fair value because of the short maturity of these instruments. Debt: The Company's non-seller-financed debt is primarily variable in nature and based on the prime rate, and, accordingly, the carrying amount of debt instruments approximates fair value. The stated interest rates of the Company's non-convertible seller-financed notes approximate market rates for debt with similar terms and maturities, and, accordingly, the carrying amounts approximates fair value. The Company's seller-financed debt from the Goodyear acquisition consisted of a note payable, which contained a conversion option, which allowed the holder to convert the debt into 64,000 shares of common stock at a price of $14.12 per share on February 15, 1999. Accordingly, the fair value of the debt as of December 31, 1998 was calculated using the closing market price of NCO's common stock on February 15, 1999. Interest Rate Instruments: While it is not the Company's intention to terminate any of the interest rate instruments, the fair value of the instruments was estimated by obtaining quotes from brokers that represented amounts the Company would have received or paid if the agreements were terminated at December 31, 1998 and 1999. These fair values indicated that the gains or losses that would have resulted from the termination of the interest rate swap agreement and the interest rate collar agreement at December 31, 1998 and 1999 would have not been material. Foreign Exchange Contracts: The fair value of foreign exchange contracts at December 31, 1998 was not material. F-23 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 15. Fair value of financial instruments (continued): The estimated fair value of the Company's financial instruments are as follows at December 31:
1998 1999 -------------------------------- -------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------------- -------------- -------------- -------------- Financial assets: Cash and cash equivalents $ 23,560,000 $ 23,560,000 $ 52,380,000 $ 52,380,000 Financial liabilities: Non-seller financed debt 148,535,000 148,535,000 322,750,000 322,750,000 Subordinated seller notes payable 500,000 500,000 880,000 880,000 Subordinated seller notes payable, convertible 900,000 2,176,000 - - Non-interest bearing note payable 36,000 36,000 - -
16. Supplemental cash flow information: The following are supplemental disclosures of cash flow information:
1997 1998 1999 -------------- --------------- ---------------- Cash paid for interest $ 1,570,000 $ 2,905,000 $ 19,999,000 Cash paid for income taxes 4,181,000 5,726,000 7,923,000 Non-cash investing and financing activities: Fair value of assets acquired 12,320,000 47,872,000 28,368,000 Liabilities assumed from acquisitions 7,019,000 46,730,000 53,713,000 Fair value of contributed capital - 3,834,000 - Property acquired under capital leases 967,000 138,000 - Value of fixed assets traded for new fixed assets 238,000 - - Convertible note payable, issued for acquisition 900,000 - - Notes payable, issued for acquisitions 1,000,000 - - Convertible note payable, converted to common stock 1,000,000 - 900,000 Common stock issued for acquisitions 9,310,000 - 101,526,000 Common stock options issued for acquisitions - - 2,562,000 Redemption of redeemable preferred stock for common stock - - 12,231,000 Warrant issued 5,450,000 - 1,925,000 Warrants exercised 149,000 247,000 6,332,000
F-24 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 17. Employee benefit plans: The Company has a savings plan under Section 401(k) of the Internal Revenue Code (the "Plan"). The Plan allows all eligible employees to defer up to 15% of their income on a pretax basis through contributions to the Plan. The Company will provide a matching contribution of 25% of an employee's contribution, subject to a maximum of 1.5% of an employee's base salary. The charges to operations for the matching contributions were $220,000, $755,000 and $1,407,000, for 1997, 1998, and 1999, respectively. 18. Commitments and contingencies: The Company is party, from time to time, to various legal proceedings incidental to its business. In the opinion of management none of these items individually or in the aggregate would have a significant effect on the financial position, result of operations, cash flows, or liquidity of the Company. 19. Segment reporting: The Company is organized into market specific operating divisions that are responsible for all aspects of client sales, client service, and operational delivery of services. The accounting policies of the segments are the same as those described in Note 2, "Summary of significant accounting policies." Segment data includes a charge allocating corporate overhead costs to each of the operating segments based on revenue and employee headcount. During 1999, the operating divisions, which were each headed by a divisional chief executive officer, included Accounts Receivable Management Services, Healthcare Services, Technology-Based Outsourcing, Commercial Services, Market Strategy and International Operations. The Accounts Receivable Management Services division provides accounts receivable management services to consumer and commercial accounts for all market segments, serving clients of all sizes in local, regional and national markets. The Healthcare Services division primarily focuses on providing comprehensive outsourcing services for the hospital market. In addition, the Healthcare Services division provides accounts receivable management programs for physician groups and allied health service providers. During the first quarter of 2000, the accounts receivable management services portion of the Healthcare Services division was merged into the Accounts Receivable Management Services division, and the pre-delinquency services portion of the Healthcare Services division was merged into the Technology-Based Outsourcing division. With the March 1999 acquisition of JDR, the Technology-Based Outsourcing division was created. This division continues the growth of the client relationship beyond bad debt recovery and delinquency management, delivering cost-effective receivables and customer relationship management solutions to all market segments, serving clients of all sizes in local, regional and national markets. With the May 1999 acquisition of Co-Source, the Commercial Services division was created. The Commercial Services division focuses on providing accounts receivable management and collection services to the commercial market. During the first quarter of 2000, the Commercial Services division was merged into the Accounts Receivable Management Services division. The Market Strategy division provides full-service, custom market research services to the telecommunications, financial services, utilities, healthcare, pharmaceutical, and consumer products sectors. In addition, the Market Strategy division provides telemarketing services for clients, including lead generation and qualification, and the booking of appointments for a client's sales representatives. F-25 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 19. Segment reporting (continued): With the May 1998 acquisition of FCA, the International Operations division was created. The International Operations division provides accounts receivable management services across Canada and the United Kingdom. The following tables represent the revenue, payroll and related expenses, selling, general and administrative expenses, and earnings before interest, taxes, depreciation, and amortization ("EBITDA") for each segment for the years ended December 31, 1997, 1998 and 1999. EBITDA is used by the Company's management to measure the segments' operating performance and is not intended to report the segments' operating results in conformity with generally accepted accounting principles.
For the year ended December 31, 1997 (Amounts in thousands) ------------------------------------------------------------------------ Payroll and Selling General Related and Admin. Revenue Expenses Expenses EBITDA ---------------- ----------------- ----------------- --------------- A/R Management $ 81,942 $ 40,550 $ 28,318 $ 13,074 Tech-Based Outsourcing 17,778 10,945 6,165 668 Market Strategy 8,353 5,454 1,889 1,010 --------- -------- -------- -------- Total $ 108,073 $ 56,949 $ 36,372 $ 14,752 ========= ======== ======== ========
For the year ended December 31, 1998 (Amounts in thousands) ------------------------------------------------------------------------ Payroll and Selling General Related and Admin. Revenue Expenses Expenses EBITDA ---------------- ----------------- ----------------- --------------- A/R Management $ 127,419 $ 63,023 $ 38,649 $ 25,747 Healthcare Services 20,442 9,930 5,978 4,534 Tech-Based Outsourcing 43,530 22,932 11,893 8,705 Market Strategy 20,005 12,527 5,210 2,268 International Operations 18,556 10,902 4,858 2,796 --------- --------- -------- -------- Total $ 229,952 $ 119,314 $ 66,588 $ 44,050 ========= ========= ======== ========
For the year ended December 31, 1999 (Amounts in thousands) --------------------------------------------------------------------------- Selling Non- Payroll and General and Recurring Related Admin. Acquisition Revenue Expenses Expenses Costs EBITDA -------------- ------------- --------------- ------------- ------------ A/R Management $ 175,225 $ 85,563 $ 50,401 $ - $ 39,261 Healthcare Services 136,375 72,037 39,410 - 24,928 Tech-Based Outsourcing 63,118 32,994 16,964 - 13,160 Commercial Services 54,553 29,673 12,705 - 12,175 Market Strategy 32,043 20,011 7,397 - 4,635 International Operations 31,040 17,599 8,631 - 4,810 Other - - - 4,601 (4,601) ---------- --------- --------- ------- -------- Total $ 492,354 $ 257,877 $ 135,508 $ 4,601 $ 94,368 ========= ========= ========= ======= ========
F-26 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 20. Recent accounting pronouncements: In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was subsequently amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" (collectively "SFAS No. 133"). SFAS No. 133 is effective for the fiscal years beginning after June 15, 2000 and requires that an entity recognize all derivative instruments as either assets or liabilities on its balance sheet at their fair values. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction, and, if it is, the type of hedge transaction. The Company will adopt SFAS No. 133 by the first quarter of 2001. Due to the Company's limited use of derivative instruments, SFAS No. 133 is not expected to have a material impact on the consolidated results of operations, financial condition, or cash flows of the Company. F-27 EX-23.1 2 EXHIBIT 23.1 Consent of Independent Accountants ---------------------------------- We hereby consent to the incorporation by reference in the registration statements of NCO Group, Inc. on Form S-8 (File No's. 333-42743, 333-62131, 333-73087, 333-83229 and 333-87493) and Form S-3 (File No. 333-86473) of our report dated February 16, 2000, on our audits of the consolidated financial statements and the financial statement schedule of NCO Group, Inc. as of December 31, 1998 and 1999, and for each of the three years in the period ended December 31, 1999, which report is included in this Annual Report on Form 10-K/A. /s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP Philadelphia, Pennsylvania April 11, 2000 EX-23.2 3 EXHIBIT 23.2 Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 29, 1999 on the financial statements of JDR Holdings, Inc. and Subsidiaries for the period from May 29, 1997 to December 31, 1997 and for the year ended December 31, 1998 included in this Form 10-K/A, into NCO Group, Inc.'s previously filed Registration Statements on Form S-8 (File No. 333-42743), (File 333-62131), (File No. 333-73087), (File No. 333-83229) and (File No. 333-87493) and on Form S-3 (File No. 333-86473). /s/ Arthur Andersen LLP ----------------------- Philadelphia, Pa., April 11, 2000 -----END PRIVACY-ENHANCED MESSAGE-----