-----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, IbF4W/a1riQL32fC6Fe1Y6SyPGWiqAZSZBQ8TE7FXrIiWpiAjru+ljnT9dhjOfLk 65Fb2SHUIg6NHtj4/bpHqQ== /in/edgar/work/0000950116-00-002729/0000950116-00-002729.txt : 20001115 0000950116-00-002729.hdr.sgml : 20001115 ACCESSION NUMBER: 0000950116-00-002729 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NCO GROUP INC CENTRAL INDEX KEY: 0001022608 STANDARD INDUSTRIAL CLASSIFICATION: [7320 ] IRS NUMBER: 232858652 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21639 FILM NUMBER: 765538 BUSINESS ADDRESS: STREET 1: 515 PENNSYLVANIA AVE CITY: FT WASHINGTON STATE: PA ZIP: 19034 BUSINESS PHONE: 2157939300 10-Q 1 0001.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2000, 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) 515 Pennsylvania Avenue, Fort Washington, Pennsylvania - -------------------------------------------------------------------------------- (Address of principal executive offices) 23-2858652 - -------------------------------------------------------------------------------- (IRS Employer Identification Number) 19034 - -------------------------------------------------------------------------------- (Zip Code) 215-793-9300 - -------------------------------------------------------------------------------- (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 25,612,343 shares common stock, no par value, outstanding as of November 10, 2000. NCO GROUP, INC. INDEX PAGE Part I FINANCIAL INFORMATION Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Consolidated Balance Sheets - December 31, 1999 and September 30, 2000 3 Consolidated Statements of Operations - Three months and nine months ended September 30, 1999 and 2000 4 Consolidated Statements of Cash Flows - Nine months ended September 30, 1999 and 2000 5 Notes to Consolidated Financial Statements 6 Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14 Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19 PART II 20 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 Form 8-K Part 1 - Financial Information Item 1 - Financial Statements NCO GROUP, INC. Consolidated Balance Sheets (Amounts in thousands)
September 30, December 31, 2000 ASSETS 1999 (Unaudited) ------------ ------------- Current assets: Cash and cash equivalents $ 50,513 $ 13,851 Accounts receivable, trade, net of allowance for doubtful accounts of $5,391 and $5,622, respectively 70,430 92,152 Purchased accounts receivable 6,719 24,987 Deferred taxes 2,965 3,065 Other current assets 5,800 11,944 --------- --------- Total current assets 136,427 145,999 Funds held on behalf of clients Property and equipment, net 53,714 63,995 Other assets: Intangibles, net of accumulated amortization 553,879 541,066 Net assets of discontinued operations 41,492 18,861 Other assets 6,180 8,515 --------- --------- Total other assets 601,551 568,442 --------- --------- Total assets $ 791,692 $ 778,436 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion $ 1,302 $ 805 Corporate taxes payable 11,490 2,888 Accounts payable 8,457 8,599 Accrued expenses 30,430 22,554 Accrued compensation and related expenses 14,609 17,582 --------- --------- Total current liabilities 66,288 52,428 Funds held on behalf of clients Long-term liabilities: Long-term debt, net of current portion 323,949 307,997 Deferred taxes 25,747 36,550 Other long-term liabilities 10,820 6,416 Commitments and contingencies Shareholders' equity: Common stock, no par value, 37,500 shares authorized, 25,533 and 25,610 shares issued and outstanding, respectively 314,601 315,932 Foreign currency translation adjustment 694 (889) Retained earnings 49,593 60,002 --------- --------- Total shareholders' equity 364,888 375,045 --------- --------- Total liabilities and shareholders' equity $ 791,692 $ 778,436 ========= =========
See accompanying notes. -3- NCO GROUP, INC. Consolidated Statements of Operations (Unaudited) (Amounts in thousands, except per share data)
For the Three Months For the Nine Months Ended September 30, Ended September 30, --------------------------- --------------------------- 1999 2000 1999 2000 ------------ ---------- ------------ ---------- Revenue $ 127,100 $ 153,858 $ 320,583 $ 451,904 Operating costs and expenses: Payroll and related expenses 66,585 74,892 168,194 219,380 Selling, general, and administrative expenses 34,523 44,878 88,687 132,571 Depreciation and amortization expense 6,014 8,253 14,717 23,771 Nonrecurring acquisition costs -- -- 4,601 -- --------- --------- --------- --------- Total operating costs and expenses 107,122 128,023 276,199 375,722 --------- --------- --------- --------- Income from operations 19,978 25,835 44,384 76,182 Other income (expense): Interest and investment income 366 609 864 1,575 Interest expense (5,590) (6,450) (12,372) (19,265) Other income -- -- -- 1,313 --------- --------- --------- --------- Total other expense (5,224) (5,841) (11,508) (16,377) --------- --------- --------- --------- Income before provision for income taxes 14,754 19,994 32,876 59,805 Income tax expense 6,349 8,447 14,943 25,242 --------- --------- --------- --------- Income from continuing operations 8,405 11,547 17,933 34,563 Accretion of preferred stock to redemption value -- -- (377) -- --------- --------- --------- --------- Income from continuing operations applicable to common shareholders 8,405 11,547 17,556 34,563 Discontinued operations, net of taxes: Income (loss) from discontinued operations 497 -- 996 (975) Loss on disposal of discontinued operations -- (2,365) -- (23,179) --------- --------- --------- --------- Net income applicable to common shareholders $ 8,902 $ 9,182 $ 18,552 $ 10,409 ========= ========= ========= ========= Income from continuing operations applicable to common shareholders per share: Basic $ 0.36 $ 0.45 $ 0.80 $ 1.35 Diluted $ 0.35 $ 0.45 $ 0.76 $ 1.34 Net income applicable to common shareholders per share: Basic $ 0.38 $ 0.36 $ 0.84 $ 0.41 Diluted $ 0.37 $ 0.36 $ 0.81 $ 0.40 Weighted average shares outstanding: Basic 23,169 25,610 22,034 25,576 Diluted 24,152 25,704 22,992 25,826
See accompanying notes. -4- NCO GROUP, INC Consolidated Statements of Cash Flows (Unaudited) (Amounts in thousands)
For the Nine Months Ended September 30, ------------------------------ 1999 2000 ----------- ---------- Cash flows from operating activities: Income from continuing operations $ 17,933 $ 34,563 Adjustments to reconcile income from continuing operations to net cash provided by continuing operating activities: Depreciation 5,418 10,924 Amortization of intangibles 9,299 12,847 Write-off of deferred financing costs 353 -- Provision for doubtful accounts 1,120 3,421 Compensation expense on stock options granted 34 -- Changes in assets and liabilities, net of acquisitions: Accounts receivable, trade (13,135) (25,419) Deferred taxes 2,521 10,703 Other assets (1,220) (8,215) Accounts payable and accrued expenses 3,377 3,909 Corporate taxes payable 4,821 (8,260) Other long-term liabilities 1,028 (4,404) --------- --------- Net cash provided by continuing operating activities 31,549 30,069 Net cash (used in) provided by discontinued operating activities (1,489) 1,597 --------- --------- Net cash provided by operating activities 30,060 31,666 Cash flows from investing activities: Acquisition of purchased accounts receivable (6,180) (20,901) Collections applied to principal of purchased accounts receivable 2,006 2,633 Purchase of property and equipment (14,348) (24,348) Net cash paid for acquisitions (130,897) (10,000) --------- --------- Net cash used in investing activities (149,419) (52,616) Cash flows from financing activities: Repayment of notes payable (1,672) (1,635) Repayment of acquired notes payable (42,000) -- Borrowings under revolving credit agreement 190,965 -- Repayment of borrowings under revolving credit agreement (4,000) (15,000) Payment of fees to acquire new debt (3,565) -- Issuance of common stock, net 4,588 1,013 --------- --------- Net cash provided by (used in) financing activities 144,316 (15,622) Effect of exchange rate on cash 56 (90) --------- --------- Net increase (decrease) in cash and cash equivalents 25,013 (36,662) Cash and cash equivalents at beginning of period 22,528 50,513 --------- --------- Cash and cash equivalents at end of period $ 47,541 $ 13,851 ========= =========
See accompanying notes. -5- NCO GROUP, INC. Notes to Consolidated Financial Statements (Unaudited) 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, utility, government and telecommunications sectors. 2. Summary of Significant Accounting Policies: Interim Financial Information: The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended September 30, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000, or for any other interim period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 27, 2000, as amended on April 11, 2000. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of significant intercompany accounts and transactions. Revenue Recognition: The Company generates revenue 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 and accepted by the client. 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. Intangibles: The Company's intangible assets consist primarily of goodwill. Goodwill represents the excess of purchase price over the fair market value of the net assets of the acquired businesses based on their respective fair values at the date of acquisition. 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 circumstances indicate that the carrying amount of the goodwill may not be recoverable. In making such determination with respect to goodwill, the Company evaluates the operating results of the underlying business that gave rise to such amount. -6- 2. Summary of Significant Accounting Policies (continued): 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 nondeductible portion of goodwill expenses attributable to certain acquisitions. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the 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. Reclassifications: Certain amounts for December 31, 1999, and for the three months and nine months ended September 30, 1999, have been reclassified for comparative purposes. 3. Discontinued Operations: On April 14, 2000 (the "Measurement Date"), the Company's Board of Directors approved a plan to divest the Company's Market Strategy division as part of its strategic plan to increase long-term shareholder value and focus on its core business of accounts receivable management services. The Market Strategy division provided market research and telemarketing services. The market research assets were acquired through the January 1997 acquisition of the Tele-Research Center, Inc. and the February 1998 acquisition of The Response Center. The telemarketing assets were acquired as non-core components of the March 1999 acquisition of JDR Holdings, Inc., and the August 1999 acquisition of Compass International Services Corporation. On October 26, 2000, TRC Holdings, Inc. and Creative Marketing Strategies, Inc., both management-led groups, acquired the assets of the market research and telemarketing businesses, respectively. In consideration for the purchased assets of the market research business, the Company received a $12.25 million note. The note earns interest at a fixed rate of 9% per year and the interest payments are due monthly. The entire principal balance is due on December 31, 2002. In the event that the principal and the remaining interest is not paid in full on December 31, 2002, the principal of the note will be increased by a maximum of $2.0 million. The remaining principal and interest will be due in equal monthly payments until December 31, 2005. In consideration for the purchased assets of the telemarketing business, the Company received a $6.0 million note. The note earns interest at a fixed rate of 9% per year and the interest payments are due monthly. Commencing on December 1, 2003, in addition to the interest payments, principal payments of $25,000 will be due monthly until November 1, 2005. The remaining principal and interest will become due in full on November 1, 2005. In accordance with the Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the consolidated financial statements and the accompanying notes of the Company have been presented to reflect the Market Strategy division as discontinued operations for all periods presented. -7- 3. Discontinued Operations (continued): The following summary of the Market Strategy division's assets and liabilities has been presented net in the Company's consolidated balance sheets (amounts in thousands):
December 31, 1999 September 30, 2000 ----------------- ------------------ Current assets $ 13,734 $ 8,236 Total assets 47,740 22,956 Current liabilities 6,248 4,053 Total liabilities 6,248 4,095 Net assets of discontinued operations 41,492 18,861
The following summary of the Market Strategy division's operations prior to the Measurement Date have been presented net in the Company's consolidated statements of operations (amounts in thousands):
For the three months ended For the nine months ended September 30, September 30, -------------------------- ----------------------------- 1999 2000 1999 2000 ---------- ---------- ---------- ----------- Revenue $ 8,978 $-- $ 22,063 $ 7,802 ======== ==== ======== ======== Income (loss) from discontinued operations before provision for income taxes $ 865 $-- $ 1,744 $ (1,498) Income tax expense (benefit) 368 -- 748 (523) -------- ---- -------- -------- Income (loss) from discontinued operations, net of taxes $ 497 $-- $ 996 $ (975) ======== ==== ======== ========
For the nine months ended September 30, 2000, the Company recorded a $23.2 million loss (net of a tax benefit of $4.3 million), or $0.90 loss per share on a diluted basis, on the disposal of the Market Strategy division. This loss reflects the difference between the net assets of the Market Strategy division over the proceeds from the divestiture and the operating losses from the Measurement Date through the completion of the divestiture. -8- 4. 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 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 nine months ended September 30, 1999 (amounts in thousands, except per share data): For the nine months ended September 30, 1999: Revenue: NCO $ 308,437 JDR (for the period prior to the acquisition) 12,146 --------- Combined $ 320,583 ========= Income from continuing operations applicable to common shareholders: NCO $ 20,803 JDR (for the period prior to the acquisition) 447 Nonrecurring acquisition costs, net of taxes (3,694) --------- Combined $ 17,556 ========= For the nine months ended September 30, 1999, the Company incurred $4.6 million of nonrecurring acquisition costs in connection with the JDR acquisition. These costs consisted primarily of investment banking fees, legal and accounting fees, and printing costs. Purchase Transactions: The following acquisitions represent the acquisitions that were completed by the Company during 1999 and the last quarter of 1998. 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 November 30, 1998, the Company acquired all of the outstanding stock of Medaphis Services Corporation ("MSC"), a wholly owned subsidiary of Medaphis Corporation, for $117.5 million in cash, which includes a $10.0 million earn-out that was paid in April 2000. 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. 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 and the assumption of stock options to purchase approximately 200,000 shares of NCO common stock. The purchase price was valued at approximately $104.1 million. -9- 5. 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 accounting principles generally accepted in the United States. The Company's comprehensive income is as follows (amounts in thousands):
For the three months For the nine months ended September 30, ended September 30, -------------------------- -------------------------- 1999 2000 1999 2000 ------------ ------------ ------------ ------------ Net income applicable to common shareholders $ 8,902 $ 9,182 $ 18,552 $ 10,409 Foreign currency translation adjustment 182 (944) 1,195 (1,583) -------- -------- -------- -------- Comprehensive income $ 9,084 $ 8,238 $ 19,747 $ 8,826 ======== ======== ======== ========
6. 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 $47.7 million and $65.9 million at December 31, 1999 and September 30, 2000, respectively, have been shown net of their offsetting liability for financial statement presentation. 7. Long-Term Debt: In May 1999, the Company's credit agreement with Mellon Bank, N.A., for itself and as administrative agent for other participating lenders (collectively, "Mellon Bank"), 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. At the option of the Company, the borrowings bear interest at a rate equal to either Mellon Bank's prime rate plus a margin of 0.25% to 0.50% that is determined quarterly based upon the Company's consolidated funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio (Mellon Bank's prime rate was 9.50% at September 30, 2000), or the London InterBank Offered Rate ("LIBOR") plus a margin of 1.25% to 2.25% depending on the Company's consolidated funded debt to EBITDA ratio (LIBOR was 6.62% at September 30, 2000). 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. Prior to the JDR acquisition on March 31, 1999, 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. -10- 8. Earnings Per Share: Basic earnings per share were computed by dividing the income from continuing operations applicable to common shareholders and the net income applicable to common shareholders for the three months and nine months ended September 30, 1999 and 2000, by the weighted average number of shares outstanding. Diluted earnings per share were computed by dividing the income from continuing operations and the net income applicable to common shareholders for the three months and nine months ended September 30, 1999 and 2000, by the weighted average number of shares outstanding including all common equivalent shares. 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 income from continuing operations per share and net income applicable to common shareholders per share consisted of the following (amounts in thousands, except per share amounts):
For the three months ended September 30, -------------------------------------------------------------------------------------- 1999 2000 ----------------------------------------- ------------------------------------------ Income from Income from Continuing Continuing Operations Net Income Operations Net Income Shares Per Share Per Share Shares Per Share Per Share ---------- ---------------- ------------- ----------- ---------------- ------------- Basic 23,169 $ 0.36 $ 0.38 25,610 $ 0.45 $ 0.36 Dilutive effect of warrants 266 -- -- 17 -- -- Dilutive effect of options 717 (0.01) (0.01) 77 -- -- ------ -------- -------- ------ -------- -------- Diluted 24,152 $ 0.35 $ 0.37 25,704 $ 0.45 $ 0.36 ====== ======== ======== ====== ======== ========
For the nine months ended September 30, -------------------------------------------------------------------------------------- 1999 2000 ----------------------------------------- ------------------------------------------ Income from Income from Continuing Continuing Operations Net Income Operations Net Income Shares Per Share Per Share Shares Per Share Per Share ---------- ---------------- ------------- ----------- ---------------- ------------- Basic 22,034 $ 0.80 $ 0.84 25,576 $ 1.35 $ 0.41 Dilutive effect of warrants 203 (0.01) (0.01) 85 -- -- Dilutive effect of options 744 (0.03) (0.02) 165 (0.01) (0.01) Other 11 -- -- -- -- -- ------ -------- -------- ------ -------- -------- Diluted 22,992 $ 0.76 $ 0.81 25,826 $ 1.34 $ 0.40 ====== ======== ======== ====== ======== ========
-11- 9. Supplemental Cash Flow Information: The following are supplemental disclosures of cash flow information for the nine months ended September 30, 1999 and 2000 (amounts in thousands): 1999 2000 -------- ------ Non-cash investing and financing activities: Fair value of assets acquired $ 30,339 $ - Liabilities assumed from acquisitions 52,422 - Common stock issued for acquisitions 101,526 - Stock options issued for acquisitions 1,500 - Convertible note payable, exercised for common stock 900 - Warrants issued for acquisitions 1,925 - Warrants exercised 4,575 - 10. 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 include charges 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. In January of 2000, NCO realigned its corporate structure into three operating divisions. 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. The Commercial Services division was merged into the Accounts Receivable Management Services division. The Company has divested the Market Strategy division and, as a result, that division has been reflected as discontinued operations. The segment information for the three months and nine months ended September 30, 1999, has been restated to reflect the three continuing operating segments. 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 Technology-Based Outsourcing 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. The International Operations division provides accounts receivable management services across Canada and the United Kingdom. -12- 10. Segment Reporting (continued): 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 three months and nine months ended September 30, 1999 and 2000. EBITDA is used by the Company's management to measure the operating results of the segments and is not intended to report the operating results of the segments in conformity with generally accepted accounting principles.
For the three months ended September 30, 1999 (amounts in thousands) ------------------------------------------------------------------------ Payroll and Selling, General Related and Admin. Revenue Expenses Expenses EBITDA ---------------- ----------------- ----------------- --------------- A/R Management $ 84,269 $ 43,566 $ 22,952 $ 17,751 Tech-Based Outsourcing 34,879 18,439 9,478 6,962 International Operations 7,952 4,580 2,093 1,279 -------- -------- -------- -------- Total $127,100 $ 66,585 $ 34,523 $ 25,992 ======== ======== ======== ========
For the three months ended September 30, 2000 (amounts in thousands) ------------------------------------------------------------------------ Payroll and Selling, General Related and Admin. Revenue Expenses Expenses EBITDA ---------------- ----------------- ----------------- --------------- A/R Management $109,656 $ 51,830 $ 33,212 $ 24,614 Tech-Based Outsourcing 36,096 18,786 9,328 7,982 International Operations 8,106 4,276 2,338 1,492 -------- -------- -------- -------- Total $153,858 $ 74,892 $ 44,878 $ 34,088 ======== ======== ======== ========
For the nine months ended September 30, 1999 (amounts in thousands) ------------------------------------------------------------------------ Selling, Non- Payroll and General and Recurring Related Admin. Acquisition Revenue Expenses Expenses Costs EBITDA ------------- -------------- -------------- ------------- ----------- A/R Management $205,221 $105,035 $ 57,663 $ -- $ 42,523 Tech-Based Outsourcing 91,954 49,561 24,675 -- 17,718 International Operations 23,408 13,598 6,349 -- 3,461 Other -- -- -- 4,601 (4,601) -------- -------- -------- -------- -------- Total $320,583 $168,194 $ 88,687 $ 4,601 $ 59,101 ======== ======== ======== ======== ========
For the nine months ended September 30, 2000 (amounts in thousands) ------------------------------------------------------------------------ Payroll and Selling, Related General and Revenue Expenses Admin. Expenses EBITDA ---------------- ----------------- ----------------- --------------- A/R Management $317,510 $150,747 $ 95,781 $ 70,982 Tech-Based Outsourcing 110,973 55,848 29,998 25,127 International Operations 23,421 12,785 6,792 3,844 -------- -------- -------- -------- Total $451,904 $219,380 $132,571 $ 99,953 ======== ======== ======== ========
-13- Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Certain statements included in this Report on Form 10-Q, other than historical facts, are forward-looking statements (as such term is defined in the Securities Exchange Act of 1934, and the regulations thereunder) that are intended to be covered by the safe harbors created thereby. Forward-looking statements include, without limitation, statements as to the disposal of the Market Strategy division and its effect on the Company; statements as to the Company's objective to focus on internal growth, strategic acquisitions and alliances, and integration; fluctuations in quarterly operating results; the impact of acquisitions on the Company's earnings; the Company's ability to realize operating efficiencies in the integration of its acquisitions; trends in the Company's future operating performance; the effects of legal or governmental proceedings; the effects of changes in accounting pronouncements; year 2000 compliance; 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 that may cause actual results to differ materially from those in the forward-looking statements. In addition to the factors discussed in this Report on Form 10-Q, certain risks, uncertainties and other factors, including, without limitation, the risk that the Company will not be able to implement its five-year strategy as and when planned; risks associated with growth and future acquisitions; risks relating to fluctuations in quarterly operating results; risks related to timing of contracts; risks related to strategic acquisitions and international operations; 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 27, 2000, as amended on April 11, 2000, can cause actual results and developments to be materially different from those expressed or implied by such forward-looking statements. A copy of the Annual Report on Form 10-K can be obtained, without charge except for exhibits, by written request to Steven L. Winokur, Executive Vice President, Finance/CFO, NCO Group, Inc., 515 Pennsylvania Avenue, Fort Washington, PA 19034. Three Months Ended September 30, 2000, Compared to Three Months Ended September 30, 1999 Revenue. Revenue increased $26.8 million or 21.1% to $153.9 million for the three months ended September 30, 2000, from $127.1 million for the comparable period in 1999. The Accounts Receivable Management Services ("A/R Management"), Technology-Based Outsourcing ("TBO"), and International Operations ("International") divisions represented $109.7 million, $36.1 million, and $8.1 million, respectively, of the revenue for the three months ended September 30, 2000. The A/R Management division's revenue increased $25.4 million or 30.1% to $109.7 million for the three months ended September 30, 2000, from $84.3 million for the comparable period in 1999. The acquisition of Compass International Services Corporation ("Compass") on August 20, 1999 represented $5.4 million of the increase and $3.2 million of this increase was attributable to the acquisition of Co-Source Corporation ("Co-Source") on May 21, 1999. The remainder of the increase in the A/R Management division's revenue was attributable to the addition of new clients and growth in business from existing clients. The TBO division's revenue increased $1.2 million or 3.5% to $36.1 million for the three months ended September 30, 2000, from $34.9 million for the comparable period in 1999. This increase in the TBO division's revenue was attributable to the addition of new clients and growth in business from existing clients. The International division's revenue increased $154,000 or 1.9% to $8.1 million for the three months ended September 30, 2000, from $8.0 million for the comparable period in 1999. This increase in the International division's revenue was primarily attributable to the addition of new clients and growth in business from existing clients. However, the growth was limited due to a weak Canadian economy. -14- Payroll and related expenses. Payroll and related expenses increased $8.3 million to $74.9 million for the three months ended September 30, 2000, from $66.6 million for the comparable period in 1999, but decreased as a percentage of revenue to 48.7% from 52.4%. This decrease as a percentage of revenue was partially attributable to the Company continuing the process of rationalizing staff levels in both its acquired and existing businesses. The decrease as a percentage of revenue was also attributable to the increase in productivity that was achieved through the expansion of the Company's use of predictive dialing equipment. The remaining portion of the decrease was the result of spreading the fixed portion of the Company's payroll cost structure over a larger revenue base. Selling, general and administrative expenses. Selling, general and administrative expenses increased $10.4 million to $44.9 million for the three months ended September 30, 2000, from $34.5 million for the comparable period in 1999, and increased as a percentage of revenue to 29.2% from 27.2%. The increase as a percentage of revenue was primarily attributable to the increased information technology costs associated with the expansion of the Company's use of predictive dialing equipment. Increased productivity more than offset the increase in selling, general, and administrative expense by a reduction in payroll and related expenses. The Company experienced some increase in selling, general and administrative expenses as a percentage of revenue as a result of increased collection costs attributed to certain adverse changes in the payment patterns of consumers which made collections more difficult, as well as further integration of its information technology infrastructure. Depreciation and amortization. Depreciation and amortization increased to $8.3 million for the three months ended September 30, 2000, from $6.0 million for the comparable period in 1999. Of this increase, $623,000 was attributable to the Compass acquisition. The remaining $1.7 million increase consisted of depreciation resulting from normal capital expenditures made in the ordinary course of business. These capital expenditures included purchases associated with the Company's planned migration towards a single, integrated information technology platform, and predictive dialers and other equipment required to expand the Company's infrastructure to handle future growth. Other income (expense). Interest and investment income increased $243,000 to $609,000 for the three months ended September 30, 2000, from $366,000 for the comparable period in 1999. This increase was primarily attributable to an increase in operating funds and funds held on behalf of clients, and the implementation of the Company's new cash investment strategy. This new strategy allows the Company to fully take advantage of its funds available for investment. Interest expense increased to $6.5 million for the three months ended September 30, 2000, from $5.6 million for the comparable period in 1999. The increase was partially attributable to a full quarter of interest expense in third quarter of 2000 from borrowings under the revolving credit facility of $29.5 million that were used to repay debt that was assumed as a result of the August 1999 acquisition of Compass. The remainder of the increase was attributable to an increase in interest rates that was partially offset by repayments of debt made during 2000. Income tax expense. Income tax expense increased to $8.4 million, or 42.2% of income before taxes, for the three months ended September 30, 2000, from $6.3 million, or 43.0% of income before taxes, for the comparable period in 1999. The decrease in the effective tax rate was primarily attributable to additional revenues diluting the impact of the nondeductible goodwill related to certain acquisitions. Discontinued operations. On April 14, 2000 (the "Measurement Date"), the Company's Board of Directors approved a plan to divest the Company's Market Strategy division as part of its strategic plan to increase long-term shareholder value and focus on its core business of accounts receivable management services. An estimate of the operations of the Market Strategy division for the period from the Measurement Date to the expected completion of the divestiture were recorded during the first quarter of 2000 as part of the loss on the disposal of the Market Strategy division. The Company recorded an additional loss $2.4 million during the third quarter of 2000. This additional loss was primarily attributable to lower than expected operating results from the Market Strategy division during the third quarter of 2000. The Company completed the divestiture of the Market Strategy division on October 26, 2000. -15- Nine Months Ended September 30, 2000, Compared to Nine Months Ended September 30, 1999 Revenue. Revenue increased $131.3 million or 41.0% to $451.9 million for the nine months ended September 30, 2000, from $320.6 million for the comparable period in 1999. The A/R Management, TBO, and International divisions represented $317.5 million, $111.0 million, and $23.4 million, respectively, of the revenue for the nine months ended September 30, 2000. The A/R Management division's revenue increased $112.3 million or 54.7% to $317.5 million for the nine months ended September 30, 2000, from $205.2 million for the comparable period in 1999. The acquisition of Compass on August 20, 1999 represented $31.2 million of the increase and $35.1 million of this increase was attributable to the acquisition of Co-Source on May 21, 1999. The remainder of the increase in the A/R Management division's revenue was attributable to the addition of new clients and growth in business from existing clients. The TBO division's revenue increased $19.0 million or 20.7% to $111.0 million for the nine months ended September 30, 2000, from $92.0 million for the comparable period in 1999. This increase in the TBO division's revenue was attributable to the addition of new clients and growth in business from existing clients. The International division's revenue decreased $13,000 or 0.1% to $23.4 million for the nine months ended September 30, 2000, from $23.4 million for the comparable period in 1999. This lack of growth in the International division's revenue was attributable to a weak Canadian economy. Payroll and related expenses. Payroll and related expenses increased $51.2 million to $219.4 million for the nine months ended September 30, 2000, from $168.2 million for the comparable period in 1999, but decreased as a percentage of revenue to 48.5% from 52.5%. This decrease as a percentage of revenue was partially attributable to the Company continuing the process of rationalizing staff levels in both its acquired and existing businesses. The decrease as a percentage of revenue was also attributable to the increase in productivity that was achieved through the expansion of the Company's use of predictive dialing equipment. The remaining portion of the decrease was the result of spreading the fixed portion of the Company's payroll cost structure over a larger revenue base. Selling, general and administrative expenses. Selling, general and administrative expenses increased $43.9 million to $132.6 million for the nine months ended September 30, 2000, from $88.7 million for the comparable period in 1999, and increased as a percentage of revenue to 29.3% from 27.7%. The increase as a percentage of revenue was primarily attributable to the increased information technology costs associated with the expansion of the Company's use of predictive dialing equipment. Increased productivity more than offset the increase in selling, general, and administrative expense by a reduction in payroll and related expenses. The Company experienced some increase in selling, general and administrative expenses as a percentage of revenue as a result of significant start-up costs incurred as a result of new client relationships, further integration of its information technology infrastructure, as well as increased collection costs attributed to certain adverse changes in the payment patterns of consumers which made collections more difficult. Depreciation and amortization. Depreciation and amortization increased to $23.8 million for the nine months ended September 30, 2000, from $14.7 million for the comparable period in 1999. Of this increase, $2.9 million was attributable to the Compass acquisition and $1.6 million was attributable to the Co-Source acquisition. The remaining $4.6 million increase consisted of depreciation resulting from normal capital expenditures made in the ordinary course of business during 2000. These capital expenditures included purchases associated with the Company's planned migration towards a single, integrated information technology platform, and predictive dialers and other equipment required to expand the Company's infrastructure to handle future growth. -16- Other income (expense). Interest and investment income increased $711,000 to $1.6 million for the nine months ended September 30, 2000, from $864,000 for the comparable period in 1999. This increase was primarily attributable to an increase in operating funds and funds held on behalf of clients, and the implementation of the Company's new cash investment strategy. This new strategy allows the Company to fully take advantage of its funds available for investment. Interest expense increased to $19.3 million for the nine months ended September 30, 2000, from $12.4 million for the comparable period in 1999. The increase was primarily attributable to the Company financing the May 1999 acquisition of Co-Source with borrowings of $122.7 million under the revolving credit facility. Additionally, a portion of the increase was attributable to borrowings under the revolving credit facility of $29.5 million that were used to repay debt that was assumed as a result of the August 1999 acquisition of Compass. The remainder of the increase was attributable to an increase in interest rates that was partially offset by repayments of debt made during 2000. Income tax expense. Income tax expense increased to $25.2 million, or 42.2% of income before taxes, for the nine months ended September 30, 2000, from $14.9 million, or 45.5% of income before taxes, for the comparable period in 1999. The decrease in the effective tax rate was primarily attributable to the nondeductible portion of the $4.6 million of nonrecurring acquisition costs incurred during the first quarter of 1999 in connection with the acquisition of JDR Holdings, Inc. ("JDR"). In addition, a portion of the decrease was attributable to additional revenues diluting the impact of the nondeductible goodwill related to certain acquisitions. Accretion of preferred stock to redemption value. The accretion of preferred stock to redemption value relates to JDR's preferred stock that was outstanding prior to its conversion into NCO common stock on March 31, 1999. This non-cash accretion represents the periodic amortization of the difference between the original carrying amount and the mandatory redemption amount. Discontinued operations. The Market Strategy division had a loss from operations of $975,000 for the period from January 1, 2000 to the Measurement Date, as compared to income of $996,000 for the nine months ended September 30, 1999. For the nine months ended September 30, 2000, the Company recorded a $23.2 million loss on the disposal of the Market Strategy division. The loss on disposal included the operations for the period from the Measurement Date to the completion of the divestiture. The Company completed the divestiture of the Market Strategy division on October 26, 2000. Liquidity and Capital Resources Historically, the Company's primary sources of cash have been bank borrowings, public offerings, and cash flows from operations. Cash has been used for acquisitions, repayments of bank borrowings, purchases of equipment, acquisitions of purchased accounts receivable, and working capital to support the Company's growth. Cash provided by operating activities was $31.7 million during the nine months ended September 30, 2000, compared to $30.1 million for the comparable period in 1999. This increase was primarily attributable to the increase in income from continuing operations and deferred tax liabilities, primarily associated with timing differences in depreciation and amortization. These increases were partially offset by an increase in accounts receivable and a decrease in corporate taxes payable. Cash used in investing activities was $52.6 million during the nine months ended September 30, 2000, compared to $149.4 million for the comparable period in 1999. During the nine months ended September 30, 2000, purchases of accounts receivable portfolios were $20.9 million compared to $6.2 million for the comparable period in 1999. Collections on purchased accounts receivable portfolios for the nine months ended September 30, 2000 was $10.4 million, of which $2.6 million, or 25.0%, was applied to reduce the principal balance of the purchased portfolios. Capital expenditures were $24.3 million during the nine months ended September 30, 2000 compared to $14.3 million for the comparable period in 1999. The increase in purchases of accounts receivable portfolios, and property and equipment was offset by the payment of $130.9 million of acquisition related expenses paid during the first nine months of 1999 in connection with the acquisitions of Medaphis Services Corporation ("MSC"), JDR, Co-Source, and Compass compared to the payment of a $10.0 million earn-out in the second quarter of 2000 in connection with the acquisition of MSC. -17- Cash used in financing activities was $15.6 million during the nine months ended September 30, 2000, compared to cash provided by financing activities of $144.3 million for the comparable period in 1999. During the nine months ended September 30, 1999, the Company had $149.0 million of borrowings, net of the repayment of acquired notes payable, which were primarily attributable to the acquisition of Co-Source. During the nine months ended September 30, 2000, the Company repaid $15.0 million of borrowings under the revolving credit agreement. In May 1999, the Company's credit agreement with Mellon Bank, N.A., for itself and as administrative agent for other participating lenders ("Mellon Bank"), 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. At the option of the Company, the borrowings bear interest at a rate equal to either Mellon Bank's prime rate plus a margin of 0.25% to 0.50% depending on the Company's consolidated funded debt to EBITDA ratio (Mellon Bank's prime rate was 9.50% at September 30, 2000) or LIBOR plus a margin of 1.25% to 2.25% depending on the Company's consolidated funded debt to EBITDA ratio (LIBOR was 6.62% at September 30, 2000). 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. The Company believes that funds generated from operations, together with existing cash and available borrowings under its credit agreement, will be sufficient to finance its current operations, planned capital expenditure requirements, and internal growth at least through the next 12 months. However, the Company could require additional debt or equity financing if it were to make any other significant acquisitions for cash during that period. Market Risk The Company is exposed to various types of market risk in the normal course of business, including the impact of interest rate changes, foreign currency exchange rate fluctuations, and changes in corporate tax rates. The Company employs risk management strategies that may include the use of derivatives such as interest rate swap agreements, interest rate ceilings and floors, and foreign currency forwards and options to manage these exposures. The Company does not hold derivatives for trading purposes. Goodwill The Company's balance sheet includes amounts designated as "intangibles" that consist primarily of goodwill. Goodwill represents the excess of purchase price over the fair market value of the net assets of the acquired businesses, based on their respective fair values at the date of acquisition. Accounting principles generally accepted in the United States require that this and all other intangible assets be amortized over the period benefited. Management has determined that period to be from 15 to 40 years based on the attributes of each acquisition. As of September 30, 2000, the Company's balance sheet included goodwill that represented approximately 68.9% of total assets and 142.9% of shareholders' equity. If management has incorrectly overestimated the length of the amortization period for goodwill, earnings reported in periods immediately following the acquisition would be overstated. In later years, NCO would be burdened by a continuing charge against earnings without the associated benefit to income valued by management in arriving at the consideration paid for the business. Earnings in later years also could be significantly affected if management determined then that the remaining balance of goodwill was impaired. Management has concluded that the anticipated future cash flows associated with intangible assets recognized in the acquisitions will continue indefinitely, and there is no persuasive evidence that any material portion will dissipate over a period shorter than the respective amortization period. -18- Recent Accounting Pronouncement: 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" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment 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 value. 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 effect on the consolidated results of operations, financial condition or cash flows of the Company. Item 3 Quantitative and Qualitative Disclosures about Market Risk Included in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Report on Form 10-Q. -19- 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 --------------------- None - not applicable 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 Form 8-K -------------------------------- (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K None - not applicable -20- 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: November 14, 2000 By: /s/ Michael J. Barrist ---------------------- Michael J. Barrist Chairman of the Board, President and Chief Executive Officer (principal executive officer) Date: November 14, 2000 By: /s/ Steven L. Winokur --------------------- Steven L. Winokur Executive Vice President, Finance, Chief Financial Officer and Treasurer -21- EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 13,851,000 0 97,774,000 5,622,000 0 145,999,000 89,285,000 25,290,000 778,436,000 52,428,000 0 0 0 315,932,000 59,113,000 778,436,000 451,904,000 451,904,000 0 372,301,000 (1,313,000) 3,421,000 17,690,000 59,805,000 25,242,000 34,563,000 (24,154,000) 0 0 10,409,000 0.41 0.40
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