-----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, EggtkJc7SPPrW7CUNGEyPDqAV/+TqdfsJWJLA+1HbaG5akm3xY4rV+Y7OlFGbEET gABn+zGWmyf8yKJYqwL0bQ== 0000950116-02-001076.txt : 20020514 0000950116-02-001076.hdr.sgml : 20020514 ACCESSION NUMBER: 0000950116-02-001076 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020430 FILED AS OF DATE: 20020514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NCO GROUP INC CENTRAL INDEX KEY: 0001022608 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-CONSUMER CREDIT REPORTING, COLLECTION AGENCIES [7320] IRS NUMBER: 232858652 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21639 FILM NUMBER: 02645829 BUSINESS ADDRESS: STREET 1: 515 PENNSYLVANIA AVE CITY: FT WASHINGTON STATE: PA ZIP: 19034 BUSINESS PHONE: 2157939300 10-Q 1 tenq.txt TENQ 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 March 31, 2002, 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) 507 Prudential Road, Horsham, Pennsylvania - -------------------------------------------------------------------------------- (Address of principal executive offices) 23-2858652 - -------------------------------------------------------------------------------- (IRS Employer Identification Number) 19044 - -------------------------------------------------------------------------------- (Zip Code) 215-441-3000 - -------------------------------------------------------------------------------- (Registrant's telephone number including area code) 515 Pennsylvania Avenue, Fort Washington, Pennsylvania, 19034 - -------------------------------------------------------------------------------- (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 25,877,000 shares common stock, no par value, outstanding as of May 13, 2002. NCO GROUP, INC. INDEX PAGE PART I - FINANCIAL INFORMATION Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Consolidated Balance Sheets - December 31, 2001 and March 31, 2002 1 Consolidated Statements of Income - Three months ended March 31, 2001 and 2002 2 Consolidated Statements of Cash Flows - Three months ended March 31, 2001 and 2002 3 Notes to Consolidated Financial Statements 4 Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15 Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20 PART II - OTHER INFORMATION 21 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)
March 31, ASSETS December 31, 2002 2001 (Unaudited) ------------ ----------- Current assets: Cash and cash equivalents $ 32,161 $ 25,150 Restricted cash 1,125 1,125 Accounts receivable, trade, net of allowance for doubtful accounts of $5,311 and $6,717, respectively 99,055 101,356 Purchased accounts receivable, current portion 47,341 49,807 Deferred income taxes 8,336 8,153 Other current assets 14,784 9,682 --------- --------- Total current assets 202,802 195,273 Funds held on behalf of clients Property and equipment, net 71,457 76,243 Other assets: Goodwill 514,161 514,104 Other intangible assets, net of accumulated amortization 7,929 7,260 Purchased accounts receivable, net of current portion 92,660 87,089 Other assets 42,016 49,502 --------- --------- Total other assets 656,766 657,955 --------- --------- Total assets $ 931,025 $ 929,471 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion $ 21,922 $ 22,964 Income taxes payable 176 3,264 Accounts payable 12,164 9,171 Accrued expenses 39,382 34,517 Accrued compensation and related expenses 16,785 15,031 --------- --------- Total current liabilities 90,429 84,947 Funds held on behalf of clients Long-term liabilities: Long-term debt, net of current portion 357,868 347,436 Deferred income taxes 42,855 44,648 Other long-term liabilities 4,565 4,100 Minority interest 21,213 22,185 Shareholders' equity: Preferred stock, no par value, 5,000 shares authorized, no shares issued and outstanding - - Common stock, no par value, 50,000 shares authorized, 25,816 and 25,874 shares issued and outstanding, respectively 320,993 321,067 Other comprehensive loss (4,346) (4,165) Retained earnings 97,448 109,253 --------- --------- Total shareholders' equity 414,095 426,155 --------- --------- Total liabilities and shareholders' equity $ 931,025 $ 929,471 ========= =========
See accompanying notes. -1- NCO GROUP, INC. Consolidated Statements of Income (Unaudited) (Amounts in thousands, except per share data)
For the Three Months Ended March 31, ------------------------------ 2001 2002 ------------ ----------- Revenue $ 171,029 $ 178,907 Operating costs and expenses: Payroll and related expenses 82,912 86,120 Selling, general and administrative expenses 51,123 61,073 Depreciation and amortization expense 8,954 6,226 --------- --------- Total operating costs and expenses 142,989 153,419 --------- --------- Income from operations 28,040 25,488 Other income (expense): Interest and investment income 916 667 Interest expense (7,421) (4,986) Other income (expense) - (595) --------- --------- Total other income (expense) (6,505) (4,914) --------- --------- Income before income tax expense 21,535 20,574 Income tax expense 8,666 7,797 --------- --------- Income from operations before minority interest 12,869 12,777 Minority interest (592) (972) --------- --------- Net income $ 12,277 $ 11,805 ========= ========= Net income per share: Basic $ 0.48 $ 0.46 Diluted $ 0.47 $ 0.43 Weighted average shares outstanding: Basic 25,687 25,855 Diluted 26,340 29,903
See accompanying notes. -2- NCO GROUP, INC Consolidated Statements of Cash Flows (Unaudited) (Amounts in thousands)
For the Three Months Ended March 31, ------------------------------ 2001 2002 ------------ ----------- Cash flows from operating activities: Net income $ 12,277 $ 11,805 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 4,628 5,549 Amortization of intangibles 4,326 677 Provision for doubtful accounts 779 2,302 Impairment of purchased accounts receivable - 797 Gain on insurance proceeds from property and equipment - (847) Minority interest 592 972 Changes in operating assets and liabilities, net of acquisitions: Restricted cash 2,555 - Accounts receivable, trade (6,183) (4,921) Deferred income taxes 7,530 1,777 Other assets (2,147) (3,425) Accounts payable and accrued expenses 1,278 (9,593) Income taxes payable (294) 3,093 Other long-term liabilities (115) (465) -------- -------- Net cash provided by operating activities 25,226 7,721 Cash flows from investing activities: Purchases of accounts receivable (13,493) (9,238) Collections applied to principal of purchased accounts receivable 6,978 11,524 Purchases of property and equipment (7,755) (10,366) Insurance proceeds from involuntary conversion of property and equipment - 2,633 Investment in consolidated subsidiary by minority interest 2,320 - Net cash paid for pre-acquisition liabilities and acquisition related costs (11,077) - -------- -------- Net cash used in investing activities (23,027) (5,447) Cash flows from financing activities: Repayment of notes payable (4,390) (4,684) Repayment of acquired notes payable (20,084) - Borrowings under revolving credit agreement 47,350 370 Repayment of borrowings under revolving credit agreement (13,800) (5,000) Payment of fees to acquire debt (939) - Issuance of common stock, net 2,872 69 -------- -------- Net cash provided by (used in) financing activities 11,009 (9,245) Effect of exchange rate on cash (303) (40) -------- -------- Net increase (decrease) in cash and cash equivalents 12,905 (7,011) Cash and cash equivalents at beginning of the period 13,490 32,161 -------- -------- Cash and cash equivalents at end of the period $ 26,395 $ 25,150 ======== ========
See accompanying notes. -3- NCO GROUP, INC. Notes to Consolidated Financial Statements (Unaudited) 1. Nature of Operations: NCO Group, Inc. (the "Company" or "NCO") is a leading provider of accounts receivable management and collection services. The Company also owns approximately 63% of NCO Portfolio Management, Inc., a separate public company that purchases and manages defaulted consumer accounts receivable from consumer creditors such as banks, finance companies, retail merchants, and other consumer oriented companies. The Company's client base includes companies in the financial services, healthcare, retail and commercial, utilities, education, telecommunications, and government sectors. These clients are primarily located throughout the United States of America, Canada, the United Kingdom, and Puerto Rico. 2. 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 period ended March 31, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002, 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 19, 2002. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and all affiliated subsidiaries and entities controlled by the Company. All significant intercompany accounts and transactions have been eliminated. Two entities that the Company does not control are InoVision-MEDCLR NCOP Ventures, LLC and Creditrust SPV98-2, LLC (see note 14). Contingency Fees and Contractual Services: The Company generates revenue from contingency fees and contractual services. Contingency 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. Purchased Accounts Receivable: The Company accounts for its investment in purchased accounts receivable on an accrual basis under the guidance of the American Institute of Certified Public Accountants' Practice Bulletin No. 6, "Amortization of Discounts on Certain Acquired Loans," using unique and exclusive static pools. Static pools are established with accounts having similar attributes. Typically, each pool consists of an individual acquisition of accounts. Once a static pool is established, the accounts in the pool are not changed. Proceeds from the sale of accounts within a static pool are accounted for as collections in that static pool. Collections on replacement accounts received from the originator of the loans are included as collections in the corresponding static pools. The discount between the cost of each static pool and the face value of the static pool is not recorded since the Company expects to collect a relatively small percentage of each static pool's face value. -4- 2. Accounting Policies (continued): Purchased Accounts Receivable (continued): Each static pool is initially recorded at cost. Collections on the pools are allocated to revenue and principal reduction based on the estimated internal rate of return ("IRR") for each pool. The IRR for each static pool is estimated based on the expected monthly collections over the estimated economic life of each pool (generally five years, based on the Company's collection experience), compared to the original purchase price. Revenue on purchased accounts receivable is recorded monthly based on each static pool's effective IRR applied to each static pool's monthly opening carrying value. To the extent collections exceed the revenue, the carrying value is reduced and the reduction is recorded as collections applied to principal. Because the IRR reflects collections for the entire economic life of the static pool and those collections are not constant, lower collection rates, typically in the early months of ownership, can result in a situation where the actual collections are less than the revenue accrual. In this situation, the carrying value of the pool may be accreted for the difference between the revenue accrual and collections. To the extent the estimated future cash flow increases or decreases from the expected level of collections, the Company prospectively adjusts the IRR accordingly. If the carrying value of a particular static pool exceeds its expected future cash flows, a charge to income would be recognized in the amount of such impairment. Additional impairments on previously impaired static pools may occur if the current estimated future cash flow projection, after being adjusted prospectively for actual collection results, is less than the carrying value recorded. After the impairment of a static pool, no income is recorded on that static pool and collections are recorded as a return of capital until the full carrying value of the static pool has been recovered. The estimated yield for each static pool is based on estimates of future cash flows from collections, and actual cash flows may vary from current estimates. The difference could be material. Credit Policy: The Company has two types of arrangements under which it collects its contingency fee revenue. For certain clients, the Company remits funds collected on behalf of the client net of the related contingency fees while, for other clients, the Company remits gross funds collected on behalf of clients and bills the client separately for its contingency fees. Management carefully monitors its client relationships in order to minimize its credit risk and generally does not require collateral. In 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: 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. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangibles" ("SFAS 142") (see note 3). Other intangible assets consist primarily of deferred financing costs, which relate to debt issuance costs incurred. Deferred financing costs are amortized over the term of the debt (see note 3). Interest Rate Hedges: The Company accounts for its interest rate swap agreements as either assets or liabilities on the balance sheet measured at fair value. Changes in the fair value of the interest rate swap agreements will be recorded in other comprehensive income since the interest rate swap agreements were designated and qualified as cash flow hedges. If the interest rate swap agreements no longer qualify as cash flow hedges, the change in the fair value may be recorded in current earnings. -5- 2. 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. Prior to the adoption of SFAS 142 on January 1, 2002, income taxes were computed after giving effect to the nondeductible portion of goodwill expenses attributable to certain acquisitions. The static pools of purchased accounts receivable are composed of distressed debt. Collection results are not guaranteed until received; accordingly, for tax purposes, any gain on a particular static pool is deferred until the full cost of its acquisition is recovered. Revenue for financial reporting purposes is recognized ratably over the life of the static pool. Deferred tax liabilities arise from income tax deferrals created during the early stages of the static pool. These deferrals reverse after the cost basis of the static pool is recovered. The creation of new tax deferrals from future purchases of static pools are expected to offset the reversal of the deferrals from static pools where the collections have become fully taxable. 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 amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. In the ordinary course of accounting for purchased accounts receivable, estimates have been made by management as to the amount of future cash flows expected from each static pool. The estimated future cash flow of each static pool is used to compute the IRR for the static pool. The IRR is used to allocate cash flow between revenue and amortization of the carrying values of the purchased accounts receivable. On an ongoing basis, we compare the historical trends of each static pool to projected collections. The future projections are then increased or decreased, within parameters, in accordance with the historical trend. The results are further reviewed by management with a view towards specifically addressing any particular static pool's performance. Actual results will differ from these estimates and a material change in these estimates could occur within one year. Reclassifications: Certain amounts for December 31, 2001, have been reclassified for comparative purposes. 3. Intangible Assets: Goodwill: Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangibles" ("SFAS 142"). As a result of adopting SFAS 142, the Company no longer amortizes goodwill. Goodwill must be tested at least annually for impairment, including an initial test completed within six months of adopting SFAS 142. The test for impairment uses a fair-value based approach, whereby if the implied fair value of a reporting unit's goodwill is less than its carrying amount, goodwill would be considered impaired. The Company is currently in the process of determining if there are any impairment charges attributable to the adoption of SFAS 142. However, the Company does not expect to incur an impairment charge based on its preliminary valuations. Any impairment charge incurred in connection with the adoption of SFAS 142 would be classified as an effect of a change in accounting principle. -6- 3. Intangible Assets (continued): Goodwill (continued): SFAS 142 requires goodwill to be allocated and tested at the reporting unit level. The Company's reporting units under SFAS 142 are U.S. Operations and International Operations. These reporting units had the following goodwill as of December 31, 2001 and March 31, 2002 (amounts in thousands): December 31, March 31, 2001 2002 ------------- --------- U.S. Operations $ 484,182 $ 484,182 International Operations 29,979 29,922 --------- --------- Total $ 514,161 $ 514,104 ========= ========= The following presents the results of operations for the three months ended March 31, 2001 as if SFAS 142 had been adopted on January 1, 2001 (dollars in thousands): For the Three Months Ended March 31, 2001 ----------------------------------- Diluted Earnings Amount Per Share ----------- ------------------ Net income, as reported $ 12,277 $ 0.47 Add back of goodwill amortization, net of tax 2,916 0.11 -------- ------ Adjusted net income $ 15,193 $ 0.58 ======== ====== Other Intangible Assets: The Company's adoption of SFAS 142 had no effect on its other intangible assets. Other intangible assets consist primarily of deferred financing costs. The following represents the other intangible assets as of December 31, 2001 and March 31, 2002 (amounts in thousands):
December 31, 2001 March 31, 2002 --------------------------------- --------------------------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization ---------------- --------------- ---------------- --------------- Deferred financing costs $ 11,855 $ 4,294 $ 11,863 $ 4,932 Other intangible assets 900 532 900 571 -------- ------- -------- ------- Total $ 12,755 $ 4,826 $ 12,763 $ 5,503 ======== ======= ======== =======
-7- 3. Intangible Assets (continued): Other Intangible Assets (continued): During the three months ended March 31, 2001 and 2002, the Company recorded amortization expense of $401,000 and $677,000, respectively, for all other intangible assets. The following represents the Company's expected amortization expense from these other intangible assets over the next five years (amounts in thousands): Estimated For the Years Ended Amortization December 31, Expense ------------------- ------------ 2002 $ 2,709 2003 2,682 2004 1,542 2005 790 2006 206 4. Acquisition: On February 20, 2001, the Company merged NCO Portfolio Management, Inc. ("NCO Portfolio"), its wholly owned subsidiary, with Creditrust Corporation ("Creditrust") to form a new public entity focused on the purchase of accounts receivable. After the Creditrust merger, the Company owned approximately 63% of the outstanding stock of NCO Portfolio, subject to certain adjustments. The Company's contribution to the NCO Portfolio merger consisted of $25.0 million of purchased accounts receivable. As part of the Creditrust merger, NCO Portfolio signed a ten-year service agreement that appointed the Company as the sole provider of collection services to NCO Portfolio. The Company has agreed to offer all of its future U.S. accounts receivable purchase opportunities to NCO Portfolio. In connection with the Creditrust merger, the Company amended its revolving credit facility to provide NCO Portfolio with a $50.0 million revolving line of credit in the form of a sub-facility under its existing credit facility. Initially, NCO Portfolio borrowed $36.3 million to fund the Creditrust merger. The following summarizes the unaudited pro forma results of operations for the three months ended March 31, 2001, assuming the Creditrust merger occurred on January 1, 2001. 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 (amounts in thousands, except per share data): For the Three Months Ended March 31, 2001 -------------------- Revenue $ 174,609 Net income $ 4,760 Earnings per share - basic $0.18 Earnings per share - diluted $0.20 -8- 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. The Company's comprehensive income for the three months ended March 31, 2001 and 2002 was as follows (amounts in thousands): For the Three Months Ended March 31, -------------------------- 2001 2002 ------------ ------------ Net income $ 12,277 $ 11,805 Other comprehensive income: Foreign currency translation adjustment (2,261) (187) Unrealized gain on interest rate swap - 368 -------- -------- Comprehensive income $ 10,016 $ 11,986 ======== ======== 6. Purchased Accounts Receivable: The Company's Portfolio Management and International Operations divisions purchase defaulted consumer receivables at a discount from the actual principal balance. As of March 31, 2002, the carrying value of Portfolio Management's and International Operations' purchased accounts receivable was $133.5 million and $3.4 million, respectively. The following summarizes the change in purchased accounts receivable for the year ended December 31, 2001 and for the three months ended March 31, 2002 (amounts in thousands): December 31, March 31, 2001 2002 ------------ --------- Balance, at beginning of period $ 34,475 $ 140,001 Purchased accounts receivable acquired from Creditrust 93,518 - Purchases of accounts receivable 50,621 9,238 Collections on purchased accounts receivable (99,868) (28,512) Revenue recognized 64,065 16,988 Impairment of purchased accounts receivable (2,738) (797) Foreign currency translation adjustment (72) (22) --------- --------- Balance, at end of period $ 140,001 $ 136,896 ========= ========= During the three months ended March 31, 2002, an impairment of $797,000 was recorded as a charge to income on static pools where the carrying amounts exceeded the expected future cash flows. No revenue will be recorded on these static pools until the carrying values have been fully recovered. As of March 31, 2002, the combined carrying values on all previously impaired static pools aggregated $7.5 million, or 5.5% of the total purchased accounts receivable, representing their net realizable value. No impairments were recorded during the three months ended March 31, 2001. 7. Funds Held on Behalf of Clients: In the course of the Company's regular business activities as a provider of accounts receivable management services, 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 $56.8 million and $59.6 million at December 31, 2001 and March 31, 2002, respectively, have been shown net of their offsetting liability for financial statement presentation. -9- 8. Long-term Debt: Long-term debt consisted of the following at December 31, 2001 and March 31, 2002 (amounts in thousands): December 31, March 31, 2001 2002 ---------------- -------------- Revolving credit loan $ 206,630 $ 202,000 Convertible notes 125,000 125,000 Securitized debt 45,379 41,140 Capital leases 2,781 2,260 Less current portion (21,922) (22,964) --------- --------- $ 357,868 $ 347,436 ========= ========= Revolving Credit Facility: The Company has a credit agreement with Citizens Bank of Pennsylvania, formerly Mellon Bank, N.A., ("Citizens Bank"), for itself and as administrative agent for other participating lenders, structured as a revolving credit facility. The balance under the revolving credit facility is due on May 20, 2004 (the "Maturity Date"). The borrowing capacity of the revolving credit facility is subject to mandatory reductions, including a quarterly reduction of $6.3 million on March 31, 2001, subsequent quarterly reductions of $5.2 million until the Maturity Date, and 50 percent of the net proceeds received from any offering of debt or equity. At the option of NCO, the borrowings bear interest at a rate equal to either Citizens Bank's prime rate plus a margin of 0.25% to 0.50%, which is determined quarterly based upon the Company's consolidated funded debt to earnings before interest, taxes, depreciation, and amortization ("EBITDA") ratio (Citizens Bank's prime rate was 4.75% at March 31, 2002), 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 1.88% at March 31, 2002). The Company is charged a fee on the unused portion of the credit facility ranging from 0.13% to 0.38% depending on the Company's consolidated funded debt to EBITDA ratio. In connection with the merger of Creditrust into NCO Portfolio, the Company amended its revolving credit facility to allow the Company to provide NCO Portfolio with a $50 million revolving line of credit in the form of a sub-facility under its existing credit facility. The borrowing capacity of the sub-facility is subject to mandatory reductions including four quarterly reductions of $2.5 million beginning March 31, 2002 through December 31, 2002. Effective March 31, 2003, quarterly reductions of $3.75 million are required until the earlier of the Maturity Date or the date at which the sub-facility is reduced to $25 million. At the option of NCO, the borrowings bear interest at a rate equal to either Citizens Bank's prime rate plus a margin of 1.25% to 1.50% that is determined quarterly based upon the Company's consolidated funded debt to EBITDA ratio, or LIBOR plus a margin of 2.25% to 3.25% depending on the Company's consolidated funded debt to EBITDA ratio. The following summarizes the availability under the revolving credit facility as of March 31, 2002 (amounts in thousands):
NCO Group NCO Portfolio Combined --------------- ------------------ --------------- Maximum capacity $ 214,825 $ 47,500 $ 262,325 Less: Outstanding borrowings 154,500 47,500 202,000 Unused letters of credit 2,554 - 2,554 --------- -------- --------- Available $ 57,771 $ - $ 57,771 ========= ======== =========
-10- 8. Long-term Debt (continued): Revolving Credit Facility (continued): Borrowings under the revolving credit facility are collateralized by substantially all the assets of the Company, including the common stock of NCO Portfolio, and certain assets of NCO Portfolio. 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 and distributions to shareholders. As of March 31, 2002, the Company was in compliance with all required financial covenants. Convertible Debt: In April 2001, the Company completed the sale of $125.0 million aggregate principal amount of 4.75% Convertible Subordinated Notes due 2006 ("Notes") in a private placement pursuant to Rule 144A and Regulation S under the Securities Act of 1933. The Notes are convertible into NCO common stock at an initial conversion price of $32.92 per share. The Company will be required to repay the $125.0 million of aggregate principal if the Notes are not converted prior to their maturity in April 2006. The Company used the $121.3 million of net proceeds from this offering to repay debt under its revolving credit facility. In accordance with the terms of the credit agreement, 50% of the net proceeds from the Notes permanently reduced the maximum borrowings available under the revolving credit facility. Securitized Debt: Creditrust established three securitized notes payable to fund the purchase of accounts receivable prior to the Creditrust merger. Each of the notes payable is non-recourse to the Company and NCO Portfolio, secured by a static pool of purchased accounts receivable, and is bound by an indenture and servicing agreement. Pursuant to the acquisition, the trustee appointed NCO as the successor servicer for each static pool of purchased accounts receivable. When the notes payable were established, a separate special purpose finance subsidiary was created to house the assets and debt. These notes are term notes without the ability to re-borrow. Monthly principal payments on the notes equal all collections after servicing fees, collection costs, interest expense and administrative fees. The first securitized note ("Warehouse Facility") was established in September 1998 through Creditrust Funding I LLC, a special purpose finance subsidiary. The Warehouse Facility carries a floating interest rate of LIBOR plus 0.65% per annum, and the final due date of all payments under the facility is the earlier of March 2005, or satisfaction of the note from collections. A $900,000 liquidity reserve is included in restricted cash as of March 31, 2002, and is restricted as to use until the facility is retired. Interest expense, trustee fees and guarantee fees aggregated $257,000 and $167,000 for the period from February 21, 2001, to March 31, 2001, and for the three months ended March 31, 2002, respectively. As of March 31, 2002, the amount outstanding on the facility was $17.1 million. The note issuer, Radian Group, Inc., formerly Asset Guaranty Insurance Company, has been guaranteed against loss by NCO Portfolio for up to $4.5 million, which will be reduced if and when reserves and residual cash flows from another securitization, Creditrust SPV 98-2, LLC, are posted as additional collateral for this facility (see note 14). The second securitized note ("SPV99-1 Financing") was established in August 1999 through Creditrust SPV99-1, LLC, a special purpose finance subsidiary. SPV99-1 Financing carries interest at 9.43% per annum, with a final payment date of the earlier of August 2004, or satisfaction of the note from collections. A $225,000 liquidity reserve is included in restricted cash as of March 31, 2002, and is restricted as to use until the facility is retired. Interest expense and trustee fees aggregated $141,000 and $52,000 for the period from February 21, 2001, to March 31, 2001, and for the three months ended March 31, 2002, respectively. As of March 31, 2002, the amount outstanding on the facility was $1.2 million. -11- 8. Long-term Debt (continued): Securitized Debt (continued): The third securitized note ("SPV99-2 Financing") was established in August 1999 through Creditrust SPV99-2, LLC, a special purpose finance subsidiary. SPV99-2 Financing carries interest at 15.00% per annum, with a final payment date of the earlier of December 2004, or satisfaction of the note from collections. Interest expense and trustee fees aggregated $421,000 and $876,000 for the period from February 21, 2001, to March 31, 2001, and for the three months ended March 31, 2002, respectively. As of March 31, 2002, the amount outstanding on the facility was $22.8 million. 9. Earnings Per Share: Basic earnings per share ("EPS") was computed by dividing the net income for the three months ended March 31, 2001 and 2002, by the weighted average number of common shares outstanding. Diluted EPS was computed by dividing the adjusted net income for the three months March 31, 2001 and 2002, by the weighted average number of common shares outstanding plus all common equivalent shares. Net income is adjusted to add-back convertible interest expense, net of taxes. The convertible interest, net of taxes, included in the diluted EPS calculation for the three months ended March 31, 2002, was $920,000. There was no convertible interest during the three months ended March 31, 2001. 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 weighted average shares outstanding for the three months ended March 31, 2001 and 2002 was as follows (amounts in thousands): For the Three Months Ended March 31, --------------------------- 2001 2002 --------- ---------- Basic 25,687 25,855 Dilutive effect of convertible debt - 3,797 Dilutive effect of options 154 251 Dilutive effect of warrants 499 - ------- ------- Diluted 26,340 29,903 ======= ======= 10. Interest Rate Hedge: As of March 31, 2002, the Company was party to two interest rate swap agreements, which qualified as cash flow hedges, to fix LIBOR at 2.8225% on an aggregate amount of $102 million of the variable-rate debt outstanding under the revolving credit facility. The aggregate notional amount of the interest rate swap agreements is subject to quarterly reductions that will reduce the aggregate notional amount to $62 million by maturity in September 2003. 11. Supplemental Cash Flow Information: The following are supplemental disclosures of cash flow information for the three months ended March 31, 2001 and 2002 (amounts in thousands): For the Three Months Ended March 31, --------------------------- 2001 2002 --------- ---------- Non-cash investing and financing activities: Fair value of assets acquired $ 123,978 $ - Liabilities assumed from acquisitions 109,394 - Warrants exercised - 875 -12- 12. Segment Reporting: The Company's business consists of three operating divisions: U.S. Operations, Portfolio Management and International Operations. The accounting policies of the segments are the same as those described in note 2, "Accounting Policies." U.S. Operations provides accounts receivable management services to consumer and commercial accounts for all market sectors including financial services, healthcare, retail and commercial, utilities, education, telecommunications, and government. U.S. Operations serves clients of all sizes in local, regional and national markets. In addition to traditional accounts receivable collections, these services include developing the client relationship beyond bad debt recovery and delinquency management, delivering cost-effective accounts receivable and customer relationship management solutions to all market sectors, serving clients of all sizes in local, regional and national markets. U.S. Operations had total assets, net of any intercompany balances, of $732.4 million and $727.5 million at December 31, 2001, and March 31, 2002, respectively. Portfolio Management purchases and manages defaulted consumer accounts receivable from consumer creditors such as banks, finance companies, retail merchants, and other consumer oriented companies. Portfolio Management had total assets, net of any intercompany balances, of $153.7 million and $153.0 million at December 31, 2001, and March 31, 2002, respectively. International Operations provides accounts receivable management services across Canada and the United Kingdom. U.S. Operations uses International Operations as a subcontractor to perform accounts receivable management services for some of its clients. International Operations had total assets, net of any intercompany balances, of $44.9 million and $49.0 million at December 31, 2001, and March 31, 2002, respectively. 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 ended March 31, 2001 and 2002. 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 accounting principles generally accepted in the United States.
For the Three Months Ended March 31, 2001 (amounts in thousands) ----------------------------------------------------------------------- Payroll and Selling, General Related and Admin. Revenue Expenses Expenses EBITDA ---------------- --------------- ----------------- --------------- U.S. Operations $ 155,772 $ 78,691 $ 47,929 $ 29,152 Portfolio Management 12,618 257 6,105 6,256 International Operations 8,768 4,742 2,440 1,586 Eliminations (6,129) (778) (5,351) - --------- -------- -------- -------- Total $ 171,029 $ 82,912 $ 51,123 $ 36,994 ========= ======== ======== ======== For the Three Months Ended March 31, 2001 (amounts in thousands) ----------------------------------------------------------------------- Payroll and Selling, General Related and Admin. Revenue Expenses Expenses EBITDA ---------------- --------------- ----------------- --------------- U.S. Operations $ 162,277 $ 81,688 $ 56,957 $ 23,632 Portfolio Management 16,270 554 9,663 6,053 International Operations 10,649 5,867 2,753 2,029 Eliminations (10,289) (1,989) (8,300) - --------- -------- -------- -------- Total $ 178,907 $ 86,120 $ 61,073 $ 31,714 ========= ======== ======== ========
-13- 13. Net Loss Due to Flood and Relocation of Corporate Headquarters: In June 2001, the entire first floor of the Company's Fort Washington, PA, headquarters was severely damaged by a flood caused by remnants of Tropical Storm Allison. During the third quarter of 2001, the Company decided to relocate its corporate headquarters to Horsham, PA. The Company has filed a lawsuit against its landlord to terminate the leases for the Fort Washington facilities. Due to the uncertainty of the outcome of the lawsuit, the Company has recorded the full amount of rent due under the remaining terms of the leases during the third quarter of 2001. The Company has also recorded other expenses and expected insurance proceeds during the third quarter of 2001 in connection with the flood and the relocation of the corporate headquarters. The net effect of the charges and the gain from the insurance proceeds included in selling, general, and administrative expenses during the third quarter of 2001 was $11.2 million. During the first quarter of 2002, the Company received insurance proceeds in excess of its original estimate, which resulted in a gain of approximately $1.0 million. This gain was included in the Statement of Income in "other income (expense)." 14. Investments in Unconsolidated Subsidiaries: NCO Portfolio owns a 100% retained residual interest in an investment in securitization, Creditrust SPV 98-2, LLC, which was acquired as part of the Creditrust merger. This transaction qualified for gain on sale accounting when the purchased accounts receivable were originally securitized by Creditrust. This securitization issued a note that is due in January 2004 and had a balance of $4.7 million as of March 31, 2002. The retained interest represents the present value of the residual interest in the securitization using discounted future cash flows after the securitization note is fully repaid plus a cash reserve. As of March 31, 2002, the investment in securitization was $7.3 million, composed of $4.0 million in present value of discounted residual cash flows plus $3.3 million in cash reserves. The investment accrues non-cash income at a rate of 8% per annum on the residual cash flow component only. The income earned increases the investment balance until the securitization note has been repaid. After repayment of the note, collections are split between income and amortization of the investment in securitization based on the discounted cash flows. The Company recorded $28,000 in income on this investment during the three months ended March 31, 2002. The cash reserves of $3.3 million plus the first $1.3 million in residual cash collections received after the securitization note has been repaid have been pledged as collateral against the Warehouse Facility (see note 8). NCO Portfolio has a 50% ownership interest in a joint venture, InoVision-MEDCLR NCOP Ventures, LLC ("Joint Venture") with IMNV Holdings, LLC ("IMNV"). The Joint Venture was established in 2001 to purchase utility, medical and various other small balance accounts receivable and is accounted for using the equity method of accounting. As of March 31, 2002, NCO Portfolio and IMNV each had an investment of $854,000 in the Joint Venture for the purchase of accounts receivable. Included in the Statement of Income, in "interest and investment income," was $83,000, representing the Company's 50% share of operating income from this unconsolidated subsidiary for the three months ended March 31, 2002. The Joint Venture has access to capital through a specialty finance lender who, at its option, lends 90% of the value of the purchased accounts receivable to the Joint Venture. The debt is cross-collateralized by all static pools in which the lender participates, and is non-recourse to NCO Portfolio. The following table summarizes the financial information of the Joint Venture as of and for the three months ended March 31, 2002 (amounts in thousands): Total assets $ 6,150 Total liabilities 4,467 Revenue 1,860 Operating income 166 -14- 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) which are intended to be covered by the safe harbors created thereby. Forward-looking statements include, without limitation, statements as to the Company's expected future results of operations, the Company's growth strategy, the Company's Internet and e-commerce strategy, the final outcome of the environmental liability, the effects of the terrorist attacks and the economy on the Company's business, expected increases in operating efficiencies, anticipated trends in the accounts receivable management industry, estimates of future cash flows of purchased accounts receivable, estimates of goodwill impairments and amortization expense for other intangible assets, the effects of legal or governmental proceedings, the effects of changes in accounting pronouncements and statements as to trends or 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, certain risks, uncertainties and other factors, including, without limitation, the risk that the Company will not be able to achieve expected future results of operations, the risk that the Company will not be able to implement its growth strategy as and when planned, risks associated with the recent expansion of NCO Portfolio Management, Inc., risks associated with growth and future acquisitions, the risk that the Company will not be able to realize operating efficiencies in the integration of its acquisitions, fluctuations in quarterly operating results, risks relating to the timing of contracts, risks related to purchased accounts receivable, risks associated with technology, the Internet and the Company's e-commerce strategy, risks related to the expected settlement of the environmental liability, risks related to past or possible future terrorist attacks, risks related to the economy, and 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 March 19, 2002, 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., 507 Prudential Rd., Horsham, PA 19044. Three Months Ended March 31, 2002, Compared to Three Months Ended March 31, 2001 Revenue. Revenue increased $7.9 million, or 4.6%, to $178.9 million for the three months ended March 31, 2002, from $171.0 million for the comparable period in 2001. U.S. Operations, Portfolio Management and International Operations accounted for $162.3 million, $16.3 million and $10.6 million, respectively, of the revenue for the three months ended March 31, 2002. U.S. Operations' revenue included $8.3 million of revenue earned on services performed for Portfolio Management that was eliminated upon consolidation. International Operations' revenue included $2.0 million of revenue earned on services performed for U.S. Operations that was eliminated upon consolidation. U.S. Operations' revenue increased $6.5 million, or 4.2%, to $162.3 million for the three months ended March 31, 2002, from $155.8 million for the comparable period in 2001. The increase in U.S. Operations' revenue was attributable to the addition of new clients and the growth in business from existing clients. Portfolio Management's revenue increased $3.7 million, or 28.9%, to $16.3 million for the three months ended March 31, 2002, from $12.6 million for the comparable period in 2001. This increase in Portfolio Management's revenue was primarily attributable to a full quarter impact of the acquisition of Creditrust Corporation ("Creditrust") in February 2001. The remainder of the increase was attributable to an increase in acquisitions of purchased accounts receivable. However, the growth in revenue was hindered by lower than projected collections due to diminished consumer payments. -15- International Operations' revenue increased $1.9 million, or 21.5%, to $10.6 million for the three months ended March 31, 2002, from $8.8 million for the comparable period in 2001. This increase in International Operations' revenue was primarily attributable to new services provided for our U.S. Operations, the addition of new clients, and growth in business from existing clients. Payroll and related expenses. Payroll and related expenses increased $3.2 million to $86.1 million for the three months ended March 31, 2002, from $82.9 million for the comparable period in 2001, but decreased as a percentage of revenue to 48.1% from 48.5%. U.S. Operations' payroll and related expenses increased $3.0 million to $81.7 million for the three months ended March 31, 2002, from $78.7 million for the comparable period in 2001, but decreased as a percentage of revenue to 50.3% from 50.5%. Despite the difficult collection environment, we were able to reduce the amount of labor required to attain our revenue goals and leverage the fixed portion of our payroll structure over a larger revenue base. Portfolio Management's payroll and related expenses increased $297,000 to $554,000 for the three months ended March 31, 2002, from $257,000 for the comparable period in 2001, and increased as a percentage of revenue to 3.4% from 2.0%. Portfolio Management outsources all of its collection services to U.S. Operations and, therefore, has a relatively small fixed payroll cost structure. However, due to the expansion of this division and the Creditrust merger in February 2001, Portfolio Management required additional employees to operate NCO Portfolio Management, Inc. as a separate public company. International Operations' payroll and related expenses increased $1.2 million to $5.9 million for the three months ended March 31, 2002, from $4.7 million for the comparable period in 2001, and increased as a percentage of revenue to 55.1% from 54.1%. The increase was primarily attributable to the increase in outsourcing services since those services typically have a higher payroll cost structure than the remainder of International Operations' business. The higher payroll cost structure of the outsourcing services was offset by a lower selling, general and administrative cost structure than the remainder of International Operations' business. Selling, general and administrative expenses. Selling, general and administrative expenses increased $10.0 million to $61.1 million for the three months ended March 31, 2002, from $51.1 million for the comparable period in 2001, and increased as a percentage of revenue to 34.1% from 29.9%. The increase as a percentage of revenue was primarily attributable to reduced collectibility within the Company's contingency revenue stream due to the effects of the difficult collection environment. Accordingly, in order to mitigate the effects of the decreased collectibility while maintaining its performance for its clients, the Company had to increase spending for direct costs of collections. These costs included telephone, letter writing and postage, third-party servicing fees, credit reporting, skiptracing, and legal and forwarding fees. Depreciation and amortization. Depreciation and amortization decreased $2.8 million to $6.2 million for the three months ended March 31, 2002, from $9.0 million for the comparable period in 2001. This decrease was the result of the adoption of Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangibles" ("SFAS 142") on January 1, 2002. SFAS 142 eliminated the amortization of goodwill, which was $3.9 million for the three months ended March 31, 2001. Partially offsetting the $3.9 million decrease was additional depreciation resulting from normal capital expenditures made in the ordinary course of business during 2001 and 2002. These capital expenditures included purchases associated with our planned migration towards a single, integrated information technology platform, the relocation of our corporate headquarters to Horsham, PA, and predictive dialers and other equipment required to expand our infrastructure to handle future growth. Other income (expense). Interest and investment income decreased $249,000 to $667,000 for the three months ended March 31, 2002, over the comparable period in 2001. This decrease was primarily attributable to decreases in operating cash and funds held on behalf of clients. Interest expense decreased to $5.0 million for the three months ended March 31, 2002, from $7.4 million for the comparable period in 2001. This decrease was primarily attributable to falling interest rates and debt repayments made during 2001. The decrease was partially offset by a full quarter of interest from the Portfolio Management's $36.3 million of borrowings made in connection with the Creditrust merger in February 2001 and its subsequent borrowings used to purchase accounts receivable portfolios. In addition, a portion of the decrease was offset by a full quarter -16- of interest from securitized debt that was assumed as part of the Creditrust merger. During the three months ended March 31, 2002, we recorded a net expense of $595,000. This expense was the net effect of a $1.0 million insurance gain, and a $1.6 million expense from the estimated settlement of an environmental liability. The gain resulted from the settlement of the insurance claim related to the June 2001 flood of the Fort Washington facilities. The insurance gain was principally due to greater than estimated insurance proceeds. The expense from the environmental liability was the result of contamination that allegedly occurred in the pre-acquisition operations of a company acquired by a subsidiary of Medaphis Services Corporation. We acquired Medaphis Services Corporation in November 1998. These operations were unrelated to the accounts receivable outsourcing business. Income tax expense. Income tax expense for the three months ended March 31, 2002, decreased to $7.8 million, or 37.9% of income before income tax expense, from $8.7 million, or 40.2% of income before income tax expense, for the comparable period in 2001. The decrease in the effective rate was primarily attributable to the elimination of the amortization of nondeductible goodwill related to certain acquisitions. The goodwill amortization was eliminated upon the adoption of SFAS 142 on January 1, 2002. Liquidity and Capital Resources Historically, our 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, purchases of accounts receivable, and working capital to support our growth. Cash Flows from Operating Activities. Cash provided by operating activities was $7.7 million for the three months ended March 31, 2002, compared to $25.2 million for the comparable period in 2001. The decrease in cash provided by operations was primarily attributable to less net income, a large reduction in accounts payable and accrued expenses, and a smaller increase in deferred income tax liabilities. The reduction in accounts payable and accrued expenses was related to large payments made in the first quarter of 2002 including the termination liability from the prior healthcare plan. The increase in deferred tax liabilities in the first quarter of 2001 was primarily attributable to the use of net operating losses. Income taxes payable for the three months ended March 31, 2002, increased as compared to the three months ended March 31, 2001. Cash Flows from Investing Activities. Cash used in investing activities was $5.4 million for the three months ended March 31, 2002, compared to $23.0 million for the comparable period in 2001. The decrease was due primarily to the net cash used to pay pre-acquisition liabilities and acquisition related costs during the three months ended March 31, 2001. Capital expenditures were $10.4 million for the three months ended March 31, 2002, compared to $7.8 million for the same period in 2001. Cash Flows from Financing Activities. Cash used in financing activities was $9.2 million for the three months ended March 31, 2002, compared to cash provided by financing activities of $11.0 million for the same period in 2001. The cash provided by financing activities during the three months ended March 31, 2001 related to the net borrowings under the revolving credit facility made in connection with the Creditrust merger that were used to repay the acquired notes payable, finance purchased accounts receivable, and repay other acquisition related liabilities. Credit Facility. We have a credit agreement with Citizens Bank of Pennsylvania, formerly Mellon Bank, N.A., ("Citizens Bank"), for itself and as administrative agent for other participating lenders, structured as a revolving credit facility. The balance under the revolving credit facility is due on May 20, 2004 (the "Maturity Date"). The borrowing capacity of the revolving credit facility is subject to mandatory reductions, including a quarterly reduction of $6.3 million on March 31, 2001, subsequent quarterly reductions of $5.2 million until the Maturity Date, and 50 percent of the net proceeds received from any offering of debt or equity. As of March 31, 2002, the maximum borrowing capacity and the availability under the revolving credit facility was $262.3 million and $57.8 million, respectively. -17- At our option, the borrowings bear interest at a rate equal to either Citizens Bank's prime rate plus a margin of 0.25% to 0.50%, which is determined quarterly based upon our consolidated funded debt to earnings before interest, taxes, depreciation, and amortization, also referred to as EBITDA, ratio (Citizens Bank's prime rate was 4.75% at March 31, 2002), or the London InterBank Offered Rate, also referred to as LIBOR, plus a margin of 1.25% to 2.25% depending on our consolidated funded debt to EBITDA ratio (LIBOR was 1.88% at March 31, 2002). In connection with the Creditrust merger, the revolving credit facility was amended to provide NCO Portfolio with a $50 million revolving line of credit in the form of a sub-facility under the existing revolving credit facility. The borrowing capacity of the sub-facility is subject to mandatory reductions including four quarterly reductions of $2.5 million beginning March 31, 2002, through December 31, 2002. Effective March 31, 2003, quarterly reductions of $3.75 million are required until the earlier of the Maturity Date or the date at which the sub-facility is reduced to $25 million. At our option, the borrowings bear interest at a rate equal to either Citizens Bank's prime rate plus a margin of 1.25% to 1.50% that is determined quarterly based upon our consolidated funded debt to EBITDA ratio, or LIBOR plus a margin of 2.25% to 3.25% depending on our consolidated funded debt to EBITDA ratio. As of March 31, 2002, there was no availability under the NCO Portfolio sub-facility. During February 2002, we entered into two interest rate swap agreements, which qualified as cash flow hedges, to fix LIBOR at 2.8225% on an aggregate amount of $102 million of the variable-rate debt outstanding under the revolving credit facility. The aggregate notional amount of the interest rate swap agreements is subject to quarterly reductions that will reduce the aggregate notional amount to $62 million by maturity in September 2003. Borrowings under the revolving credit facility are collateralized by substantially all of our assets, including the common stock of NCO Portfolio, and certain assets of NCO Portfolio. The balance under the revolving credit facility will become due on May 20, 2004. 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 and distributions to shareholders. As of March 31, 2002, we were in compliance with all required financial covenants. Convertible Notes. In April 2001, we completed the sale of $125.0 million aggregate principal amount of 4.75% Convertible Subordinated Notes due 2006 ("Notes") in a private placement pursuant to Rule 144A and Regulation S under the Securities Act of 1933. The Notes are convertible into our common stock at an initial conversion price of $32.92 per share. We used the $121.3 million of net proceeds from this offering to repay debt under our revolving credit agreement. In accordance with the terms of the credit agreement, 50% of the net proceeds from the Notes permanently reduced the maximum borrowings available under the revolving credit facility. Off-Balance Sheet Arrangements NCO Portfolio owns a 100% retained residual interest in an investment in securitization, Creditrust SPV 98-2, LLC, which was acquired as part of the merger with Creditrust. This transaction qualified for gain on sale accounting when the purchased accounts receivable were originally securitized. This securitization issued a note that is due in January 2004 and had a balance of $4.7 million as of March 31, 2002. The retained interest represents the present value of the residual interest in the securitization using discounted future cash flows after the securitization note is fully repaid plus a cash reserve. As of March 31, 2002, the investment in securitization was $7.3 million, composed of $4.0 million in present value of discounted residual cash flows plus $3.3 million in cash reserves. The investment accrues non-cash income at a rate of 8% per annum on the residual cash flow component only. The income earned increases the investment balance until the securitization note has been repaid, after which the collections are split between income and amortization of the investment in securitization based on the discounted cash flows. NCO Portfolio recorded $28,000 of income on this investment for the three months ended March 31, 2002. The cash reserves of $3.3 million plus the first $1.3 million in residual cash collections received after the securitization note has been repaid have been pledged as collateral against another securitized note. NCO Portfolio has a 50% ownership interest in a joint venture, InoVision-MEDCLR NCOP Ventures, LLC ("Joint Venture") with IMNV Holdings, LLC ("IMNV"). The Joint Venture was set up in 2001 to purchase utility, medical and various other small balance accounts receivable and is accounted for using the equity method of accounting. As of March 31, 2002, NCO Portfolio and IMNV each -18- had an investment of $854,000 in the Joint Venture for the purchase of accounts receivable. Included in the Statement of Income, in "interest and investment income," was $83,000 representing NCO Portfolio's 50% share of operating income from this unconsolidated subsidiary for the three months ended March 31, 2002. The Joint Venture has access to capital through a specialty finance lender who, at its option, lends 90% of the value of the purchased accounts receivable to the Joint Venture. The debt is cross-collateralized by all static pools in which the lender participates, and is non-recourse to NCO Portfolio. Stock Repurchase Plan In September 2001, our Board of Directors and our lender group authorized the repurchase of up to $15.0 million of our currently issued common stock, subject to a limit of one million shares. The share purchases were to be made from time to time, depending on market conditions, until March 31, 2002. Shares were to be purchased either in the open market or through privately negotiated transactions. The repurchase program did not obligate us to acquire any specific number of shares and could be discontinued at any time. We did not repurchase any shares under the stock repurchase plan. Market Risk We are 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. A material change in these rates could adversely affect our operating results and cash flows. A 25 basis-point increase in interest rates could increase our annual interest expense by $250,000 for each $100 million of variable debt outstanding for the entire year. We employ 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. Goodwill The Company's balance sheet includes amounts designated as "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. As of March 31, 2002, the Company's balance sheet included goodwill that represented approximately 55.3% of total assets and 120.6% of shareholders' equity. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangibles" ("SFAS 142"). As a result of adopting SFAS 142, the Company no longer amortizes goodwill. Goodwill must be tested at least annually for impairment, including an initial test completed within six months of adopting SFAS 142. The test for impairment uses a fair-value based approach, whereby if the implied fair value of a reporting unit's goodwill is less than its carrying amount, goodwill would be considered impaired. The Company is currently in the process of determining if there are any impairment charges attributable to the adoption of SFAS 142. However, the Company does not expect to incur an impairment charge based on its preliminary valuations. Any impairment charge incurred in connection with the adoption of SFAS 142 would be classified as an effect of a change in accounting principle. Impact of Recently Issued and Proposed Accounting Pronouncements During 2001, the Accounting Staff Executive Committee approved an exposure draft on a proposed Statement of Position, "Accounting for Discounts Related to Credit Quality" ("SOP"). The proposed SOP would limit the revenue that may be accrued to the excess of the estimate of expected future cash flows over a static pool's initial cost of accounts receivable acquired. The proposed SOP would require that the excess of the contractual cash flows over expected future cash flows not be recognized as an adjustment of revenue, expense or on the balance sheet. The proposed SOP would freeze the internal rate of return ("IRR") originally estimated when the accounts receivable are purchased for subsequent impairment testing. Rather than lower the estimated IRR if the original collection estimates are not received, the carrying value of a static pool would be written down to maintain the original IRR. Increases in expected future cash flows would be recognized prospectively through adjustment of the IRR over a static pool's remaining life. The exposure draft provides that previously issued annual financial statements would not need to be restated. Until final issuance of this SOP, we cannot ascertain its effect on our reporting. -19- 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. -20- Part II. Other Information Item 1. Legal Proceedings ----------------- The discussions concerning the Company's litigation with the landlord of its Fort Washington facilities and the environmental litigation involving its subsidiary AssetCare, Inc. contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" are incorporated herein by reference. 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 --------------------- In January 2002, the Company issued 55,267 shares of common stock upon the cashless exercise of a warrant to purchase 375,000 shares issued in February 1997 as part of the consideration for the acquisition of the Collection Division of CRW Financial, Inc. The shares were issued without registration under the Securities Act pursuant to the exemption under Section 3(a)(9) of the Securities Act. 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 10.1 Amended and Restated Note Receivable, as of April 1, 2002, from TRC Holdings, Inc. 10.2 Amended Asset Purchase Agreement, as of April 1, 2002, among TRC Holdings, Inc., and NCO Group, Inc. and its wholly owned subsidiary, NCO Teleservices, Inc. 10.3 Amendment dated as of January 30, 2002 between the Company and UBS AG, London Branch to Non-Transferable Common Stock Purchase Warrant Dated February 2, 1997. 99.1 Consolidating Schedule (b) Reports on Form 8-K Date of Report Item Reported -------------- ------------- 2/27/02 Item 5 - Press release and conference call transcript from the earnings release for the fourth quarter of 2001 -21- Signatures Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 14, 2002 By: /s/ Michael J. Barrist ---------------------- Michael J. Barrist Chairman of the Board, President and Chief Executive Officer (principal executive officer) Date: May 14, 2002 By: /s/ Steven L. Winokur --------------------- Steven L. Winokur Executive Vice President, Finance, Chief Financial Officer and Treasurer -22- EX-10 3 exh10-1.txt EXH10-1.TXT Exhibit 10.1 AMENDED AND RESTATED NOTE $11,250,000 Fort Washington, PA Effective as of April 1, 2002 FOR VALUE RECEIVED, TRC HOLDINGS, INC., a Pennsylvania corporation, with an address of Suite 1300 Virginia Drive, Fort Washington, Pennsylvania 19034 ("Maker") unconditionally promises to pay to the order of NCO TELESERVICES, INC. a Pennsylvania corporation or its permitted assignee, with an address at 515 Pennsylvania Avenue, Fort Washington, Pennsylvania 19034 ("Payee"), the principal sum of ELEVEN MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS ($11,250,000) (hereinafter referred to as the "Loan" or the "Loan Amount"), lawful money of the United States of America, together with interest from the date hereof, on the outstanding balance of the Loan, the original amount of which, TWELVE MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS ($12,250,000), resulted from a transaction under that certain Asset Purchase Agreement dated October 26, 2000, by and between Maker and Payee (the "Agreement"), and on the terms set forth herein. Any capitalized terms used but not otherwise defined herein shall have the meaning given to such term in the Agreement. 1. Interest and Principal Payments. Notwithstanding the terms of the Agreement: (a) Interest Rate. During each year that this Note is outstanding, it shall bear interest at the Prime Rate of Interest as reported in the Wall Street Journal on the last business day of February of such year, plus one percent (1%). Notwithstanding the foregoing, the maximum interest rate payable on this Note shall be nine percent (9%) per annum. (b) Principal Payments. Beginning on May 1, 2002, and continuing on the first day of each month through October 1, 2003, Maker shall pay interest only, in arrears, on the unpaid principal balance of the Note at the rate specified in Paragraph 1(a) hereof. Beginning on November 1, 2003, and continuing on the first day of each month for one hundred fifty-five (155) consecutive months, Maker shall pay the amount of One Hundred Ten Thousand Dollars ($110,000) on account of interest and principal on this Note. Each such monthly payment shall be first applied to interest on the then outstanding principal balance of this Note at the rate specified in Paragraph 1(a) hereof and the balance of each payment shall be applied to the reduction of the outstanding principal balance. In the event any principal balance remains outstanding after the application of such payments, the remaining balance shall be paid in full on November 1, 2016. (c) Additional Contingent Principal Payments. In addition to the foregoing, on May 1 of each year that this Note is outstanding, Maker will make an additional payment, to be applied against the outstanding principal balance, of an amount equal to fifteen percent (15%) of Maker's Net Income, if any, for the year ending on the preceding December 31. For purposes of this paragraph, Net Income shall be the amount of taxable income, if any, included on the Maker's federal income tax return for such year as determined by the Maker's independent certified public accountant, adjusted by the deduction of all shareholder distributions for the purpose of paying federal, state and local income taxes and by the addition of an amount equal to any payments made to Messrs. Raquet, Hammond, Olesky and Ms. Zuckerman in excess of the amounts due them under their current employment agreements. (d) Late Charge. Any payment not received by the close of business on the fifth business day of each month shall incur a late charge of five percent (5%) of the payment. 2. Prepayment. Maker shall have the right to prepay this Note, in whole or in part without premium or penalty, at any time. Any prepayment shall be applied against principal and the monthly principal payment shall be recalculated to reduce the amount of each remaining monthly principal payment due hereunder. 3. Security and Subordination. Payment of this Note by the Maker is secured by a second (2nd) lien on the Assets of Maker being acquired by Maker from Payee pursuant to the Agreement, intended to be secured by the filing of UCC Financing Statements forthwith with the appropriate state and local offices. The Loan shall be subordinated (in all respects) to bank debt of Maker, the proceeds of which are to be used by Maker for operating working capital. By acceptance of this Note, Payee agrees to execute and deliver such agreements and instruments as any such bank may require from time to time, and to such amendments to or legends on this Note, pertaining to such subordination. 4. Events of Default. Maker will be in default (an "Event of Default") hereunder if any of the following happens:(a) Maker fails to make any payment or principal or interest when due; (b) the entry of decree or order for relief by a court having jurisdiction over Maker in an involuntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency, or other similar law, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) for Maker or for any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of thirty (30) consecutive days; (c) the commencement by Maker of a voluntary case under the federal bankruptcy laws, as not constituted or hereafter amended, or any other applicable federal or state bankruptcy, insolvency, or other similar law, the consent by Maker to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, conservator, sequestrator (or other similar official) for Maker or for any substantial part of its property, or the making by it of any assignment for the benefit of creditors, or for the failure of Maker generally to pay its debts as such debts become due, or the ordering of the winding-up or liquidation of its affairs by Maker; (d) Maker shall merge its business with or into any other entity and Maker is not the surviving entity; or (e) Maker shall sell all or substantially all of its assets outside the ordinary course of its business. 5. Remedies: Default Rate. Upon the occurrence of an Event of Default, the entire principal indebtedness evidenced hereby, together with all arrearages of interest hereon and other sums due hereunder, if any, shall, at the option of Payee, become due and payable immediately, without presentation, demand or further action, (after such Event of Default and acceleration and until Maker's indebtedness to Payee is paid in full, including the period following entry of any judgment) at a rate which is four percent (4%) per annum in excess of the rate herein specified (the "Default Rate"), together with all reasonable attorney's fees for collection, then due by Maker to Payee and the payment of same may be enforced and recovered by the entry of judgment on this Note and the issuance of execution thereon. 6. Confession of Judgment. Upon the occurrence of an Event of Default hereunder, Maker hereby irrevocably authorizes and empowers any attorney of any court of record or the Prothonotary or Clerk of any court in the Commonwealth of Pennsylvania, or elsewhere, to appear at any time for the of any term, and therein to confess or enter judgment against the Maker for all or any part of the sums due Payee pursuant to this Note and all arrearages of interest thereon together with interest thereon at the Default Rate after default including interest at that rate from and after the date of any foreclosure, sheriff's or judicial sale until actual payment is made to Payee of the full amount due Payee plus costs and together with all actual attorneys' fees incurred by Payee from time to time in enforcing its rights hereunder, including the Confession of Judgment against Maker. For purposes of such confessions of judgment, this Note or a copy thereof verified by affidavit shall be a good and sufficient warrant. The authority granted herein to confess judgment shall not be exhausted by any exercise thereof but shall continue from time to time and at all times until all obligations of Maker to Payee have been fully paid and/or discharged. Payee may confess one or more judgments in the same or different jurisdictions for all or any of the amount owing hereunder, without regard to whether judgment has theretofore been confessed on more than one occasion for the same amount. In the event any judgment confessed against Maker hereunder is stricken or opened upon application by or on Maker's behalf for any reason, Payee is hereby authorized and empowered to again appear for and confess judgment against Maker for any part or all of the amounts owing hereunder, as provided for herein, if doing so will cure any errors or defects in such prior proceedings. 7. Remedies Cumulative. The remedies of Payee provided herein or otherwise available to Payee at law or in equity including all warrants of attorney may be pursued separately, successively or together at the sole discretion of Payee, and may be exercised as often as occasion therefore shall occur, and the failure to exercise any such right or remedy shall in no event be construed as a waiver or release of the same. 8. Assignment. Payee shall, without the requirement of first obtaining Maker's consent, have the right to assign this Note to any company affiliated with Payee. Otherwise, Payee shall not negotiate or assign this Note to any other person or entity without Maker's prior written consent. 9. Miscellaneous. (a) Maker waives presentment for payment, demand, notice of demand, notice of nonpayment or dishonor, protest and notice of protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Note. Liability hereunder shall be unconditional and shall not be affected in any manner by any indulgence, extension of time, renewal, waiver or modification granted or consented to by Payee. (b) The words "Payee" and "Maker" whenever occurring herein shall be deemed and construed to include the respective permitted successors and assigns of Payee and Maker (c) This Note shall be governed by and construed according to the laws of the Commonwealth of Pennsylvania, Maker hereby consents to the exclusive jurisdiction of the Court of Common Pleas of Montgomery County, Pennsylvania in any and all actions or proceedings arising hereunder or pursuant hereto. (d) Maker irrevocably as an independent covenant waives the right to jury trial in any action or proceeding between Maker and Payee, (e) Caption headings in this Note are for convenience purposes only and are not to be used to interpret or define the provisions of this Note. If a court of competent jurisdiction finds any provision of this Note to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances, and all provisions of this Note in all other respects shall remain valid and enforceable. (f) Payee shall not be deemed, by any act of omission or commission to have waived any of its rights or remedies hereunder unless such waiver is in writing and signed by Payee, and then only to the extent specifically set forth in writing. A waiver by Payee with respect to one event shall not be construed as continuing or as a bar to or waiver of any right or remedy with respect to a subsequent event. (g) So long as Maker's obligations hereunder remain outstanding, Maker shall furnish Payee with quarterly financial statements and within sixty (60) days following the end of its fiscal year, an audited financial statement. IN WITNESS WHEREOF, Maker, intending to be legally bound hereby, has executed this Note, under seal, the day and year first above written. Date: April 1, 2002 TRC HOLDINGS, INC, By: ---------------------------------------- Name: Richard Raquet Title: President ACKNOWLEDGMENT OF CONFESSION OF JUDGMENT THE UNDERSIGNED MAKER HEREBY ACKNOWLEDGES THAT THIS NOTE CONTAINS A CONFESSION OF JUDGMENT. MAKER UNDERSTANDS THAT A JUDGMENT MAY BE OBTAINED AGAINST MAKER WITHOUT NOTICE AND AN OPPORTUNITY TO BE HEARD IN COURT. THE UNDERSIGNED MAKER, ACTING THROUGH ITS OFFICERS, HAS RETAINED INDEPENDENT COUNSEL (OR HAS BEEN ADVISED BY PAYEE TO RETAIN SUCH COUNSEL) TO REVIEW THIS NOTE INCLUDING THE CONFESSION OF JUDGMENT. THE UNDERSIGNED DOES KNOWINGLY AND FREELY EXECUTE THIS NOTE CONTAINING THE CONFESSION OF JUDGMENT. TRC HOLDINGS, INC, By: ---------------------------------------- Name: Richard Raquet Title: President EX-10 4 exh10-2.txt EXH10-2.TXT Exhibit 10.2 AMENDMENT AGREEMENT This Agreement, made this 1st day of April, 2002 among TRC Holdings, Inc., a Pennsylvania corporation ("Buyer"), NCO Group, Inc., a Pennsylvania corporation, and its wholly owned subsidiary, NCO Teleservices, Inc., a Pennsylvania corporation (collectively referred to as "Seller"). Buyer and Seller entered into an Asset Purchase Agreement dated October 26, 2000 and effective as of September 29, 2000 (the "Asset Purchase Agreement") pursuant to which Buyer purchased the market research business of Seller on October 30, 2000. The parties desire to amend certain terms of the Asset Purchase Agreement, as provided herein. NOW, THEREFORE, the parties hereto, in consideration of the foregoing and the mutual covenants contained herein, intending to be legally bound hereby, agree as follows: 1. The reference in paragraph 1.4 of the Asset Purchase Agreement to a sublease of the premises at 535 Pennsylvania Avenue, Fort Washington, Pa. and its attachment as Exhibit "A" are hereby deleted. 2. The terms of the Note described in paragraph 2.1 of the Asset Purchase Agreement are hereby deleted and the terms of the Note shall be the terms included in the Amended and Restated Note attached hereto as Exhibit "1". Upon execution of this Amendment Agreement, Buyer will pay to Seller the amount of One Million Dollars ($1,000,000) in reduction of the principal balance of the Note from $12,250,000 to $11,250,000. In addition to the payments due under the Note, if, during the period while the Note is outstanding, Buyer shall sell substantially all of the assets or the stock of its market research business, Seller shall be entitled to receive ten percent (10%) of the excess over the Net Proceeds up to a maximum of $3 million. Net Proceeds shall be defined as the sale price reduced by (a) the expenses of sale, (b) amounts required to pay in full any debts or other liabilities not assumed by the Purchaser and (c) an amount equal to the shareholders invested capital in the Company. Seller's payments hereunder shall be in the same form and at the same time or times as any payments to be received by Buyer. 3. The reference in paragraph 10.6 (c) of the Asset Purchase Agreement to the sublease of Seller's Upper Darby, Pennsylvania facility including its attachment as Exhibit "B" are hereby deleted. 4. The reference in paragraph 10.6 (i) of the Asset Purchase Agreement, requiring enforcement of NCO's rights against Robert Malmud is hereby deleted and Seller shall have no further obligation to pursue any claims against Robert Malmud. 5. In all other respects the Asset Purchase Agreement remains in full force and effect. IN WITNESS WHEREOF, the parties hereto set their hands and seals as of the date first above written TRC Holdings, Inc. By: ------------------------------------- President NCO Teleservices, Inc. By: ------------------------------------- NCO Group, Inc. By: ------------------------------------- EX-10 5 exh10-3.txt EXH10-3.TXT Exhibit 10.3 THIS AMENDMENT TO NON-TRANSFERABLE COMMON STOCK PURCHASE WARRANT DATED FEBRUARY 2, 1997 is made as of January 30, 2002 among NCO GROUP, INC. (the "Company") and UBS AG, LONDON BRANCH ("the Holder"). WHEREAS, the Company issued CRW Financial, Inc. ("CRW") a NON-TRANSFERABLE COMMON STOCK PURCHASE WARRANT DATED FEBRUARY 2, 1997 (the "Warrant"). WHEREAS, Swiss Bank Corporation, London Branch purchased the Warrant from CRW and subsequently merged into the Holder and the Holder is now a party to the Warrant as Holder. WHEREAS, the parties wish to document herein certain amendments to the Warrant. NOW, THEREFORE, intending to be legally bound hereby, the parties agree as follows: 1. Amendment to Section 1.2. With effect from the effective date of January 29, 2002, the parties agree to amend Section 1.2 of the Warrant by deleting it and replacing it with the following: "1.2 Cashless Exercise. The Holder shall have the option (the "Cashless Exercise Option"), to exercise this Warrant, in whole but not in part, by the surrender of this Warrant and the Form of Exercise (and without payment of the Purchase Price in cash) in exchange for a number of whole shares of the Company's Common Stock equal to the product of (a) the number of shares of Company's Common Stock for which this Warrant is exercisable as of the business day on which this Warrant is received by the Company or its counsel Blank Rome Comisky & McCauley LLP (the "Cashless Exercise Date"), and (b) the Cashless Exercise Ratio (the "Cashless Exercise"). The "Cashless Exercise Ratio" shall be determined in accordance with the following formula: Final Price on Cashless Exercise Date - Exercise Price ------------------------------------------------------ Final Price on Cashless Exercise Date where: "Final Price" means, on any day, the last reported sale price per share of the Company's Common Stock for that day. The "Cashless Exercise Date" shall be deemed the "Exercise Date" under the Warrant." 1 2. Certain Understanding. UBS AG, London Branch hereby represents, warrants, confirms and agrees that (i) UBS AG, London Branch, as the successor in interest by merger to Swiss Bank Corporation, London Branch, acquired all right, title and interest in and to the Warrant from CRW, (ii) UBS AG, London Branch is the successor in interest by merger to Swiss Bank Corporation, London Branch of its rights and obligations under the Warrant, the Registration Rights Agreement dated as of February 2, 1997, the Transfer Agreement dated as of January 26, 1998 and the Standstill Agreement dated February 1998 between Swiss Bank Corporation, London Branch and NCO Group, Inc. (collectively, with the Warrant, the "Warrant Documents"), and (iii) UBS AG, London Branch is the owner and Holder of the Warrant. Based on the foregoing representations, NCO Group, Inc. hereby acknowledges, confirms and agrees that UBS AG, London Branch is the owner and Holder of the Warrant and is entitled to the rights and subject to the obligations of Swiss Bank Corporation, London Branch (as its successor in interest by merger) under the Warrant Documents. 3. Cashless Exercise of Warrant. UBS AG, London Branch hereby irrevocably confirms its election to exercise the Warrant in full by the Cashless Exercise Option pursuant to Section 1.2 of the Warrant. The parties agree that the Cashless Exercise Date is January 29, 2002 and that the number of Warrant Shares issuable upon such Cashless Exercise is 55,267 based on the closing price of NCO Group, Inc.'s common stock of $21.60 per share as of such date, as reported by Nasdaq. No additional shares are issuable under the Warrant. UBS AG, London Branch shall cause the Warrant to be delivered to NCO Group, Inc. or its counsel, Blank Rome Comisky & McCauley LLP, on or before the execution of this Amendment. UBS AG, London Branch hereby rescinds all prior attempts to exercise the Warrant and demand registration of the Warrant Shares. 4. Issuance of Certificate Without Restrictive Legend. UBS AG, London Branch acknowledges that, to the extent that the Warrant Shares may be sold pursuant to SEC Rule 144, they will not be "Registrable Securities" entitled to registration rights under the Registration Rights Agreement. In the event that the Warrant Shares are not eligible to be sold pursuant to SEC Rule 144 and UBS AG, London Branch exercises its demand registration rights under the Registration Rights Agreement, UBS AG, London Branch shall pay the costs and fees of any demand registration statement prepared pursuant to the Registration Rights Agreement. 5. Entire Agreement. This Amendment constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communications and prior writings with respect thereto. 6. Definitions. All capitalized terms used in this Amendment (but not defined herein) shall have the same meaning ascribed to them in the Warrant. 2 7. Governing Law. This Amendment will be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania applicable to agreements made and to be entirely performed within such Common wealth without giving effect to principles of conflicts of laws. 8. Agreement Continuation. The Warrant Documents, as modified herein, shall continue in full force and effect, and nothing herein contained shall be construed as a waiver or modification of existing rights under any Warrant Document, except as such rights are expressly modified hereby. This Amendment shall survive the exercise of the Warrant. 9. Counterparts. This Amendment may be executed and delivered in counterparts (including by facsimile transmission), each of which will be deemed an original. IN WITNESS WHEREOF, the parties have signed this Amendment as of the date and year first above written. Holder: UBS AG, LONDON BRANCH By: /s/ By: /s/ -------------------------- ----------------------- Name: Michael Collins Name: John Tobin III Title: Executive Director Title: Managing Director Equities Equities Company: NCO GROUP, INC. By: /s/ ------------------------- Name: Michael J. Barrist Title: CEO 3 EX-99.1 6 exh99-1.txt EX-99.1 Exhibit 99.1 NCO GROUP, INC. Consolidating Statement of Income (Unaudited) (Amounts in thousands)
For the Three Months Ended March 31, 2002 -------------------------------------------------------------------- Intercompany NCO Group NCO Portfolio Eliminations Consolidated ------------- --------------- -------------- -------------- Revenue $ 170,937 $ 16,270 $ (8,300) $ 178,907 Operating costs and expenses: Payroll and related expenses 85,566 554 - 86,120 Selling, general, and administrative expenses 59,710 9,663 (8,300) 61,073 Depreciation and amortization expense 6,151 75 - 6,226 --------- -------- -------- --------- 151,427 10,292 (8,300) 153,419 --------- -------- -------- --------- 19,510 5,978 - 25,488 Other income (expense): Interest and investment income 654 131 (118) 667 Interest expense (3,237) (1,867) 118 (4,986) Other income (expense) (595) - (595) --------- -------- -------- --------- (3,178) (1,736) - (4,914) --------- -------- -------- --------- Income before income tax expense 16,332 4,242 - 20,574 Income tax expense 6,206 1,591 - 7,797 --------- -------- -------- --------- Income from operations before minority interest 10,126 2,651 - 12,777 Minority interest (1) - - (972) (972) --------- -------- -------- --------- Net income $ 10,126 $ 2,651 $ (972) $ 11,805 ========= ======== ======== =========
(1) NCO Group owns approximately 63% percent of the outstanding common stock of NCO Portfolio Management, Inc. -----END PRIVACY-ENHANCED MESSAGE-----