-----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, AlbWM9dPfXPeSEw2Li08AS1u4NTa9sdgIar7V/pRb7dw+DOzx0RkWICZUTGWEiQF A7+pylxJAyZ9GEpmQQ65EQ== 0000950116-02-001910.txt : 20020814 0000950116-02-001910.hdr.sgml : 20020814 20020814175311 ACCESSION NUMBER: 0000950116-02-001910 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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: 02737481 BUSINESS ADDRESS: STREET 1: 515 PENNSYLVANIA AVE CITY: FT WASHINGTON STATE: PA ZIP: 19034 BUSINESS PHONE: 2157939300 MAIL ADDRESS: STREET 1: 507 PRUDENTIAL ROAD CITY: HORSHAM STATE: PA ZIP: 19044 10-Q 1 tenq.txt TEN-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 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) Not Applicable - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No ______ The number of shares outstanding of each of the issuer's classes of common stock was 25,908,000 shares common stock, no par value, outstanding as of August 13, 2002. NCO GROUP, INC. INDEX PAGE PART I - FINANCIAL INFORMATION Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Consolidated Balance Sheets - December 31, 2001 and June 30, 2002 1 Consolidated Statements of Income - Three and six months ended June 30, 2001 and 2002 2 Consolidated Statements of Cash Flows - Six months ended June 30, 2001 and 2002 3 Notes to Consolidated Financial Statements 4 Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16 Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23 PART II - OTHER INFORMATION 24 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) June 30 December 31, 2002 ASSETS 2001 (Unaudited) -------- ----------- Current assets: Cash and cash equivalents $ 32,161 $ 27,117 Restricted cash 1,125 900 Accounts receivable, trade, net of allowance for doubtful accounts of $5,311 and $8,739, respectively 99,055 97,739 Purchased accounts receivable, current portion 47,341 50,272 Deferred income taxes 8,336 9,111 Other current assets 14,784 11,727 -------- -------- Total current assets 202,802 196,866 Funds held on behalf of clients Property and equipment, net 71,457 78,515 Other assets: Goodwill 514,161 515,510 Other intangible assets, net of accumulated amortization 7,929 6,808 Purchased accounts receivable, net of current portion 92,660 81,753 Other assets 42,016 48,218 -------- -------- Total other assets 656,766 652,289 -------- -------- Total assets $931,025 $927,670 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion $ 21,922 $ 22,270 Income taxes payable 176 - Accounts payable 12,164 12,828 Accrued expenses 39,382 28,101 Accrued compensation and related expenses 16,785 14,079 -------- -------- Total current liabilities 90,429 77,278 Funds held on behalf of clients Long-term liabilities: Long-term debt, net of current portion 357,868 332,575 Deferred income taxes 42,855 49,209 Other long-term liabilities 4,565 3,744 Minority interest 21,213 22,818 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 25,907 shares issued and outstanding, respectively 320,993 321,823 Other comprehensive loss (4,346) (2,338) Retained earnings 97,448 122,561 -------- -------- Total shareholders' equity 414,095 442,046 -------- -------- Total liabilities and shareholders' equity $931,025 $927,670 ======== ========
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NCO GROUP, INC. Consolidated Statements of Income (Unaudited) (Amounts in thousands, except per share data) For the Three Months For the Six Months Ended June 30, Ended June 30, -------------------------- -------------------------- 2001 2002 2001 2002 -------- -------- -------- -------- Revenue $183,275 $177,678 $354,304 $356,585 Operating costs and expenses: Payroll and related expenses 99,475 83,480 182,387 169,600 Selling, general and administrative expenses 58,164 61,343 109,287 122,416 Depreciation and amortization expense 9,623 6,521 18,577 12,747 -------- -------- -------- -------- Total operating costs and expenses 167,262 151,344 310,251 304,763 -------- -------- -------- -------- Income from operations 16,013 26,334 44,053 51,822 Other income (expense): Interest and investment income 888 787 1,804 1,454 Interest expense (7,295) (4,963) (14,716) (9,949) Other income (expense) - 305 - (290) -------- -------- -------- -------- Total other income (expense) (6,407) (3,871) (12,912) (8,785) -------- -------- -------- -------- Income before income tax expense 9,606 22,463 31,141 43,037 Income tax expense 3,719 8,522 12,385 16,319 -------- -------- -------- -------- Income from operations before minority interest 5,887 13,941 18,756 26,718 Minority interest (1,438) (633) (2,030) (1,605) -------- -------- -------- -------- Net income $ 4,449 $ 13,308 $ 16,726 $ 25,113 ======== ======== ======== ======== Net income per share: Basic $ 0.17 $ 0.51 $ 0.65 $ 0.97 Diluted $ 0.17 $ 0.48 $ 0.63 $ 0.90 Weighted average shares outstanding: Basic 25,781 25,891 25,734 25,873 Diluted 26,229 29,977 28,100 29,940
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NCO GROUP, INC Consolidated Statements of Cash Flows (Unaudited) (Amounts in thousands) For the Six Months Ended June 30, ----------------------- 2001 2002 --------- -------- Cash flows from operating activities: Net income $ 16,726 $ 25,113 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 9,710 11,383 Amortization of intangibles 8,867 1,364 Provision for doubtful accounts 2,202 5,537 Impairment of purchased accounts receivable 463 1,211 Gain on insurance proceeds from property and equipment - (847) Minority interest 2,030 1,606 Changes in operating assets and liabilities, net of acquisitions: Restricted cash 2,555 225 Accounts receivable, trade (14,157) (4,054) Deferred income taxes 4,027 5,750 Other assets (4,101) (4,594) Accounts payable and accrued expenses 8,327 (13,371) Income taxes payable (208) (1,176) Other long-term liabilities 1,081 (1,308) --------- -------- Net cash provided by operating activities 37,522 26,839 Cash flows from investing activities: Purchases of accounts receivable (26,319) (16,823) Collections applied to principal of purchased accounts receivable 16,306 24,007 Purchases of property and equipment (13,491) (18,141) Proceeds from notes receivable - 1,000 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 (32,261) (7,324) Cash flows from financing activities: Repayment of notes payable (10,740) (8,544) Repayment of acquired notes payable (20,084) - Borrowings under revolving credit agreement 51,330 370 Repayment of borrowings under revolving credit agreement (142,350) (17,250) Payment of fees to acquire debt (5,055) (253) Proceeds from the issuance of convertible debt 125,000 - Issuance of common stock, net 3,647 747 --------- -------- Net cash provided by (used in) financing activities 1,748 (24,930) Effect of exchange rate on cash (98) 371 --------- -------- Net increase (decrease) in cash and cash equivalents 6,911 (5,044) Cash and cash equivalents at beginning of the period 13,490 32,161 --------- -------- Cash and cash equivalents at end of the period $ 20,401 $ 27,117 ========= ========
-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 and six-month periods ended June 30, 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. The Company does not control InoVision-MEDCLR NCOP Ventures, LLC and Creditrust SPV98-2, LLC (see note 15) and, accordingly, their financial condition and results of operations are not consolidated with the Company's financial statements. Contingency Fees and Fees for Contractual Services: The Company generates revenue from contingency fees and fees for contractual services. Contingency fee revenue is recognized upon collection of funds on behalf of clients. Contingency fee revenue on long-term contracts with variable rates is recognized upon collection of funds on behalf of clients at the anticipated average fee over the life of the contract. For certain government clients, the Company records revenue for services upon completion, less an allowance for transactions that may not meet clients' guidelines at the time of funding. Fees for contractual services are 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 will 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 contingency fee revenue on long-term contracts with variable rates, estimates have been made by management as to the amount of total collections and contingency fee revenue to be earned over the life of the contract. The estimated contingency fee revenue earned under the contract through the balance sheet date was determined based on the amount of actual collections through that date. Actual results could differ from those estimates and a material change could occur within one reporting period. In the ordinary course of accounting for purchased accounts receivable, estimates have been made by management as to the amount and timing 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 reporting period. 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 that was completed in connection with the adoption of 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 did not incur any impairment charges in connection with the adoption of SFAS 142. -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, Portfolio Management and International Operations. Portfolio Management does not have any goodwill. The U.S. Operations and International Operations had the following goodwill (amounts in thousands): December 31, June 30, 2001 2002 ------------ -------- U.S. Operations $484,182 $484,182 International Operations 29,979 31,328 -------- -------- Total $514,161 $515,510 ======== ======== The change in International Operations' goodwill balance from December 31, 2001 to June 30, 2002 was due to changes in the exchange rates used for the foreign currency translation. The following presents the results of operations as if SFAS 142 had been adopted on January 1, 2001 (dollars in thousands):
For the Three Months Ended For the Six Months Ended June 30, 2001 June 30, 2001 ------------------------------ ---------------------------- Diluted Diluted Earnings Earnings Amount Per Share Amount Per Share --------------- -------------- ------------ --------------- Net income, as reported $ 4,449 $ 0.17 $16,726 $ 0.63 Add back of goodwill amortization, net of tax 2,908 0.11 5,824 0.20 ------- -------- ------- -------- Adjusted net income $ 7,357 $ 0.28 $22,550 $ 0.83 ======= ======== ======= ========
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 (amounts in thousands):
December 31, 2001 June 30, 2002 --------------------------------- --------------------------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization ---------------- --------------- ---------------- --------------- Deferred financing costs $11,855 $ 4,294 $12,124 $ 5,606 Other intangible assets 900 532 900 610 ------- ------- ------- ------- Total $12,755 $ 4,826 $13,024 $ 6,216 ======= ======= ======= =======
-7- 3. Intangible Assets (continued): Other Intangible Assets (continued): The Company recorded amortization expense for all other intangible assets of $401,000 and $687,000 during the three months ended June 30, 2001 and 2002, respectively, and $1.0 million and $1.4 million during the six months ended June 30, 2001 and 2002, respectively. 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 $ 2,778 2003 2,802 2004 1,578 2005 785 2006 229 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, 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 Six Months Ended June 30, 2001 ------------------------- Revenue $ 357,884 Net income $ 7,758 Earnings per share - basic $ 0.30 Earnings per share - diluted $ 0.30 -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 was as follows (amounts in thousands):
For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------ -------------------- 2001 2002 2001 2002 ------ ------- ------- ------- Net income $4,449 $13,308 $16,726 $25,113 Other comprehensive income: Foreign currency translation adjustment 1,830 2,511 (431) 2,324 Unrealized gain on interest rate swap - (684) - (316) ------ ------- ------- ------- Comprehensive income $6,279 $15,135 $16,295 $27,121 ====== ======= ======= =======
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 June 30, 2002, the carrying values of Portfolio Management's and International Operations' purchased accounts receivable were $128.2 million and $3.8 million, respectively. The following summarizes the change in purchased accounts receivable (amounts in thousands):
December 31, June 30, 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 17,172 Collections on purchased accounts receivable (99,868) (55,959) Revenue recognized 64,065 31,952 Impairment of purchased accounts receivable (2,738) (1,211) Foreign currency translation adjustment (72) 70 -------- -------- Balance, at end of period $140,001 $132,025 ======== ========
During the three and six months ended June 30, 2002, impairments of $414,000 and $1.2 million, respectively, were recorded as a charge to income on static pools where the carrying amounts exceeded the expected future cash flows. During the three months ended June 30, 2001, impairments of $463,000 were 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 June 30, 2002, the combined carrying values on all previously impaired static pools aggregated $8.5 million, or 6.4% of the total purchased accounts receivable, representing their net realizable value. 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 $55.3 million at December 31, 2001 and June 30, 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 (amounts in thousands):
December 31, June 30, 2001 2002 -------- -------- Revolving credit loan $206,630 $189,750 Convertible notes 125,000 125,000 Securitized debt 45,379 38,022 Capital leases and other 2,781 2,073 Less current portion (21,922) (22,270) -------- -------- $357,868 $332,575 ======== ========
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 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 June 30, 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 1.84% at June 30, 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 June 30, 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 June 30, 2002 (amounts in thousands):
NCO Group NCO Portfolio Combined --------- ------------- -------- Maximum capacity $212,125 $45,000 $257,125 Less: Outstanding borrowings 147,500 42,250 189,750 Unused letters of credit 2,345 - 2,345 -------- ------- -------- Available $ 62,280 $ 2,750 $ 65,030 ======== ======= ========
-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 June 30, 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: Prior to the Creditrust merger, Creditrust established three securitized notes payable to fund the purchase of accounts receivable. 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 June 30, 2002, and is restricted as to use until the facility is retired. Interest expense, trustee fees and guarantee fees aggregated $318,000 and $160,000 for the three months ended June 30, 2001 and 2002, respectively. Interest expense, trustee fees and guarantee fees aggregated $473,000 and $328,000 for the period from February 21, 2001, to June 30, 2001, and for the six months ended June 30, 2002, respectively. As of June 30, 2002, $16.4 million was outstanding on this facility. The note issuer, Radian Asset Assurance, 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 15). 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 carried interest at 9.43% per annum, with a final payment date of the earlier of August 2004, or satisfaction of the note from collections. In May 2002, the note was paid off, and the $225,000 liquidity reserve was returned to NCO Portfolio. Interest expense, trustee fees and guarantee fees aggregated $257,000 and $3,000 for the three months ended June 30, 2001 and 2002, respectively. Interest expense, trustee fees and guarantee fees aggregated $398,000 and $56,000 for the period from February 21, 2001, to June 30, 2001, and for the six months ended June 30, 2002, respectively. -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 $1.0 million and $832,000 for the three months ended June 30, 2001 and 2002, respectively. Interest expense, trustee fees and guarantee fees aggregated $1.4 million and $1.7 million for the period from February 21, 2001, to June 30, 2001, and for the six months ended June 30, 2002, respectively. As of June 30, 2002, $21.6 million was outstanding on this facility. 9. Earnings Per Share: Basic earnings per share ("EPS") was computed by dividing the net income by the weighted average number of common shares outstanding. Diluted EPS was computed by dividing the adjusted net income 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 and six months ended June 30, 2002, was $920,000 and $1.8 million, respectively. There was no convertible interest during the three and six months ended June 30, 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 was as follows (amounts in thousands):
For the Three Months For the Six Months Ended Ended June 30, June 30, -------------------------- --------------------------- 2001 2002 2001 2002 ------------ ------------ ------------ ------------- Basic 25,781 25,891 25,734 25,873 Dilutive effect of convertible debt - 3,797 1,815 3,797 Dilutive effect of options 313 289 406 270 Dilutive effect of warrants 135 - 145 - ------------ ------------ ------------ ------------- Diluted 26,229 29,977 28,100 29,940 ============ ============ ============ =============
10. Interest Rate Hedge: As of June 30, 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 $96.7 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 (amounts in thousands):
For the Six Months Ended June 30, ---------------------------- 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. Commitments and Contingencies: Forward-Flow Agreement NCO Portfolio currently has a "forward-flow" agreement with a major financial institution that obligates NCO Portfolio to purchase, on a monthly basis, portfolios of charged-off accounts receivable meeting certain criteria. As of June 30, 2002, NCO Portfolio is obligated to purchase accounts receivable at a maximum of $1.8 million per month through August 2002, with an option to renew for three additional three-month terms. A portion of the purchase price is deferred for twelve months including a nominal rate of interest. As of June 30, 2002, the total deferred amount under this forward-flow agreement was $353,000. The Company is a guarantor of NCO Portfolio for this "forward-flow" agreement. Litigation The Company is party, from time to time, to various legal proceedings incidental to its business. In June of 2001, the 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 abandon the Fort Washington facilities and move its corporate headquarters to Horsham, PA. The Company has currently 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. In the first quarter of 2002, the Company recorded a net expense of $1.3 million for its expected exposure from an environmental litigation that was the result of contamination that allegedly occurred in the pre-acquisition operations of a company acquired by a subsidiary of Medaphis Services Corporation. The Company acquired Medaphis Services Corporation in November 1998. These operations were unrelated to the accounts receivable outsourcing business. In the opinion of management no other legal proceedings individually or in the aggregate will have a significant effect on the financial position, results of operations, cash flows, or liquidity of the Company. 13. 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, and delivering cost-effective accounts receivable and customer relationship management solutions to all market sectors. U.S. Operations had total assets, net of any intercompany balances, of $732.4 million and $728.9 million at December 31, 2001, and June 30, 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 $147.0 million at December 31, 2001, and June 30, 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 $51.8 million at December 31, 2001, and June 30, 2002, respectively. -13- 13. Segment Reporting (continued): The following tables represent the revenue, payroll and related expenses, selling, general and administrative expenses, and earnings before interest, taxes, depreciation, and amortization ("EBITDA") for each segment. 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 June 30, 2001 ----------------------------------------------------------- Payroll and Selling, General Related and Admin. Revenue Expenses Expenses EBITDA -------- -------- ------------------ ------- U.S. Operations $164,842 $93,931 $ 54,349 $16,562 Portfolio Management 17,916 551 8,799 8,566 International Operations 9,276 6,057 2,711 508 Eliminations (8,759) (1,064) (7,695) - -------- ------- --------- ------- Total $183,275 $99,475 $ 58,164 $25,636 ======== ======= ========= =======
For the Three Months Ended June 30, 2002 (amounts in thousands) ----------------------------------------------------------- Payroll and Selling, General Related and Admin. Revenue Expenses Expenses EBITDA -------- -------- ----------------- ------- U.S. Operations $162,316 $78,563 $ 56,905 $26,848 Portfolio Management 14,108 549 9,271 4,288 International Operations 11,951 7,001 3,231 1,719 Eliminations (10,697) (2,633) (8,064) - -------- ------- --------- ------- Total $177,678 $83,480 $ 61,343 $32,855 ======== ======= ========= =======
For the six months ended June 30, 2001 ----------------------------------------------------------- Payroll and Selling, General Related and Admin. Revenue Expenses Expenses EBITDA -------- -------- ----------------- ------- U.S. Operations $320,614 $172,622 $102,278 $45,714 Portfolio Management 30,534 808 14,904 14,822 International Operations 18,044 10,799 5,151 2,094 Eliminations (14,888) (1,842) (13,046) - -------- -------- -------- ------- Total $354,304 $182,387 $109,287 $62,630 ======== ======== ======== =======
For the Six Months Ended June 30, 2002 (amounts in thousands) ----------------------------------------------------------- Payroll and Selling, General Related and Admin. Revenue Expenses Expenses EBITDA -------- -------- ----------------- ------- U.S. Operations $324,593 $160,251 $113,862 $50,480 Portfolio Management 30,378 1,103 18,934 10,341 International Operations 22,600 12,868 5,984 3,748 Eliminations (20,986) (4,622) (16,364) - -------- -------- -------- ------- Total $356,585 $169,600 $122,416 $64,569 ======== ======== ======== =======
-14- 14. 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)." 15. 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 the earlier of January 2004 or satisfaction of the note from collections, and had an outstanding balance of $3.8 million as of June 30, 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 June 30, 2002, the investment in securitization was $7.4 million, composed of $4.1 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 $47,000 and $75,000 of income on this investment during the three and six months ended June 30, 2002, respectively. 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). The Company performs collection services for Creditrust SPV 98-2, LLC and recorded service fee revenue of $757,000 and $445,000 for the three months ended June 30, 2001 and June 30, 2002, respectively, and $757,000 and $955,000 for the six months ended June 30, 2001 and 2002, respectively. 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. NCO Portfolio and IMNV each had an investment in the Joint Venture of $1.4 million as of June 30, 2002. Included in the Statements of Income, as "interest and investment income," were $220,000 and $303,000 for the three and six months ended June 30, 2002, respectively, representing the Company's 50% share of operating income from this unconsolidated subsidiary. The Company performs collection services for the joint venture and recorded service fee revenue of $1.2 million and $2.2 million for the three and six months ended June 30, 2002, respectively. 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 six months ended June 30, 2002 (amounts in thousands): Total assets $ 7,187 Total liabilities 4,220 Revenue 4,192 Operating income 606 -15- 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. -16- Three Months Ended June 30, 2002, Compared to Three Months Ended June 30, 2001 Revenue. Revenue decreased $5.6 million, or 3.1%, to $177.7 million for the three months ended June 30, 2002, from $183.3 million for the comparable period in 2001. U.S. Operations, Portfolio Management and International Operations accounted for $162.3 million, $14.1 million and $12.0 million, respectively, of the revenue for the three months ended June 30, 2002. U.S. Operations' revenue included $8.1 million of revenue earned on services performed for Portfolio Management that was eliminated upon consolidation. International Operations' revenue included $2.6 million of revenue earned on services performed for U.S. Operations that was eliminated upon consolidation. U.S. Operations' revenue decreased $2.5 million, or 1.5%, to $162.3 million for the three months ended June 30, 2002, from $164.8 million for the comparable period in 2001. The decrease in U.S. Operations' revenue was attributable to a reduction in consumer payment patterns and volume fluctuations in our early stage delinquency business. A portion of the decrease was offset by the addition of new clients and the growth in business from certain existing clients, including a positive effect on revenue attributable to an amendment of a long-term contract with a significant client during the second quarter of 2002. Portfolio Management's revenue decreased $3.8 million, or 21.3%, to $14.1 million for the three months ended June 30, 2002, from $17.9 million for the comparable period in 2001. Portfolio Management's collections decreased $1.6 million, or 5.5%, to $27.7 million for the three months ended June 30, 2002, from $29.3 million for the comparable period in 2001. Portfolio Management's revenue represented 51% of collections for the three months ended June 30, 2002, as compared to 61% of collections for the same period in the prior year. This decrease in Portfolio Management's revenue was partially attributable to a reduction in consumer payment patterns due to the general softening of the economy. The decrease was also attributable to a reduction in purchases of accounts receivable. Purchases of accounts receivables declined due to upward pricing pressure in the market and our unwillingness to sacrifice our internal rate of returns by paying higher prices. International Operations' revenue increased $2.7 million, or 28.8%, to $12.0 million for the three months ended June 30, 2002, from $9.3 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. A portion of the increase was offset by changes in the foreign currency exchange rates used to translate the International Operations' results of operations into U.S. dollars. Payroll and related expenses. Payroll and related expenses decreased $16.0 million to $83.5 million for the three months ended June 30, 2002, from $99.5 million for the comparable period in 2001, and decreased as a percentage of revenue to 47.0% from 54.3%. U.S. Operations' payroll and related expenses decreased $15.3 million to $78.6 million for the three months ended June 30, 2002, from $93.9 million for the comparable period in 2001, and decreased as a percentage of revenue to 48.4% from 57.0%. The decrease as a percentage of revenue was primarily attributable to $10.0 million of one-time charges incurred by U.S. Operations during the second quarter of 2001. These charges related to a comprehensive streamlining of its expense structure designed to counteract the effects of operating in a more difficult collection environment. These costs primarily consisted of the elimination or acceleration of certain contractual employment obligations, severance costs related to terminated employees, and costs related to a decision to change the structure of our healthcare benefit programs from a large, singular benefit platform to individual plans across the country. The decrease was also attributable to our continued focus on managing our staffing levels to our business volumes, despite the difficult collection environment. Portfolio Management's payroll and related expenses decreased $2,000 to $549,000 for the three months ended June 30, 2002, from $551,000 for the comparable period in 2001, and increased as a percentage of revenue to 3.9% from 3.1%. Portfolio Management outsources all of its collection services to U.S. Operations and, therefore, has a relatively small fixed payroll cost structure. However, the increase as a percentage of revenue was attributable to spreading the fixed portion of the payroll cost structure over a smaller revenue base. International Operations' payroll and related expenses increased $944,000 to $7.0 million for the three months ended June 30, 2002, from $6.1 million for the comparable period in 2001, but decreased as a percentage of revenue to 58.6% from 65.3%. The decrease as a percentage of revenue was attributable to $736,000 of one-time charges incurred by International Operations during the second quarter of 2001. These charges related to a comprehensive streamlining of its expense structure. These costs primarily consisted of the elimination or acceleration of certain contractual employment obligations and severance costs related to terminated employees. This decrease was partially offset by an 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. -17- Selling, general and administrative expenses. Selling, general and administrative expenses increased $3.1 million to $61.3 million for the three months ended June 30, 2002, from $58.2 million for the comparable period in 2001, and increased as a percentage of revenue to 34.5% from 31.7%. The increase as a percentage of revenue was primarily attributable to reduced collectibility within our 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 our performance for our clients, we 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. The increase as a percentage of revenue was partially offset by $1.8 million of one-time charges incurred during the second quarter of 2001 related to a comprehensive streamlining of its expense structure designed to counteract the effects of operating in a more difficult collection environment. These costs primarily related to real estate obligations for closed facilities and equipment rental obligations. Depreciation and amortization. Depreciation and amortization decreased $3.1 million to $6.5 million for the three months ended June 30, 2002, from $9.6 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 June 30, 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 $101,000 to $787,000 for the three months ended June 30, 2002, over the comparable period in 2001. This decrease was primarily attributable to lower interest rates earned on operating cash, funds held in trust on behalf of clients, and notes receivables. Interest expense decreased to $5.0 million for the three months ended June 30, 2002, from $7.3 million for the comparable period in 2001. This decrease was primarily attributable to lower interest rates and debt repayments made during 2001 and 2002. The decrease was partially offset by Portfolio Management's borrowings used to purchase accounts receivable portfolios. During the three months ended June 30, 2002, we recorded income of $305,000. This income was from a partial recovery of an environmental liability. The environmental liability was originally recorded during the first quarter of 2002 and 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 June 30, 2002, increased to $8.5 million, or 37.9% of income before income tax expense, from $3.7 million, or 38.7% 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. Six Months Ended June 30, 2002, Compared to Six Months Ended June 30, 2001 Revenue. Revenue increased $2.3 million, or 0.6%, to $356.6 million for the six months ended June 30, 2002, from $354.3 million for the comparable period in 2001. U.S. Operations, Portfolio Management and International Operations accounted for $324.6 million, $30.4 million and $22.6 million, respectively, of the revenue for the six months ended June 30, 2002. U.S. Operations' revenue included $16.4 million of revenue earned on services performed for Portfolio Management that was eliminated upon consolidation. International Operations' revenue included $4.6 million of revenue earned on services performed for U.S. Operations that was eliminated upon consolidation. -18- U.S. Operations' revenue increased $4.0 million, or 1.2%, to $324.6 million for the six months ended June 30, 2002, from $320.6 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, including a positive effect on revenue attributable to an amendment of a long-term contract with a significant client during the second quarter of 2002. A portion of the increase was offset by a reduction in consumer payment patterns and volume fluctuations in our early stage delinquency business. Portfolio Management's revenue decreased $156,000, or 0.5%, to $30.4 million for the six months ended June 30, 2002, from $30.5 million for the comparable period in 2001. Portfolio Management's collections increased $6.8 million, or 13.8%, to $56.5 million for the six months ended June 30, 2002, from $49.7 million for the comparable period in 2001. Portfolio Management's revenue represented 54% of collections for the six months ended June 30, 2002, as compared to 61% of collections for the same period in the prior year. This decrease in Portfolio Management's revenue was partially attributable to a reduction in consumer payment patterns due to the general softening of the economy. The decrease was also attributable to a reduction in purchases of accounts receivable. Purchases of accounts receivables declined due to upward pricing pressure in the market and our unwillingness to sacrifice our internal rate of returns by paying higher prices. International Operations' revenue increased $4.6 million, or 25.2%, to $22.6 million for the six months ended June 30, 2002, from $18.0 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. A portion of the increase was offset by changes in the foreign currency exchange rates used to translate the International Operations' results of operations into U.S. dollars. Payroll and related expenses. Payroll and related expenses decreased $12.8 million to $169.6 million for the six months ended June 30, 2002, from $182.4 million for the comparable period in 2001, and decreased as a percentage of revenue to 47.6% from 51.5%. U.S. Operations' payroll and related expenses decreased $12.4 million to $160.3 million for the six months ended June 30, 2002, from $172.6 million for the comparable period in 2001, and decreased as a percentage of revenue to 49.4% from 53.8%. The decrease as a percentage of revenue was primarily attributable to $10.0 million of one-time charges incurred by U.S. Operations during the second quarter of 2001. These charges related to a comprehensive streamlining of its expense structure designed to counteract the effects of operating in a more difficult collection environment. These costs primarily consisted of the elimination or acceleration of certain contractual employment obligations, severance costs related to terminated employees, and costs related to a decision to change the structure of our healthcare benefit programs from a large, singular benefit platform to individual plans across the country. The decrease was also attributable to our continued focus on managing our staffing levels to our business volumes, despite the difficult collection environment. Portfolio Management's payroll and related expenses increased $295,000 to $1.1 million for the six months ended June 30, 2002, from $808,000 for the comparable period in 2001, and increased as a percentage of revenue to 3.6% from 2.6%. 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 $2.1 million to $12.9 million for the six months ended June 30, 2002, from $10.8 million for the comparable period in 2001, but decreased as a percentage of revenue to 56.9% from 59.8%. The decrease as a percentage of revenue was attributable to $736,000 of one-time charges incurred by International Operations during the second quarter of 2001. These charges related to a comprehensive streamlining of its expense structure. These costs primarily consisted of the elimination or acceleration of certain contractual employment obligations and severance costs related to terminated employees. This decrease was partially offset by an 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. -19- Selling, general and administrative expenses. Selling, general and administrative expenses increased $13.1 million to $122.4 million for the six months ended June 30, 2002, from $109.3 million for the comparable period in 2001, and increased as a percentage of revenue to 34.3% from 30.8%. The increase as a percentage of revenue was primarily attributable to reduced collectibility within our 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 our performance for our clients, we 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. The increase as a percentage of revenue was partially offset by $1.8 million of one-time charges incurred during the second quarter of 2001 related to a comprehensive streamlining of its expense structure designed to counteract the effects of operating in a more difficult collection environment. These costs primarily related to real estate obligations for closed facilities and equipment rental obligations. Depreciation and amortization. Depreciation and amortization decreased $5.9 million to $12.7 million for the six months ended June 30, 2002, from $18.6 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 $7.8 million for the six months ended June 30, 2001. Partially offsetting the $7.8 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 $350,000 to $1.5 million for the six months ended June 30, 2002, over the comparable period in 2001. This decrease was primarily attributable to lower interest rates earned on operating cash, funds held in trust on behalf of clients, and notes receivables. Interest expense decreased to $9.9 million for the six months ended June 30, 2002, from $14.7 million for the comparable period in 2001. This decrease was primarily attributable to lower interest rates and debt repayments made during 2001 and 2002. The decrease was partially offset by a full six months 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 six months of interest from securitized debt that was assumed as part of the Creditrust merger. During the six months ended June 30, 2002, we recorded a net expense of $290,000. This expense was the net effect of a $1.0 million insurance gain, and a $1.3 million net 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 six months ended June 30, 2002, increased to $16.3 million, or 37.9% of income before income tax expense, from $12.4 million, or 39.8% 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 $26.8 million for the six months ended June 30, 2002, compared to $37.5 million for the comparable period in 2001. The decrease in cash provided by operations was primarily attributable to a $13.4 million decrease in accounts payable and accrued expenses compared to a $8.3 million increase for the same period in the prior year. 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 our prior healthcare plan. A portion of the decrease was offset by less of an increase in accounts receivable as a result of our increased efforts to improve collectibility of our accounts receivables. -20- Cash Flows from Investing Activities. Cash used in investing activities was $7.3 million for the six months ended June 30, 2002, compared to $32.3 million for the comparable period in 2001. The decrease was due partially due to the net cash used to pay pre-acquisition liabilities and acquisition related costs during the six months ended June 30, 2001. The decrease was also attributable to a decrease in the purchases of accounts receivables and an increase in the collections applied to principal. Purchases of accounts receivables declined due to upward pricing pressure in the market and our unwillingness to sacrifice our internal rate of returns by paying higher prices. The increase in collections applied to principal was due to a full six month of collections from the accounts receivables purchased as part of the February 20, 2001 Creditrust merger and collections from accounts receivables purchased during 2001 and 2002. Purchases of property and equipment were $18.1 million for the six months ended June 30, 2002, compared to $13.5 million for the same period in 2001. Cash Flows from Financing Activities. Cash used in financing activities was $24.9 million for the six months ended June 30, 2002, compared to cash provided by financing activities of $1.7 million for the same period in 2001. The cash used in financing activities during the six months ended June 30, 2002 resulted from repayments of borrowing under our revolving credit facility and repayments of securitized debt assumed as part of the Creditrust merger. The cash provided by financing activities during the six months ended June 30, 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 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 June 30, 2002, the maximum borrowing capacity and the availability under the revolving credit facility were $257.1 million and $65.0 million, respectively. 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 June 30, 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 1.84% at June 30, 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 June 30, 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 June 30, 2002, there was $2.8 million available 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 original 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. As of June 30, 2002, a notional amount of $96.7 million was covered by the interest rate swap agreements. 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 June 30, 2002, we were in compliance with all required financial covenants. -21- 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 $3.8 million as of June 30, 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 June 30, 2002, the investment in securitization was $7.4 million, composed of $4.1 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 $47,000 and $75,000 of income on this investment for the three months and six months ended June 30, 2002, respectively. 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. NCO Portfolio and IMNV each had an investment in the Joint Venture of $1.4 million as of June 30, 2002. Included in the Statements of Income, as "interest and investment income," were $202,000 and $303,000 for the three and six months ended June 30, 2002, respectively, representing NCO Portfolio's 50% share of operating income from this unconsolidated subsidiary. 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. 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 Our 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 June 30, 2002, our balance sheet included goodwill that represented approximately 55.6% of total assets and 116.6% of shareholders' equity. -22- Effective January 1, 2002, we adopted Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangibles" ("SFAS 142"). As a result of adopting SFAS 142, we no longer amortize goodwill. Goodwill must be tested at least annually for impairment, including an initial test that was completed in connection with the adoption of 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. We did not incur any impairment charges in connection with the adoption of SFAS 142. Critical Accounting Policies The preparation of consolidated 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. We believe that the following accounting policies include the estimates that are the most critical and could have the most potential impact on its results of operations: revenue recognition for purchased accounts receivable; bad debts; and deferred taxes. These and other critical accounting policies are described in Note 2 to these financial statements, and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 to our 2001 financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2001. 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. 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. -23- Part II. Other Information Item 1. Legal Proceedings ----------------- In June of 2001, the 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 abandon the Fort Washington facilities and move its corporate headquarters to Horsham, PA. The Company has currently 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 recorded the full amount of rent due under the remaining terms of the leases during the third quarter of 2001. AssetCare, Inc., a subsidiary of the Company acquired as part of the Medaphis Services Corporation acquisition, was identified in an administrative order issued by the State of California as a party that is partially responsible for cleanup costs and natural resource damages associated with a former scrap recycling site next to Humboldt Bay in California. The subsidiary was identified as a successor-in-interest to a former scrap recycler who conducted limited operations at the site. The subsidiary was also named in a civil proceeding brought by one of the owners of the site as a party that is responsible for the costs that will be incurred by the owner for complying with the terms of the order. AssetCare agreed to pay $1,410,000 to settle the claims in the litigation with the owner in exchange for a full release from the owner. Subsequently, the Company reached an agreement in principle with the former owner of Medaphis Services Corporation pursuant to which they agreed to partially reimburse the Company for its claims under the acquisition agreement. The Company is involved in legal proceedings from time to time in the ordinary course of its business. Management believes that none of these legal proceedings will have a materially adverse effect on the financial condition or results of operations of the Company. Item 2. Changes in Securities --------------------- None - not applicable Item 3. Defaults Upon Senior Securities ------------------------------- None - not applicable Item 4. Submission of Matters to a Vote of Shareholders ----------------------------------------------- The Annual Meeting of Shareholders of the Company was held on May 20, 2002. At the Annual Meeting, the shareholders elected Charles C. Piola, Jr. and Eric S. Siegel as directors to serve for a term of three years as described below: Number of Votes --------------- Withhold Name For Authority ---- --- --------- Charles C. Piola, Jr. 22,230,517 871,847 Eric S. Siegel 22,336,049 735,315 In addition, the terms of the following directors continued after the Annual Meeting: Michael J. Barrist, William C. Dunkelberg, Ph.D., Leo J. Pound and Allen F. Wise. The proposal to amend the 1996 Stock Option Plan to increase the number of shares of common stock that may be issued under such plan was withdrawn by the Board of Directors prior to the meeting and no vote was taken on such matter. Accordingly, the number of shares of common stock that can be issued under such plan will remain at 4,717,422 shares. Item 5. Other Information ----------------- None - not applicable -24- Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 99.1 Consolidating Schedule 99.2 Chief Executive Officer Certification of Financial Statements 99.3 Chief Financial Officer Certification of Financial Statements (b) Reports on Form 8-K Date of Report Item Reported -------------- ------------- 5/9/02 Item 5 - Press release and conference call transcript from the earnings release for the first quarter of 2002 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: August 14, 2002 By: /s/ Michael J. Barrist ---------------------- Michael J. Barrist Chairman of the Board, President and Chief Executive Officer (principal executive officer) Date: August 14, 2002 By: /s/ Steven L. Winokur --------------------- Steven L. Winokur Executive Vice President, Finance, Chief Financial Officer and Treasurer -25- EX-99 3 ex99-1.txt EXHIBIT 99.1
Exhibit 99.1 NCO GROUP, INC. Consolidating Statement of Income (Unaudited) (Amounts in thousands) For the Three Months Ended June 30, 2002 ---------------------------------------------------------------------- Intercompany NCO Group NCO Portfolio Eliminations Consolidated --------- ------------- ----------- -------------- Revenue $171,634 $ 14,108 $(8,064) $177,678 Operating costs and expenses: Payroll and related expenses 82,931 549 - 83,480 Selling, general and administrative expenses 60,136 9,271 (8,064) 61,343 Depreciation and amortization expense 6,446 75 - 6,521 -------- -------- ------- -------- 149,513 9,895 (8,064) 151,344 -------- -------- ------- -------- 22,121 4,213 - 26,334 Other income (expense): Interest and investment income 600 303 (116) 787 Interest expense (3,327) (1,752) 116 (4,963) 305 - 305 -------- -------- ------- -------- (2,422) (1,449) - (3,871) -------- -------- ------- -------- Income before income tax expense 19,699 2,764 - 22,463 Income tax expense 7,485 1,037 - 8,522 -------- -------- ------- -------- Income from operations before minority interest 12,214 1,727 - 13,941 Minority interest (1) - - (633) (633) -------- -------- ------- -------- Net income $ 12,214 $ 1,727 $ (633) $ 13,308 ======== ======== ======= ========
(1) NCO Group owns approximately 63% percent of the outstanding common stock of NCO Portfolio Management, Inc.
NCO GROUP, INC. Consolidating Statement of Income (Unaudited) (Amounts in thousands) For the Six Months Ended June 30, 2002 ---------------------------------------------------------------------- Intercompany NCO Group NCO Portfolio Eliminations Consolidated --------- ------------- ------------ -------------- Revenue $342,571 $ 30,378 $(16,364) $356,585 Operating costs and expenses: Payroll and related expenses 168,497 1,103 - 169,600 Selling, general and administrative expenses 119,846 18,934 (16,364) 122,416 Depreciation and amortization expense 12,597 150 - 12,747 -------- -------- -------- -------- 300,940 20,187 (16,364) 304,763 -------- -------- -------- -------- 41,631 10,191 - 51,822 Other income (expense): Interest and investment income 1,254 434 (234) 1,454 Interest expense (6,564) (3,619) 234 (9,949) (290) - (290) -------- -------- -------- -------- (5,600) (3,185) - (8,785) -------- -------- -------- -------- Income before income tax expense 36,031 7,006 - 43,037 Income tax expense 13,691 2,628 - 16,319 -------- -------- -------- -------- Income from operations before minority interest 22,340 4,378 - 26,718 Minority interest (1) - - (1,605) (1,605) -------- -------- -------- -------- Net income $ 22,340 $ 4,378 $ (1,605) $ 25,113 ======== ======== ======== ========
(1) NCO Group owns approximately 63% percent of the outstanding common stock of NCO Portfolio Management, Inc. EX-99 4 ex99-2.txt EXHIBIT 99.2 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 This Certification is intended to accompany the Quarterly Report on Form 10-Q of NCO Group, Inc. (the "Company") for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), and is given solely for the purpose of satisfying the requirements of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. To the best of his knowledge, the undersigned, Michael J. Barrist, Chief Executive Officer, hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Michael J. Barrist, Chief Executive Officer ------------------ Date: 8/14/02 EX-99 5 ex99-3.txt EXHIBIT 99.3 Exhibit 99.3 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 This Certification is intended to accompany the Quarterly Report on Form 10-Q of NCO Group, Inc. (the "Company") for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), and is given solely for the purpose of satisfying the requirements of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. To the best of his knowledge, the undersigned, Steven L. Winokur, Chief Financial Officer, hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Steven L. Winokur, Chief Financial Officer ------------------ Date: 8/14/02 -----END PRIVACY-ENHANCED MESSAGE-----