-----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, HJheC7Oy4jD6RL04MoR6s6/8ItU0maZsTPvFg+dkzETThpfT55oOJjtnNMWQQeYs SqVeI0pnAi/guz4BNR+Q4w== 0000950116-02-002452.txt : 20021104 0000950116-02-002452.hdr.sgml : 20021104 20021104172112 ACCESSION NUMBER: 0000950116-02-002452 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020819 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20021104 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: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-21639 FILM NUMBER: 02808820 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 8-K/A 1 eightka.txt 8-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ---------------------- Date of Report (Date of earliest event reported): August 19, 2002 NCO GROUP, INC. --------------- (Exact name of registrant as specified in its charter) Pennsylvania 0-21639 23-2858652 - --------------------------------- ----------------------------------- -------------------------------- (State or other jurisdiction (Commission File Number) (I.R.S. Employer of incorporation or organization) Identification Number)
507 Prudential Rd. Horsham, PA 19044 ----------------------------------------------------------- (Address of principal executive offices, including zip code) (215) 441-3000 ---------------------------------------------------- (Registrant's telephone number, including area code) __________________________________________________________ (Former name or former address if changed since last report) ITEM 2. Acquisition and Disposition of Assets. On August 19, 2002, NCO Group, Inc. ("NCO Group"), through a subsidiary, acquired certain assets and related operations, excluding the purchased accounts receivable portfolio, and assumed certain liabilities of Great Lakes Collection Bureau, Inc. ("Great Lakes"), a subsidiary of GE Capital Corporation ("GE Capital"). NCO Portfolio Management, Inc. ("NCO Portfolio")(Nasdaq: NCPM), a 63% owned subsidiary of NCO Group, through a subsidiary, acquired the purchased accounts receivable portfolio of Great Lakes. NCO Group paid approximately $10.6 million for the assets and related operations of Great Lakes, subject to certain adjustments. The purchase price was determined by negotiations between the parties and was paid from NCO Group's existing cash and using borrowings under NCO Group's revolving credit agreement. As part of the acquisition, NCO Group and GE Capital signed a multi-year agreement under which NCO Group will provide services to GE Capital. NCO Portfolio paid $22.9 million for Great Lakes purchased accounts receivable portfolio. The purchase price was determined by negotiations between the parties. NCO Portfolio funded the purchase with $2.3 million of existing cash and $20.6 million of non-recourse financing provided by Cargill Financial Services Corporation. This non-recourse financing is collateralized by the Great Lakes purchased accounts receivable portfolio. Risks Associated with Great Lakes Acquisition If either NCO Group or NCO Portfolio are unable to successfully integrate the Great Lakes business and portfolios into their respective operations, they may not be able to realize expected operating efficiencies, eliminate redundant costs or operate the business or collect the portfolios profitably. The integration of the Great Lakes business and portfolios is subject to a number of risks, including risks that: o the acquisition could divert management's attention from the daily operations of NCO Group and NCO Portfolio and otherwise require additional management, operational and financial resources o the conversion of the Great Lakes computer and operating systems into NCO Group's systems may take longer or cost more than expected; o NCO Group may be unable to retain clients or key employees of Great Lakes; o actual recoveries on the portfolios purchased may be less than the amount expected; and o Great Lakes might have additional liabilities that NCO Group did not anticipate at the time of the acquisition. Forward Looking Statements Statements included in this Current Report on Form 8-K, other than historical facts, are forward-looking statements, as such term is defined in federal securities laws and regulations, which are intended to be covered by the safe harbors created in those laws and regulations. Forward-looking statements include, among others, statements as to the expected results of the Great Lakes acquisition on NCO Group's and NCO Portfolio's earnings, NCO Group's and NCO Portfolio's ability to realize operating efficiencies in the integration of the acquisition, and statements as to the NCO Group's, NCO Portfolio'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, risks, uncertainties and other factors, including, without limitation, the risk that neither NCO Group nor NCO Portfolio will be able to realize operating efficiencies in the integration of the Great Lakes acquisition, risks related to past and possible future terrorist attacks, risks related to the economy, risks relating to growth and future acquisitions, risks related to fluctuations in quarterly operating results, and other risks detailed from time to time in the companies' filings with the Securities and Exchange Commission, including the annual reports on Form 10-K, filed on March 19, 2002, can cause actual results and developments to be materially different from those expressed or implied by such forward-looking statements. 2 On September 3, 2002, NCO Group filed a current report on Form 8-K with the SEC to report the acquisition of Great Lakes. NCO Group is amending such Current Report on Form 8-K to provide the financial information required by Item 7 of the Current Report on Form 8-K. ITEM 7. Financial Statements and Exhibits. The following exhibits are being filed as part of this report: (a) Financial Statements of Businesses Acquired Great Lakes Collection Bureau, Inc. and Subsidiary -- Report of Independent Auditor................................ F-1 Consolidated Balance Sheets as of December 31, 2001 and 2000.... F-2 Consolidated Balance Sheet as of June 30, 2002 (Unaudited)...... F-3 Consolidated Statements of Operations for the years ended December 31, 2001 and 2000................................... F-4 Consolidated Statements of Operations for the six months ended June 30, 2002 and 2001 (Unaudited)........................... F-5 Consolidated Statements of Shareholder's Deficiency for the years ended December 31, 2001 and 2000....................... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2001 and 2000................................... F-7 Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001 (Unaudited)........................... F-8 Notes to Consolidated Financial Statements...................... F-9 (b) Pro Forma Financial Information Pro Forma Consolidated Financial Statements..................... F-15 (c) Exhibits Number Title ------ ----- 23.1 Consent of KPMG LLP 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NCO Group, Inc. By: /s/ Steven L. Winokur --------------------------------- Executive Vice President, Finance and Chief Financial Officer Date: November 4, 2002 12 Fountain Plaza, Suite 601 Buffalo, NY 14202 Independent Auditors' Report The Board of Directors Great Lakes Collection Bureau, Inc.: We have audited the accompanying consolidated balance sheets of Great Lakes Collection Bureau, Inc. and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholder's deficiency and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Great Lakes Collection Bureau, Inc. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The Company is an indirect wholly-owned subsidiary of General Electric Capital Corporation (the Group). At December 31, 2001, the Company owes its parent $108,099,809 for advances. The Company depends on the Group for financing support and its continuing forbearance regarding the repayment of these advances. /s/ KPMG LLP March 1, 2002 Buffalo, New York F-1 GREAT LAKES COLLECTION BUREAU, INC. AND SUBSIDIARY Consolidated Balance Sheets December 31, 2001 and 2000
Assets 2001 2000 -------------- ------------- Current assets: Cash $ 11,385,670 21,960,643 Commissions receivable 845,124 1,885,972 Commissions receivable - affiliates 1,637,270 1,234,000 Current portion of purchased accounts receivable 21,365,326 44,994,708 Other receivable 2,926,054 412,043 Prepaid expenses and other 393,342 681,186 -------------- ------------- Total current assets 38,552,786 71,168,552 Deferred income taxes 9,946,000 9,039,000 Purchased accounts receivable, excluding current portion 9,559,984 33,208,417 Property and equipment, net 7,502,593 6,415,585 -------------- ------------- Total assets $ 65,561,363 119,831,554 ============== ============= Liabilities and Shareholder's Deficiency Current liabilities: Due to clients $ 849,615 913,954 Accounts payable 1,469,965 685,044 Accrued wages and benefits 1,517,682 2,469,286 Accrued legal claim 300,000 526,500 Other accrued expenses 231,709 727,771 -------------- ------------- Total current liabilities 4,368,971 5,322,555 Advances from parent 108,099,809 151,289,240 -------------- ------------- Total liabilities 112,468,780 156,611,795 -------------- ------------- Shareholder's deficiency: Common stock, no par value; 200 shares authorized, issued and outstanding 4,000 4,000 Additional paid-in capital 33,396,159 30,691,860 Accumulated deficit (80,307,576) (67,476,101) -------------- ------------- Total shareholder's deficiency (46,907,417) (36,780,241) -------------- ------------- Commitments and contingencies (notes 4 and 8) -------------- ------------- Total liabilities and shareholder's deficiency $ 65,561,363 119,831,554 ============== ============= See accompanying notes to consolidated financial statements.
F-2 GREAT LAKES COLLECTION BUREAU, INC. AND SUBSIDIARY Consolidated Balance Sheet June 30, 2002 (Unaudited)
June 30, 2002 --------------- Assets Current assets: Cash $ 2,397,510 Commissions receivable 1,572,944 Current portion of purchased accounts receivable 14,819,189 Other receivables 1,685,347 Prepaid expenses and other assets 241,309 ----------- Total current assets 20,716,299 Deferred income taxes 12,252,089 Purchased accounts receivable, excluding current portion 1,418,568 Property and equipment, net 6,898,028 ----------- Total assets $41,284,984 =========== Liabilities and Shareholder's Equity Current liabilities: Due to clients $ 295,536 Accounts payable 25,039 Accrued wages and benefits 1,615,495 Accrued legal claim 300,000 Other accrued expenses 8,223 ----------- Total current liabilities 2,244,293 Advances from parent 25,230,809 ----------- Total liabilities 27,475,102 ----------- Shareholder's equity: Common stock, no par value; 200 shares authorized, issued and outstanding 4,000 Additional paid-in capital 98,396,159 Accumulated deficit (84,590,277) ----------- Total shareholder's equity 13,809,882 ----------- Total liabilities and shareholder's equity $41,284,984 ============
F-3 GREAT LAKES COLLECTION BUREAU, INC. AND SUBSIDIARY Consolidated Statements of Operations Years ended December 31, 2001 and 2000
2001 2000 --------------- -------------- Operating revenue: Commissions: Affiliates $ 17,351,419 2,380,631 Other 14,237,668 21,854,830 --------------- -------------- Total commissions 31,589,087 24,235,461 --------------- -------------- Purchased accounts receivable 20,205,662 74,538,608 Other 455,511 678,972 --------------- -------------- Total operating revenue 52,250,260 99,453,041 Amortization of purchased accounts receivable - 64,026,064 Impairment charge on purchased accounts receivable - 52,151,322 --------------- -------------- Net operating revenue (loss) 52,250,260 (16,724,345) --------------- -------------- Operating expenses: Salaries and employee benefits 35,004,044 49,649,100 Outsourced collection fees 14,461,681 8,525,242 Postage 1,942,943 2,463,991 Telephone 3,028,805 3,594,324 Legal and professional 662,391 1,246,328 Data research 1,168,929 1,383,934 Other general and administrative 8,648,697 7,311,762 --------------- -------------- Total operating expenses 64,917,490 74,174,681 --------------- -------------- Loss from operations (12,667,230) (90,899,026) Interest expense - related party (8,177,245) (15,355,675) --------------- -------------- Loss before income taxes (20,844,475) (106,254,701) Income tax benefit 8,013,000 42,382,000 --------------- -------------- Net loss $ (12,831,475) (63,872,701) =============== ==============
See accompanying notes to consolidated financial statements. F-4 GREAT LAKES COLLECTION BUREAU, INC. AND SUBSIDIARY Consolidated Statements of Operations For the Six Months Ended June 30, 2002 and 2001 (Unaudited)
For the Six Months Ended June 30, 2002 2001 ----------------- --------------- Operating revenue: Commissions: Affiliates $ 8,531,322 $ 8,108,182 Other 7,216,526 8,179,289 ----------- ----------- Total commissions 15,747,848 16,287,471 ----------- ----------- Purchased accounts receivable 6,374,315 12,242,874 Other 58,358 547,564 ----------- ----------- Total operating revenue 22,180,521 29,077,909 Operating expenses: Salaries and employee benefits 15,159,723 20,215,616 Outsourced collection fees 5,014,235 7,470,401 Postage 783,788 1,101,663 Telephone 795,997 1,345,877 Legal and professional 259,643 267,901 Data research 451,380 672,907 Other general and administrative 3,382,355 4,681,590 ----------- ----------- Total operating expenses 25,847,121 35,755,955 ----------- ----------- Loss from operations (3,666,600) (6,678,046) Interest expense - related party (2,922,172) (4,090,859) ----------- ----------- Loss before income taxes (6,588,772) (10,768,905) Income tax benefit 2,306,071 4,597,157 ----------- ----------- Net loss $(4,282,701) $(6,171,748) =========== ===========
F-5 GREAT LAKES COLLECTION BUREAU, INC. AND SUBSIDIARY Consolidated Statements of Shareholder's Deficiency Years ended December 31, 2001 and 2000
Additional Total Common paid-in Accumulated shareholder's stock capital deficit deficiency --------- ------------- ------------ ------------- Balances at December 31, 1999 $ 4,000 46,944,860 (3,603,400) 43,345,460 Net loss - - (63,872,701) (63,872,701) Cumulative effect adjustment for change in intercorporate tax allocation policy - (16,253,000) - (16,253,000) -------- ----------- ----------- ----------- Balances at December 31, 2000 4,000 30,691,860 (67,476,101) (36,780,241) Net loss - - (12,831,475) (12,831,475) Capital contributions - 2,704,299 - 2,704,299 -------- ----------- ----------- ----------- Balances at December 31, 2001 $ 4,000 33,396,159 (80,307,576) (46,907,417) ======== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-6 GREAT LAKES COLLECTION BUREAU, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended December 31, 2001 and 2000
2001 2000 ------------- ------------- Cash flows from operating activities: Net loss $ (12,831,475) (63,872,701) Adjustments to reconcile net loss to net cash provided by operating activities: Impairment charge on purchased accounts receivable - 52,151,322 Depreciation and amortization 1,423,478 64,742,577 Non-cash charges (credits) applied to advances from parent (7,985,132) 3,206,091 Deferred income taxes (907,000) (24,676,000) Purchase of accounts receivable (240,231) (28,335,302) Cash collections applied directly to purchased accounts receivable 47,518,046 11,711,315 Cash provided (used) by changes in: Commissions receivable 1,040,848 568,962 Commissions receivable - affiliates (403,270) (434,000) Other receivables (2,514,011) (787,945) Prepaid expenses and other assets 287,844 85,666 Accounts payable 784,921 (646,647) Accrued wages and benefits (951,604) 565,215 Accrued legal claim (226,500) (752,500) Other accrued expenses (496,062) 729,654 Due to clients (64,339) (468,416) -------------- ------------ Net cash provided by operating activities 24,435,513 13,787,291 -------------- ------------ Cash used in investing activities - purchase of property and equipment (2,510,486) (2,368,940) -------------- ------------ Net cash used in investing activities (2,510,486) (2,368,940) -------------- ------------ Cash flows used in financing activities - reduction in advances from parent (32,500,000) - -------------- ------------ Net cash used in financing activities (32,500,000) - -------------- ------------ Increase (decrease) in cash (10,574,973) 11,418,351 Cash at beginning of year 21,960,643 10,542,292 -------------- ------------ Cash at end of year $ 11,385,670 21,960,643 ============== ============ Schedule of noncash investing and financing activities: Shareholder's equity adjustment pursuant to intercorporate tax allocation $ - 16,253,000 Reduction of advances from parent recorded as capital contributions 2,704,299 -
See accompanying notes to consolidated financial statements. F-7 GREAT LAKES COLLECTION BUREAU, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2002 and 2001 (Unaudited)
For the Six Months Ended June 30, 2002 2001 --------------------- --------------------- Cash flows from operating activities: Net loss $ (4,282,701) $ (6,171,748) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 641,397 810,254 Non-cash charges (credits) applied to advances from parent (2,368,999) 762,280 Deferred income taxes (2,306,089) (3,853,888) Purchase of accounts receivable 4,799 (262,412) Cash collections applied directly to purchased accounts receivable 14,682,754 27,283,025 Cash provided (used) by changes in: Commissions receivable 909,450 1,263,574 Other receivables 1,240,707 (1,884,009) Prepaids and other assets 152,033 341,137 Accounts payable (1,444,926) (647,720) Accrued wages and benefits 97,813 (613,206) Accrued legal claim 0 (151,500) Other accrued expenses (223,486) (1,030,614) Due to clients (554,079) (426,871) --------------------- --------------------- 6,548,673 15,418,302 --------------------- --------------------- Cash used in investing activities-purchase of property and equipment (36,832) (1,896,949) --------------------- --------------------- Cash flows used in financing activities-reduction of advances from parent (15,500,000) (25,000,000) --------------------- --------------------- Increase (decrease) in cash (8,988,159) (11,478,647) Cash at beginning of period 11,385,670 21,960,643 --------------------- --------------------- Cash at end of period $2,397,511 $10,481,996 ===================== ===================== Schedule of noncash investing and financing activities: Reduction of advances from parent recorded as capital contributions $65,000,000 $2,704,299
F-8 GREAT LAKES COLLECTION BUREAU, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Years ended December 31, 2001 and 2000 (1) Summary of Significant Accounting Policies Great Lakes Collection Bureau, Inc. and its subsidiary (the Company) performs debt collection services on delinquent accounts receivable. The Company is a wholly-owned subsidiary of FGIC Government Services, Inc. (FGIC), a wholly-owned subsidiary of General Electric Capital Corporation (the Group). The Company is engaged by corporate creditors, including other Group subsidiaries, to collect such accounts on a commission basis. The Company also purchases and collects delinquent receivable portfolios although this business activity has been substantially curtailed during 2000. The Company incurred substantial losses in recent years including the year ended December 31, 2001. At December 31, 2001, the Company had a total shareholder's deficiency of $46,907,417 and owes the Group $108,099,809 for advances. The Company depends on the Group for financing support and its continuing forbearance regarding the repayment of these advances. (a) Principles of Consolidation The consolidated financial statements include the financial statements of Great Lakes Collection Bureau, Inc. and its wholly-owned subsidiary, GLB Canada, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. (b) Interim Financial Statements The accompanying unaudited consolidated financial statements as of and for the six-month period ended June 30, 2002 and 2001, have been prepared in accordance with generally accepted accounting principles for interim financial information. 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 six-month period 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. (c) Commission Revenue Commission revenue on collections from customer portfolios is recognized as customer receivables are collected. (d) Purchased Accounts Receivable Purchased accounts receivable portfolios (portfolios) are initially recorded at purchase cost. Prior to September 30, 2000, collections on these portfolios were credited to revenue while the cost of the portfolios was amortized to expense based on the proportion that each period's cash collections bore to the total estimated collections for the portfolios over their assumed life of four years. This approach was intended to result in an annual rate of return for these portfolios that was equal to the corresponding rate of return anticipated over the portfolios' life. Changes in estimated future cash collections were reflected in the period that the change in estimate was made. In September 2000, the Company completed a comprehensive review of its portfolios concluding that its previous estimates of the amount and timing of future portfolio collections required revision. Based on this review, an impairment charge of $52,151,322 was recorded in 2000 operations. Based on these results the Company determined that, due to continuing uncertainties as to the amount and timing of future collections, these estimates should no longer be used as a basis for its ongoing accounting policy. Accordingly, beginning on September 30, 2000, the Company implemented a cost recovery method of accounting for its portfolios. Under this method, the cash received from portfolio collections, net of applicable collection costs, is directly applied as a reduction of the portfolio's carrying cost. Revenue from collections is, therefore, recorded only to the extent of collection costs. (e) Property and Equipment Property and equipment are carried at cost. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. (Continued) F-9 GREAT LAKES COLLECTION BUREAU, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Years ended December 31, 2001 and 2000 (f) Income Taxes Effective January 1, 2000, the Company changed its method of intercorporate tax allocation for financial reporting purposes. Prior to this date, income taxes were provided under the asset and liability method as if the Company were filing a separate tax return. Any difference between the amount of income taxes determined under the asset and liability method and the amount allocated to the Company by the Group under their tax sharing arrangement, which generally consisted of Company losses utilized on the Group's tax return, was reflected as an adjustment to shareholder's equity. Pursuant to this method, the Company recognized the tax benefit of its losses as deferred tax assets. At December 31, 1999 deferred tax assets included loss carryforwards of $16,253,000. Under the new intercorporate tax allocation policy, the Company continues to determine its income taxes as if it were filing a separate tax return except in its treatment of operating losses. Under the new method, the Company is given current tax benefit for any of its losses that are utilized by the Group. Accordingly, such losses will no longer result in loss carryforwards or a deferred tax asset for the Company. Adoption of the new method has no impact on earnings in 2000. The cumulative effect of adopting the new method has been reflected as a reduction of deferred tax assets and shareholder's equity as of the January 1, 2000 adoption date. (g) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (2) Purchased Accounts Receivable A summary of purchased accounts receivable at December 31, 2001 and 2000 follows:
2001 2000 ------------- ----------- Cost of purchased accounts receivable $ 317,155,091 316,914,860 Less: Amortization 227,000,420 227,000,420 Net cash collections under cost recovery method 59,229,361 11,711,315 ------------- ----------- $ 30,925,310 78,203,125 ============= ===========
(Continued) F-10 GREAT LAKES COLLECTION BUREAU, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Years ended December 31, 2001 and 2000 During 2000, the Company determined that the carrying value of its purchased receivable portfolios exceeded the estimated cash collections from those portfolios less the related costs. In accordance with the Company's accounting policy, this excess of $52,151,322 was charged to operations and included in accumulated amortization. (3) Property and Equipment Property and equipment at December 31, 2001 and 2000 consists of the following:
2001 2000 ----------- ---------- Land $ 521,500 521,500 Building and improvements 2,630,702 2,599,042 Furniture and equipment 7,967,659 5,622,061 Software 565,473 432,245 ----------- ---------- 11,685,334 9,174,848 Less accumulated depreciation 4,182,741 2,759,263 ----------- ---------- Property and equipment, net $ 7,502,593 6,415,585 =========== ==========
Depreciation expense totaled $1,423,478 and $716,513 in 2001 and 2000, respectively. (4) Commitments The Company leases office space, vehicles and equipment under noncancelable operating leases that expire through 2005. Minimum annual rental commitments required under these leases at December 31, 2001 follows: 2002 $ 1,415,463 2003 1,314,504 2004 744,626 2005 156,309 ============ Rent expense was $1,778,897 and $1,760,436 in 2001 and 2000, respectively. Cash collected on behalf of customers is temporarily placed on deposit in segregated accounts. At December 31, 2001, cash of $849,615 is restricted for the purpose of customer reimbursement. (Continued) F-11 GREAT LAKES COLLECTION BUREAU, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Years ended December 31, 2001 and 2000 (5) Income Taxes The components of income tax benefit for 2001 and 2000 are as follows:
2001 2000 ------------ ----------- Current tax benefit allocated from Group $ 7,106,000 17,706,000 ------------ ----------- Deferred: Federal 749,000 20,307,000 State 158,000 4,369,000 ------------ ----------- Total deferred 907,000 24,676,000 ------------ ----------- $ 8,013,000 42,382,000 ============ ===========
Actual income tax benefit differs from the expected benefit due primarily to the effect of state taxes and the valuation allowance on the net operating loss of the Canadian subsidiary. The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000 are as follows:
2001 2000 ------------- ----------- Deferred tax assets: Purchased accounts receivable $ 9,561,000 8,652,000 Accrued expenses 279,000 633,000 Net operating loss of subsidiary 805,000 - ------------- ----------- Total deferred tax assets 10,645,000 9,285,000 ------------- ----------- Deferred tax liabilities: Property and equipment (403,000) (246,000) ------------- ----------- Total deferred tax liabilities (403,000) (246,000) ------------- ----------- Deferred tax asset 10,242,000 9,039,000 ------------- ----------- Valuation allowance (296,000) - ------------- ----------- Net deferred tax asset $ 9,946,000 9,039,000 ============= ===========
(Continued) F-12 GREAT LAKES COLLECTION BUREAU, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Years ended December 31, 2001 and 2000 The Company's Canadian subsidiary has a net operating loss of approximately $2,000,000 expiring in 2008. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the ability of Group to utilize these assets as a reduction of its consolidated income taxes and to allocate these benefits to the Company under the intercorporate tax allocation policy. The Company believes it is more likely than not that it will realize the benefits of these deductible differences net of the valuation allowance at December 31, 2001. (6) Pension Plan The Company sponsors a defined contribution profit-sharing plan for substantially all employees. The Company's contribution to the plan was $78,915 and $201,845 in 2001 and 2000, respectively. The Company also sponsors a 401(k) plan open to all employees who meet certain requirements. Company matching contributions were $142,226 and $188,642 in 2001 and 2000, respectively. (7) Related Party Transactions In 2001, advances from parent were reduced by $2,704,299 for certain adjustments relating to the Group's acquisition of the Company in 1997. This debt forgiveness has been accounted as a contribution of capital. The Company has received advances from the Group to fund operations and prior to 2001, to fund purchases of receivable portfolios. These advances bear interest at a variable rate (6.64% at December 31, 2001), are due on demand and were $108,099,809 and $151,289,240 at December 31, 2001 and 2000, respectively. Interest charged by the Group for these advances in 2001 and 2000 was $8,177,245 and $15,355,675, respectively, and has been included in the advances from parent on the accompanying balance sheets. The Company records advances from parent for certain administrative expenses paid by Group on the Company's behalf. The total reimbursable expenses were $4,945,137 in 2001 and $5,563,088 in 2000. The Company collects receivables on behalf of affiliated Group entities. Commissions receivable from these entities amounted to $1,637,270 and $1,234,000 at December 31, 2001 and 2000, respectively. Commission revenue from these entities was $17,351,419 and $2,380,631 in 2001 and 2000, respectively. In 2001, the Company incurred severance expense of $1,698,514 related to staff reductions. Of this amount, the Group reimbursed the Company for $905,260. Severance expense and the Group's partial reimbursement thereof is included in salaries and employee benefits in the accompanying 2001 statement of operations. (Continued) F-13 GREAT LAKES COLLECTION BUREAU, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Years ended December 31, 2001 and 2000 The Company paid certain operating costs on behalf of an affiliated Group entity in 2001 and 2000. Included in prepaid expenses and other assets are reimbursement due from the entity of $562,136 and $366,896 at December 31, 2001 and 2000, respectively. In 2001, the Company was overcharged by an affiliate for certain employee benefit costs managed by the affiliate on behalf of the Company. The scheduled reimbursement of $786,574 due from the affiliate is included in prepaid expenses and other on the accompanying 2001 balance sheet. (8) Commitments and Contingencies The Company is a defendant in various legal proceedings arising in the ordinary course of business. The Company has estimated costs to conclude these matters totaled $300,000 which has been accrued for as of December 31, 2001. In the opinion of management, the ultimate resolution disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. (9) Subsequent Event (Unaudited) In May of 2002, the Company received an equity infusion from it's parent in the amount of $65 million to satisfy regulatory licensing requirements as to capitalization and financial condition. F-14 Pro Forma Consolidated Financial Statements Basis of Presentation The Pro Forma Consolidated Balance Sheet as of June 30, 2002 and the Pro Forma Consolidated Statements of Income for the six months ended June 30, 2002 and the year ended December 31, 2001 are based on the historical financial statements of NCO Group, Inc. ("NCO Group"); Creditrust Corporation ("Creditrust"); and Great Lakes Collection Bureau, Inc. ("Great Lakes"). Creditrust was acquired on February 20, 2001, and Great Lakes was acquired on August 19, 2002. The acquisitions listed above have been accounted for assuming the use of the purchase method of accounting with the results of the acquired companies included in NCO Group's historical statements of income beginning on the date of acquisition. The Pro Forma Consolidated Balance Sheet as of June 30, 2002 has been prepared assuming the Great Lakes acquisition was completed on June 30, 2002. The Pro Forma Consolidated Statement of Income for the six months ended June 30, 2002 has been prepared assuming the Great Lakes acquisition was completed on January 1, 2002. The Pro Forma Consolidated Statement of Income for the year ended December 31, 2001 has been prepared assuming the Creditrust and Great Lakes acquisitions were completed on January 1, 2001. The Pro Forma Consolidated Balance Sheet and Statements of Income do not purport to represent what NCO Group's actual financial position or results of operations would have been had the acquisitions occurred as of such dates, or to project NCO Group's financial position or results of operations for any period or date, nor does it give effect to any matters other than those described in the notes thereto. In addition, the allocation of purchase price to the assets and liabilities of Great Lakes is preliminary and the final allocation may differ from the amount reflected herein. The unaudited Pro Forma Consolidated Balance Sheet and Statements of Income should be read in conjunction with NCO Group's consolidated financial statements and notes thereto, and the historical financial statements of Great Lakes, which are included in this Current Report on Form 8-K. F-15
NCO GROUP, INC. Pro Forma Consolidated Balance Sheet June 30, 2002 (Unaudited) (dollars in thousands) Acquisition NCO Group Great Lakes Adjustments (1) Pro Forma ----------- ------------- ----------------- ----------- ASSETS Current assets: Cash and cash equivalents $ 27,117 $ 2,102 $ (4,392) $ 24,827 Restricted cash 900 - - 900 Accounts receivable, trade, net 97,739 1,573 (488) 98,824 Purchased accounts receivable, current portion 50,272 14,819 (6,355) 58,736 Deferred income taxes 9,111 - - 9,111 Other current assets 11,727 1,927 (1,696) 11,958 ----------- ------------- ----------------- ----------- Total current assets 196,866 20,421 (12,931) 204,356 Property and equipment, net 78,515 6,898 (2,467) 82,946 Other assets: Goodwill 515,510 - 2,354 517,864 Other intangibles, net of accumulated amortization 6,808 - 5,492 12,300 Purchased accounts receivable, net of current portion 81,753 1,419 13,171 96,343 Deferred income taxes - 12,252 (12,252) - Other assets 48,218 - - 48,218 ----------- ------------- ----------------- ----------- Total other assets 652,289 13,671 8,765 674,725 ----------- ------------- ----------------- ----------- Total assets $ 927,670 $ 40,990 $ (6,633) $ 962,027 =========== ============= ================= =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion $ 22,270 $ - $ 15,796 $ 38,066 Corporate taxes payable - - - - Accounts payable 12,828 - - 12,828 Accrued expenses 28,101 1,949 1,198 31,248 Accrued compensation and related expenses 14,079 - - 14,079 ----------- ------------- ----------------- ----------- Total current liabilities 77,278 1,949 16,994 96,221 Long-term liabilities: Long term debt, net of current portion 332,575 25,231 (9,817) 347,989 Deferred income taxes 49,209 - 49,209 Other long-term liabilities 3,744 - 3,744 Minority interest 22,818 - 22,818 Shareholders' equity Preferred stock - - - - Common stock 321,823 4 (4) 321,823 Additional paid-in capital - 98,396 (98,396) - Other comprehensive loss (2,338) - - (2,338) Retained earnings (deficit) 122,561 (84,590) 84,590 122,561 ----------- ------------- ----------------- ----------- Shareholders' equity 442,046 13,810 (13,810) 442,046 ----------- ------------- ----------------- ----------- Total liabilities and shareholders' equity $ 927,670 $ 40,990 $ (6,633) $ 962,027 =========== ============= ================= ===========
F-16
NCO GROUP, INC. Pro Forma Consolidated Statement of Income For the Six Months Ended June 30, 2002 (Unaudited) (amounts in thousands, except per share amounts) Acquisition NCO Group Great Lakes Adjustments Pro Forma -------- ----------- ------------ -------- Revenue $356,585 $ 22,180 $ - $378,765 Operating costs and expenses: Payroll and related expenses 169,600 15,160 - 184,760 Selling, general, and administrative expenses 122,416 10,046 - 132,462 Depreciation and amortization expense 12,747 641 351 (2) 13,739 -------- -------- ------ -------- Total operating costs and expenses 304,763 25,847 351 330,961 -------- -------- ------ -------- Income (loss) from operations 51,822 (3,667) (351) 47,804 Other income (expense): Interest and investment income 1,454 - - 1,454 Interest expense (9,949) (2,922) (276) (3) (13,147) Other income (290) - - (290) -------- -------- ------ -------- (8,785) (2,922) (276) (11,983) -------- -------- ------ -------- Income (loss) before income tax expense 43,037 (6,589) (627) 35,821 Income tax expense (benefit) 16,319 (2,306) (238) (4) 13,775 -------- -------- ------ -------- Income (loss) from operations before minority interest 26,718 (4,283) (389) 22,046 Minority interest (1,605) - 1,120 (5) (485) -------- -------- ------ -------- Net income (loss) $ 25,113 $ (4,283) $ 731 $ 21,561 ======== ======== ====== ======== Net income per share: Basic $ 0.97 $ 0.83 (6) ======== ======== Diluted $ 0.90 $ 0.78 (6) ======== ======== Weighted average shares outstanding: Basic 25,873 25,873 ======== ======== Diluted 29,940 29,940 ======== ========
F-17
NCO GROUP, INC. Pro Forma Consolidated Statement of Income For the Year Ended December 31, 2001 (Unaudited) (amounts in thousands, except per share amounts) Acquisition NCO Group Creditrust (7) Great Lakes Adjustments Pro Forma --------- ---------- ----------- ----------- ---------- Revenue $701,506 $ 3,580 $ 52,250 $ - $757,336 Operating costs and expenses: Payroll and related expenses 350,634 3,075 35,004 - 388,713 Selling, general, and administrative expenses 237,690 2,774 28,490 - 268,954 Depreciation and amortization expense 38,205 115 1,423 568 (8) 40,311 -------- ------- -------- ------- -------- Total operating costs and expenses 626,529 5,964 64,917 568 697,978 -------- ------- -------- ------- -------- Income (loss) from operations 74,977 (2,384) (12,667) (568) 59,358 Other income (expense): Interest and investment income 3,627 146 - - 3,773 Interest expense (26,962) (2,491) (8,177) (3,919) (9) (41,549) Other income - (1,008) - 1,008 -- -------- ------- -------- ------- -------- (23,335) (3,353) (8,177) (2,911) (37,776) -------- ------- -------- ------- -------- Income (loss) before income tax expense 51,642 (5,737) (20,844) (3,479) 21,582 Income tax expense (benefit) 21,463 (2,237) (8,013) 4,929 (10) 16,142 -------- ------- -------- ------- -------- Income (loss) from operations before minority interest 30,179 (3,500) (12,831) (8,408) 5,440 Minority interest (4,310) - - 7,151 (11) 2,841 -------- ------- -------- ------- -------- Net income (loss) $ 25,869 $(3,500) $(12,831) $(1,257) $ 8,281 ======== ======= ======== ======= ======== Net income per share: Basic $ 1.00 $ 0.32 (12) ======== ======== Diluted $ 0.99 $ 0.32 (12) ======== ======== Weighted average shares outstanding: Basic 25,773 25,773 ======== ======== Diluted 28,897 26,091 ======== ========
F-18 Notes to Pro Forma Consolidated Financial Statements (Unaudited) (1) Gives effect to the following acquisition related adjustments: (i) certain assets and liabilities of Great Lakes that were not acquired by NCO Group; (ii) the recognition of goodwill; (iii) the recognition of a customer list; and (iv) the accrual of estimated acquisition related expenses. The accrual of estimated acquisition related expenses includes: (i) professional fees related to the acquisitions; (ii) termination costs relating to certain redundant personnel scheduled to be eliminated upon the completion of the Great Lakes acquisition; and (iii) certain future rental obligations attributable to facilities which are scheduled to be closed upon the completion of the Great Lakes acquisition. The Great Lakes customer list is expected to be amortized on a straight-line basis over five years. The allocation of the purchase price paid for Great Lakes is estimated to be as follows (dollars in thousands): Great Lakes ----------- Net tangible assets acquired $ 27,654 Accrued acquisition expenses, estimated (2,000) Goodwill and customer list 7,846 -------- Consideration paid $ 33,500 ======== (2) Gives effect to: (i) the elimination of depreciation expense related to assets revalued or not acquired; and (ii) the adjustment to amortization expense for the customer list assuming the Great Lakes acquisition had occurred on January 1, 2002. (3) Gives effect to: (i) the elimination of interest on Great Lakes' debt that was not assumed as part of the acquisition; (ii) interest expense on the borrowings related to the Great Lakes acquisition as if it occurred on January 1, 2002; and (iii) deferred income attributable to the lender's residual interest in the purchased accounts receivable. The interest expense was calculated using an estimated interest rate of 3.5 percent on the $10.6 million of borrowings under NCO Group's revolving credit facility and 8.0 percent on the $21.6 million borrowed by NCO Portfolio to acquire Great Lakes' purchased accounts receivable. (4) Adjusts the estimated income tax expense as if the Great Lakes acquisition occurred on January 1, 2002. (5) Reflects the minority interest in the net income attributable to the Great Lakes purchased accounts receivables acquired by NCO Portfolio. NCO Group owns 63 percent of NCO Portfolio. (6) Net income per share includes: (i) payroll and related expenses of approximately $1.6 million, net of taxes, attributable to certain redundant personnel costs scheduled to be eliminated upon the completion of the Great Lakes acquisition; and (ii) rental and related operating costs of approximately $257,000, net of taxes, attributable to a facility that NCO Group did not acquire. Net income per share did not include revenue of $3.4 million, net of taxes and minority interest, from the purchased accounts receivable due to Great Lakes using a cost recovery method. Great lakes accounted for their purchased accounts receivable using the cost recovery method due to uncertainties as to the amount and timing of collections, as compared to NCO Group accounting for its investment in purchased accounts receivable on an accrual basis under the guidance of Practice Bulletin 6, "Amortization of Discounts of Certain Acquired Loans." Net income per share-basic and net income per share-diluted would have been $1.04 and $0.98, respectively, on a pro forma basis assuming the acquisition occurred on January 1, 2002, those costs had not been incurred, and the purchased accounts receivable were accounted for under NCO Group's method. F-19 (7) Represents the historical results of operations of Creditrust from January 1, 2001 to February 19, 2001, the period prior to the acquisition. (8) Gives effect to: (i) the elimination of depreciation expense of property, related to assets revalued or not acquired with Great Lakes; (ii) the adjustment to amortization expense for the customer list assuming the Great Lakes acquisition had occurred on January 1, 2001; (iii) the elimination of amortization expense from the write-off of Creditrust's deferred financing fees; and (iv) the addition of amortization expense from $875,000 of new deferred financing costs from the Creditrust acquisition. (9) Gives effect to: (i) the elimination of interest on Great Lakes' debt that was not assumed as part of the acquisition; (ii) interest expense on borrowings related to the Great Lakes acquisition as if it occurred on January 1, 2001; (iii) deferred income attributable to the lender's residual interest in the purchased accounts receivable of Great Lakes; (iv) the replacement of Creditrust pre-acquisition debt with the new credit facility; (v) the reduction in Creditrust's securitized debt by utilizing reserves included in restricted cash; and (vi) the elimination of Creditrust's original issue discounts associated with warrants eliminated as part of the acquisition. The interest expense for Great Lakes was calculated using an estimated interest rate of 3.5 percent on the $10.6 million of borrowings under NCO Group's revolving credit facility and 8.0 percent on the $21.6 million borrowed by NCO Portfolio to acquire Great Lakes' purchased accounts receivable. (10) Adjusts the estimated income tax expense, as if the Great Lakes and Creditrust acquisitions occurred on January 1, 2001. Gives effect to the adjustment of deferred income tax assets that may not be recoverable after the Creditrust acquisition. (11) Gives effect to: (i) the minority interest in the pre-acquisition net income attributable to the Great Lakes purchased accounts receivables acquired by NCO Portfolio; and (ii) the minority interest in the pre-acquisition loss from Creditrust. NCO Group owns 63 percent of NCO Portfolio. (12) Net income per share includes: (i) payroll and related expenses of approximately $2.6 million, net of taxes, attributable to certain redundant personnel costs scheduled to be eliminated upon the completion of the Great Lakes acquisition; (ii) rental and related operating costs of approximately $524,000, net of taxes, attributable to a facility that NCO Group did not acquire with Great Lakes; and (iii) payroll and related expenses of approximately $249,000, net of taxes, attributable to certain redundant personnel costs that were eliminated upon the completion of the Creditrust acquisition. Net income per share did not include revenue of $14.1 million, net of taxes and minority interest, from the purchased accounts receivable due to Great Lakes using a cost recovery method. Great lakes accounted for their purchased accounts receivable using the cost recovery method due to uncertainties as to the amount and timing of collections, as compared to NCO Group accounting for its investment in purchased accounts receivable on an accrual basis under the guidance of Practice Bulletin 6, "Amortization of Discounts of Certain Acquired Loans." Net income per share-basic and net income per share-diluted would have been $1.01 and $1.00, respectively, on a pro forma basis assuming the acquisition occurred on January 1, 2001, those costs had not been incurred, and the purchased accounts receivable were accounted for under NCO Group's method. F-20 EX-23 3 ex23-1.txt EXHIBIT 23.1 Exhibit 23.1 Independent Auditors' Consent The Board of Directors Great Lakes Collection Bureau, Inc.: We consent to the incorporation by reference in the registration statements (Nos. 333-42743, 333-62131, 333-73807, 333-83229, 333-87493 and 333-61746) on Form S-8 and (No. 333-61748) on Form S-3 of NCO Group, Inc. of our report dated March 1, 2002, with respect to the consolidated balance sheets of Great Lakes Collection Bureau, Inc. and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholder's deficiency and cash flows for each of the years in the two-year period ended December 31, 2001, which report appears in the Form 8-KA of NCO Group, Inc. dated November 4, 2002. /s/ KPMG LLP November 1, 2002 Buffalo, New York -----END PRIVACY-ENHANCED MESSAGE-----