Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 2000
-----------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-21639
-------
NCO GROUP, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2858652
- ------------ ----------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
515 Pennsylvania Avenue
Fort Washington, Pennsylvania 19034-3313
- ----------------------------- --------------------------------
(Address of principal (Zip Code)
executive offices)
Registrant's Telephone Number, Including Area Code (215) 793-9300
--------------
Securities Registered Pursuant to Section 12(b) of the Act: None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common stock, no par value 25,749,018
-------------------------- ---------------------------
(Title of Class) (Number of Shares Outstanding
as of March 14, 2001)
Indicate by check mark whether the Registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant is approximately $596,601,000 (1)
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Proxy Statement to be filed in connection with
its 2001 Annual Meeting of Shareholders are incorporated by reference into Part
III of this Report. Other documents incorporated by reference are listed in the
Exhibit Index.
-----------------
(1) The aggregate market value of the voting stock set forth equals the number
of shares of the Company's common stock outstanding, reduced by the amount of
common stock held by officers, directors and shareholders owning 10% or more of
the Company's common stock, multiplied by $31.938, the last reported sale price
for the Company's common stock on March 14, 2001. The information provided shall
in no way be construed as an admission that any officer, director or 10%
shareholder in the Company may be deemed an affiliate of the Company or that he
is the beneficial owner of the shares reported as being held by him, and any
such inference is hereby disclaimed. The information provided herein is included
solely for record keeping purposes of the Securities and Exchange Commission.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business. 1
Item 2. Properties. 18
Item 3. Legal Proceedings. 19
Item 4. Submission of Matters to a Vote of Security Holders. 19
Item 4.1 Executive Officers of the Registrant who are not also Directors. 19
PART II
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters. 21
Item 6. Selected Financial Data. 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 24
Item 7a Quantitative and Qualitative Disclosures about Market Risk. 33
Item 8. Financial Statements and Supplementary Data. 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures. 33
PART III
Item 10. Directors and Executive Officers of the Registrant. 34
Item 11. Executive Compensation. 34
Item 12. Security Ownership of Certain Beneficial Owners and Management. 34
Item 13. Certain Relationships and Related Transactions. 34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 35
Signatures. 40
Index to Consolidated Financial Statements and
Financial Statement Schedule. F-1
As used in this Annual Report on Form 10-K, unless the context otherwise
requires, "we,""us," "our,""Company" or "NCO" refers to NCO Group, Inc. and its
subsidiaries.
Forward-Looking Statements
Certain statements included in this Annual Report on Form 10-K, including
without limitation statements in Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations", 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, expected increases in operating efficiencies, anticipated trends in
the accounts receivable management industry, 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 associated with technology, the internet and the
Company's e-commerce strategy and other risks described under Item 1. "Business
- - Investment Considerations" or in the Company's other filings made from time to
time with the Securities and Exchange Commission, can cause actual results and
developments to be materially different from those expressed or implied by such
forward-looking statements.
Item 1. Business.
PART I
General
We believe we are the largest outsourced accounts receivable management and
collection company in the world, serving a wide range of clients in North
America and abroad. Our extensive industry knowledge, technological expertise,
management depth and longstanding client relationships enable us to deliver
customized solutions that improve our clients' receivables recovery rates, thus
improving their financial performance. Our services are provided through the
utilization of sophisticated technologies including advanced workstations,
leading-edge client interface systems and call management systems comprised of
predictive dialers, automated call distribution systems, digital switching and
customized computer software. We have over 9,000 employees and provide our
services through the operation of 82 centers.
-1-
Industry Background
Increasingly, companies are outsourcing many non-core functions to focus on
revenue-generating activities, reduce costs and improve productivity. In
particular, many large corporations are recognizing the advantages of
outsourcing accounts receivable management and collection. This trend is being
driven by a number of industry-specific factors:
o First, the complexity of accounts receivable management and collection
functions in certain industries has increased dramatically in recent
years. For example, with the increasing popularity of health maintenance
organizations, or HMOs, and preferred provider organizations, or PPOs,
healthcare institutions now face the challenge of billing not only large
insurance companies but also individuals who are required to pay small,
one-time co-payments.
o Second, the increasing complexity of the collection process which
requires sophisticated call management and database systems for efficient
collections.
o Third, the trend in certain industries to outsource non-core functions,
due to competitive pressures, changing regulations and/or required
capital expenditures.
o Fourth, the increased focus by credit grantors on early identification
and intervention in pre-delinquent debt (i.e., debt with an average age
of less than 90 days).
We operate in a large industry with positive growth dynamics. Growth in our
industry is fundamentally driven by the continuing growth in consumer and
commercial debt. According to SMR Research Corporation, an industry research
firm, overall consumer debt in 1999 exceeded $6.3 trillion. In 2000,
approximately $135 billion of delinquent consumer debt was estimated to have
been placed for collection with third-party collection agencies, nearly double
the $73 billion placed in 1990 according to the Nilson Report, an industry
newsletter. The primary market segments within our industry are financial
services, healthcare, and retail and commercial. Other important market segments
include telecommunications and utilities.
The accounts receivable management and collection industry is highly
fragmented. Based on information obtained from the American Collectors
Association, there are approximately 6,500 accounts receivable management and
collection companies in the United States, the majority of which are small,
local businesses. We believe that many smaller competitors have insufficient
capital to expand and invest in technology and are unable to adequately meet the
geographic coverage and quality standards demanded by businesses seeking to
outsource their accounts receivable management function.
Strategy
Our strategy is to maintain our market dominance as we become a global
provider of accounts receivable management and collection services. Our strategy
to achieve these objectives includes the following elements:
Expand our relationships with clients - A significant amount of our growth
stems from the expansion of existing client relationships. These relationships
and the resultant opportunities continue to grow in scale, complexity and profit
potential. Over time, management believes these relationships should transition
from the operational delivery of services to the strategic development of
long-term, goal-oriented partnerships where we are sharing in the improved
profitability and operational efficiencies created for our clients.
-2-
Enhance our operating margins - Until 1999, we focused primarily on
realizing efficiencies through the integration of acquired companies. Over the
next several years, we intend to continue to pursue the following initiatives to
increase profitability:
o standardization of systems and practices;
o consolidation of facilities;
o automation of clerical functions;
o use of statistical analysis to improve performance and reduce direct unit
costs; and
o leveraging our purchasing power.
Enhance our technology capabilities - We will continue to enhance our
technology platform as well as continue to update and modernize our equipment,
including the workstations and predictive dialers used by account
representatives. In addition, we will continue to update and refine our NCO
Access interface, which translates client account information into a standard
presentation format that provides our account representatives with a common
visual interface that links directly into disparate client host systems.
The Internet offers the potential for significant operational benefits.
There are a variety of cost-reducing applications available, such as improved
data exchange capabilities and the replacement of direct mail with e-mail. We
are creating client-specific web pages that will facilitate reporting of
payments and account activity, online tracking of collection results and online
statistical modeling.
Expand internationally - We believe that business process outsourcing is
gaining widespread acceptance throughout Canada, Europe and Asia. Our
international expansion strategy is designed to capitalize on each of these
markets in the near term, as well as continue to monitor all developing
opportunities to determine the timing of entry into new markets. We operate in
Canada and the United Kingdom through wholly owned subsidiaries and are one of
the largest providers of consumer collection services in both of these markets.
We expect to further penetrate these markets through increased sales of accounts
receivable management and collection services and deployment of our commercial
sales model in order to further develop business-to-business opportunities.
Additionally, we expect to pursue strategic alliances and partnerships and
further explore acquisitions in these markets. For example, we formed a
strategic alliance with Alec Burlington N.V. in 1999 and with Receivables
Management Group Pty Ltd. in 2000 to provide an entre into the European and
Australasian markets, respectively, to service our U.S. clients. These alliances
enhance our service offerings as well as increase the awareness of NCO as a
global provider of accounts receivable management and collection services.
Increase purchases of delinquent receivables through NCO Portfolio - Since
1991, we have purchased, collected and managed portfolios of purchased accounts
receivables. These portfolios have consisted primarily of delinquent
receivables. Due to the profitability of these purchases, we expanded our
presence in this marketplace in 1999 and determined that it would be beneficial
to further expand our presence, while at the same time limiting our exposure to
credit risk. Through the merger of our subsidiary NCO Portfolio with Creditrust,
we have created a vehicle which will be one of the only publicly-traded
companies purchasing delinquent receivables. Under the terms of our credit
agreement, our investment in NCO Portfolio currently is limited to our $25.0
million equity investment and the $50.0 million credit subfacility. In the
future, NCO Portfolio may develop partnerships with banks, commercial lenders,
and other investors who will provide additional funding sources for purchases of
delinquent receivables. By utilizing such risk sharing partnerships, we will
gain access to capital while limiting both our and NCO Portfolio's exposure to
credit risk.
-3-
Continue to explore strategic acquisition opportunities - The accounts
receivable management and collection industry is highly fragmented with over
6,500 participants in the United States. The vast majority of these participants
are small, local businesses. Although our focus is on internal growth, we
believe we will continue to find attractive acquisition opportunities over time.
Services
Accounts Receivable Management and Collection
We provide a wide range of accounts receivable management and collection
services to our clients utilizing an extensive technological infrastructure.
Although most of our accounts receivable management and collection services to
date have focused on the recovery of traditional delinquent accounts, we do
engage in the recovery of current receivables and early stage delinquencies
(generally, accounts which are 90 days or less past due). We generate
approximately 60% of our revenue from the recovery of delinquent accounts
receivable on a contingent fee basis. In addition, we generate revenue from
fixed fees for certain accounts receivable management and collection and other
related services. We seek to be a low cost provider and, as such, our contingent
fees typically range from 15% to 35% of the amount recovered on behalf of our
clients. However, fees can range from 6% for the management of accounts placed
early in the accounts receivable cycle to 50% for accounts that have been
serviced extensively by the client or by third-party providers. Our average fee
is approximately 25% across all industries, with the exception of the healthcare
industry where it is lower due to a higher percentage of early intervention
accounts receivable management business.
Accounts receivable management and collection services typically include
the following activities:
Management Planning. Our approach to accounts receivable management and
collection for each client is determined by a number of factors including
account size and demographics, the client's specific requirements and
management's estimate of the collectability of the account. We have developed a
library of standard processes for accounts receivable management and collection,
which is based upon our accumulated experience. We will integrate these
processes with our client's requirements to create a customized recovery
solution. In many instances, the approach will evolve and change as the
relationship with the client develops and both parties evaluate the most
effective means of recovering accounts receivable. Our standard approach, which
may be tailored to the specialized requirements of our clients, defines and
controls the steps that will be undertaken by us on behalf of the client and the
manner in which data will be reported to the client. Through our systemized
approach to accounts receivable management and collection, we remove most
decision making from the recovery staff and ensure uniform, cost-effective
performance.
Once the approach has been defined, we electronically or manually transfer
pertinent client data into our information system. When the client's records
have been established in our system, we commence the recovery process.
Skiptracing. In cases where the customer's telephone number or address is
unknown, we systematically search the United States Post Office National Change
of Address service, consumer databases, electronic telephone directories, credit
agency reports, tax assessor and voter registration records, motor vehicle
registrations, military records and other sources. The geographic expansion of
banks, credit card companies, national and regional telecommunications companies
and managed healthcare providers along with the mobility of consumers has
increased the demand for locating the client's customers. Once we have located
the customer, the notification process can begin.
-4-
Account Notification. We initiate the recovery process by forwarding an
initial letter that is designed to seek payment of the amount due or open a
dialogue with customers who cannot afford to pay at the current time. This
letter also serves as an official notification to each customer of his or her
rights as required by the federal Fair Debt Collection Practices Act. We
continue the recovery process with a series of mail and telephone notifications.
Telephone representatives remind the customer of their obligation, inform them
that their account has been placed for collection with us and begin a dialogue
to develop a payment program.
Credit Reporting. At a client's request, we will electronically report
delinquent accounts to one or more of the national credit bureaus where it will
remain for a period of up to seven years. The denial of future credit often
motivates the payment of all past due accounts.
Payment Process. After we receive payment from the customer, we either
remit the amount received minus our fee to the client or remit the entire amount
received to the client and bill the client for our services.
Activity Reports. Clients are provided with a system-generated set of
standardized or customized reports that fully describe all account activity and
current status. These reports are typically generated monthly; however, the
information included in the report and the frequency that the reports are
generated can be modified to meet the needs of the client.
Quality Tracking. We emphasize quality control throughout all phases of the
accounts receivable management and collection process. Some clients may specify
an enhanced level of supervisory review and others may request customized
quality reports. Large national credit grantors will typically have exacting
performance standards which require sophisticated capabilities such as
documented complaint tracking and specialized software to track quality metrics
to facilitate the comparison of our performance to that of our peers.
Delinquency Management
We provide pre-charge-off delinquency management services that enable
clients to manage their at-risk customers and quickly restore the relationships
to a current payment status. We mail reminder letters and make first-party calls
to the clients' customers, reminding of the past due balance and encouraging
them to make immediate repayment using pay-by-phone direct debit checks or, in
certain cases, credit cards. Our services include responding to inbound calls
seven days a week. We apply our extensive database and predictive modeling
techniques to the customer's profile, assigning more intense efforts to higher
risk customers.
Customer Service and Support
We utilize our communications and information system infrastructure to
supplement or replace the customer service function of our clients. For example,
we are currently engaged by a large regional utility company to provide customer
service functions for a segment of the utility's customer base that is
delinquent. For other clients, we provide a wide range of specialized services
such as fraud-prevention, over-limit calling, inbound calling for customer
credit application and approval processes, and general back office support. We
can provide customer contact through inbound or outbound calling, or customized
web-enabled functions.
-5-
Billing
We complement existing service lines by offering adjunct billing services
to clients as an outsourcing option. Additionally, we can assist healthcare
clients in the billing and management of third party insurance.
Additional Services
We selectively provide other related services which complement our
traditional accounts receivable management and collection business and which
leverage our technological infrastructure. We believe that the following
services will provide additional growth opportunities for us:
Attorney Network Services. We will also coordinate litigation undertaken
by a nationwide network of more than 150 law firms whose attorneys specialize in
collection litigation. Our collection support staff manages the attorney
relationships and facilitates the transfer of all necessary documentation.
NCO ePayments. We can provide clients with a virtual 24-hour payment
center that is accessible by the use of telephones, personal computers or the
Internet.
Credit and Investigative Reporting Service. We develop the information
needed to profile commercial debtors and make decisions affecting extensions of
credit.
NCO Benefit Systems. We administer compliant COBRA administration services
for human resources departments.
Technology and Infrastructure
We have made a substantial investment in our information systems such as
"thin client" network computing devices, predictive dialers, automated call
distribution systems, digital switching and customized computer software,
including the NCO Access interface product. As a result, we believe we are able
to address accounts receivable management and collection activities more
reliably and more efficiently than our competitors. Our systems also permit
network access to enable clients to electronically communicate with us and
monitor operational activity on a real-time basis. We provide our services
through the operation of 82 centers that are electronically linked through an
international wide area network, with the exception of our two United Kingdom
centers.
We also utilize a custom-developed NCO Access interface product that
leverages industry standard visual basic and thin client server technology in
order to facilitate the critical process of "real-time" translation of account
data from our clients' host systems to our system. The NCO Access interface
product set allows rapid ramp up of new client projects and the ability to work
online with client host systems while completely integrating and leveraging the
power of our base receivables management software infrastructure. Additionally,
this technology allows sophisticated reporting capabilities that are not always
available on clients' host systems. The NCO Access interface product translates
client account information into a standard presentation format that provides our
account representatives with a common visual interface that links directly into
disparate client host systems. Key benefits of the NCO Access interface include
dramatic reduction in project ramp up time, reduction in training costs, and an
overall increase in account representative productivity.
-6-
We utilize approximately 65 predictive dialer locations with over 3,000
stations to address our low balance, high volume accounts. These systems scan
our databases, simultaneously initiate calls on all available telephone lines
and determine if a live connection is made. Upon determining that a live
connection has been made, the computer immediately switches the call to an
available representative and instantaneously displays the associated account
record on the representative's workstation. Calls that reach other signals, such
as a busy signal, telephone company intercept or no answer, are tagged for
statistical analysis and placed in priority recall queues or multiple-pass
calling cycles. The system also automates virtually all record keeping and
follow-up activities including letter and report generation. Our automated
method of operations dramatically improves the productivity of our collection
staff.
We employ an approximately 250-person MIS staff led by a Chief Information
Officer. We maintain disaster recovery contingency plans and have implemented
procedures to protect against the loss of data resulting from power outages,
fire and other casualties. We have implemented a security system to protect the
integrity and confidentiality of our computer systems and data and maintain
comprehensive business interruption and critical systems insurance on our
telecommunications and computer systems.
Sales and Marketing
Our sales force is organized at the corporate level to address clients by
need based upon their respective complexity, geography and industry. We utilize
a focused and professional direct selling effort in which sales representatives
personally cultivate relationships with prospective and existing clients. Our
sales effort consists of an approximately 60-person direct sales force, and for
the commercial sector, approximately 300 telephone sales representatives. Each
sales representative is charged with identifying leads, qualifying prospects and
closing sales. When appropriate, our operating personnel will join in the sales
effort to provide detailed information and advice regarding our operational
capabilities. We supplement our direct sales effort with print media and
attendance at trade shows.
Many of our prospective clients issue requests-for-proposals as part of the
contract award process. We have a staff of technical writers for the purpose of
preparing detailed, professional responses to requests-for-proposals.
Quality Assurance and Client Service
Our reputation for quality service is critical to acquiring and retaining
clients. Therefore, we and our clients monitor our representatives for strict
compliance with the clients' specifications and our policies. We regularly
measure the quality of our services by capturing and reviewing such information
as the amount of time spent talking with clients' customers, level of customer
complaints and operating performance. In order to provide ongoing improvement to
our telephone representatives' performance and to assure compliance with our
policies and standards, quality assurance personnel monitor each telephone
representative on a frequent basis and provide ongoing training to the
representative based on this review. Our information systems enable us to
provide clients with reports on a real-time basis as to the status of their
accounts and clients can choose to network with our computer system to access
such information directly.
-7-
We maintain a client service department to promptly address client issues
and questions and alert senior executives of potential problems that require
their attention. In addition to addressing specific issues, a team of client
service representatives will contact clients on a regular basis in order to
establish a close rapport, determine clients' overall level of satisfaction and
identify practical methods of improving their satisfaction.
Client Relationships
Our client base currently includes over 13,700 companies in the financial
services, healthcare, education, retail, utilities, government and
telecommunications sectors, and over 58,000 companies in the commercial sector.
Our 10 largest clients in 2000 accounted for approximately 26.9% of our revenue.
In 2000, no client accounted for more than 6.0% of total revenue. In 2000, we
derived 29.8% of our revenue from financial institutions (which included the
banking and insurance sectors), 28.8% from healthcare organizations, 22.1% from
retail and commercial entities, 6.5% from educational organizations, 5.6% from
telecommunications companies, 5.1% from utilities, and 2.1% from government
entities.
The following table sets forth a list of certain of our key clients:
Financial Services Healthcare Retail and Commercial
- ------------------------------------- ------------------------------------- -----------------------------------
Bank of America Columbia/HCA Airborne Freight Corporation
Capital One Financial Corporation Healthcare Corporation Business Dayton Hudson Corporation
Citicorp Services Emery Worldwide
First Union National Bank, N.A. Health Management Associates, Inc. Federal Express Corporation
MBNA UCSF Stanford University Sears, Roebuck and Co.
The Progressive Corporation
Education Telecommunications Utilities and Government
- ------------------------------------- ------------------------------------- -----------------------------------
California Student Aid AT&T Consumer Energy
Commission / EDFUND BellSouth Telecommunications, Inc. PECO Energy Company
New York State Higher Education MCI WorldCom The City of Philadelphia, Water
Service Corporation Sprint Corporation Revenue Bureau
Pennsylvania Higher Education Verizon The United States Department of
Assistance Agency Treasury
Penn State University Virginia Power
The United States Department of
Education
We enter into contracts with most of our clients that define, among other
things, fee arrangements, scope of services and termination provisions. Clients
may usually terminate such contracts on 30 or 60 days notice. In the event of
termination, however, clients typically do not withdraw accounts referred to us
prior to the date of termination, thus providing us with an ongoing stream of
revenue from such accounts which diminish over time. Under the terms of our
contracts, clients are not required to place accounts with us but do so on a
discretionary basis.
-8-
Personnel and Training
Our success in recruiting, hiring and training a large number of employees
is critical to our ability to provide high quality accounts receivable
management and collection, customer support and teleservices programs to our
clients. We seek to hire personnel with previous experience in accounts
receivable management and collection or as a telephone representative. NCO
generally offers competitive compensation and benefits and offers promotion
opportunities within NCO.
All our collection personnel receive comprehensive training that consists
of a combination of classroom and practical experience. Prior to customer
contact, new employees receive one week of training in our operating systems,
procedures and telephone techniques and instruction in applicable federal and
state regulatory requirements. Our personnel also receive a wide variety of
continuing professional education consisting of both classroom and role playing
sessions.
As of December 31, 2000, we had a total of approximately 8,400 full-time
employees and 800 part-time employees, of which 6,800 are telephone
representatives. None of our employees are represented by a labor union. We
believe that our relations with our employees are good.
Competition
The accounts receivable management and collection industry is highly
competitive. We compete with a large number of providers, including large
national corporations such as Outsourcing Solutions, Inc., IntelliRisk
Management Corporation, and GC Services, Inc., as well as many regional and
local firms. Some of our competitors may offer more diversified services and/or
operate in broader geographic areas than us. In addition, the accounts
receivable management and collection services offered by us are performed
in-house by many companies. Moreover, many larger clients retain multiple
accounts receivable management and collection providers which exposes us to
continuous competition in order to remain a preferred vendor. We believe that
the primary competitive factors in obtaining and retaining clients are the
ability to provide customized solutions to a client's requirements, personalized
service, sophisticated call and information systems, and price.
Regulation
The accounts receivable management and collection industry is regulated
both at the federal and state level. The federal Fair Debt Collection Practices
Act regulates any person who regularly collects or attempts to collect, directly
or indirectly, consumer debts owed or asserted to be owed to another person. The
Fair Debt Collection Practices Act establishes specific guidelines and
procedures which debt collectors must follow in communicating with consumer
debtors, including the time, place and manner of such communications. Further,
it prohibits harassment or abuse by debt collectors, including the threat of
violence or criminal prosecution, obscene language or repeated telephone calls
made with the intent to abuse or harass. The Fair Debt Collection Practices Act
also places restrictions on communications with individuals other than consumer
debtors in connection with the collection of any consumer debt and sets forth
specific procedures to be followed when communicating with such third parties
for purposes of obtaining location information about the consumer. Additionally,
the Fair Debt Collection Practices Act contains various notice and disclosure
requirements and prohibits unfair or misleading representations by debt
collectors. We are also subject to the Fair Credit Reporting Act which regulates
the consumer credit reporting industry and which may impose liability on us to
the extent that the adverse credit information reported on a consumer to a
credit bureau is false or inaccurate. The Federal Trade Commission has the
authority to investigate consumer complaints against debt collection companies
and to recommend enforcement actions and seek monetary penalties. The accounts
receivable management and collection business is also subject to state
-9-
regulation. Some states require that we be licensed as a debt collection
company. We believe that we currently hold applicable licenses from all states
where required.
The collection of accounts receivable by collection agencies in Canada is
regulated at the provincial and territorial level in substantially the same
fashion as is accomplished by federal and state laws in the United States. The
manner in which we carry on the business of collecting accounts is subject, in
all provinces and territories, to established rules of common law or civil law
and statute. Such laws establish rules and procedures governing the tracing,
contacting and dealing with debtors in relation to the collection of outstanding
accounts. These rules and procedures prohibit debt collectors from engaging in
intimidating, misleading and fraudulent behavior when attempting to recover
outstanding debts. In Canada, our collection operations are subject to licensing
requirements and periodic audits by government agencies and other regulatory
bodies. Generally, such licenses are subject to annual renewal. We believe that
we hold all necessary licenses in those provinces and territories that require
them.
If we engage in other teleservice activities in Canada, there are several
provincial and territorial consumer protection laws of more general application.
This legislation defines and prohibits unfair practices by telemarketers, such
as the use of undue pressure and the use of false, misleading or deceptive
consumer representations.
In addition, the accounts receivable management and collection industry is
regulated in the United Kingdom, including a licensing requirement. If we expand
our international operations, we may become subject to additional government
control and regulation in other countries, which may be more onerous than those
in the United States.
Several of the industries served by us are also subject to varying degrees
of government regulation. Although compliance with these regulations is
generally the responsibility of our clients, we could be subject to a variety of
enforcement or private actions for our failure or the failure of our clients to
comply with such regulations.
We devote significant and continuous efforts, through training of personnel
and monitoring of compliance, to ensure that we are in compliance with all
federal and state regulatory requirements. We believe that we are in material
compliance with all such regulatory requirements.
-10-
History of Acquisitions
The following is a summary of the acquisitions we completed since 1994
(dollars in thousands):
Revenue for the
Date Value of Fiscal Year Prior
Acquired Business Purchase Price to Acquisition
-------- ---------------------- -------------- -----------------
Creditrust Corporation 2/20/01 Purchased A/R $ 25,000(1) $ 36,491
Compass International Services 8/20/99 A/R Management and 104,100 105,800(2)
Corporation Telemarketing
Co-Source Corporation 5/21/99 Commercial Receivables 124,600 61,100
Management
JDR Holdings, Inc. 3/31/99 Technology-Based 103,100 51,000
Outsourcing, A/R
Management and
Telemarketing
Medaphis Services Corporation 11/30/98 Healthcare Receivables 117,500 96,700
Management
MedSource, Inc. 7/1/98 Healthcare Receivables 35,700(3) 22,700
Management
FCA International Ltd. 5/5/98 A/R Management 69,900 62,800
The Response Center 2/6/98 Market Research 15,000 8,000
Collections Division of American 1/1/98 A/R Management 1,700 1,700
Financial Enterprises, Inc.
ADVANTAGE Financial 10/1/97 A/R Management 5,000 5,100
Services, Inc.
Credit Acceptance Corporation 10/1/97 A/R Management 1,800 2,300
Collections Division of CRW 2/2/97 A/R Management 12,800 25,900
Financial, Inc.
CMS A/R Services 1/31/97 A/R Management 5,100 6,800
Tele-Research Center, Inc. 1/30/97 Market Research and 2,200 1,800
Telemarketing
Goodyear & Associates, Inc. 1/22/97 A/R Management 5,400 5,500
Management Adjustment 9/5/96 A/R Management 9,000 13,500
Bureau, Inc.
Collections Division of Trans 1/3/96 A/R Management 4,800 7,000
Union Corporation
Eastern Business Services, Inc. 8/1/95 A/R Management 2,000 2,000
B. Richard Miller, Inc. 4/29/94 A/R Management 1,400 1,300
(1) We merged our subsidiary NCO Portfolio Management, Inc. with Creditrust
Corporation. We own approximately 63% of the post-merger company.
(2) Pro Forma Revenue - Assumes the acquisitions completed by Compass
International Services Corporation in 1998 and the sale of its Print
and Mail Division were all completed on January 1, 1998.
(3) Includes $17.3 million of debt repaid by us.
-11-
Investment Considerations
Our business is dependent on our ability to grow internally.
Our business is dependent on our ability to grow internally, which is
dependent upon (1) our ability to retain existing clients and expand our
existing client relationships and (2) our ability to attract new clients.
Our ability to retain existing clients and expand those relationships is
subject to a number of risks, including, the risk that:
o we fail to maintain the quality of services we provide to our clients;
o we fail to maintain the level of attention expected by our clients; and
o we fail to successfully leverage our existing client relationships to
sell additional services.
Our ability to attract new clients is subject to a number of risks,
including:
o the market acceptance of our service offerings;
o the quality and effectiveness of our salesforce; and
o the competitive factors within the accounts receivable management and
collection industry.
If our efforts to retain and expand our client relationships and to attract
new clients do not prove effective, it could have a materially adverse effect on
our business, results of operations and financial condition.
If we are not able to respond to technological changes in
telecommunications and computer systems in a timely manner, we may not be able
to remain competitive.
Our success depends in large part on our sophisticated telecommunications
and computer systems. We use these systems to identify and contact large numbers
of debtors and to record the results of collection efforts. If we are not able
to respond to technological changes in telecommunications and computer systems
in a timely manner, we may not be able to remain competitive. We have made a
significant investment in technology to remain competitive and we anticipate
that it will be necessary to continue to do so in the future. Computer and
telecommunications technologies are changing rapidly and are characterized by
short product life cycles, so that we must anticipate technological
developments. If we are not successful in anticipating, managing or adopting
technological changes on a timely basis or if we do not have the capital
resources available to invest in new technologies, our business would be
materially adversely affected.
We are highly dependent on our telecommunications and computer systems.
As noted above, our business is highly dependent on our telecommunications
and computer systems. These systems could be interrupted by natural disasters,
power losses, or similar events. Our business also is materially dependent on
services provided by various local and long distance telephone companies. If our
equipment or systems cease to work or become unavailable, or if there is any
significant interruption in telephone services, we may be prevented from
providing services. Because we generally recognize income only as accounts are
collected, any failure or interruption of services would mean that we would
continue to incur payroll and other expenses without any corresponding income.
-12-
We currently utilize three computer hardware systems and are in the process
of evaluating a transition to one system. If we decide to transition to one
platform and do not succeed in that migration, our business may be materially
adversely affected.
We compete with a large number of providers in the accounts receivable
management and collection industry. This competition could have a materially
adverse effect on our future financial results.
We compete with a large number of companies in providing accounts
receivable management and collection services. We compete with other sizable
corporations in the United States and abroad such as Outsourcing Solutions,
Inc., IntelliRisk Management Corporation, and GC Services, Inc., as well as many
regional and local firms. We may lose business to competitors that offer more
diversified services and/or operate in broader geographic areas than us. We may
also lose business to regional or local firms who are able to use their
proximity to or contacts at local clients as a marketing advantage. In addition,
the accounts receivable management and collection services offered by us are
performed in-house by many companies. Many larger clients retain multiple
accounts receivable management and collection providers, which exposes us to
continuous competition in order to remain a preferred provider. Because of this
competition, in the future we may have to reduce our collection fees to remain
competitive and this competition could have a materially adverse effect on our
future financial results.
Many of our clients are concentrated in the financial services, healthcare,
and retail and commercial sectors. If any of these sectors performs poorly or if
there are any adverse trends in these sectors, it could materially adversely
affect us.
For the year ended December 31, 2000, we derived approximately 29.8% of our
revenue from clients in the financial services sector, approximately 28.8% of
our revenue from clients in the healthcare sector and approximately 22.1% of our
revenue from clients in the retail and commercial sectors. If any of these
sectors performs poorly, clients in these sectors may have fewer or smaller
accounts to refer to us or they may elect to perform accounts receivable
management and collection services in-house. If there are any trends in any of
these sectors to reduce or eliminate the use of third-party accounts receivable
management and collection services, the volume of referrals to us could
decrease.
Most of our contracts do not require clients to place accounts with us,
they may be terminated on 30 or 60 days notice and they are on a contingent fee
basis. We cannot guarantee that existing clients will continue to use our
services at historical levels, if at all.
Under the terms of most of our contracts, clients are not required to give
accounts to us for collection and usually have the right to terminate our
services on 30 or 60 days notice. Accordingly, we cannot guarantee that existing
clients will continue to use our services at historical levels, if at all. In
addition, most of these contracts provide that we are entitled to be paid only
when we collect accounts. Under applicable accounting principles, therefore, we
can recognize revenues only as accounts are recovered.
We are subject to risks as a result of our investment in NCO Portfolio.
We are subject to risks as a result of our investment in NCO Portfolio,
including:
o The operations of NCO Portfolio could divert management's attention from
our daily operations, particularly that of Michael J. Barrist, our
-13-
Chairman, President and Chief Executive Officer, who is also serving in
the same capacities for NCO Portfolio, and otherwise require the use of
other of our management, operational and financial resources.
o Our investment in NCO Portfolio currently is limited to our $25.0 million
equity investment and the $50.0 million subfacility. If NCO Portfolio
defaults on that credit, which would be a default under our credit
agreement with our lenders, or if the value of our investment is
impaired, it would have a material adverse effect on us.
NCO Portfolio will have additional business risks that may have an adverse
effect on our combined financial results.
NCO Portfolio is subject to additional business related risks common to the
purchase and management of delinquent receivables business. The results of NCO
Portfolio will be consolidated into our results. To the extent that those risks
have an adverse effect on NCO Portfolio, they will have an adverse effect on our
combined financial results. Some of those risks are:
o Receivables may not be collectible --NCO Portfolio purchases, collects
and manages delinquent receivables generated primarily by consumer credit
transactions. These are obligations that the individual consumer has
failed to pay when due. The receivables are purchased from credit
grantors, including banks, finance companies, retail merchants and other
service providers. Substantially all of the receivables consist of
account balances that the credit grantor has made numerous attempts to
collect, has subsequently deemed uncollectible and charged off from its
books. The receivables are purchased at a significant discount to the
amount the customer owes and, although the belief is that the recoveries
on the receivables will be in excess of the amount paid for the
receivables, actual recoveries on the receivables may vary and may be
less than the amount expected. The timing or amounts to be collected on
those receivables cannot be assured. If cash flow from operations is less
than anticipated as a result of NCO Portfolio's inability to collect its
receivables, NCO Portfolio will not be able to purchase new receivables
after it has exhausted the availability under the subfacility and its
future growth and profitability will be materially adversely affected. We
cannot guarantee that NCO Portfolio's operating performance will be
sufficient to service debt on the subfacility or finance the purchase of
new receivables.
o Use of estimates in accounting --NCO Portfolio's revenue is recognized
based on estimates of future collections on the pools of receivables
managed. Although estimates are based on statistical analysis, the actual
amount collected on these pools and the timing of those collections may
not correlate to NCO Portfolio's estimates upon which its revenue
recognition is based. If collections on these pools are less than
estimated, NCO Portfolio may be required to take a charge to earnings in
an amount that could materially adversely affect earnings and
creditworthiness.
o Possible shortage of receivables for purchase at favorable prices --The
availability of portfolios of delinquent receivables for purchase at
favorable prices depends on a number of factors outside of NCO
Portfolio's control, including the continuation of the current growth
trend in consumer debt and competitive factors affecting potential
purchasers and sellers of portfolios of receivables. Any slowing of the
consumer debt growth trend could result in less credit being extended by
credit grantors. Consequently, fewer delinquent receivables could be
available at prices that NCO Portfolio finds attractive. If competitors
raise the prices they are willing to pay for portfolios of receivables
above those NCO Portfolio wishes to pay, NCO Portfolio may be unable to
buy delinquent receivables at prices consistent with its historic return
targets. In addition, NCO Portfolio may overpay for portfolios of
delinquent receivables, which may have a materially adverse effect on our
combined financial results.
o Government regulation of NCO Portfolio operations --Federal and state
consumer protection and related laws and regulations govern the
relationship of a customer and a creditor. Significant laws include the
-14-
Fair Debt Collection Practices Act, the Federal Truth-In-Lending Act, the
Fair Credit Billing Act, the Equal Credit Opportunity Act, the Fair
Credit Reporting Act and the Electronic Funds Transfer Act, and various
federal regulations which relate to these acts, as well as comparable
statutes in the states where account debtors reside or where credit
grantors are located. Some of these laws may apply to NCO Portfolio's
activities. If credit grantors who sell receivables to NCO Portfolio fail
to comply with these laws, NCO Portfolio's ability to collect on those
receivables could be limited regardless of any act or omission on its
part. NCO Portfolio's failure to comply with these laws may also limit
its ability to collect on the receivables.
The SEC is reviewing the historical financial statements of Creditrust.
Prior to the merger with NCO Portfolio, the staff of the Division of
Corporation Finance of the SEC made certain comments to Creditrust regarding its
historical financial statements. The staff raised questions as to the manner in
which Creditrust estimated and accounted for the collectibility of its purchased
receivables, as well as to its use of the accrual basis of accounting.
Creditrust discussed these matters with its independent accountants, and
believed that these matters were accounted for properly and that its financial
statements were fairly stated. We cannot guarantee you that the SEC will not
continue to comment on the historical financial statements of Creditrust or
require NCO Portfolio to restate Creditrust's historical financial statements.
Our success depends on our senior management team and if we are not able to
retain them, it could have a materially adverse effect on us.
We are highly dependent upon the continued services and experience of our
senior management team, including Michael J. Barrist, our Chairman, President
and Chief Executive Officer. NCO depends on the services of Mr. Barrist and the
other members of our senior management team to, among other things, continue our
growth strategies and maintain and develop our client relationships.
We may seek to make strategic acquisitions of companies. Acquisitions
involve additional risks that may adversely affect us.
We may be unable to make acquisitions because suitable companies in the
accounts receivable management and collection business are not available at
favorable prices due to increased competition for these companies.
We may have to borrow money or incur liabilities, or sell stock, to pay for
future acquisitions and we may not be able to do so at all or on terms favorable
to us. Additional borrowings and liabilities may have a materially adverse
effect on our liquidity and capital resources. If we issue stock for all or a
portion of the purchase price for future acquisitions, our shareholders may be
diluted. If the price of our common stock decreases or potential sellers are not
willing to accept our common stock as payment for the sale of their businesses,
we may be required to use more of our cash resources, if available, in order to
continue our acquisition program.
Completing acquisitions involves a number of risks, including diverting
management's attention from our daily operations and other additional
management, operational and financial resources. We might not be able to
successfully integrate future acquisitions into our business or operate the
acquired businesses profitably, and we may be subject to unanticipated problems
and liabilities of acquired companies.
-15-
We are dependent on our employees and a higher turnover rate would
materially adversely affect us.
We are dependent on our ability to attract, hire and retain qualified
employees. The accounts receivable management and collection industry
experiences a high employee turnover rate. Many of our employees receive modest
hourly wages and some of these employees are employed on a part-time basis. A
higher turnover rate among our employees would increase our recruiting and
training costs and could materially adversely impact the quality of services we
provide to our clients. If we were unable to recruit and retain a sufficient
number of employees, we would be forced to limit our growth or possibly curtail
our operations. Growth in our business will require us to recruit and train
qualified personnel at an accelerated rate from time to time. We cannot assure
you that we will be able to continue to hire, train and retain a sufficient
number of qualified employees. Any increase in hourly wages, costs of employee
benefits or employment taxes also could materially adversely affect us.
If we fail to comply with government regulation of the collections
industry, it could result in the suspension or termination of our ability to
conduct business.
The collections industry is regulated under various United States federal
and state, Canadian and United Kingdom laws and regulations. Many states, as
well as Canada and the United Kingdom, require that we be licensed as a debt
collection company. The Federal Trade Commission has the authority to
investigate consumer complaints against debt collection companies and to
recommend enforcement actions and seek monetary penalties. If we fail to comply
with applicable laws and regulations, it could result in the suspension or
termination of our ability to conduct collections, which would have a materially
adverse effect on us. In addition, new federal, state or foreign laws or
regulations, or changes in the ways these rules or laws are interpreted or
enforced, could limit our activities in the future or significantly increase the
cost of regulatory compliance. If we expand our international operations, we may
become subject to additional government controls and regulations in other
countries, which may be stricter or more burdensome than those in the United
States.
Several of the industries served by us are also subject to varying degrees
of government regulation. Although our clients are generally responsible for
complying with these regulations, we could be subject to a variety of
enforcement or private actions for our failure, or the failure of our clients,
to comply with these regulations.
We may experience variations from quarter to quarter in operating results
and net income that could adversely affect the price of our common stock.
Factors that could cause quarterly fluctuations include, among other
things, the following:
o the timing of our clients' accounts receivable management and collection
programs and the commencement of new contracts;
o customer contracts which require us to incur costs in periods prior to
recognizing revenue under those contracts;
o the effect of a change of business mix on profit margins;
o the timing of additional selling, general and administrative expenses
to support new business;
o the costs and timing of completion and integration of acquisitions; and
o that our business tends to be slower in the third and fourth quarters of
the year due to the summer and holiday seasons.
-16-
If we do not achieve the results projected in our public forecasts, it
could have a materially adverse effect on the market price of our common stock.
We have publicly announced our 2001 investor guidance concerning our
expected results of operations for 2001. Our 2001 investor guidance contains
forward-looking statements and may be affected by various factors discussed in
"Risk Factors" and elsewhere in this offering memorandum which may cause actual
results to differ materially from the results discussed in the 2001 investor
guidance. Our 2001 investor guidance reflects numerous assumptions, including
our anticipated future performance, general business and economic conditions and
other matters, some of which are beyond our control. In addition, unanticipated
events and circumstances may affect our actual financial results. Our 2001
investor guidance is not a guarantee of future performance and the actual
results throughout the periods covered by the 2001 investor guidance may vary
from the projected results. If we do not achieve the results projected in our
2001 investor guidance, it could have a materially adverse effect on the market
price of our common stock.
Goodwill represented 67.9% of our total assets at December 31, 2000. If our
management as incorrectly overstated the permissible length of the amortization
period for goodwill, earnings reported in periods immediately following our
acquisitions would be overstated. In later years, we would be burdened by a
continuing charge against earnings.
Our balance sheet includes amounts designated as intangibles, which
predominantly consist of "goodwill." Goodwill represents the excess of purchase
price over the fair market value of the net assets of the acquired businesses
based on their respective fair values at the date of acquisition. GAAP requires
that this and all other intangible assets be amortized over the period
benefited. Our management has determined that period to range from 15 to 40
years based on the attributes of each acquisition.
As of December 31, 2000, our balance sheet included goodwill that
represented 67.9% of total assets and 137.7% of shareholders' equity. If our
management has incorrectly overstated the permissible length of the amortization
period for goodwill, earnings reported in periods immediately following our
acquisitions would be overstated. In later years, we would be burdened by a
continuing charge against earnings without the associated benefit to income
valued by our management in arriving at the consideration paid for the business.
Earnings in later years also could be significantly affected if our management
determined then that the remaining balance of goodwill was impaired.
Our stock price has been and is likely to continue to be volatile, which
may make it difficult for shareholders to resell common stock when they want at
prices they find attractive.
The trading price of our common stock has been and is likely to be highly
volatile. Our stock price could be subject to wide fluctuations in response to a
variety of factors, including the following:
o announcements of fluctuations in our, or our competitors', operating
results;
o the timing and announcement of acquisitions by us or our competitors;
o changes in our publicly available guidance of future results of
operations;
o government regulatory action;
o changes in estimates or recommendations by securities analysts;
o adverse or unfavorable publicity about us or our services;
o the commencement of material litigation, or an unfavorable verdict,
against us;
o additions or departures of key personnel; and
o sales of common stock.
-17-
In addition, the stock market in recent years has experienced significant
price and volume fluctuations and a significant cumulative decline in recent
months. Such volatility and decline have affected many companies irrespective
of, or disproportionately to, the operating performance of these companies.
These broad fluctuations may materially adversely affect the market price of our
common stock.
Most of our outstanding shares are available for resale in the public
market without restriction. The sale of a large number of these shares could
adversely affect our stock price and could impair our ability to raise capital
through the sale of equity securities or make acquisitions for stock.
Sales of our common stock could adversely affect the market price of our
common stock and could impair our future ability to raise capital through the
sale of equity securities or make acquisitions for stock. As of March 16, 2001,
there were 25,749,018 shares of our common stock outstanding. Most of those
shares are available for resale in the public market without restriction,
except for shares held by our affiliates. Generally, our affiliates may either
sell their shares under a registration statement or in compliance with the
volume limitations and other requirements imposed by Rule 144 adopted by the
SEC.
In addition, as of March 16, 2001, we had the authority to issue up to
approximately 3,794,946 shares of our common stock under our stock option plans.
We also had outstanding warrants to purchase approximately 397,000 shares of our
common stock.
"Anti-takeover" provisions may make it more difficult for a third party to
acquire control of us, even if the change in control would be beneficial to
shareholders.
We are a Pennsylvania corporation. Anti-takeover provisions in Pennsylvania
law and our charter and bylaws could make it more difficult for a third party to
acquire control of us. These provisions could adversely affect the market price
of our common stock and could reduce the amount that shareholders might receive
if we are sold. For example, our charter provides that our board of directors
may issue preferred stock without shareholder approval. In addition, our bylaws
provide for a classified board, with each board member serving a staggered
three-year term. Directors may be removed only for cause and only with the
approval of the holders of at least 65% of our common stock.
Item 2. Properties.
We currently lease 79 offices throughout North America, two offices in the
United Kingdom and one office in Puerto Rico. The leases of these facilities
expire between 2001 and 2015, and most contain renewal options.
We believe that our facilities are adequate for our current operations, but
additional facilities may be required to support growth. We believe that
suitable additional or alternative space will be available as needed on
commercially reasonable terms.
-18-
Item 3. Legal Proceedings.
We are involved in legal proceedings from time to time in the ordinary
course of our business. Our management believes that none of these legal
proceedings will have a materially adverse effect on our financial condition or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 4.1 Executive Officers of the Registrant who are not Directors.
Name Age Position
- --------------------------------------- --- ---------------------------------------------
Robert Di Sante........................ 49 Executive Vice President, International
Operations
Stephen W. Elliott..................... 39 Executive Vice President, Information
Technology and Chief Information Officer
Joshua Gindin, Esq..................... 44 Executive Vice President and General Counsel
Steven Leckerman....................... 48 Executive Vice President, U.S. Operations
Louis A. Molettiere.................... 57 Executive Vice President and Chief Operating
Officer
Paul E. Weitzel, Jr.................... 42 Executive Vice President, Corporate
Development and International Services
Steven L. Winokur...................... 41 Executive Vice President, Finance; Chief
Financial Officer; and Treasurer
Albert Zezulinski...................... 53 Executive Vice President, Healthcare Services
Robert Di Sante. Mr. Di Sante joined us through the acquisition of FCA
International Ltd. in May 1998 and became an Executive Vice President in
February 1999. Prior to joining us, Mr. Di Sante was Executive Vice President,
Finance and Corporate Services of FCA International Ltd. Mr. Di Sante is a
chartered accountant.
Stephen W. Elliot. Mr. Elliot joined us in 1996 as Senior Vice President,
Technology and Chief Information Officer after having provided consulting
services to us for the year prior to his arrival. Mr. Elliott became an
Executive Vice President in February 1999. Prior to joining us, Mr. Elliott was
employed by Electronic Data Systems, a computer services company, for almost 10
years, most recently as Senior Account Manager.
-19-
Joshua Gindin, Esq. Mr. Gindin joined us in May 1998. Prior to joining us,
Mr. Gindin was a partner in the law firm of Kessler & Gindin which served as our
legal counsel since 1986.
Steven Leckerman. Mr. Leckerman joined us in 1995 as Senior Vice President,
Collection Operations, and became Executive Vice President, U.S. Operations in
January 2001. From 1982 to 1995, Mr. Leckerman was employed by Allied Bond
Corporation, a division of Union Corporation, where he served as manager of
dialer and special projects.
Louis A. Molettiere. Mr. Molettiere joined us through the acquisition of
the Co-Source Corporation in May 1999 and became Executive Vice President and
Chief Operating Officer in February 2000. Prior to joining us, Mr. Molettiere
was Vice President of Marketing of Milliken & Michaels, a subsidiary of
Co-Source Corporation, since 1993. Prior to joining Milliken & Michaels, Mr.
Molettiere was with AT&T for 22 years, most recently as General Marketing
Manager - National and Major Markets.
Paul E. Weitzel, Jr. Mr. Weitzel joined us through the acquisition of
MedSource, Inc. in July 1998. Prior to joining us, Mr. Weitzel was Chairman and
Chief Executive Officer of MedSource, Inc. since 1997. Prior to joining
MedSource, Inc., Mr. Weitzel was with MedQuist, Inc., a medical transcription
company, for four years, most recently as President and Chief Executive Officer.
Mr. Weitzel is a certified public accountant.
Steven L. Winokur. Mr. Winokur joined us in December 1995. Prior to that,
Mr. Winokur acted as a part-time consultant to us since 1986. From February 1992
to December 1995, Mr. Winokur was the principal of Winokur & Associates, a
certified public accounting firm. From March 1981 to February 1992, Mr. Winokur
was with Gross & Company, a certified public accounting firm, where he most
recently served as Administrative Partner. Mr. Winokur is a certified public
accountant.
Albert Zezulinski. Mr. Zezulinski joined us in January 2001. Prior to
joining us, Mr. Zezulinski was Director of Healthcare Financial Services for BDO
Seidman, LLP, an international accounting and consulting firm. Mr. Zezulinski
has more than 30 years of experience in the healthcare field.
-20-
PART II
Item 5. Market for the Registrant's Common Stock and
Related Shareholder Matters.
The Company's common stock is listed on the Nasdaq National Market under
the symbol "NCOG." The following table sets forth, for the fiscal quarters
indicated, the high and low closing sale prices for the common stock, as
reported by Nasdaq.
High Low
---- ---
1999
First Quarter $ 43.75 $28.81
Second Quarter 38.00 25.75
Third Quarter 49.88 36.38
Fourth Quarter 52.75 25.88
2000
First Quarter $31.94 $18.13
Second Quarter 34.38 21.06
Third Quarter 27.00 11.88
Fourth Quarter 30.94 12.69
On March 14, 2001, the last reported sale price of our common stock as
reported on The Nasdaq National Market was $31.938 per share. On March 14, 2001,
there were approximately 85 holders of record of our common stock.
Dividend Policy
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. In addition, our credit agreement prohibits us from paying
cash dividends without the lender's prior consent. We currently intend to retain
future earnings to finance our operations and fund the growth of our business.
Any payment of future dividends will be at the discretion of our board of
directors and will depend upon, among other things, our earnings, financial
condition, capital requirements, level of indebtedness, contractual restrictions
with respect to the payment of dividends and other factors that our board of
directors deems relevant.
-21-
Sales of Unregistered Securities during 2000
Set forth below is information concerning certain issuances of common stock
during 2000 which were not registered under the Securities Act and which have
not been previously reported.
During 2000, we granted options to certain executive officers and key
employees under the 1996 Stock Option Plan on the dates and at the exercise
prices set forth below. Generally, options will become exercisable in equal
one-third installments beginning on the first anniversary of the date of grant.
All of the options were issued in connection with such employee's employment
with us and no cash or other consideration was received by us in exchange for
the grant of such options. The grants of the options were not registered under
the Securities Act because there was no "sale" of the options; however, the
stock issued upon the exercise of the options has been registered on Form S-8.
Date Issued Options Granted Exercise Price
----------- --------------- --------------
January through March 2000 2,000 $25.98
April through June 2000 2,000 $23.06
July through September 2000 69,000 $17.74
October through December 2000 970,000 $25.21
In May 2000, we issued options in accordance with the 1996 Non-Employee
Director Stock Option Plan to purchase 3,000 shares of common stock to each of
Eric S. Siegel, Alan F. Wise, and Stuart Wolf. These options were granted at an
exercise price of $31.188 per share, which was the fair market value of the
underlying shares on the grant date. In September 2000, we issued options in
accordance with the 1996 Non-Employee Director Stock Option Plan to purchase
15,000 shares of common stock to each of William C. Dunkleberg and Leo J. Pound.
These options were granted at an exercise price of $16.125 per share, which was
the fair market value of the underlying shares on the grant date. The grants of
the options were not registered under the Securities Act because there was no
"sale" of the options; however, the stock issued upon the exercise of the
options has been registered on Form S-8.
-22-
Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA (1)
(Amounts in thousands, except per share data)
For the years ended December 31,
----------------------------------------------------------------------
1996(3) 1997 1998 1999 2000
------- ------- -------- -------- --------
Statement of Income Data (2):
Revenue $30,760 $99,720 $209,947 $460,311 $605,884
Operating costs and expenses:
Payroll and related expenses 14,651 51,493 106,787 237,709 293,292
Selling, general and administrative
expenses 10,032 34,379 61,607 128,177 179,924
Depreciation and amortization
expense 1,254 4,052 8,615 21,805 32,360
Nonrecurring acquisition costs - - - 4,601 -
------- ------- -------- -------- --------
Income from operations 4,823 9,796 32,938 68,019 100,308
Other income (expense) (576) (419) (1,794) (16,899) (22,126)
------- ------- -------- -------- --------
Income before provision for income taxes 4,247 9,377 31,144 51,120 78,182
Income tax expense 1,706 4,638 12,881 22,821 32,042
------- ------- -------- -------- --------
Income from continuing operations 2,541 4,739 18,263 28,299 46,140
Accretion of preferred stock to redemption value - (1,617) (1,604) (377) -
------- ------- -------- -------- --------
Income from continuing operations applicable
to common shareholders 2,541 3,122 16,659 27,922 46,140
Discontinued operations, net of taxes:
Income (loss) from discontinued operations - (148) 82 1,067 (975)
Loss on disposal of discontinued operations - - - - (23,179)
------- ------- -------- -------- --------
Net income applicable to common shareholders $ 2,541 $ 2,974 $ 16,741 $ 28,989 $ 21,986
======= ======= ======== ======== ========
Income from continuing operations applicable to
common shareholders per share:
Basic $ 0.34 $ 0.23 $ 0.91 $ 1.22 $ 1.80
======= ======= ======== ======== ========
Diluted $ 0.34 $ 0.21 $ 0.84 $ 1.17 $ 1.79
======= ======= ======== ======== ========
Net income applicable to common
shareholders per share:
Basic $ 0.34 $ 0.22 $ 0.91 $ 1.27 $ 0.86
======= ======= ======== ======== ========
Diluted $ 0.34 $ 0.20 $ 0.85 $ 1.22 $ 0.85
======= ======= ======== ======== ========
Weighted average shares outstanding:
Basic 7,630 13,736 18,324 22,873 25,587
======= ======= ======== ======== ========
Diluted 7,658 14,808 19,758 23,799 25,842
======= ======= ======== ======== ========
Other Consolidated Financial Data (2):
EBITDA (4) $ 6,077 $ 13,848 $ 41,553 $ 89,824 $ 132,668
December 31,
----------------------------------------------------------------------
1996 1997 1998 1999 2000
------- -------- -------- -------- --------
Balance Sheet Data (2):
Cash and cash equivalents $12,059 $ 30,194 $ 22,528 $ 50,513 $ 13,490
Working capital 13,629 37,825 31,517 65,937 79,732
Net assets of discontinued operations - 9,484 27,740 41,492 -
Total assets 35,826 129,301 410,992 791,692 784,006
Long-term debt, net of
current portion 1,478 14,940 143,831 323,949 303,920
Redeemable preferred stock - 6,522 11,882 - -
Shareholders' equity 30,648 94,336 199,465 364,888 386,426
(1) This data should be read in conjunction with the consolidated financial
statements, including the accompanying notes, included elsewhere in
this report on Form 10-K.
(2) Gives effect to the restatement of our historical financial statements
for: (i) the acquisition of JDR Holdings, Inc. using the
pooling-of-interests method of accounting; and (ii) the treatment of
the Market Strategy division as discontinued operations.
(3) We were taxed as an S corporation prior to September 3, 1996.
Accordingly, income tax expense and net income have been provided on a
pro forma basis as if we had been subject to income taxes.
(4) Earnings before interest, taxes, depreciation, and amortization,
referred to as EBITDA, is used by management to measure results of
operations and is not intended to report results of operations in
conformity with generally accepted accounting principles.
-23-
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Overview
We believe we are the largest outsourced accounts receivable management and
collection company in the world, serving a wide range of clients in North
America and abroad. We generate approximately 60% of our revenue on a
contingency fee basis. Our contingent fees typically range from 15% to 35% of
the amount recovered on behalf of our clients. However, fees can range from 6%
for the management of accounts placed early in the accounts receivable cycle to
50% for accounts that have been serviced extensively by the client or by
third-party providers. Our average fee is approximately 25% across all
industries, with the exception of the healthcare industry where it is lower due
to a higher percentage of early intervention accounts receivable management
business. In addition, we generate revenue from fixed fee services for certain
accounts receivable management and collection services. Revenue is earned and
recognized upon collection of accounts receivable for contingency fee services
and as work is performed for fixed fee services. We enter into contracts with
most of our clients which define, among other things, fee arrangements, scope of
services and termination provisions. Clients typically have the right to
terminate their contracts on 30 or 60 days notice.
Our operating costs consist principally of payroll and related costs,
selling, general and administrative costs, and depreciation and amortization.
Payroll and related expenses consist of wages and salaries, commissions, bonuses
and benefits for all of our employees, including management and administrative
personnel. Selling, general and administrative expenses include telephone,
postage and mailing costs and other collection costs as well as expenses which
directly support operations including facilities costs, equipment maintenance,
sales and marketing, data processing, professional fees and other management
costs.
We have grown rapidly, through both internal growth and acquisitions. To
date, all of our acquisitions, except the acquisition in 1999 of JDR Holdings,
Inc., referred to as JDR, have been accounted for under the purchase method of
accounting with the results of the acquired companies included in our operating
results beginning on the date of acquisition. JDR was accounted for under the
pooling-of-interests method of accounting.
On April 14, 2000, our board of directors approved a plan to divest our
Market Strategy division. The Market Strategy division provided market research
and telemarketing services and was divested as part of our strategic plan to
increase long-term shareholder value and focus on our core accounts receivable
management and collection services business. The Market Strategy division's
operations for all periods presented prior to April 14, 2000 have been presented
separately as income or loss from discontinued operations in our consolidated
statements of income. We completed the divestiture in October 2000 and recorded
a loss of $23.2 million. This loss reflects the difference between the net
assets and the proceeds from the divestiture as well as the operating losses
from April 14, 2000 through the completion of the divestiture.
During 2000, the continued integration of our infrastructure facilitated
the reduction of our operating divisions from three to two. Effective October 1,
2000, the new operating divisions included U.S. Operations (formerly Accounts
Receivable Management Services and Technology-Based Outsourcing) and
International Operations. Each of these divisions maintains industry specific
functional groups. Management's discussion of operating results has been
adjusted for this change.
-24-
In February 2001, we completed the merger of our subsidiary, NCO Portfolio
Management, Inc., referred to as NCO Portfolio, with Creditrust Corporation,
referred to as Creditrust. As a result of this merger, our results of operations
will be more significantly impacted by purchases of and collections on
delinquent receivables. NCO Portfolio recognizes revenue based on estimates of
future portfolio collections and the timing of these collections. On a periodic
basis, NCO Portfolio reviews and adjusts the amount and timing of expected
future collections, based on the performance of the portfolio to date. We own
approximately 63.0% of NCO Portfolio after the merger. The results of NCO
Portfolio will be consolidated into our results, with a charge for minority
interest and elimination of significant intercompany transactions.
Results of Operations
The following table sets forth selected historical income statement data
(amounts in thousands):
For the years ended December 31,
------------------------------------------------------------------------
1998 (1) 1999 (1) 2000 (1)
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------ ----- ------ -----
Revenue $209,947 100.% $460,311 100.% $605,884 100.%
Payroll and related expenses 106,787 50.9 237,709 51.6 293,292 48.4
Selling, general, and administrative
expenses 61,607 29.3 128,177 27.9 179,924 29.7
Nonrecurring acquisition costs - 0.0 4,601 1.0 - 0.0
-------- -------- -------- ----- -------- -----
EBITDA (2) 41,553 19.8 89,824 19.5 132,668 21.9
Depreciation and amortization 8,615 4.1 21,805 4.7 32,360 5.3
Other expense 1,794 0.9 16,899 3.7 22,126 3.7
Income tax expense 12,881 6.1 22,821 5.0 32,042 5.3
-------- -------- -------- ----- -------- ----
Income from continuing operations $ 18,263 8.7% $ 28,299 6.1% $ 46,140 7.6%
======== ======== ======== ===== ======== ====
(1) Gives effect to the restatement of our historical financial statements
for: (i) the acquisition of JDR Holdings, Inc. in 1999 using the
pooling-of-interests method of accounting; and (ii) the treatment of
the Market Strategy division as discontinued operations. We divested
our Market Strategy division in October 2000.
(2) Earnings before interest, taxes, depreciation, and amortization
("EBITDA") is used by management to measure results of operations and
is not intended to report results of operations in conformity with
generally accepted accounting principles.
Year ended December 31, 2000 Compared to Year ended December 31, 1999
Revenue. Revenue increased $145.6 million, or 31.6%, to $605.9 million in
2000, from $460.3 million in 1999. Our U.S. Operations and International
Operations divisions represented $574.2 million and $31.7 million, respectively,
of the revenue for 2000.
Our U.S. Operations division's revenue increased $144.9 million, or 33.8%,
to $574.2 million for 2000, from $429.3 million for the comparable period in
1999. A full year of revenue from the acquisitions of Compass International
Services Corporation, referred to as Compass, on August 20, 1999 and Co-Source
Corporation, referred to as Co-Source, on May 21, 1999 represented $42.5 million
and $33.5 million of this increase, respectively. The remainder of the increase
in our U.S. Operations division's revenue was attributable to the addition of
new clients and the growth in business from existing clients.
-25-
Our International Operations division's revenue increased $665,000, or
2.1%, to $31.7 million for the year ended December 31, 2000, from $31.0 million
for the comparable period in 1999. This increase in our International Operations
division's revenue was primarily attributable to the addition of new clients and
growth in business from existing clients. However, the growth was limited due to
the effects of a weak Canadian economy.
Payroll and related expenses. Payroll and related expenses increased $55.6
million to $293.3 million in 2000, from $237.7 million in 1999, but decreased as
a percentage of revenue to 48.4% from 51.6%.
The payroll and related expenses of our U.S Operations division increased
$55.9 million to $276.0 million in 2000, from $220.1 million in 1999, but
decreased as a percentage of revenue to 48.1% from 51.3%. This decrease as a
percentage of revenue was partially attributable to the continuing process of
rationalizing staff levels in both our U.S. Operations division's acquired and
existing businesses, as well as an increase in productivity that was achieved
through the expansion of our use of predictive dialing equipment. The remaining
portion of the percentage decrease was the result of spreading the fixed portion
of our payroll cost structure over a larger revenue base.
The payroll and related expenses of our International Operations division
decreased $352,000 to $17.2 million in 2000, from $17.6 million in 1999, and
decreased as a percentage of revenue to 54.4% from 56.7%. This decrease as a
percentage of revenue was partially attributable to the reduction of redundant
information technology staff upon the completion of an internal systems
migration. In addition, a portion of the decrease was attributable to the
continuing process of rationalizing staff levels, as well as an increase in
productivity that was achieved through the expansion of our use of predictive
dialing equipment.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $51.7 million to $179.9 million in 2000 from
$128.2 million in 1999. Selling, general and administrative expenses increased
as a percentage of revenue to 29.7% in 2000 from 27.9% in 1999. The increase as
a percentage of revenue was primarily attributable to increased information
technology costs associated with the expansion of our use of predictive dialing
equipment. However, increased productivity more than offset the increase in
selling, general, and administrative expenses through a reduction in payroll and
related expenses. The remaining increase was primarily attributable to start-up
costs incurred as a result of new client relationships, further integration of
information technology infrastructure and increased collection costs attributed
to certain adverse changes in the payment patterns of consumers which made
collections more difficult in the second half of 2000.
Depreciation and amortization. Depreciation and amortization increased to
$32.4 million in 2000 from $21.8 million in 1999. Of this increase, $3.0 million
was attributable to a full year of depreciation related to the Compass
acquisition and $1.6 million was attributable to a full year of depreciation
related to the Co-Source acquisition. The remaining $6.0 million increase
consisted of depreciation resulting from normal capital expenditures made in the
ordinary course of business during 2000. These capital expenditures included
purchases associated with our planned migration towards a single, integrated
information technology platform, and predictive dialers and other equipment
required to expand our infrastructure to handle future growth.
Non-recurring acquisition costs. In the first quarter of 1999, we incurred
$4.6 million of nonrecurring acquisition costs in connection with the
acquisition of JDR. These costs consisted primarily of investment banking fees,
legal and accounting fees, and printing costs.
-26-
Other income (expense). Interest and investment income increased $1.1
million to $2.5 million for 2000 over the comparable period in 1999. This
increase was primarily attributable to an increase in funds held on behalf of
clients and the implementation of our new cash investment strategy. Interest
expense increased to $25.9 million for the year ended December 31, 2000, from
$18.3 million for the comparable period in 1999. The increase was primarily
attributable to our financing the May 1999 Co-Source acquisition with borrowings
of $122.7 million under the revolving credit facility. Additionally, a portion
of the increase was attributable to borrowings under the revolving credit
facility of $29.5 million that were used to repay debt that was assumed as a
result of the August 1999 acquisition of Compass. The remainder of the increase
was attributable to an increase in interest rates that was partially offset by
repayments of debt made during 2000. In addition, we received insurance proceeds
of approximately $1.3 million for flood and telephone outages experienced in the
fourth quarter of 1999.
Income tax expense. Income tax expense for 2000 increased to $32.0 million,
or 41.0%, of income before taxes, from $22.8 million, or 44.6% of income before
taxes, for 1999. The decrease in the effective tax rate was primarily
attributable to the nondeductible portion of the $4.6 million of nonrecurring
acquisition costs incurred during the first quarter of 1999 in connection with
the JDR acquisition. A portion of the decrease was attributable to higher
revenues diluting the impact of the nondeductible goodwill related to certain
acquisitions. In addition, as the result of tax savings initiatives implemented
during 2000, we were able to utilize, on a one-time basis, previously generated
tax benefits of $850,000.
Accretion of preferred stock to redemption value. The accretion of
preferred stock to redemption value relates to JDR's preferred stock that was
outstanding prior to its conversion into our common stock on March 31, 1999.
This non-cash accretion represents the periodic amortization of the difference
between the original carrying amount and the mandatory redemption amount.
Discontinued operations. The Market Strategy division had a net loss from
operations of $975,000 for the period from January 1, 2000 to April 14, 2000, as
compared to net income of $1.1 million for the year ended December 31, 1999. For
the year ended December 31, 2000, we recorded a $23.2 million net loss on the
disposal of the Market Strategy division. The loss on disposal included the
operations for the period from April 14, 2000 to completion of the divestiture.
We completed the divestiture of the Market Strategy division on October 26,
2000.
Year ended December 31, 1999 Compared to Year ended December 31, 1998
Revenue. Revenue increased $250.4 million, or 119.3%, to $460.3 million in
1999 from $209.9 million in 1998. Our U.S. Operations and International
Operations divisions represented $429.3 million and $31.0 million, respectively,
of the revenue for 1999.
Our U.S. Operations division's revenue increased $237.9 million, or 124.3%,
to $429.3 million for 1999, from $191.4 million for 1998. Incremental revenue
from the Compass and Co-Source acquisitions, which were completed in August and
May 1999, respectively, represented $28.0 million and $44.2 million of this
increase. Additionally, a full year of revenue from the acquisitions of Medaphis
Services Corporation, referred to as MSC, on November 30, 1998, MedSource, Inc.,
referred to as MedSource, on July 1, 1998, and FCA International Ltd., referred
to as FCA, on May 5, 1998, represented $101.4 million, $12.3 million, and $7.9
million of the increase, respectively. The remainder of the increase in the U.S.
Operations division's revenue was attributable to the addition of new clients
and the growth in business from existing clients.
-27-
The International Operations division's revenue increased $12.4 million, or
67.3%, to $31.0 million for the year ended December 31, 1999, from $18.6 million
for the comparable period in 1998. The International Operations division was
created in May 1998 as a result of the acquisition of FCA. The increase in 1999
was attributable to a full year of revenue from the Canadian and United Kingdom
operations of FCA.
Payroll and related expenses. Payroll and related expenses increased $130.9
million to $237.7 million in 1999 from $106.8 million in 1998, and increased as
a percentage of revenue to 51.6% from 50.9%.
The payroll and related expenses of the U.S. Operations division increased
$124.2 million to $220.1 million in 1999 from $95.9 million in 1998, and
increased as a percentage of revenue to 51.3% from 50.1%. This increase was due
primarily to several recent acquisitions having a higher cost structure than the
remainder of our business. In addition, a portion of this increase was
attributable to an increase in the size of our commercial operations, which have
a higher payroll cost structure than the consumer collection business. However,
the higher payroll structure of the commercial operations was offset by its
lower selling, general and administrative cost structure.
The payroll and related expenses of the International Operations division
increased $6.7 million to $17.6 million in 1999, from $10.9 million in 1998, but
decreased as a percentage of revenue to 56.7% from 58.8%. Payroll and related
expenses decreased as a percentage of revenue due to the successful integration
of FCA and spreading these costs over a larger revenue base.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $66.6 million to $128.2 million in 1999 from
$61.6 million in 1998. Selling, general and administrative expenses decreased as
a percentage of revenue to 27.9% from 29.3%. This percentage decrease resulted
from the realization of operating efficiencies and by spreading selling, general
and administrative expenses over a larger revenue base. In addition, a portion
of this percentage decrease was attributable to an increase in the size of the
commercial operations, which have lower selling, general and administrative cost
structures than the consumer collection business.
Depreciation and amortization. Depreciation and amortization increased to
$21.8 million in 1999 from $8.6 million in 1998. Of this increase, $1.7 million
was attributable to incremental depreciation from the Compass acquisition and
$2.2 million incremental depreciation from the Co-Source acquisition. In
addition, $4.0 million, $940,000 and $1.8 million was attributable a full year
of depreciation for MSC, a full year of depreciation for MedSource and a full
year of depreciation for FCA, respectively. The remaining $2.6 million consisted
of depreciation resulting from capital expenditures made in the ordinary course
of business during 1999. These capital expenditures included purchases
associated with our planned migration towards a single, integrated information
technologies platform, the expansion of our infrastructure to handle future
growth and our year 2000 compliance program.
Nonrecurring acquisition costs. In the first quarter of 1999, we incurred
$4.6 million of nonrecurring acquisition costs in connection with the JDR
acquisition. These costs consisted primarily of investment banking fees, legal
and accounting fees, and printing costs.
Other income (expense). Interest and investment income increased to $1.4
million for 1999 from $1.1 million in 1998. This increase was primarily
attributable to an increase in operating funds and funds held on behalf of
clients. Interest expense increased to $18.3 million in 1999 from $2.9 million
-28-
in 1998. The increase was partially attributable to a full year of interest
expense from our financing a portion of the July 1998 acquisition of MedSource
and all of the November 1998 acquisition of MSC with borrowings of $25.5 million
and $107.5 million, respectively, under our revolving credit facility. In
addition, we financed the May 1999 acquisition of Co-Source with borrowings of
$122.7 million under our revolving credit facility. In addition, a further
portion of the increase was attributable to borrowings under the revolving
credit facility of $29.5 million that were used to repay debt that was assumed
as a result of the Compass acquisition.
Income tax expense. Income tax expense for 1999 increased to $22.8 million,
or 44.6% of income before taxes, from $12.9 million, or 41.4% of income before
taxes, for 1998. The increase in the effective tax rate was partially
attributable to the impact of nondeductible goodwill related to certain
acquisitions. In addition, the increase was also attributable to the
nondeductible portion of the $4.6 million of nonrecurring acquisition costs
incurred during the first quarter of 1999 in connection with the JDR
acquisition.
Accretion of preferred stock to redemption value. The accretion of
preferred stock to redemption value relates to JDR's preferred stock that was
outstanding prior to its conversion into our common stock on March 31, 1999.
This non-cash accretion represents the periodic amortization of the difference
between the original carrying amount and the mandatory redemption amount.
Discontinued operations. The Market Strategy division had net income of
$1.1 million for 1999 as compared to net income of $82,000 for 1998.
Quarterly Results of Operations (Unaudited)
The following table sets forth selected historical financial data for the
calendar quarters of 1999 and 2000. This quarterly information is unaudited, but
has been prepared on a basis consistent with our audited financial statements
presented elsewhere herein and, in management's opinion, includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the information for the quarters presented. The operating
results for any quarter are not necessarily indicative of results for any future
period. All amounts have been restated to reflect the divestiture of the Market
Strategy division in 2000.
1999 Quarters Ended
-------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- --------
(Amounts in thousands, except per share data)
Revenue $89,528 $103,955 $127,100 $139,728
Income from operations 8,304 16,102 19,978 23,635
Income from continuing operations, applicable
to common shareholders 1,945 7,206 8,405 10,366
Income from discontinued operations, net of taxes 184 315 497 71
Net income applicable to common shareholders 2,129 7,521 8,902 10,437
Income from continuing operations applicable to
common shareholders per share:
Basic $ 0.09 $ 0.34 $ 0.36 $ 0.41
Diluted $ 0.09 $ 0.32 $ 0.35 $ 0.40
Net income applicable to common shareholders
per share:
Basic $ 0.10 $ 0.35 $ 0.38 $ 0.41
Diluted $ 0.10 $ 0.34 $ 0.37 $ 0.40
-29-
2000 Quarters Ended
----------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
(Amounts in thousands, except per share data)
Revenue $143,998 $154,048 $153,858 $153,980
Income from operations 24,249 26,098 25,835 24,126
Income from continuing operations, applicable to
common shareholders 11,393 11,623 11,547 11,577
Loss from discontinued operations, net of taxes 21,718 71 2,365 -
Net (loss) income applicable to common shareholders (10,325) 11,552 9,182 11,577
Income from continuing operations applicable to
common shareholders per share:
Basic $ 0.45 $ 0.45 $ 0.45 $ 0.45
Diluted $ 0.44 $ 0.45 $ 0.45 $ 0.45
Net (loss) income applicable to common shareholders per share:
Basic $ (0.40) $ 0.45 $ 0.36 $ 0.45
Diluted $ (0.40) $ 0.45 $ 0.36 $ 0.45
We have experienced and expect to continue to experience quarterly
variations in operating results as a result of many factors, including the costs
and timing of completion and integration of acquisitions, the timing of clients'
accounts receivable management and collection programs, the commencement of new
contracts, the termination of existing contracts, the costs to support growth by
acquisition or otherwise, the integration of acquisitions, the effect of the
change of business mix on margins, and the timing of additional selling, general
and administrative expenses to support new business. Additionally, our planned
operating expenditures are based on revenue forecasts, and, if revenues are
below expectations in any given quarter, operating results would likely be
materially adversely affected. While the effects of seasonality on our business
historically have been obscured by our rapid growth, our business tends to be
slower in the third and fourth quarters of the year due to the summer and
holiday seasons.
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 receivables,
and working capital to support our growth.
Cash Flows from Operating Activities. Cash provided by operating activities
was $52.3 million in 2000 and $47.7 million in 1999. The increase in cash
provided by operations was primarily due to the increase in income from
continuing operations to $46.1 million in 2000 from $28.3 million in 1999 and
the increase in non-cash charges, depreciation and amortization, to $32.4
million in 2000 from $21.8 million in 1999. A portion of these increases was
offset by the $14.8 million increase in accounts receivable and the $8.2 million
decrease in other long-term liabilities.
Cash provided by operating activities was $47.7 million in 1999 and $22.4
million in 1998. The increase in cash provided by operating activities was
primarily due to the increase in income from continuing operations to $28.3
million in 1999 from $18.3 million in 1998 and the increase in non-cash charges,
depreciation and amortization, to $21.8 million in 1999 from $8.6 million in
1998. In addition, a portion of the increase was the result of deferred taxes
that were recorded as a result of acquisition accounting. A portion of these
increases was offset by the $8.5 million increase in accounts receivable and the
$5.7 million decrease in accounts payable and accrued expenses.
-30-
Cash Flows from Investing Activities. Cash used in investing activities was
$69.6 million in 2000, compared to $170.0 million for 1999. The decrease was due
primarily to cash paid in 1999 to acquire Co-Source and Compass. We financed
these acquisitions with borrowings under our revolving credit agreement. This
increase was partially offset by a $25.3 million increase in the purchase of
delinquent receivables.
Cash used in investing activities was $170.0 million in 1999 compared to
$233.0 million for 1998. The decrease was due primarily to cash paid in 1998 to
acquire The Response Center, FCA, MedSource, and MSC. We financed these
acquisitions with the proceeds from our 1998 public offering and borrowings
under our revolving credit agreement. This increase was partially offset by our
financing the May 1999 acquisition of Co-Source with borrowings under our
revolving credit facility.
Capital expenditures were $31.0 million, $29.6 million, and $10.3 million
in 2000, 1999, and 1998, respectively.
Cash Flows from Financing Activities. Cash used in financing activities was
$19.8 million in 2000, compared to cash provided by financing activities of
$149.7 million in 1999. During 2000, we did not have any significant sources of
cash from financing activities and we repaid $19.0 million of borrowings under
our revolving credit agreement. During 1999, our primary source of cash from
financing activities was borrowings under the revolving credit facility that
were used to repay the existing debt under the JDR credit facility and to
finance the acquisition of Co-Source.
Cash provided by financing activities was $149.7 million in 1999, compared
to $203.0 million in 1998. During 1999, our primary source of cash from
financing activities was borrowings under our revolving credit facility that
were used to repay the existing debt under the JDR credit facility and to
finance the acquisition of Co-Source. Net proceeds of $91.3 million from our
1998 public offering and net borrowings of $135.6 million were our primary
sources of cash from financing activities in 1998,which were used for the
acquisitions of FCA, MedSource and MSC.
Credit Facility. We have a credit agreement with Mellon Bank, N.A., for
itself and as administrative agent for other participating lenders, to provide
for borrowings up to $350.0 million, structured as a $350.0 million revolving
credit facility. At our option, the borrowings bear interest at a rate equal to
either Mellon Bank's prime rate plus a margin of 0.25% to 0.50% that is<