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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, 2001
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.
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(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2858652
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
507 Prudential Road
Horsham, Pennsylvania 19044
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(Address of principal (Zip Code)
executive offices)
Registrant's Telephone Number, Including Area Code (215) 441-3000
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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 25,874,000
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(Title of Class) (Number of Shares Outstanding
as of March 18, 2002)
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 $529,637,000(1)
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Proxy Statement to be filed in connection with
its 2002 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.
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(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 $27.370, the last reported sale price
for the Company's common stock on March 18, 2002. 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
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PART I
Item 1. Business. 1
Item 2. Properties. 19
Item 3. Legal Proceedings. 20
Item 4. Submission of Matters to a Vote of Security Holders. 20
Item 4.1 Executive Officers of the Registrant who are not also Directors. 20
PART II
Item 5. Market for Registrant's Common Stock and 22
Related Shareholder Matters.
Item 6. Selected Financial Data. 23
Item 7. Management's Discussion and Analysis of Financial 24
Condition and Results of Operations.
Item 7a Quantitative and Qualitative Disclosures about Market Risk. 38
Item 8. Financial Statements and Supplementary Data. 38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures. 38
PART III
Item 10. Directors and Executive Officers of the Registrant. 39
Item 11. Executive Compensation. 39
Item 12. Security Ownership of Certain Beneficial Owners and Management. 39
Item 13. Certain Relationships and Related Transactions. 39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 40
Signatures. 46
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, the effects of the terrorist attacks and the economy on the Company's
business, expected increases in operating efficiencies, anticipated trends in
the accounts receivable management industry, estimates of future cash flows of
purchased accounts receivable, 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. ("NCO
Portfolio"), risks associated with growth and future acquisitions, the risk that
the Company will not be able to realize operating efficiencies in the
integration of its acquisitions, fluctuations in quarterly operating results,
risks relating to the timing of contracts, risks related to purchased accounts
receivable, risks associated with technology, the Internet and the Company's
e-commerce strategy, risks related to past or possible future terrorist attacks,
risks related to the economy, 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.
PART I
Item 1. Business.
General
We believe we are the largest provider of outsourced accounts receivable
management and collection services in the world, serving a wide range of clients
in North America and abroad. Our extensive industry knowledge, technological
expertise, management depth, and long-standing client relationships enable us to
deliver customized solutions that improve our clients' accounts receivable
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
approximately 9,000 employees who provide our services through the operation of
80 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 that
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 The Kaulkin Report, an industry publication,
overall consumer debt in 2000 exceeded $8.3 trillion. Approximately $135 billion
of delinquent consumer debt was estimated to have been placed for collection
with third-party collection agencies during 2000, nearly double the $73 billion
placed in 1990 according to The Kaulkin Report. The primary market sectors
within our industry are financial services, healthcare, and retail and
commercial. Other important market sectors include telecommunications,
utilities, and government.
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:
-2-
Expand our relationships with clients - A significant amount of our growth
stems from the expansion of existing client relationships. These relationships
and the resulting opportunities continue to grow in scale, complexity and profit
potential. Over time, we believe 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.
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(TM) 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 Australasia. 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. Additionally, we expect to pursue
direct investments, strategic alliances and partnerships as well as further
explore acquisitions in these markets. For example, we formed strategic
alliances with Receivables Management Group Pty Ltd. in 2000 and MIRARE Credit
Information Services in 2001 to provide an entree into the Australasian and
Korean markets, respectively. 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.
We also provide our domestic clients with a cost-effective option of using
foreign labor markets such as India to provide effective services at a reduced
price. We currently have approximately 150 telephone representatives working in
India for our U.S clients. We expect to expand our presence in India as well as
explore new opportunities in other labor markets such as Australia.
-3-
Increase purchases of delinquent accounts receivable through NCO Portfolio
- - Since 1991, we have purchased, collected and managed portfolios of purchased
accounts receivable. These portfolios have consisted primarily of delinquent
accounts receivable. 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 in February 2001, we have created one of the only publicly traded
companies purchasing delinquent accounts receivable. Under the terms of our
credit agreement, our investment in NCO Portfolio currently is limited to our
$25.0 million equity investment and a $50.0 million credit sub-facility. During
2001, NCO Portfolio invested $574,000 for a 50% ownership interest in a joint
venture, InoVision-MEDCLR NCOP Ventures, LLC ("Joint Venture") with IMNV
Holdings, LLC ("Marlin"). The Joint Venture was set up to purchase utility,
medical and other various small balance accounts receivable. The Joint Venture
is accounted for using the equity method of accounting. The Joint Venture has
access to capital through a specialty finance lender who, at its option, lends
90% of the value of the purchased accounts receivable to the Joint Venture. The
debt is cross-collateralized by all static pools in which the lender
participates, and is non-recourse to NCO Portfolio. In the future, NCO Portfolio
may develop additional growth opportunities including partnerships with banks,
commercial lenders, and other investors who will provide additional funding
sources for purchases of delinquent accounts receivable. By utilizing such risk
sharing partnerships, we will gain access to capital while limiting both our and
NCO Portfolio's exposure to credit risk.
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 by 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 accounts receivable 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 contingency 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 amounts 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 across all industries was approximately 19% during 2001, as
compared to 19% during 2000.
-4-
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 collectibility 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 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 each client, defines and controls the steps that
will be undertaken by us on behalf of the client and the manner in which we will
report data to the client. Through our systematic 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 begin the recovery process.
Skiptracing. In cases where the customer's telephone number or address is
unknown, we systematically search the U.S. 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.
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.
-5-
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 them 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.
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 that complement our
traditional accounts receivable management and collection business and leverage
our technological infrastructure. We believe that the following services will
provide additional growth opportunities for us:
Attorney Network Services. We coordinate litigation undertaken on behalf of
our clients through 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.
-6-
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 80 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 accounts receivable 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.
Our call centers utilize predictive dialers with over 4,200 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.
Our MIS staff is comprised of approximately 240 employees 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.
-7-
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 330 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 a request for proposal 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 ensure 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.
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 50,000 companies in the financial
services, healthcare, retail and commercial, utilities, education,
telecommunications, and government sectors. Our 10 largest clients in 2001
accounted for approximately 28% of our revenue. In 2001, no client accounted for
more than 6% of total revenue. In 2001, we derived 34.4% of our revenue,
excluding purchased accounts receivable, from financial services (which included
the banking and insurance sectors), 25.5% from healthcare organizations, 21.3%
from retail and commercial entities, 6.4% from utilities, 5.6% from educational
organizations, 5.1% from telecommunications companies, and 1.7% from government
entities.
-8-
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.
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 telephone representatives. We
generally offer competitive compensation and benefits and offer internal
promotion opportunities.
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, 2001, we had a total of approximately 8,100 full-time
employees and 900 part-time employees, of which 7,400 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, Risk Management Alternatives, Inc., and GC Services LP,
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 we do. In
addition, many companies perform the accounts receivable management and
collection services offered by us in-house. 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 that 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
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.
-9-
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 A/R 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 A/R 117,500 96,700
Management
MedSource, Inc. 7/1/98 Healthcare A/R 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
You should carefully consider the risks described below. If any of the
risks actually occur, our business, financial condition or results of future
operations could be materially adversely affected. This Annual Report on Form
10-K contains forward-looking statements that involve risk and uncertainties.
Our actual results could differ materially from those anticipated in the
forward-looking statements as a result of many factors, including the risks
faced by us described below and elsewhere in this Annual Report on Form 10-K.
Terrorist attacks and threats of war may negatively impact our results of
operations, revenue, and stock price.
Terrorist attacks and threats of war may negatively impact our results of
operations, revenue, and stock price. Recent terrorist attacks in the United
States, as well as future events occurring in response or in connection to them,
including, without limitation, future terrorist attacks against United States
targets and threats of war or actual conflicts involving the United States or
its allies, may impact our operations, including affecting our ability to
collect our clients' accounts receivable. More generally, any of these events
could cause consumer confidence and spending to decrease or result in increased
volatility in the economy. They could also result in the deepening of the
economic recession in the United States. Any of these occurrences could have a
material adverse effect on our operating results, collections and revenue and
may result in the volatility of the market price for our common stock.
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 sales force; 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.
-12-
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.
We currently utilize three computer hardware systems and are in the process
of transitioning to one system. If we do not succeed in that transition, 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, Risk Management Alternatives, Inc.,
and GC Services LP, 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 we do. 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, many companies perform the accounts
receivable management and collection services offered by us in-house. 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.
-13-
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, 2001, we derived approximately 34.4% of our
revenue, excluding purchased accounts receivable, from clients in the financial
services sector, approximately 25.5% of our revenue from clients in the
healthcare sector and approximately 21.3% 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 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 a $50.0 million credit sub-facility. If
NCO Portfolio defaults on that credit, it 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 defaulted consumer accounts receivable 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:
-14-
o Collections may not be sufficient to recover the cost of investments in
purchased accounts receivable and support operations - NCO Portfolio
purchases delinquent accounts receivable generated primarily by consumer
credit transactions. These are obligations that the individual consumer has
failed to pay when due. The accounts receivable are purchased from consumer
creditors such as banks, finance companies, retail merchants and other
consumer oriented companies. Substantially all of the accounts receivable
consist of account balances that the credit grantor has made numerous
attempts to collect, has subsequently deemed uncollectible, and charged-off
its books. After purchase, collections on accounts receivable could be
reduced by consumer bankruptcy filings, which have been on the rise. The
accounts receivable are purchased at a significant discount to the amount the
customer owes and, although the belief is that the recoveries on the accounts
receivable will be in excess of the amount paid for the accounts receivable,
actual recoveries on the accounts receivable may vary and may be less than
the amount expected. The timing or amounts to be collected on those accounts
receivable cannot be assured. If cash flows from operations are less than
anticipated as a result of our inability to collect NCO Portfolio's accounts
receivable, NCO Portfolio will not be able to purchase new accounts
receivable after it has exhausted the availability under the sub-facility,
and its future growth and profitability will be materially adversely
affected. There can be no assurance that NCO Portfolio's operating
performance will be sufficient to service debt on the sub-facility or finance
the purchase of new accounts receivable.
o Use of estimates in reporting results - NCO Portfolio's revenue is recognized
based on estimates of future collections on static pools of accounts
receivable purchased. Although estimates are based on statistical analysis,
the actual amount collected on these static pools and the timing of those
collections may differ materially from NCO Portfolio's estimates. If
collections on static pools are materially less than estimated, NCO Portfolio
will be required to record impairment expenses that will reduce earnings and
could materially adversely affect earnings, financial condition, and
creditworthiness.
o Possible shortage of accounts receivable for purchase at favorable prices -
The availability of portfolios of delinquent accounts receivable 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 accounts receivable. The growth in consumer debt may also be
affected by changes in credit grantors' underwriting criteria and regulations
governing consumer lending. Any slowing of the consumer debt growth trend
could result in less credit being extended by credit grantors. Consequently,
fewer delinquent accounts receivable could be available at prices that NCO
Portfolio finds attractive. If competitors raise the prices they are willing
to pay for portfolios of accounts receivable above those NCO Portfolio wishes
to pay, NCO Portfolio may be unable to buy delinquent accounts receivable at
prices consistent with its historic return targets. In addition, NCO
Portfolio may overpay for portfolios of delinquent accounts receivable, 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 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 that
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
accounts receivable to NCO Portfolio fail to comply with these laws, NCO
Portfolio's ability to collect on those accounts receivable 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 accounts
receivable.
-15-
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'
ownership interest 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.
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.
-16-
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 and
termination of existing contracts;
o the timing and amount of collections on purchased accounts receivable;
o customer contracts that require us to incur costs in periods prior to
recognizing revenue under those contracts;
o the effects 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.
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 investor guidance concerning our expected
results of operations for the first and second quarters of 2002. Our investor
guidance contains forward-looking statements and may be affected by various
factors discussed in "Risk Factors" and elsewhere in this Annual Report on Form
10-K that may cause actual results to differ materially from the results
discussed in the investor guidance. Our 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 investor guidance is not a guarantee of future performance and the
actual results throughout the periods covered by the investor guidance may vary
from the projected results. If we do not achieve the results projected in our
investor guidance, it could have a materially adverse effect on the market price
of our common stock.
-17-
Goodwill represented 55.3% of our total assets at December 31, 2001.
Effective January 1, 2002, we were required to adopt the Financial Accounting
Standards Board's ("FASB") SFAS No. 142, "Goodwill and Other Intangibles." If
the goodwill is deemed to be impaired under FASB 142, we may need to take a
charge to earnings to write-down the goodwill to its fair value.
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.
Effective January 1, 2002, we were required to adopt the Financial
Accounting Standards Board's ("FASB") SFAS No. 142, "Goodwill and Other
Intangibles." FASB 142 concluded that purchased goodwill will not be amortized
but will be reviewed for impairment when certain events indicate that the
goodwill of a reporting unit is impaired. The impairment test will use a
fair-value based approach, whereby if the implied fair value of a reporting
unit's goodwill is less than its carrying amount, goodwill would be considered
impaired.
As of December 31, 2001, our balance sheet included goodwill that
represented 55.3% of total assets and 124.3% of shareholders' equity. If the
goodwill is deemed to be impaired under FASB 142, we may need to take a charge
to earnings to write-down the goodwill to its fair value.
Investors should be aware that our earnings for periods beginning after
December 31, 2001 will not include charges for the amortization of goodwill and
should consider this when comparing such earnings with historical earnings for
periods ended on or before December 31, 2001, which included goodwill
amortization charges.
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.
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.
-18-
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 18, 2002,
there were 25,874,000 shares of our common stock outstanding. Most of these
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 18, 2002, we had the authority to issue up to
approximately 4,730,000 shares of our common stock under our stock option plans.
We also had outstanding notes convertible into an aggregate of 3,797,000 shares
of our common stock at a conversion price of $32.92 per share. Additionally, we
had outstanding warrants to purchase approximately 22,000 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 77 offices throughout North America, two offices in the
United Kingdom and one office in Puerto Rico. The leases of these facilities
expire between 2002 and 2016, and most contain renewal options.
Effective March 11, 2002, we relocated our corporate headquarters to 507
Prudential Road, Horsham, PA 19044.
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.
-19-
Item 3. Legal Proceedings.
The discussions concerning our litigation with the landlord of our Fort
Washington facilities contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are incorporated herein by
reference.
AssetCare, Inc., our subsidiary acquired as part of Medaphis Services
Corporation, has been identified in an administrative order issued by the State
of California as a party that is partially responsible for cleanup costs and
natural resource damages associated with a former scrap recycling site next to
Humboldt Bay in California. The subsidiary was identified as a
successor-in-interest to a former scrap recycler who conducted limited
operations at the site. The subsidiary has also been named in a civil proceeding
brought by one of the owners of the site as a party that is responsible for the
costs that will be incurred by the owner for complying with the terms of the
order. Although we are still investigating these claims and cannot predict the
outcome of the proceedings or quantify the ultimate liability of the subsidiary
in light of the early stage of the litigation, based upon: (i) the fact that the
former scrap recycler conducted scrap recycling operations for a four-year
period during the 100-year operational history of the site; and (ii) the
possibility of indemnification and contribution claims against other entities,
any costs incurred or assessed against the subsidiary are not expected to have a
materially adverse effect on our financial condition or results of operations.
The subsidiary intends to vigorously defend these matters.
We are involved in other 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
- -------------------------------------------------- -------- ------------------------------------------------
Stephen W. Elliott..................... 40 Executive Vice President, Information
Technology and Chief Information Officer
Joshua Gindin, Esq..................... 45 Executive Vice President and General Counsel
Steven Leckerman....................... 49 Executive Vice President, U.S. Operations
Paul E. Weitzel, Jr.................... 43 Executive Vice President, Corporate
Development and International Operations
Steven L. Winokur...................... 42 Executive Vice President, Finance; Chief
Financial Officer; and Treasurer
-20-
Stephen W. Elliott - Mr. Elliott 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.
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.
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.
-21-
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
---- ---
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
2001
First Quarter $ 34.48 $ 25.56
Second Quarter 32.70 23.25
Third Quarter 29.73 12.02
Fourth Quarter 24.50 13.45
On March 18, 2002, the last reported sale price of our common stock as
reported on The Nasdaq National Market was $27.37 per share. On March 18, 2002,
there were approximately 70 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.
-22-
Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA (1)
(Amounts in thousands, except per share data)
For the years ended December 31,
--------------------------------------------------------------------------
1997 1998 1999 2000 2001
----------- ------------ ------------ ----------- ------------
Statement of Income Data:
Revenue $ 99,720 $ 209,947 $ 460,311 $ 605,884 $ 701,506
Operating costs and expenses:
Payroll and related expenses 51,493 106,787 237,709 293,292 350,634
Selling, general and administrative expenses 34,379 61,607 128,177 179,924 237,690
Depreciation and amortization expense 4,052 8,615 21,805 32,360 38,205
Nonrecurring acquisition costs - - 4,601 - -
----------- ------------ ------------ ----------- ------------
Income from operations 9,796 32,938 68,019 100,308 74,977
Other income (expense) (419) (1,794) (16,899) (22,126) (23,335)
----------- ------------ ------------ ----------- ------------
Income before provision for income taxes 9,377 31,144 51,120 78,182 51,642
Income tax expense 4,638 12,881 22,821 32,042 21,463
----------- ------------ ------------ ----------- ------------
Income from continuing operations before
minority interest 4,739 18,263 28,299 46,140 30,179
Minority interest - - - - (4,310)
----------- ------------ ------------ ----------- ------------
Income from continuing operations 4,739 18,263 28,299 46,140 25,869
Accretion of preferred stock to redemption value (1,617) (1,604) (377) - -
----------- ------------ ------------ ----------- ------------
Income from continuing operations applicable
to common shareholders 3,122 16,659 27,922 46,140 25,869
Discontinued operations, net of taxes:
(Loss) income from discontinued operations (148) 82 1,067 (975) -
Loss on disposal of discontinued operations - - - (23,179) -
----------- ------------ ------------ ----------- ------------
Net income applicable to common shareholders $ 2,974 $ 16,741 $ 28,989 $ 21,986 $ 25,869
=========== ============ ============ =========== ============
Income from continuing operations applicable
to common shareholders per share:
Basic $ 0.23 $ 0.91 $ 1.22 $ 1.80 $ 1.00
=========== ============ ============ =========== ============
Diluted $ 0.21 $ 0.84 $ 1.17 $ 1.79 $ 0.99
=========== ============ ============ =========== ============
Net income applicable to common shareholders per share:
Basic $ 0.22 $ 0.91 $ 1.27 $ 0.86 $ 1.00
=========== ============ ============ =========== ============
Diluted $ 0.20 $ 0.85 $ 1.22 $ 0.85 $ 0.99
=========== ============ ============ =========== ============
Weighted average shares outstanding:
Basic 13,736 18,324 22,873 25,587 25,773
=========== ============ ============ =========== ============
Diluted 14,808 19,758 23,799 25,842 28,897
=========== ============ ============ =========== ============
Other Financial Data:
EBITDA (2) $ 13,848 $ 41,553 $ 89,824 $ 132,668 $ 113,182
December 31,
--------------------------------------------------------------------------
1997 1998 1999 2000 2001
----------- ------------ ------------ ----------- ------------
Balance Sheet Data:
Cash and cash equivalents $ 30,194 $ 22,528 $ 50,513 $ 13,490 $ 32,161
Working capital 37,825 31,517 65,937 79,732 112,373
Net assets of discontinued operations 9,484 27,740 41,492 - -
Total assets 129,301 410,992 791,692 784,006 931,025
Long-term debt, net of current portion 14,940 143,831 323,949 303,920 357,868
Minority interest - - - - 21,213
Redeemable preferred stock 6,522 11,882 - - -
Shareholders' equity 94,336 199,465 364,888 386,426 414,095
(1) 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. 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) 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 from the
recovery of delinquent accounts receivable on a contingency fee basis. Our
contingency 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 across all industries was approximately 19% during 2001, as compared
to 19% during 2000. 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 that 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 that 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 as well as
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 by focusing 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, the Portfolio Management division was created after 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 the merger, referred to as the Creditrust Merger, our results of
operations are more significantly impacted by purchases of and collections on
delinquent accounts receivable. 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% of NCO Portfolio after the Creditrust Merger. The
results of NCO Portfolio are consolidated into our results, with a charge for
minority interest and elimination of significant intercompany transactions.
Critical Accounting Policies
General
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and the accompanying notes. Actual results could differ
from those estimates. We believe the following accounting policies include the
estimates that are the most critical and could have the most potential impact on
our results of operations.
Revenue Recognition for Purchased Accounts Receivable
In the ordinary course of accounting for purchased accounts receivable,
estimates have been made by management as to the amount of future cash flows
expected from each static pool. The estimated future cash flow of each static
pool is used to compute the internal rate of return, referred to as IRR, for
each static pool. The IRR is used to allocate cash flow between revenue and
amortization of the carrying values of the purchased accounts receivable.
On an ongoing basis, we compare the historical trends of each static pool
to projected collections. The future projections are then increased or
decreased, within parameters, in accordance with the historical trend. The
results are further reviewed by management with a view towards specifically
addressing any particular static pool's performance. Actual results will differ
from these estimates and a material change in these estimates could occur within
one year.
Total cash flow for the year ended December 31, 2001 was unaffected by the
change in future estimates. The result of the change in future estimates was a
reduction in revenue and an increase in the amount of collections applied to the
principal of purchased accounts receivable. The differences between actual and
estimated collections on existing static pools as of the beginning of 2001
resulted in a reduction in net income and earnings per share $980,000 and $0.04
per diluted share, respectively for the year ended December 31, 2001.
Bad Debts
We maintain an allowance for doubtful accounts for estimated losses
resulting from the non-payment of our trade accounts receivable. If our estimate
is not sufficient to cover actual losses, we would be required to take
additional charges to our earnings.
-25-
Deferred Taxes
Income taxes or tax benefits have been provided in the results of
operations based on the statutory federal and state rates of 37.5% of pre-tax
income for NCO Portfolio. For financial reporting purposes, revenue is
recognized over the life of the static pool. Because the static pools of
purchased accounts receivable are comprised of distressed debt and collection
results are not guaranteed until received, for tax purposes, any gain on a
particular static pool is deferred until the full cost of the static pool is
recovered (cost recovery method). Temporary differences arise because revenue is
recognized on the cost recovery method for income tax purposes. Permanent
differences between the statutory rates and actual rates are minimal. Temporary
differences in recognition of revenue on purchased accounts receivable have
resulted in deferred tax liabilities. Assumed utilization of net operating
losses acquired in the Creditrust Merger has resulted in deferred tax assets.
Our deferred tax liabilities grew significantly through 2001 as a result of the
increase in purchased accounts receivable, providing us with additional
liquidity. As of December 31, 2001, NCO Portfolio's net deferred tax asset of $1
million was the result of the combination of deferred tax assets generated
principally by the assumed utilization of net operating loss carryforwards from
the Creditrust Merger, offset by the deferred tax liabilities arising from book
tax differences on purchased accounts receivable, including the purchased
accounts receivable acquired in the Creditrust Merger. The utilization of net
operating loss carryforwards is an estimate based on a number of factors beyond
our control including the level of taxable income available from successful
operations in the future. The utilization of net operating losses have been
further impacted by Tax Law provisions that limit the amount of net operating
loss carryforwards that can be utilized subsequent to a change in control such
as the Creditrust Merger.
Results of Operations
The following table sets forth selected historical income statement data
(amounts in thousands):
For the years ended December 31,
--------------------------------------------------------------------------
1999 (1) 2000 2001
----------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------ -------- ----------- -------- ----------- ---------
Revenue $460,311 100.0% $605,884 100.0% $701,506 100.0%
Payroll and related expenses 237,709 51.6 293,292 48.4 350,634 50.0
Selling, general, and
administrative
expenses 128,177 27.9 179,924 29.7 237,690 33.9
Nonrecurring acquisition costs 4,601 1.0 - - - -
---------- -------- -------- ------- --------- -------
EBITDA (2) 89,824 19.5 132,668 21.9 113,182 16.1
Depreciation and amortization 21,805 4.7 32,360 5.3 38,205 5.4
Other expense 16,899 3.7 22,126 3.7 23,335 3.3
Income tax expense 22,821 5.0 32,042 5.3 21,463 3.1
Minority interest - - - - 4,310 0.6
---------- -------- -------- ------- --------- -------
Income from continuing operations $ 28,299 6.1% $ 46,140 7.6% $ 25,869 3.7%
========== ======= ======== ======= ========= =======
(1) Gives effect to the restatement of our historical financial statements for
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.
-26-
Year ended December 31, 2001 Compared to Year ended December 31, 2000
Revenue. Revenue increased $95.6 million, or 15.8%, to $701.5 million for
the year ended December 31, 2001, from $605.9 million for the comparable period
in 2000. Our U.S. Operations, Portfolio Management, and International Operations
divisions represented $633.4 million, $62.9 million, and $37.8 million,
respectively, of the 2001 revenue. The U.S. Operations' revenue included $27.5
million of revenue earned on services performed for the Portfolio Management
division that was eliminated upon consolidation. The International Operations'
revenue included $5.1 million of revenue earned on services performed for the
U.S. Operations division that was eliminated upon consolidation. Our U.S.
Operations, Portfolio Management, and International Operations divisions
represented $566.8 million, $13.2 million and $31.7 million, respectively, of
the revenue for 2000. The U.S. Operations' revenue included $5.8 million of
revenue earned on services performed for the Portfolio Management division that
was eliminated upon consolidation.
U.S. Operation's revenue increased $66.6 million, or 11.8%, to $633.4
million in 2001, from $566.8 million in 2000. 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.
Portfolio Management's revenue increased $49.7 million, or 378.5%, to $62.9
million in 2001, from $13.2 million in 2000. This increase in the Portfolio
Management's revenue was partially attributable to an increase in purchases of
accounts receivable. The remainder of the increase was attributable to purchased
accounts receivable obtained from the Creditrust Merger in February 2001.
International Operation's revenue increased $6.1 million, or 19.2%, to
$37.8 million in 2001, from $31.7 million in 2000. This increase in our
International Operations division's revenue was primarily attributable to new
services provided for our U.S. Operations, the addition of new clients, and
growth in business from existing clients.
Payroll and related expenses. Payroll and related expenses increased $57.3
million to $350.6 million for the year ended December 31, 2001, from $293.3
million for the comparable period in 2000, and increased as a percentage of
revenue to 50.0% from 48.4%. The majority of the increase in the percentage of
revenue was attributable to $10.7 million of one-time charges incurred during
the second quarter of 2001 related to a comprehensive streamlining of our
expense structure designed to counteract the effects of operating in a more
difficult collection environment. These costs primarily consisted of the
elimination or acceleration of certain contractual employment obligations,
severance costs related to terminated employees, and costs related to a decision
to change the structure of our healthcare benefit program. Excluding the
one-time charges, payroll and related expenses as a percentage of revenue was
48.5% for 2001. During 2001, we experienced reduced collectibility within our
contingent revenue stream due to the difficult collection environment.
Accordingly, in order to mitigate the effects of the decreased collectibility
while maintaining performance for our clients, we increased payroll costs. The
effects of the difficult collection environment were exasperated by diminished
consumer payment patterns following the September 11, 2001 terrorist attacks.
The increase in payroll costs, excluding one-time charges, did not translate
into a significant increase in the percentage of payroll and related expenses to
revenue due to an increase in productivity that was achieved through the
expansion of predictive dialing equipment and the result of spreading the fixed
portion of the payroll cost structure over a larger revenue base. In addition, a
portion of these increases was offset by the increase in the size of our
Portfolio Management division, which has a lower payroll cost structure than the
remainder of our business.
-27-
The payroll and related expenses of our U.S Operations division increased
$56.8 million to $332.5 million in 2001, from $275.7 million in 2000, and
increased as a percentage of revenue to 52.5% from 48.6%. A portion of the
increase in the percentage of revenue was attributable to $10.0 million of
one-time charges incurred during the second quarter of 2001 related to a
comprehensive streamlining of the expense structure designed to counteract the
effects of operating in a more difficult collection environment. These costs
primarily consisted of the elimination or acceleration of certain contractual
employment obligations, severance costs related to terminated employees, and
costs related to a decision to change the structure of our healthcare benefit
programs from a large, singular benefit platform to individual plans across the
country. Excluding the one-time charges, payroll and related expenses as a
percentage of revenue was 50.9% for 2001. During 2001, we experienced reduced
collectibility within our contingent revenue stream due to the difficult
collection environment. Accordingly, in order to mitigate the effects of the
decreased collectibility while maintaining performance for our clients, we
increased payroll costs. The effects of the difficult collection environment
were exasperated by diminished consumer payment patterns following the September
11, 2001, terrorist attacks. The increase in payroll costs, excluding one-time
charges, did not translate into a significant increase in the percentage of
payroll and related expenses to revenue due to an increase in productivity that
was achieved through the expansion of predictive dialing equipment and the
result of spreading the fixed portion of the payroll cost structure over a
larger revenue base.
The increase as a percentage of revenue, excluding the one-time charges,
was primarily the result of reduced collectibility within our U.S. Operations
division's contingent revenue stream due to the difficult collection
environment. Accordingly, in order to mitigate the effects of the decreased
collectibility while maintaining performance for our clients, we increased
spending for payroll costs. The effects of the difficult collection environment
were exasperated by diminished consumer payment patterns following the September
11, 2001 terrorist attacks. A portion of these increases was offset by an
increase in productivity that was achieved through the expansion of predictive
dialing equipment and the result of spreading the fixed portion of the payroll
cost structure over a larger revenue base.
The payroll and related expenses of our Portfolio Management division
increased $1.3 million to $1.6 million in 2001, from $327,000 in 2000, and
increased as a percentage of revenue to 2.6% from 2.5%. Our Portfolio Management
division outsources all of the collection services to our U.S. Operations
division and, therefore, has a relatively small fixed payroll cost structure.
However, due to the expansion of this division and the February 2001 Creditrust
Merger, our Portfolio Management division required additional employees to
operate NCO Portfolio as a separate public company.
The payroll and related expenses of our International Operations division
increased $4.5 million to $21.7 million in 2001, from $17.2 million in 2000, and
increased as a percentage of revenue to 57.4% from 54.4%. The increase in the
percentage of revenue was attributable to the $736,000 of the one-time charges
incurred during the second quarter of 2001 related to a comprehensive
streamlining of the expense structure designed to counteract the effects of
operating in a more difficult collection environment. These costs primarily
consisted of the elimination or acceleration of certain contractual employment
obligations and severance costs related to terminated employees.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $57.8 million to $237.7 million in 2001 from
$179.9 million in 2000. Selling, general and administrative expenses increased
as a percentage of revenue to 33.9% in 2001 from 29.7% in 2000. A portion of the
overall increase as a percentage of revenue was the result of $13.0 million of
one-time charges incurred during the second and third quarters of 2001.
Approximately $11.2 million of these one-time charges were incurred in
connection with the June 2001 flood of our Fort Washington, PA, corporate
headquarters and the resultant decision to relocate the corporate headquarters
to Horsham, PA. The remaining $1.8 million of one-time charges related to a
comprehensive streamlining of our expense structure designed to counteract the
effects of operating in a more difficult collection environment. These costs
primarily related to real estate obligations for closed facilities and equipment
rental obligations. Excluding the one-time charges, selling, general, and
administrative expenses as a percentage of revenue was 32.0% for 2001. The
increase as a percentage of revenue, excluding the one-time charges, was
primarily the result of the reduced collectibility within our contingent revenue
stream due to a difficult collection environment. Accordingly, in order to
mitigate the effects of the decreased collectibility while maintaining
performance for our clients, we had to increase spending for direct costs of
collection. These costs included telephone, letter writing and postage,
third party servicing fees, credit reporting, skiptracing, and legal and
forwarding fees. The effects of the difficult collection environment were
exasperated by diminished consumer payment patterns following the September 11,
2001, terrorist attacks.
-28-
Depreciation and amortization. Depreciation and amortization increased to
$38.2 million in 2001 from $32.4 million in 2000. This increase consisted of
depreciation resulting from normal capital expenditures made in the ordinary
course of business during 2000 and 2001. These capital expenditures included
purchases associated with predictive dialers and other equipment required to
expand our infrastructure to handle future growth and our planned migration
towards a single, integrated information technology platform.
Other income (expense). Interest and investment income increased $1.1
million to $3.6 million for 2001 compared to 2000. This increase was primarily
attributable to interest income from the notes receivable received in connection
with the divestiture of the Market Strategy division in October 2000. Interest
expense increased to $27.0 million for 2001, from $25.9 million for 2000. This
increase was partially attributable to the Portfolio Management division
borrowing $36.3 million in connection with the February 2001 Creditrust Merger
and subsequent borrowings used to purchase accounts receivable portfolios. In
addition, a portion of the increase was attributable to interest from
securitized debt that was assumed as part of the Creditrust Merger. A portion of
these increases was offset by a decrease in interest rates and debt repayments
made during 2000 and 2001. In addition, a portion of these increases was offset
by the April 2001 sale of $125.0 million aggregate principal amount of 4.75%
Convertible Subordinated Notes due 2006. The net proceeds of $121.3 million were
used to repay debt under the revolving credit agreement. During 2000, 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 2001 decreased to $21.5 million,
or 41.6% of income before income tax expense, from $32.0 million, or 41.0% of
income before income tax expense, for 2000. The effective tax rates were
relatively comparable despite the one-time charges incurred during the second
and third quarters of 2001. The one-time charges lowered pretax income and
increased the impact of the nondeductible goodwill related to certain
acquisitions. The effect of the one-time charges was partially offset by the
expansion of the Portfolio Management division, which has a lower effective tax
rate than the remainder of our business. In addition, the impact of the one-time
charges was also mitigated by the implementation of certain tax savings
initiatives during the fourth quarter of 2000.
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.
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.
-29-
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, Portfolio Management,
and International Operations divisions represented $566.8 million, $13.2 million
and $31.7 million, respectively, of the revenue for 2000. The U.S. Operations'
revenue included $5.8 million of revenue earned on services performed for the
Portfolio Management division that was eliminated upon consolidation. Our U.S.
Operations, Portfolio Management, and International Operations divisions
represented $428.3 million, $2.0 million and $31.0 million, respectively, of the
revenue for 1999. The U.S. Operations' revenue included $981,000 of revenue
earned on services performed for the Portfolio Management division that was
eliminated upon consolidation.
U.S. Operation's revenue increased $138.5 million, or 32.3%, to $566.8
million in 2000, from $428.3 million 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.
Portfolio Management's revenue increased $11.2 million, or 571.3%, to $13.2
million in 2000, from $2.0 million in 1999. This increase in the Portfolio
Management's revenue was attributable to an increase in purchases of accounts
receivable.
International Operation's revenue increased $665,000, or 2.1%, to $31.7
million in 2000, from $31.0 million 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
$55.8 million to $275.7 million in 2000, from $219.9 million in 1999, but
decreased as a percentage of revenue to 48.6% from 51.4%. 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 Portfolio Management division
increased $147,000 to $327,000 in 2000, from $180,000 in 1999, but decreased as
a percentage of revenue to 2.5% from 9.2%. The Portfolio Management division
outsources all of its collection services to the U.S. Operations division and,
therefore, has a relatively small fixed payroll cost structure. The decrease in
the percentage of revenue was attributable to spreading the fixed payroll costs
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.
-30-
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.
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 t