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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, 2003
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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
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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 executive offices) (Zip Code)
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
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Securities registered pursuant to Section 12(g) of the Act: Common stock, no par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) 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 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of voting and nonvoting common equity held by
nonaffiliates was approximately $412,067,723(1).
The number of shares of the registrant's common stock outstanding as of March
12, 2004 was 26,035,777.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Proxy Statement to be filed in connection
with its 2004 Annual Meeting of Shareholders are incorporated by reference into
Part III of this Report; provided, however, that the Compensation Committee
Report, the Audit Committee Report, the graph showing the performance of the
Company's stock and any other information in such Proxy Statement that is not
required to be included in this Annual Report on Form 10-K, shall not be deemed
to be incorporated herein or filed for the purposes of the Securities Act of
1933 or the Securities Exchange Act of 1934. Other documents incorporated by
reference are listed in the Exhibit Index.
_________________
(1)The aggregate market value of the voting and nonvoting common equity held by
nonaffiliates set forth equals the number of shares of the registrant's common
stock outstanding, reduced by the number of shares of common stock held by
officers, directors and shareholders owning 10 percent or more of the
registrant's common stock, multiplied by $17.89, the last reported sale price
for the registrant's common stock on June 30, 2003, the last business day of
the registrant's most recently completed second fiscal quarter. The information
provided shall in no way be construed as an admission that any person whose
holdings are excluded from this figure is an affiliate of the registrant or that
such person is the beneficial owner of the shares reported as being held by such
person, 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. 2
Item 2. Properties. 27
Item 3. Legal Proceedings. 28
Item 4. Submission of Matters to a Vote of Security Holders. 28
Item 4.1 Executive Officers of the Registrant who are not also Directors. 29
PART II
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters. 31
Item 6. Selected Financial Data. 32
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 33
Item 7a Quantitative and Qualitative Disclosures about Market Risk. 47
Item 8. Financial Statements and Supplementary Data. 47
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. 47
Item 9a. Controls and Procedures. 47
PART III
Item 10. Directors and Executive Officers of the Registrant. 49
Item 11. Executive Compensation. 49
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters. 49
Item 13. Certain Relationships and Related Transactions. 49
Item 14. Principal Accountant Fees and Services. 49
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 50
Signatures. 56
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 1. "Business" and 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 pending
acquisitions of RMH Teleservices, Inc., referred to as RMH, and the minority
interest of NCO Portfolio Management, Inc., referred to as NCO Portfolio,
fluctuations in quarterly operating results, the long-term collection contract,
the final outcome of the environmental liability, the final outcome of the
Company's litigation with its former landlord, the final outcome of the Federal
Trade Commission investigation, the effects of terrorist attacks, war and the
economy on the Company's business, expected increases in operating efficiencies,
anticipated trends in the accounts receivable management industry, estimates of
future cash flows of purchased accounts receivable, estimates of goodwill
impairments and amortization expense of other intangible assets, the effects of
legal or governmental proceedings, the effects of changes in accounting
pronouncements, and statements as to trends or the Company's or management's
beliefs, expectations and opinions. Forward-looking statements are subject to
risks and uncertainties and may be affected by various factors that may cause
actual results to differ materially from those in the forward-looking
statements. In addition to the factors discussed in this report, certain risks,
uncertainties and other factors, including, without limitation, the risk that
the Company will not be able to achieve expected future results of operations,
the risk that the Company will not be able to implement its growth strategy as
and when planned, risks associated with the acquisition of RMH and the minority
interest of NCO Portfolio and their operations, 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,
risks related to the final outcome of the environmental liability, risks related
to the final outcome of the Company's litigation with its former landlord, risks
related to the final outcome of the Federal Trade Commission investigation,
risks related to the Company's litigation, regulatory investigations and tax
examinations, risks related to past or possible future terrorist attacks, risks
related to the threat or outbreak of war or hostilities, risks related to the
domestic and international economy, risks related to the Company's international
operations, 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.
The Company disclaims any intent or obligation to publicly update or revise
any forward-looking statements, regardless of whether new information becomes
available, future developments occur or otherwise.
-1-
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 composed 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
77 centers.
Our website is www.ncogroup.com. We make available on our website, free of
charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports, filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably
practicable after such material is electronically filed with or furnished to the
SEC.
In addition, we will provide, at no cost, paper or electronic copies of our
reports and other filings (excluding exhibits) made with the SEC. Requests
should be directed to:
NCO Group, Inc.
507 Prudential Road
Horsham, PA 19044
Attention: Steven L. Winokur, Executive Vice President, Finance;
Chief Financial Officer; Chief Operating Officer
of Shared Services; and Treasurer
The information on the website listed above, is not and should not be
considered part of this annual report on Form 10-K and is not incorporated by
reference in this document. This website is and is only intended to be an
inactive textual reference.
Industry Background
Increasingly, companies are outsourcing many noncore 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 collections. 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.
-2-
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 noncore 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. The primary market sectors within our industry are financial
services, healthcare, and retail and commercial. Other important market sectors
include telecommunications, utilities, education, 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 privacy and quality standards demanded by businesses
seeking to outsource their accounts receivable management function.
Strategy
Our strategy is to transition into a global provider of business process
outsourcing services while maintaining our market dominance as a global provider
of accounts receivable management and collection services. Our strategy to
achieve these objectives includes the following elements:
Expand our relationships with clients - A significant amount of our growth
stems from the expansion of existing client relationships. These relationships
and the 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 2001, 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;
o leveraging our purchasing power; and
o leveraging foreign labor.
-3-
Business Process Improvements - We continually develop and enhance our
technology and infrastructure with initiatives that improve the efficiency of
our operations and enhance client service. Examples of recent initiatives
include:
o Online access for subcontractor agencies: Leveraging the technology put
in place to service our Attorney Network System (NCOeForwardEase), which brings
us online with over 80 attorneys from across the United States, we have expanded
this system to also support the needs of data exchange with other agencies we
utilize to service accounts. These agencies are now able to receive, process,
and return updates for all forwarded accounts using the latest web server
technology.
o Quality control over client data exchange: We have continued to enhance a
proprietary software product that tracks both the client inbound files and the
client remittance files. This system now incorporates all the features for both
quality and production control.
o Web-enabled electronic bill payment for our clients and their customers:
We have developed web-based platforms that process real-time credit card
authorizations and electronic bank draft payments that are then applied to
customer accounts on the client's billing system. The system is available to the
clients' employees inside their own call centers and to their customers for
self-service over the Internet.
o Improved client host integration: We continue to see increased efficiency
gains by integrating and automating client host connections and their associated
workflows utilizing the NCO ACCESS Interface Manager. Our representatives are
able to work on our systems and the client systems together from a single
interface that is common across all call centers, yet customized to accommodate
each client's workflow. This delivers benefits including a reduction in project
ramp-up time, a reduction in training costs, and an overall increase in account
representative productivity.
o On-going business process reengineering: We continue to drive improved
performance and reduced cost through our on-going focus on business process
improvement. Through the deployment of enhanced imaging technology we will
continue to reduce the dependency on paper-driven processes and give us the
flexibility to complete these administrative tasks at any location, on-shore,
near-shore, or off-shore.
o Technology support center: This industry-leading IT Infrastructure
monitoring and management system provides graphical displays and a notification
system that rapidly alerts trained staff to potential business-impacting
problems. In many cases, the staff is alerted before the end-user community is
affected. This industry innovation allows us to combine the classic IT Help Desk
and the first and second levels of systems and network administration roles to
provide maximized return on investment, increased quality of end-user support,
and a single point of information coordination and dissemination to our end
users, IT engineers and business management.
o Enhanced data security: We continue to deploy both physical and system
security enhancements to help ensure ongoing protection and privacy of NCO and
client data as well network and systems hardening.
-4-
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 develop access to lower-cost
foreign labor. We operate in Canada and the United Kingdom through wholly owned
subsidiaries and we 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. These types of alliances enhance our service offerings as well as
increase the awareness of NCO as a global provider of accounts receivable
management and collection services.
In addition to providing services to these core markets, we also provide
our domestic clients with a cost-effective option of using such foreign labor
markets as Canada, India and Barbados to provide effective services. We
currently have approximately 1,100, 450 and 80 telephone representatives working
in Canada, India and Barbados for our U.S. clients, respectively. We are in the
process of expanding our presence in India and Barbados as well as exploring new
opportunities in other labor markets such as Australia, Eastern Europe, Central
America and the Caribbean.
Continued 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. Under the terms of our credit agreement, our investment
in NCO Portfolio currently is limited to $50.0 million. In order to take
advantage of larger purchase opportunities without increasing its exposure to
individual portfolios, NCO Portfolio entered into a four-year financing
agreement with CFSC Capital Corp. XXXIV ("Cargill") in August 2002. The
agreement stipulates that all purchases of accounts receivable by NCO Portfolio
with a purchase price in excess of $4.0 million must be first offered to Cargill
for the opportunity to finance. Cargill, at its sole discretion, has the right
to refuse to finance any of the purchased accounts receivable. Borrowings under
this financing agreement are nonrecourse to us and NCO Portfolio but are
collateralized by the accounts receivable purchased through Cargill and
cross-collateralized with all other accounts receivable purchases financed by
Cargill.
As of December 31, 2003, NCO Portfolio had an investment of $4.0 million
for its 50 percent ownership interest in a joint venture, InoVision-MEDCLR NCOP
Ventures, LLC, referred to as the Joint Venture, with IMNV Holdings, LLC,
referred to as 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 percent of the value of the purchased accounts receivable to the Joint
Venture. The debt is cross-collateralized by all portfolios in which the lender
participates and is nonrecourse 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, NCO Portfolio will gain
access to capital while limiting both our and NCO Portfolio's exposure to credit
risk.
-5-
Continue to explore strategic acquisition opportunities - During 2002, we
completed the acquisitions of Great Lakes Collection Bureau, Inc. and The
Revenue Maximization Group, Inc.
On November 18, 2003, NCO and RMH Teleservices, Inc., referred to as RMH, a
provider of customer relationship management services, announced that they
entered into an agreement by which RMH would be merged with a wholly owned
subsidiary of NCO. Pursuant to the proposed merger, we would acquire RMH in a
transaction expected to be tax-free to the shareholders of RMH. Under the RMH
merger agreement, as amended, RMH's shareholders will receive 0.2150 shares of
NCO common stock for each share of RMH common stock. The transaction is subject
to a collar arrangement. It is anticipated that the Company will issue
approximately 3.4 million shares of NCO common stock to RMH's shareholders. It
is also anticipated that the Company will issue approximately 593,000 additional
shares of NCO common stock upon the exercise of currently outstanding options
and warrants to purchase RMH common stock to be assumed by the Company in the
merger. This acquisition is expected to be completed in April 2004. We believe
that RMH's customer relationship management services will enhance our ability to
provide a broader range of business process outsourcing services to our clients
in various industry sectors.
On December 15, 2003, NCO and NCO Portfolio announced that they entered
into an agreement by which NCO Portfolio would be merged with a wholly owned
subsidiary of NCO. We currently own approximately 63.3 percent of the
outstanding stock of NCO Portfolio and pursuant to the proposed merger would
acquire all NCO Portfolio shares that we do not own in a transaction expected to
be tax-free to the stockholders of NCO Portfolio. Michael J. Barrist, chairman
of the board, president and chief executive officer of NCO, also serves as
chairman of the board, president and chief executive officer of NCO Portfolio
and beneficially owns 2.8 percent of NCO Portfolio's outstanding common stock,
excluding stock options. Under the NCO Portfolio merger agreement, NCO
Portfolio's minority stockholders will receive 0.36187 of a share of NCO common
stock for each share of NCO Portfolio common stock. We will issue approximately
1.8 million shares of NCO common stock to NCO Portfolio's minority stockholders.
Under the NCO Portfolio merger agreement, if the average closing sale price of
NCO common stock for the 10 day trading period ending on the second day prior to
the closing date of the transaction were to be less than $21.50 per share, NCO
Portfolio would have the right to terminate the NCO Portfolio merger agreement
unless we were to agree to improve the exchange ratio so that the NCO Portfolio
minority stockholders receive that number of shares of NCO common stock with a
value equivalent to the $21.50 price, based on such 10 trading day average stock
price. We will also assume all outstanding NCO Portfolio stock options. This
transaction is expected to be completed in March 2004. We believe that the
combined company will be able to more effectively pursue, in a coordinated
manner, strategic growth opportunities and other expansion strategies, in part
due to improved integration and coordination between NCO Portfolio and us.
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 current focus is
on internal growth and the integration of the RMH and NCO Portfolio
acquisitions, we believe we will continue to find attractive acquisition
opportunities over time.
HIPAA compliance - During 2003, we completed the implementation of new
policies and procedures designed to ensure our continuing compliance with the
new standards for privacy, data security, and administrative simplification
under the Health Insurance Portability and Accountability Act of 1996, referred
to as HIPAA. We enhanced our data security programs, tested and upgraded, as
necessary, physical security at all healthcare service centers, and completed
the implementation of HIPAA privacy training for all healthcare staff. We
continued the rollout of HIPAA privacy practices as the "best practices" across
all of our business lines to ensure the protection and the confidentiality of
all clients' data.
-6-
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 also
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 70 percent 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 percent to 35 percent of the amounts
recovered on behalf of our clients. However, fees can range from six percent for
the management of accounts placed early in the accounts receivable cycle to 50
percent for accounts that have been serviced extensively by the client or by
third-party providers. Our average fee for contingency-based revenue across all
industries, excluding the long-term collection contract, was approximately 19
percent during 2003, 2002 and 2001.
Accounts receivable management and collection services typically include
the following activities:
Engagement 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 client's 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 client's customer, the notification process
can begin.
-7-
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 client's customers who cannot afford to pay at the current time.
This letter also serves as an official notification to each client's 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 client's 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 possible denial of future credit
often motivates the resolution of past due accounts.
Payment Process. After we receive payment from the client's customer,
depending on the terms of our contract with the client, we can either remit the
amount received minus our fee to the client or remit the entire amount received
to the client and subsequently bill the client for our services.
Activity Reports. Clients are provided with a system-generated set of
standardized or customized reports that fully describe all account activity and
current status. These reports are typically generated monthly; however, the
information included in the report and the frequency that the reports are
generated can be modified to meet the needs of the client.
Quality Tracking. We emphasize quality control throughout all phases of the
accounts receivable management and collection process. Some clients may specify
an enhanced level of supervisory review and others may request customized
quality reports. Large national credit grantors will typically have exacting
performance standards which require sophisticated capabilities, such as
documented complaint tracking and specialized software to track quality metrics
to facilitate the comparison of our performance to that of our peers.
Delinquency Management
We provide pre-charge-off delinquency management services that enable
clients to manage their at-risk customers and quickly restore the relationships
to a current payment status. We mail reminder letters and make first-party calls
to the clients' customers, reminding 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.
-8-
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 80 law firms whose
attorneys specialize in collection litigation. Our collection support staff
manages the attorney relationships and facilitates the transfer of all necessary
documentation.
NCOePayments. We can provide clients with a virtual 24-hour payment center
that is accessible by the use of telephones or the Internet.
Credit and Investigative Reporting Service. We develop the information
needed to profile commercial debtors and make decisions affecting extensions of
credit.
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 Manager. 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 Information Technology
staff is comprised of approximately 200 employees led by a Chief Information
Officer. We provide our services through the operation of 77 centers that are
electronically linked through an international wide area network, with the
exception of our two United Kingdom centers.
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 we maintain
comprehensive business interruption and critical systems insurance on our
telecommunications and computer systems. Our systems also permit network access
to enable clients to electronically communicate with us and monitor operational
activity on a real-time basis.
Our call centers utilize predictive dialers with over 5,200 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.
-9-
Sales and Marketing
Our sales force is organized into three functional groups to best match our
sales professionals' experience and expertise with the appropriate target
market. This cost-effective structure allows us to strategically allocate
resources corresponding to potential revenue and partnership opportunities.
The largest group consists of approximately 300 telephone sales
representatives who specialize in business-to-business accounts receivable
solutions for small to mid-sized companies.
Our core sales force, composed of approximately 70 sales professionals, is
organized by industry vertical and geographical location to ensure the highest
level of focus and service to potential and existing business partners. This
group specializes in direct sales efforts aimed at delivering customized
outsourced solutions primarily within the accounts receivable management market
space.
To help facilitate our successful entrance into the business process
outsourcing arena, we recently implemented an additional group responsible for
enterprise-wide sales efforts. This team consists of approximately 10 seasoned
sales veterans who focus on forming and cultivating strategic, long-term
partnerships with large, multinational firms in order to maximize outsourcing
opportunities via our full suite of accounts receivable and customer
relationship management services.
Our in-house marketing department provides innovative customer contact
solutions and sales support by performing a wide range of personalized services
such as customer database administration, advertising, marketing campaigns and
direct mailings, collateral development, trade show and site visit management,
market and competitive research, and more. They also maintain a dedicated team
of skilled writers who prepare detailed, professional responses to formal
requests for proposals and requests for information.
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 client 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 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.
-10-
Client Relationships
Our client base currently includes over 50,000 companies in the financial
services, healthcare, retail and commercial, telecommunications, utilities,
education and government sectors. Our 10 largest clients in 2003 accounted for
approximately 31 percent of our revenue. In 2003, our largest client accounted
for 10.3 percent of total revenue. No other client accounted for more than 10
percent of total revenue. In 2003, we derived 40.0 percent of our revenue,
excluding purchased accounts receivable, from financial services (which included
the banking and insurance sectors), 23.2 percent from healthcare organizations,
13.7 percent from retail and commercial entities, 10.2 percent from
telecommunications companies, 7.3 percent from utilities, 4.7 percent from
educational organizations, and 0.9 percent from government entities.
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.
We have a long-term collection contract with a large client to provide
collection services. We receive a base service fee based on collections. We also
earn a bonus to the extent collections are in excess of the guarantees. We are
required to pay the client, subject to limits, if collections do not reach the
guarantees. Any guarantees in excess of the limits will only be satisfied with
future collections. We are entitled to recoup at least 90 percent of any such
guarantee payments from subsequent collections in excess of any remaining
guarantees.
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 collections or with experience as telephone
representatives. We generally offer internal promotion opportunities and
competitive compensation and benefits.
All of 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, 2003, we had a total of approximately 8,300 full-time
employees and 700 part-time employees, of which 7,400 are telephone
representatives. As of December 31, 2003, we also utilized 450 and 80 telephone
representatives through a subcontractor in India and Barbados, respectively. Our
employees are not represented by a labor union. We believe that our relations
with our employees are good.
-11-
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 in the United
States 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.
We provide services to healthcare clients, which as providers of healthcare
services are considered "covered entities" under Health Insurance Portability
and Accountability Act of 1996, referred to as HIPAA. As covered entities, our
clients must comply with the new standards for privacy, transaction and code
sets, and data security. Under HIPAA, we have been deemed to be a "business
associate", which requires that we protect the security and privacy of
"protected health information" provided to us by our clients for the collection
of payments for healthcare services. In 2003, we implemented HIPAA compliance
training and awareness programs for our healthcare service employees. We also
have undertaken an ongoing process to test data security at all relevant levels.
In addition, we reviewed physical security at all healthcare operation centers
and, as appropriate, upgraded or added security systems to control access to all
work areas.
-12-
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 conduct 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 that have 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 various
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 comply with all federal and
state regulatory requirements. We believe that we are in material compliance
with all such regulatory requirements.
Segment and Geographical Financial Information
See note 20 in our Notes to Consolidated Financial Statements for
disclosure of financial information regarding our segments and geographic areas.
-13-
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
---------- ---------------------- ---------------- -------------------
The Revenue Maximization 12/9/02 A/R Management $ 17,500(1) $ 24,648
Group, Inc.
Great Lakes Collection Bureau, Inc. 8/19/02 A/R Management and 33,000(2) 52,250
Purchased A/R
Creditrust Corporation 2/20/01 Purchased A/R 25,000(3) 36,491
Compass International Services 8/20/99 A/R Management and 104,100 105,800(4)
Corporation Telemarketing
Co-Source Corporation 5/21/99 A/R Management 124,600 61,100
JDR Holdings, Inc. 3/31/99 A/R Management and 103,100 51,000
Telemarketing
Medaphis Services Corporation 11/30/98 A/R Management 117,500 96,700
MedSource, Inc. 7/1/98 A/R Management 35,700(5) 22,700
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) Includes $889,000 of debt repaid by us.
(2) NCO Group, Inc. acquired the net assets and the results of operations for
$10.1 million, and NCO Portfolio Management, Inc. acquired the purchased
accounts receivable for $22.9 million.
(3) We merged our subsidiary NCO Portfolio Management, Inc. with Creditrust
Corporation. We own approximately 63 percent of the post-merger company.
(4) 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.
(5) Includes $17.3 million of debt repaid by us.
-14-
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.
Risks Related to Our Business
Decreases in our collections due to the economic condition in the United
States may have an adverse effect on our results of operations, revenue and
stock price.
Due to the economic condition in the United States, which has led to high
rates of unemployment and personal bankruptcy filings, the ability of consumers
to pay their debts has significantly decreased. Defaulted consumer loans that we
service or purchase are generally unsecured, and we may be unable to collect
these loans in case of the personal bankruptcy of a consumer. Because of higher
unemployment rates and bankruptcy filings, our collections may significantly
decline, which may adversely impact our results of operations, revenue and stock
price.
Terrorist attacks, war and threats of attacks and war may adversely impact
our results of operations, revenue and stock price.
Terrorist attacks, war and threats of attacks and war may adversely impact
our results of operations, revenue and stock price. Recent terrorist attacks in
the United States and on United States targets abroad, 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 adversely 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 an adverse effect on the economy of the United States. Any
of these occurrences could have a material adverse effect on our results of
operations, 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:
o our ability to retain existing clients and expand our existing client
relationships; and
o 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.
-15-
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.
Implementation of an enterprise resource planning system could cause business
interruptions and negatively affect our profitability and cash flows.
We are planning to begin the process of implementing an enterprise resource
planning, referred to as ERP, system in 2004 to improve customer service,
enhance operating efficiencies, and provide more effective management of
business operations. This implementation will enable us to better meet both the
changing standards of industry technology and the needs of our customer base.
Implementation of ERP systems and software carry risks such as cost overruns,
project delays, business interruptions and delays, and the diversion of
management's attention from operations. These risks could adversely affect us,
and could have a material adverse effect on our business, results of operations,
financial condition and cash flows.
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 record the results of our 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. Telecommunications
and computer technologies are changing rapidly and are characterized by short
product life cycles, so 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 could 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 terrorist acts,
natural disasters, power losses, or similar events. Our business is also
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 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.
-16-
Many of our clients are concentrated in the financial services and
healthcare sectors. If either 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, 2003, we derived approximately 40.0 percent
of our revenue, excluding purchased accounts receivable, from clients in the
financial services sector, and approximately 23.2 percent of our revenue from
clients in the healthcare sector. If either 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 we receive could decrease.
We have international operations and various factors relating to our
international operations could affect our results of operations.
We operate in Canada and the United Kingdom. Approximately 5.4% of our 2003
revenues were derived from Canada and the United Kingdom. Political or economic
instability in Canada or the United Kingdom could have an adverse impact on our
results of operations due to diminished revenues in these countries. Our future
revenue, costs of operations and profit results could be affected by a number of
factors related to our international operations, including changes in foreign
currency exchange rates, changes in economic conditions from country to country,
changes in a country's political condition, trade protection measures, licensing
and other legal requirements, and local tax issues.
Unanticipated currency fluctuations in the Canadian Dollar, British Pound
or Euro could lead to lower reported consolidated results of operations due to
the translation of these currencies into U.S. dollars when we consolidate our
financial results. In addition, NCO Group provides services to its U.S. clients
through call centers in India and Barbados. The employees of the call centers
are hired through a subcontractor. Any political or economic instability in
India or Barbados could have an adverse impact on NCO Group's results of
operations.
Most of our contracts do not require clients to place accounts with us, may
be terminated on 30 or 60 days notice and 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. Therefore, under applicable accounting principles, we
can recognize revenues only upon the collection of funds on behalf of clients.
-17-
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 $50.0 million. If
the value of our investment is impaired, it would have a material adverse
effect on us.
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. We depend on the services of Mr. Barrist and the
other members of our senior management team to, among other things, continue the
development and implementation of 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 or the business process
outsourcing business are not available at favorable prices due to increased
competition for these companies.
We may have to borrow money, incur liabilities, or sell or issue 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 have a
material adverse effect on 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.
-18-
Our employees are not represented by a labor union. If our employees
attempt to organize a labor union, and are successful, this could increase our
recruiting and training costs and could decrease our operating efficiency and
productivity.
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 U.S. 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 materially adversely affect us. In addition,
new federal, state or foreign laws or regulations, or changes in the ways these
rules or laws are interpreted or enforced, could limit our activities in the
future or significantly increase the cost of regulatory compliance. If we expand
our international operations, we may become subject to additional government
controls and regulations in other countries, which may be stricter or more
burdensome than those in the United States.
Several of the industries we serve 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 various 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.
-19-
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 routinely publicly announce investor guidance concerning our expected
results of operations. Our investor guidance contains forward-looking statements
and may be affected by various factors discussed in "Investment Considerations"
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.
If the acquisitions of RMH and the minority interest of NCO Portfolio are
completed, merger related accounting impairment and amortization charges might
reduce our profitability.
If the acquisitions of RMH and the minority interest of NCO Portfolio are
completed, under generally accepted accounting principles, the minority interest
component of the acquired assets and assumed liabilities of NCO Portfolio and
the acquired assets and assumed liabilities of RMH will be recorded on our books
at their fair values at the dates the respective mergers are completed. Any
excess of the value of the consideration paid by us at the date the merger is
completed over the fair value of the minority interest component of the
identifiable tangible and intangible assets of NCO Portfolio and over the fair
value of the identifiable tangible and intangible assets of RMH, including
customer lists for RMH, will be treated as excess of purchase price over the
fair value of net assets acquired (commonly known as goodwill). Goodwill is not
amortized for accounting purposes. However, the amounts allocable to certain
identifiable intangible assets, including customer lists, are amortized over
their respective useful lives. As a result, we may incur substantial accounting
amortization charges that will affect our profitability. In addition, if in the
future the book value of the goodwill is in excess of its fair value or we lose
a significant RMH client, we may need to record an impairment charge to reduce
goodwill or the customer list to its fair value.
Goodwill represented 53.5 percent of our total assets at December 31, 2003.
If the goodwill is deemed to be impaired, we may need to take a charge to
earnings to write-down the goodwill to its fair value.
Our balance sheet includes goodwill, which 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 adopted Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangibles," referred to as SFAS 142. As
a result of adopting SFAS 142, we no longer amortize goodwill. Goodwill must be
tested at least annually for impairment. The annual impairment test will be
completed as of October 1st of each year. The test for impairment uses a fair
value based approach, whereby if the implied fair value of a reporting unit's
goodwill is less than its carrying amount, goodwill would be considered
impaired. We make significant assumptions to estimate the future revenue and
cash flows used to determine the fair value of our reporting units. If the
expected revenue and cash flows are not realized or if a sustained significant
depression in our market capitalization indicates that our assumptions are not
accurately estimating our fair value, impairment losses may be recorded in the
future.
-20-
As of December 31, 2003, our balance sheet included goodwill that
represented 53.5 percent of total assets and 103.3 percent of shareholders'
equity. If the goodwill is deemed to be impaired under SFAS 142, we may need to
take a charge to earnings to write-down the goodwill to its fair value and this
could have a materially adverse effect on the market price of our common stock.
You should be aware that our earnings for periods beginning after December
31, 2001, do not include charges for the amortization of goodwill and you 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 to
and 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 terrorist attacks, war and threats of attacks and war;
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. Such volatility and decline have affected many
companies irrespective of, or disproportionately to, the operating performance
of these companies. These broad fluctuations may materially adversely affect the
market price of our common stock.
Most of our outstanding shares are available for resale in the public
market without restriction. The sale of a large number of these shares could
adversely affect our stock price and could impair our ability to raise capital
through the sale of equity securities or make acquisitions for stock.
Sales of our common stock could adversely affect the market price of our
common stock and could impair our future ability to raise capital through the
sale of equity securities or make acquisitions for stock. As of March 12, 2004,
there were 26,035,777 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 12, 2004, we had the authority to issue up to
approximately 4,691,793 shares of our common stock under our stock option plans.
We also had outstanding notes convertible into an aggregate of 3,797,084 shares
of our common stock at a conversion price of $32.92 per share. Additionally, we
had outstanding warrants to purchase approximately 21,762 shares of our common
stock.
-21-
If shareholders of RMH or stockholders of NCO Portfolio who receive our
common stock in the mergers sell that stock immediately, it could cause a
decline in the market price of our common stock.
If the acquisitions of RMH and the minority interest of NCO Portfolio are
completed at the anticipated exchange ratios, we will issue approximately 5.2
million shares of common stock and assume options to issue approximately 852,000
shares of common stock. All of these shares will be immediately available for
resale in the public market, except that shares issued in the RMH merger to RMH
shareholders who entered into lock up agreements with us and shares issued in
the mergers to shareholders who are affiliates of RMH or NCPM before the mergers
or who become affiliates of us after the merger, will be subject to certain
restrictions on transferability. As a result of future sales of such common
stock, or the perception that these sales could occur, the market price of our
common stock may decline and could decline significantly before or at the time
the mergers are completed or immediately thereafter. If this occurs, or if other
shareholders sell significant amounts of our common stock immediately after the
mergers are completed, these sales could cause a decline in the market price 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 up to 5,000,000 shares of 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 percent of
our common stock.
Risks Related to NCO Portfolio's Business.
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 are 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:
Collections may not be sufficient to recover the cost of investments in
purchased accounts receivable and support operations.
NCO Portfolio purchases past due 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, hospitals,
utilities, 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 uncollectable, 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, typically less than
10% of face value, to the amount the customer owes and, although NCO Portfolio
estimates 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 will vary and may be less than the amount expected, and may even be
less than the purchase price paid for such accounts. 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 may not be able to purchase new
accounts receivable 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 its debt or finance the purchase of
new accounts receivable.
-22-
NCO Portfolio uses estimates in reporting results. If collections on
portfolios are materially less than expected, NCO Portfolio may be required to
record impairment expenses that could have a materially adverse effect on NCO
Portfolio.
NCO Portfolio's revenue is recognized based on estimates of future
collections on portfolios of accounts receivable purchased. Although estimates
are based on analytics, the actual amount collected on portfolios and the timing
of those collections will differ from NCO Portfolio's estimates. If collections
on portfolios are materially less than estimated, NCO Portfolio may be required
to record impairment expenses that will reduce earnings and could materially
adversely affect its earnings, financial condition and creditworthiness.
NCO Portfolio may be adversely affected by possible shortages of available
accounts receivable for purchase at favorable prices.
The availability of portfolios of past due consumer 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 the type and quantity of past due 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.
NCO Portfolio may be unable to compete with other purchasers of past due
accounts receivable, which may have an adverse effect on our combined financial
results.
NCO Portfolio faces bidding competition in its acquisitions of portfolios
of past due consumer accounts receivable. Some of its existing competitors and
potential new competitors may have greater financial and other resources that
allow them to offer higher prices for the accounts receivable portfolios. New
purchasers of such portfolios entering the market also cause upward price
pressures. NCO Portfolio may not have the resources or ability to compete
successfully with its existing and potential new competitors. To remain
competitive, NCO Portfolio may have to increase its bidding prices, which may
have an adverse impact on our combined financial results.
-23-
Risks Related to RMH's Business
We have agreed to acquire RMH subject to conditions to closing. RMH is
engaged in the outsourced customer relationship management business, also
referred to as CRM. RMH has additional business risks that may have an adverse
effect on the combined company if that acquisition is completed. If any of the
following risks were to occur, RMH's business, financial condition or results of
operations could be materially harmed and this could in turn significantly
affect the value of our common stock after the merger with RMH.
RMH has incurred significant losses in recent years. If the acquisition of
RMH is completed, RMH's financial condition and results of operations could have
an adverse effect on us.
RMH incurred significant losses in fiscal 2003, 2002 and 2001 primarily as
a result of bad debt expenses, impairment and restructuring charges, a charge
associated with projected minimum purchase requirements under agreements with
telephone long distance carriers related to the migration from outbound to
inbound CRM services, underutilization of capacity, and unfavorable currency
exchange rates between the United States and Canada which have resulted in
higher operating costs in Canada to support clients in the United States. RMH
incurred a significant loss in the first quarter of fiscal 2004 primarily as a
result of a decline in billable hours resulting from the timing of telemarketing
campaigns, reductions in outsourcing associated with recent economic conditions,
the impact of the Do-Not-Call Implementation Act which resulted in a continued
decline in outbound customer relationship management services, and continued
unfavorable currency exchange rates between the United States and Canada. In
addition, RMH had a working capital deficit of $17,241,000 and $14,569,000 at
December 31, 2003 and September 30, 2003, respectively. The report of RMH's
independent auditors on its financial statements for the year ended September
30, 2003 states that RMH's recurring losses from operations, uncertainty
regarding the ability to remain in compliance with restrictive debt covenants
under the revolving credit facility, and uncertainty regarding the ability to
obtain additional financing to fund RMH's operations and capital requirements
raise substantial doubt about RMH's ability to continue as a going concern. If
the acquisition of RMH is completed, RMH's financial condition and results of
operations could have an adverse effect on us.
If we are not able to integrate RMH's operations into our business in a
timely manner, the anticipated benefits of the proposed acquisition of RMH may
not be realized in a timely fashion, or at all, and our existing business may be
adversely affected.
The success of the RMH acquisition will depend, in part, on our ability to
realize the anticipated revenue enhancements, growth opportunities and synergies
of combining with RMH and to effectively utilize the resources we will have
following the merger. The merger involves risks related to the integration and
management of acquired technology, operations and personnel. The integration of
RMH's business will be a complex, time-consuming and potentially expensive
process and may disrupt our business if not completed in a timely and efficient
manner. Some of the difficulties that may be encountered by us include:
o integration of administrative, financial, and information technology
efforts and resources and coordination of marketing and sales efforts;
o maintaining client relationships;
o the diversion of management's attention from other ongoing business
concerns; and potential conflicts between business cultures.
-24-
If our management focuses too much time, money and effort to integrate
RMH's operations and assets with ours, they may not be able to execute our
overall business strategy or realize the anticipated benefits of the merger with
RMH.
RMH relies on a few major clients for a significant portion of its
revenues. The loss of any of these clients or their failure to pay RMH could
reduce RMH's revenues and adversely affect RMH's results of operations.
Substantial portions of RMH's revenues are generated from a few key
clients. One client, MCI WORLDCOM Communications, Inc. and MCI WORLDCOM Network
Services, Inc., each a subsidiary of WorldCom, Inc. and collectively referred to
as MCI, accounted for 34.2% of RMH's net revenues in 2003. MCI accounted for
32.0% and 32.5% of RMH's net revenues in the first quarter of fiscal 2004 and
2003, respectively. In addition, two other clients each accounted for over 10%
of RMH's net revenues in 2003. Most of RMH's clients are not contractually
obligated to continue to use RMH's services at historic levels or at all. If any
of these clients were to significantly reduce the amount of services RMH
performs for them, fail to pay RMH, or terminate the relationship altogether,
RMH's revenues and business would be harmed.
On July 21, 2002, WorldCom, Inc. announced that it had filed for voluntary
relief under Chapter 11 of the United States Bankruptcy Code. While RMH
continued to provide services to MCI, these events create uncertainty about
RMH's future business relationship with MCI, which, if not resolved in a manner
favorable to RMH, could have a significant adverse impact on RMH's future
operating results and liquidity. In the event that RMH's business relationship
with MCI were to terminate, RMH's contracts with MCI call for certain wind-down
periods and the payment by RMH of certain termination fees, as defined in such
contracts, during which time RMH would seek new business volume. However,
replacing lost MCI business volume is subject to significant uncertainty, could
take substantially longer than the wind-down periods, and would be dependent on
a variety of factors which RMH's management cannot predict at this time.
A decrease in demand for RMH's services in one or more of the industries to
which RMH provides services could reduce RMH's revenues and adversely affect
RMH's results of operations.
RMH's success is dependent in large part on continued demand for its
services from businesses within the telecommunications, financial services,
insurance, technology and logistics industries. A reduction in or the
elimination of the use of outsourced CRM services within any of these industries
could harm RMH's business.
An increase in communication rates or a significant interruption in
communication service could harm RMH's business.
RMH's ability to offer services at competitive rates is highly dependent
upon the cost of communication services provided by various local and long
distance telephone companies. Any change in the telecommunications market that
would affect RMH's ability to obtain favorable rates on communication services
could harm RMH's business. Moreover, any significant interruption in
communication service or developments that could limit the ability of telephone
companies to provide RMH with increased capacity in the future could harm RMH's
existing operations and prospects for future growth.
-25-
Fluctuations in currency exchange rates could adversely affect RMH's
business.
A significant portion of RMH's business is conducted in Canada. RMH's
results of operations have been negatively impacted by the increase in the value
of the Canadian dollar in relation to the value of the U.S. dollar over the past
nine months, which has increased RMH's cost of doing business in Canada. Further
increases in the value of the Canadian dollar in relation to the value of the
U.S. dollar would further increase such costs and adversely affect RMH's results
of operations. In addition, RMH expects to expand its operations into other
countries and, accordingly, will face similar exchange rate risk with respect to
the costs of doing business in such countries as a result of any increases in
the value of the U.S. dollar in relation to the currencies of such countries.
There is no guarantee that RMH will be able to successfully hedge its foreign
currency exposure in the future.
RMH may not be able to effectively win business against its competition.
The CRM services industry is highly competitive. RMH competes with:
o the in-house CRM operations of its clients or potential clients;
o other outsourced CRM providers, some of which have greater resources than
RMH has; and
o providers of other marketing and CRM formats and, in particular, other
forms of direct marketing such as interactive shopping and data
collection through television, the internet and other media.
Many businesses that are significant consumers of CRM services use more
than one CRM services firm at a time and reallocate work among various firms
from time to time. RMH and other firms seeking to perform outsourced CRM
services are frequently required to compete with each other as individual
programs are initiated. RMH cannot be certain that it will be able to compete
effectively against its current competitors or that additional competitors, some
of which may have greater resources than RMH has, will not enter the industry
and compete effectively against it. As competition in the industry increases,
RMH may face increasing pressure on the prices for its services. RMH will face
continued pricing pressure as its competitors migrate call centers to lower cost
labor markets.
Consumer resistance to outbound services could harm the customer
relationship management services industry.
As the CRM services industry continues to grow, the effectiveness of CRM
services as a direct marketing tool may decrease as a result of consumer
saturation and increased consumer resistance to customer acquisition activities,
particularly direct sales.
Government regulation of the customer relationship management industry and
the industries RMH serves may increase RMH's costs and restrict the operation
and growth of RMH's business.
The CRM services industry is subject to an increasing amount of regulation
in the United States and Canada. Most of the statutes and regulations in the
United States allow a private right of action for the recovery of damages or
provide for enforcement by the Federal Trade Commission, state attorneys general
or state agencies permitting the recovery of significant civil or criminal
penalties, costs and attorneys' fees in the event that regulations are violated.
The Canadian Radio-Television and Telecommunications Commission enforces rules
regarding unsolicited communications using automatic dialing and announcing
devices, live voice and fax. If the acquisition of RMH is completed, we cannot
assure you that RMH will be in compliance with all applicable regulations at all
times. We also cannot assure you that new laws, if enacted, will not adversely
affect or limit RMH's current or future operations.
-26-
Several of the industries served by RMH, particularly the insurance,
financial services and telecommunications industries, are subject to government
regulation. RMH could be subject to a variety of private actions or regulatory
enforcement for RMH's failure or the failure of RMH's clients to comply with
these regulations. RMH's results of operations could be adversely impacted if
the effect of government regulation of the industries RMH serves is to reduce
the demand for RMH's services or expose RMH to potential liability. RMH and its
employees who sell insurance products are required to be licensed by various
state insurance commissions for the particular type of insurance product sold
and to participate in regular continuing education programs. RMH's participation
in these insurance programs requires RMH to comply with certain state
regulations, changes in which could materially increase RMH's operating costs
associated with complying with these regulations.
RMH may be unable to hire or retain qualified personnel.
By its nature, RMH's industry is labor intensive. CRM representatives, who
make up a significant portion of RMH's workforce, generally receive modest
hourly wages. RMH's recruiting and training costs are increased and RMH's
operating efficiency and productivity are decreased by:
o any increases in hourly wages, costs of employee benefits or employment
taxes;
o the high turnover rate experienced in RMH's industry;
o the high degree of training necessary for some of RMH's CRM service
offerings, particularly insurance product customer acquisition and
technology customer service;
o RMH's rapid growth; and
o competition for qualified personnel with other CRM service firms and with
other employers in labor markets in which RMH's customer interaction
centers are located.
Additionally, some of RMH's employees have attempted to organize a labor
union, which, if successful, could further increase RMH's recruiting and
training costs and could further decrease RMH's operating efficiency and
productivity. RMH may not be able to continue to cost-effectively recruit, train
and retain a sufficient number of qualified personnel to meet the needs of RMH's
business or to support RMH's growth. If RMH is unable to do so, RMH's results of
operations could be harmed.
Item 2. Properties.
We currently lease 66 offices in the United States, including our corporate
headquarters, eight offices in Canada, two offices in the United Kingdom, and
one office in Puerto Rico. The leases of these facilities expire between 2004
and 2016, and most contain renewal options.
We believe that our facilities are adequate for our current operations, but
additional facilities may be required to support growth. We believe that
suitable additional or alternative space will be available as needed on
commercially reasonable terms.
-27-
Item 3. Legal Proceedings.
In October 2003, we were notified by the Federal Trade Commission ("FTC")
that it intends to pursue a claim against us for violations of the Fair Credit
Reporting Act ("FCRA") relating to certain aspects of our credit reporting
practices during 1999 and 2000.
The allegations relate primarily to a large group of consumer accounts from
one client that were transitioned to us for servicing during 1999. We received
incorrect information from the prior service provider at the time of transition.
We became aware of the incorrect information during 2000 and ultimately removed
the incorrect information from the consumers' credit files. We have currently
negotiated a tentative settlement of this matter with the FTC, although no
assurance can be given that a settlement will be reached. In the event that we
are required to pay an assessment, we may assert certain claims for
indemnification from the owners of the consumer accounts.
We are also a party to a class action litigation regarding this group of
consumer accounts. A tentative settlement of the class action litigation has
been agreed to and is subject to court approval. We believe that the class
action litigation is covered by insurance, subject to applicable deductibles.
The FTC is also alleging that certain reporting violations occurred on a
small subset of our purchased accounts receivable.
We believe that the resolution of the above matters will not have a
material adverse effect on our financial position, results of operations or
business.
In June 2001, the first floor of our Fort Washington, Pennsylvania,
headquarters was severely damaged by a flood caused by remnants of Tropical
Storm Allison. As previously reported, during the third quarter of 2001, we
decided to relocate our corporate headquarters to Horsham, Pennsylvania. We
filed a lawsuit in the Court of Common Pleas, Montgomery County, Pennsylvania
(Civil Action No. 01-15576) against the current landlord and the former landlord
of the Fort Washington facilities to terminate the leases and to obtain other
relief. The landlord and former landlord have filed counter-claims against us.
Due to the uncertainty of the outcome of the lawsuit, we recorded the full
amount of rent due under the remaining terms of the leases during the third
quarter of 2001.
In January 2004, the Court, in ruling on the preliminary objections,
allowed the former landlord defendants' suit to proceed, but struck from the
complaint the allegations against our individual officers. Therefore, the
litigation will proceed in its course with the current landlord, the former
landlord and us as parties.
We are involved in other legal proceedings, regulatory investigations and
tax examinations from time to time in the ordinary course of its business.
Management believes that none of these other legal proceedings, regulatory
investigations or tax examinations 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.
-28-
Item 4.1 Executive Officers of the Registrant who are not Directors.
Name Age Position
- --------------------------------------- -------- ------------------------------------------------
Paul J. Burkitt........................ 42 Executive Vice President, Sales and Marketing
Charles F. Burns....................... 43 Executive Vice President, Business Process
Outsourcing
Stephen W. Elliott..................... 42 Executive Vice President, Information
Technology and Chief Information Officer
Joshua Gindin, Esq..................... 47 Executive Vice President and General Counsel
Steven Leckerman....................... 51 Executive Vice President, U.S. Operations
Paul E. Weitzel, Jr.................... 45 Executive Vice President, Corporate
Development and International Operations
Steven L. Winokur...................... 44 Executive Vice President, Finance; Chief
Financial Officer; Chief Operating Officer of
Shared Services; and Treasurer
Albert Zezulinski...................... 56 Executive Vice President, Corporate and
Government Affairs
Paul J. Burkitt - Mr. Burkitt joined us in 2003 as Executive Vice
President, Sales and Marketing. Mr. Burkitt has nearly 20 years of sales
experience. Prior to joining us, Mr. Burkitt was Executive Vice President of
Sales for RMH Teleservices, Inc., a provider of customer relationship management
services. In September 2003, in connection with an investigation by the SEC into
trading in the securities of RMH in 2001, Mr. Burkitt, without admitting or
denying the SEC's allegations of securities laws violations, agreed to pay a
civil penalty of $33,987 and to the entry of a final judgment permanently
enjoining him from violating Section 17(a) of the Securities Act of 1933 and
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder.
Charles F. Burns - Mr. Burns joined us in 2003 as Executive Vice President,
Business Process Outsourcing. Mr. Burns has nearly 20 years of sales and
consulting experience. Prior to joining us, Mr. Burns was a partner in
BearingPoint, Inc., formerly KPMG Consulting, Inc., a business systems
integrator and full-service consulting firm.
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.
-29-
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 had
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 collection company that was a division of TransUnion
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. from 1997 through the acquisition.
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 as Executive
Vice President, Finance and Chief Financial Officer, and also became Chief
Operations Officer of Shared Services in August 2003. Prior to that, Mr. Winokur
acted as a part-time consultant to us since 1986. From February 1992 to December
1995, Mr. Winokur was the principal of Winokur & Associates, a certified public
accounting firm. From March 1981 to February 1992, Mr. Winokur was with Gross &
Company, a certified public accounting firm, where he most recently served as
Administrative Partner. Mr. Winokur is a Certified Public Accountant.
Albert Zezulinski - Mr. Zezulinski joined us in January 2001 as Executive
Vice President, Health Services and became Executive Vice President, Corporate
and Government Affairs in May 2002. Mr. Zezulinski has more than 30 years of
consulting and healthcare experience. Prior to joining us, Mr. Zezulinski was
the Director of Healthcare Financial Services for BDO Seidman, LLP, an
international accounting and consulting firm.
-30-
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
Our 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 sale prices for our common stock, as reported by Nasdaq.
High Low
---- ---
2002
First Quarter $ 29.75 $ 18.30
Second Quarter 29.19 20.61
Third Quarter 22.55 11.33
Fourth Quarter 16.80 10.56
2003
First Quarter $ 17.15 $ 12.55
Second Quarter 20.43 14.50
Third Quarter 26.00 17.14
Fourth Quarter 26.18 20.63
On March 12, 2004, the last reported sale price of our common stock as
reported on The Nasdaq National Market was $23.12 per share. On March 12, 2004,
there were approximately 92 holders of record of our common stock.
Dividend Policy
We have never declared or paid cash dividends on our common stock, and 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.
Equity Compensation Plan
See Part III, Item 12, of this Annual Report on Form 10-K for disclosure
regarding our equity compensation plans.
-31-
Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA (1)
(Amounts in thousands, except per share data)
For the years ended December 31,
------------------------------------------------------------------------
1999 2000 2001 (2) 2002 2003
--------- --------- --------- --------- ---------
Statement of Income Data:
Revenue $ 460,311 $ 587,452 $ 683,873 $ 703,450 $ 753,816
Operating costs and expenses:
Payroll and related expenses 237,709 293,292 350,634 335,405 350,369
Selling, general and administrative expenses 128,177 179,924 237,690 249,672 282,268
Depreciation and amortization expense 21,805 32,360 38,205 27,324 31,628
Nonrecurring acquisition costs 4,601 - - - -
--------- --------- --------- --------- ---------
Income from operations 68,019 81,876 57,344 91,049 89,551
Other income (expense) (16,899) (22,126) (23,335) (17,970) (17,943)
--------- --------- --------- --------- ---------
Income before provision for income taxes 51,120 59,750 34,009 73,079 71,608
Income tax expense 22,821 24,572 14,661 27,702 26,732
--------- --------- --------- --------- ---------
Income from continuing operations before
minority interest 28,299 35,178 19,348 45,377 44,876
Minority interest - - (4,310) (3,218) (2,430)
--------- --------- --------- --------- ---------
Income from continuing operations 28,299 35,178 15,038 42,159 42,446
Accretion of preferred stock to redemption value (377) - - - -
--------- --------- --------- --------- ---------
Income from continuing operations applicable
to common shareholders 27,922 35,178 15,038 42,159 42,446
Discontinued operations, net of taxes:
Income (loss) from discontinued operations 1,067 (975) - - -
Loss on disposal of discontinued operations - (23,179) - - -
--------- --------- --------- --------- ---------
Net income applicable to common shareholders $ 28,989 $ 11,024 $ 15,038 $ 42,159 $ 42,446
========= ========= ========= ========= =========
Income from continuing operations applicable to
common shareholders per share:
Basic