Attached files

file filename
EX-12 - EX-12 - NCO Group, Inc.a11-9477_1ex12.htm
EX-32.2 - EX-32.2 - NCO Group, Inc.a11-9477_1ex32d2.htm
EX-31.2 - EX-31.2 - NCO Group, Inc.a11-9477_1ex31d2.htm
EX-31.1 - EX-31.1 - NCO Group, Inc.a11-9477_1ex31d1.htm
EX-32.1 - EX-32.1 - NCO Group, Inc.a11-9477_1ex32d1.htm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark one)

 

x  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2011

 

or

 

o   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                     to                     

 

Commission File Numbers 333-173514; 333-165975; 333-158745; 333-150885

 

NCO GROUP, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

02-0786880

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

507 Prudential Road, Horsham, Pennsylvania

 

19044

(Address of principal executive offices)

 

(Zip Code)

 

215-441-3000

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

The number of shares outstanding of each of the issuer’s classes of common stock as of May 13, 2011 was: 2,960,847 shares of Class A common stock, $0.01 par value and 399,814 shares of Class L common stock, $0.01 par value.

 

 

 



Table of Contents

 

NCO GROUP, INC.

 

INDEX

 

 

 

 

 

 

PAGE

 

 

 

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

 

FINANCIAL STATEMENTS (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets - March 31, 2011 and December 31, 2010

 

1

 

 

 

 

 

 

 

 

 

Consolidated Statements of Operations - Three Months Ended March 31, 2011 and 2010

 

2

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows - Three Months Ended March 31, 2011 and 2010

 

3

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

4

 

 

 

 

 

 

 

Item 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

25

 

 

 

 

 

 

 

Item 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

32

 

 

 

 

 

 

 

Item 4.

 

CONTROLS AND PROCEDURES

 

32

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

 

LEGAL PROCEEDINGS

 

33

 

 

 

 

 

 

 

Item 1A.

 

RISK FACTORS

 

33

 

 

 

 

 

 

 

Item 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

33

 

 

 

 

 

 

 

Item 3.

 

DEFAULTS UPON SENIOR SECURITIES

 

33

 

 

 

 

 

 

 

Item 4.

 

[REMOVED AND RESERVED]

 

33

 

 

 

 

 

 

 

Item 5.

 

OTHER INFORMATION

 

33

 

 

 

 

 

 

 

Item 6.

 

EXHIBITS

 

34

 

 

 

 

 

 

SIGNATURES

 

35

 



Table of Contents

 

Part I. Financial Information

Item 1. Financial Statements

 

NCO GROUP, INC.

Consolidated Balance Sheets

(Unaudited)

(Amounts in thousands, except per share amounts)

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents (includes cash and cash equivalents of consolidated variable interest entities: 2011, $623; 2010, $357)

 

$

25,397

 

$

33,077

 

Accounts receivable, trade, net of allowance for doubtful accounts of $4,838 and $5,796, respectively

 

171,867

 

171,350

 

Purchased accounts receivable, current portion, net of allowance for impairment of $157,250 and $158,694, respectively (includes purchased accounts receivable of consolidated variable interest entities: 2011, $6,554; 2010, $8,307)

 

23,173

 

29,683

 

Deferred income taxes

 

9,112

 

9,084

 

Prepaid expenses and other current assets

 

66,679

 

51,538

 

Total current assets

 

296,228

 

294,732

 

 

 

 

 

 

 

Funds held on behalf of clients (note 7)

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

96,110

 

99,089

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

Goodwill

 

480,876

 

480,757

 

Trade name, net of accumulated amortization

 

83,407

 

83,508

 

Customer relationships and other intangible assets, net of accumulated amortization

 

179,076

 

195,071

 

Purchased accounts receivable, net of current portion (includes purchased accounts receivable of consolidated variable interest entities: 2011, $8,502; 2010, $13,973)

 

26,735

 

48,924

 

Deferred income taxes

 

4,494

 

4,249

 

Other assets

 

32,224

 

31,383

 

Total other assets

 

806,812

 

843,892

 

Total assets

 

$

1,199,150

 

$

1,237,713

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Long-term debt, current portion

 

$

15,688

 

$

22,124

 

Income taxes payable

 

4,423

 

4,662

 

Accounts payable

 

20,548

 

19,787

 

Accrued expenses (includes accrued expenses of consolidated variable interest entities: 2011, $600; 2010, $666)

 

97,989

 

91,280

 

Accrued compensation and related expenses

 

46,081

 

36,578

 

Deferred revenue, current portion

 

30,644

 

31,299

 

Deferred income taxes

 

1,181

 

1,158

 

Total current liabilities

 

216,554

 

206,888

 

 

 

 

 

 

 

Funds held on behalf of clients (note 7)

 

 

 

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

Long-term debt, net of current portion

 

852,936

 

867,229

 

Deferred income taxes (includes deferred income taxes of consolidated variable interest entities: 2011, $2,134; 2010, $2,135)

 

47,184

 

45,763

 

Deferred revenue, net of current portion

 

658

 

696

 

Other long-term liabilities

 

37,017

 

30,211

 

 

 

 

 

 

 

Commitments and contingencies (note 13)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, par value $0.01 per share, 7,500 shares authorized, 3,753 and 3,626 shares issued and outstanding, respectively

 

38

 

36

 

Class L common stock, par value $0.01 per share, 800 shares authorized, 400 shares issued and outstanding

 

4

 

4

 

Class A common stock, par value $0.01 per share, 4,500 shares authorized, 2,961 shares issued and outstanding

 

30

 

30

 

Additional paid-in capital

 

764,646

 

764,535

 

Accumulated other comprehensive income

 

6,989

 

5,043

 

Accumulated deficit

 

(730,433

)

(689,242

)

Total NCO Group, Inc. stockholders’ equity

 

41,274

 

80,406

 

Noncontrolling interests

 

3,527

 

6,520

 

Total stockholders’ equity

 

44,801

 

86,926

 

Total liabilities and stockholders’ equity

 

$

1,199,150

 

$

1,237,713

 

 

See accompanying notes.

 

1



Table of Contents

 

NCO GROUP, INC.

Consolidated Statements of Operations

(Unaudited)

(Amounts in thousands)

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Services

 

$

298,444

 

$

322,926

 

Portfolio

 

(8,654

)

16,297

 

Reimbursable costs and fees

 

84,933

 

84,346

 

Total revenues

 

374,723

 

423,569

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

Payroll and related expenses

 

169,137

 

186,268

 

Selling, general and administrative expenses

 

101,901

 

111,532

 

Reimbursable costs and fees

 

84,933

 

84,346

 

Depreciation and amortization expense

 

26,049

 

27,730

 

Restructuring charges

 

12,176

 

1,434

 

Total operating costs and expenses

 

394,196

 

411,310

 

 

 

 

 

 

 

(Loss) Income from operations

 

(19,473

)

12,259

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest and investment income

 

99

 

88

 

Interest expense

 

(21,828

)

(23,601

)

Other expense, net

 

(194

)

(44

)

Total other income (expense)

 

(21,923

)

(23,557

)

Loss before income taxes

 

(41,396

)

(11,298

)

 

 

 

 

 

 

Income tax expense

 

1,905

 

3,040

 

 

 

 

 

 

 

Net loss

 

(43,301

)

(14,338

)

 

 

 

 

 

 

Less: Net (loss) income attributable to noncontrolling interests

 

(2,110

)

934

 

 

 

 

 

 

 

Net loss attributable to NCO Group, Inc.

 

$

(41,191

)

$

(15,272

)

 

See accompanying notes.

 

2



Table of Contents

 

NCO GROUP, INC

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(43,301

)

$

(14,338

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

26,049

 

27,730

 

Provision for doubtful accounts

 

(273

)

384

 

Recoveries of purchased accounts receivable

 

(1,469

)

(1,446

)

Write-down of purchased accounts receivable

 

18,575

 

 

Noncash interest

 

2,476

 

1,673

 

Noncash net (gains) losses on derivative instruments

 

(338

)

545

 

Deferred income taxes

 

458

 

1,079

 

Other

 

1,867

 

797

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, trade

 

(75

)

(407

)

Accounts payable and accrued expenses

 

17,228

 

13,902

 

Income taxes payable

 

(303

)

5,259

 

Other assets and liabilities

 

(8,870

)

1,946

 

Net cash provided by operating activities

 

12,024

 

37,124

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of accounts receivable

 

(340

)

(5,830

)

Collections applied to principal of purchased accounts receivable

 

11,991

 

20,829

 

Purchases of property and equipment

 

(7,337

)

(5,958

)

Other

 

673

 

20

 

Net cash provided by investing activities

 

4,987

 

9,061

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Repayment of notes payable

 

(459

)

(4,413

)

Net repayment of borrowings under revolving credit facility

 

(5,000

)

(17,000

)

Repayment of borrowings under senior term loan

 

(15,458

)

(25,803

)

Payment of fees related to debt

 

(2,734

)

(2,597

)

Return of investment in subsidiary to noncontrolling interests

 

(883

)

(1,264

)

Net cash used in financing activities

 

(24,534

)

(51,077

)

 

 

 

 

 

 

Effect of exchange rate on cash

 

(157

)

(229

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(7,680

)

(5,121

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of the period

 

33,077

 

39,221

 

 

 

 

 

 

 

Cash and cash equivalents at end of the period

 

$

25,397

 

$

34,100

 

 

See accompanying notes.

 

3



Table of Contents

 

NCO GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

1.              Nature of Operations:

 

NCO Group, Inc. is a holding company and conducts substantially all of its business operations through its subsidiaries (collectively, the “Company” or “NCO”). NCO is an international provider of business process outsourcing solutions, primarily focused on accounts receivable management (“ARM”) and customer relationship management (“CRM”). NCO provides services through over 100 offices throughout North America, Asia, Europe and Australia. The Company provides services to more than 14,000 active clients, including many of the Fortune 500, supporting a broad spectrum of industries, including financial services, telecommunications, healthcare, retail and commercial, utilities, education and government, technology and transportation/logistics services. These clients are primarily located throughout North America, Europe and Australia. Excluding reimbursable costs and fees, the Company’s largest client during the three months ended March 31, 2011, was in the telecommunications sector and represented 6.5 percent of the Company’s consolidated revenue for the three months ended March 31, 2011.

 

Historically, the Company’s Portfolio Management business has also purchased and collected past due consumer accounts receivable from consumer creditors. Beginning in 2009, the Company significantly reduced its purchases of accounts receivable and made a decision to minimize further investments in the future. This decision resulted from declines in liquidation rates, competition for purchased accounts receivable and the continued uncertainty of collectability, as well as potential regulatory changes affecting the purchased accounts receivable business.

 

The Company’s business consists of three operating segments: ARM, CRM and Portfolio Management.

 

2.              Accounting Policies:

 

Principles of Consolidation:

 

The consolidated financial statements include the accounts of the Company and all subsidiaries and entities controlled by the Company. All intercompany accounts and transactions have been eliminated.

 

The Company also considers whether any of its investments represent a variable interest entity (“VIE”) that is required to be consolidated by the primary beneficiary. The primary beneficiary is the entity that has both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. A VIE is an entity for which the primary beneficiary’s interest in the entity can change with changes in factors other than the amount of investment in the entity.

 

The Company has investments in VIEs that purchase portfolios of purchased accounts receivable. Based on the Company’s significant participation in the VIEs’ profits or losses and its ability to direct the activities of the VIEs, the Company consolidates these VIEs as it is considered the primary beneficiary. The aggregate assets of the VIEs, that can only be used to settle obligations of the VIEs, and liabilities of the VIEs, for which beneficial interest holders do not have recourse to the Company’s general credit, are presented on the balance sheet.

 

Interim Financial Information:

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. The December 31, 2010 balance sheet was derived from the consolidated audited financial statements of the Company, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting of only normal recurring adjustments, except as otherwise disclosed herein) considered necessary for a fair presentation have been included. Because of the seasonal nature of the Company’s business, operating results for the three-month period ended March 31, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011, or for any other interim period.

 

4



Table of Contents

 

2.              Accounting Policies (continued):

 

Interim Financial Information (continued):

 

The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission (“SEC”).

 

Use of Estimates:

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

 

Reimbursable Costs and Fees:

 

During the fourth quarter of 2010, the Company identified $58.3 million of reimbursable costs and fees received from clients associated with certain contractual arrangements acquired in connection with the acquisition of TSYS Total Debt Management that were incorrectly recorded on a net basis, as an offset to selling, general and administrative expenses. Revenue should have included these reimbursable costs and fees, with an equal and offsetting amount charged to operating expenses, due to the fact that the Company acted as principal and assumed overall risk in the transactions under these contractual arrangements. The adjustment was made in the fourth quarter of 2010 and reflected in the statement of operations for the year ended December 31, 2010. The adjustment was not material to the previously issued financial statements. Revenue and operating expenses for the three months ended March 31, 2010 have been revised to reflect the reimbursable costs and fees in both revenue and operating expenses in the statement of operations. The following summarizes the impact of this revision on the statement of operations for the three months ended March 31, 2010 (in thousands):

 

 

 

As
Previously
Reported

 

Adjustments

 

As Adjusted

 

Total revenue

 

$

413,068

 

$

10,501

 

$

423,569

 

Total operating costs and expenses

 

$

400,809

 

$

10,501

 

$

411,310

 

Income from operations

 

$

12,259

 

$

 

$

12,259

 

Loss before income taxes

 

$

(11,298

)

$

 

$

(11,298

)

Net loss attributable to NCO Group, Inc.

 

$

(15,272

)

$

 

$

(15,272

)

 

3.              Restructuring Charges:

 

The Company has several restructuring plans under which it has recorded restructuring charges, primarily in conjunction with streamlining the cost structure of the Company’s operations. These charges primarily related to the elimination of certain redundant facilities and severance costs. The severance accrual recorded for the three months ended March 31, 2011, included approximately $3.4 million related to termination benefits provided to the Company’s former President and Chief Executive Officer, who remains as the Company’s Chairman of the Board of Directors. The Company currently expects to pay the remaining severance balance through 2013 and the remaining lease balance through 2016.

 

The following presents the activity in the accruals recorded for restructuring charges (amounts in thousands):

 

 

 

Leases

 

Severance

 

Total

 

Balance at December 31, 2010

 

$

12,428

 

$

1,555

 

$

13,983

 

Accruals

 

8,308

 

3,868

 

12,176

 

Cash payments

 

(2,498

)

(1,437

)

(3,935

)

Balance at March 31, 2011

 

$

18,238

 

$

3,986

 

$

22,224

 

 

5



Table of Contents

 

4.              Deferred Revenue:

 

Deferred revenue primarily relates to prepaid fees for ARM collection and letter services for which revenue is recognized when the services are provided or the time period for which the Company is obligated to provide the services has expired. The following summarizes the change in the balance of deferred revenue (amounts in thousands):

 

Balance at December 31, 2010

 

$

31,995

 

Additions

 

8,930

 

Revenue recognized

 

(9,631

)

Foreign currency translation adjustment

 

8

 

Balance at March 31, 2011

 

$

31,302

 

 

5.              Fair Value:

 

Recurring Measurement:

 

The Company uses various valuation techniques and assumptions when measuring fair value of its assets and liabilities. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable (“Level 1”), market corroborated (“Level 2”), or generally unobservable (“Level 3”). The significant majority of the fair value amounts included in the Company’s current period earnings resulted from Level 2 fair value methodologies; that is, the Company is able to value the assets and liabilities based on observable market data for similar instruments (the “market approach”). The Company applied an income approach to amounts included in its current period earnings resulting from Level 3 fair value methodologies.

 

The financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were measured at fair value on a recurring basis (amounts in thousands):

 

 

 

At Fair Value as of

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward exchange contracts

 

$

 

$

160

 

$

 

$

160

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

 

$

160

 

$

 

$

160

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

$

 

$

 

$

 

$

 

$

1,489

 

$

 

$

1,489

 

Forward exchange contracts

 

 

110

 

 

110

 

 

 

 

 

Embedded derivatives

 

 

 

2,383

 

2,383

 

 

 

2,486

 

2,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

$

 

$

110

 

$

2,383

 

$

2,493

 

$

 

$

1,489

 

$

2,486

 

$

3,975

 

 

During the three months ended March 31, 2011, there were no transfers in or out of the Company’s Level 1, Level 2 or Level 3 fair value measurements.

 

The Company’s interest rate swaps matured during the first quarter of 2011.

 

6



Table of Contents

 

5.              Fair Value (continued):

 

Recurring Measurement (continued):

 

To value the foreign currency forward exchange contracts, the Company obtains quotes from its counterparties. The Company considers such quotes to be Level 2 measurements. To gain assurance that such quotes reflect market participant views, the Company independently validates the relevant exchange rates of its forward exchange contracts.

 

Embedded derivatives represent the contingent payment provision embedded in the Company’s nonrecourse credit facility related to purchased accounts receivable and the sellers’ participation in collections that are in excess of minimum targets for certain portfolios of purchased accounts receivable. The Company values these embedded derivatives based on the present value of expected cash flows. Inputs used to value these embedded derivatives are considered Level 3 measurements because they are unobservable. Changes in the fair market value of the embedded derivatives are recorded in interest expense on the statement of operations.

 

The following summarizes the change in the fair value of the embedded derivatives (amounts in thousands):

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

Balance at beginning of period

 

$

2,486

 

$

3,306

 

Accrued interest additions

 

125

 

225

 

Payments

 

(389

)

(438

)

Change in fair value

 

161

 

(500

)

Balance at end of period

 

$

2,383

 

$

2,593

 

 

Non-Recurring Measurement:

 

The Company has goodwill and other intangible assets that are measured at fair value on a non-recurring basis and are adjusted to fair value only when their carrying values exceed their fair values. Inputs used to value these assets are considered Level 3 measurements because they are unobservable.

 

During the three months ended March 31, 2011 and 2010, there were no adjustments to fair value as there were no indicators that would have required interim testing. The Company performs its annual testing of indefinite-lived intangible assets during the fourth quarter of each year.

 

Fair Value of Financial Instruments:

 

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:

 

Cash and Cash Equivalents, Trade Accounts Receivable, and Accounts Payable:

 

The carrying amount reported in the balance sheets approximates fair value because of the short maturity of these instruments.

 

7



Table of Contents

 

5.              Fair Value (continued):

 

Fair Value of Financial Instruments (continued):

 

Purchased Accounts Receivable:

 

The Company records purchased accounts receivable at cost, which is discounted from the contractual receivable balance. The carrying value of purchased accounts receivable is estimated based upon the Company’s estimates of future cash flows and the internal rate of return (“IRR”) derived at acquisition. In April 2011, Portfolio Management sold a portion of its portfolio of purchased accounts receivable. In connection with the sale, the Company recorded a write-down of the value of the purchased accounts receivable of $18.6 million for the three months ended March 31, 2011. The Company may decide to sell additional portions of its portfolio of purchased accounts receivable in the future, which management believes would result in further write-downs, due to the difference in assumptions in determining fair value at the time of sale.

 

Long-Term Debt:

 

The following presents the carrying values and the estimated fair values of the Company’s long-term debt at March 31, 2011 (amounts in thousands):

 

 

 

Carrying Value

 

Fair Value

 

Senior term loan

 

$

491,763

 

$

499,065

 

Senior revolving credit facility

 

5,000

 

5,007

 

Senior subordinated notes

 

200,000

 

180,500

 

Senior notes

 

165,000

 

151,800

 

 

The fair values of the Company’s senior term loan and senior revolving credit facility were based on market interest rates for debt with similar terms and maturities. The fair values of the Company’s senior notes and senior subordinated notes were based on their approximate trading prices at March 31, 2011.

 

6.              Purchased Accounts Receivable:

 

As of March 31, 2011, the carrying value of Portfolio Management’s and ARM’s purchased accounts receivable were $47.0 million and $2.9 million, respectively. The total outstanding balance due, representing the original undiscounted contractual amount less collections since acquisition, was $55.8 billion at March 31, 2011 and December 31, 2010.

 

In April 2011, Portfolio Management sold a portion of its portfolio of purchased accounts receivable. In connection with the sale, the Company recorded a write-down of the value of the purchased accounts receivable of $18.6 million for the three months ended March 31, 2011. The Company may decide to sell additional portions of its portfolio of purchased accounts receivable in the future, which could result in further write-downs.

 

The following summarizes the change in the carrying amount of the purchased accounts receivable (amounts in thousands):

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

Balance at beginning of period

 

$

78,607

 

$

138,429

 

Purchases

 

340

 

5,830

 

Collections

 

(20,305

)

(35,371

)

Revenue recognized

 

8,314

 

14,542

 

Write-down

 

(18,575

)

 

Recovery of impairment allowance

 

1,469

 

1,446

 

Other

 

58

 

(3

)

Balance at end of period

 

$

49,908

 

$

124,873

 

 

8



Table of Contents

 

6.              Purchased Accounts Receivable (continued):

 

The following presents the change in the allowance for impairment of purchased accounts receivable (amounts in thousands):

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

Balance at beginning of period

 

$

158,694

 

$

144,397

 

Additions

 

171

 

1,175

 

Recoveries

 

(1,640

)

(2,621

)

Other

 

25

 

 

Balance at end of period

 

$

157,250

 

$

142,951

 

 

Accretable yield represents the excess of the cash flows expected to be collected during the life of the portfolio over the initial investment in the portfolio. The following presents the change in accretable yield (amounts in thousands):

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

Balance at beginning of period

 

$

55,753

 

$

112,108

 

Additions

 

330

 

4,243

 

Write-down

 

(15,101

)

 

Revenue recognition

 

(8,314

)

(14,542

)

Reclassifications from nonaccretable difference

 

1,116

 

1,703

 

Foreign currency translation adjustment

 

(70

)

22

 

Balance at end of period

 

$

33,714

 

$

103,534

 

 

During the three months ended March 31, 2011 and 2010, the Company purchased accounts receivable with a cost of $340,000 and $5.8 million, respectively, that had contractually required payments receivable at the date of acquisition of $4.6 million and $387.8 million, respectively, and expected cash flows at the date of acquisition of $670,000 and $10.1 million, respectively.

 

7.              Funds Held on Behalf of Clients:

 

In the course of the Company’s regular business activities as a provider of accounts receivable management services, the Company receives clients’ funds arising from the collection of accounts placed with the Company. These funds are placed in segregated cash accounts and are generally remitted to clients within 30 days. Funds held on behalf of clients of $83.6 million and $70.5 million at March 31, 2011 and December 31, 2010, respectively, have been shown net of their offsetting liability for financial statement presentation.

 

8.              Goodwill and Other Intangible Assets:

 

Goodwill is allocated and tested at the reporting unit level. Goodwill is tested for impairment each year during the fourth quarter, and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. No event occurred or circumstances changed since the last annual test that would more likely than not reduce the fair value of a reporting unit below its carrying value. However, if the Company continues to experience adverse effects of the challenging economic and business environment, including changes in financial projections, the Company may have to recognize an impairment of all or some portion of its goodwill.  The Company’s reporting units are ARM, CRM and Portfolio Management.

 

9



Table of Contents

 

8.              Goodwill and Other Intangible Assets (continued):

 

The following summarizes the change in the Company’s ARM reporting unit’s goodwill; there was no goodwill in the Company’s CRM and Portfolio Management reporting units at March 31, 2011 or December 31, 2010 (amounts in thousands):

 

Balance at January 1, 2011:

 

 

 

Goodwill

 

$

553,962

 

Accumulated impairment

 

(73,205

)

 

 

480,757

 

 

 

 

 

Foreign currency translation and other

 

119

 

Balance at March 31, 2011:

 

 

 

Goodwill

 

554,081

 

Accumulated impairment

 

(73,205

)

 

 

$

480,876

 

 

Trade name includes the NCO trade name, which is an indefinite-lived intangible asset and therefore is not subject to amortization. Similar to goodwill, the NCO trade name is reviewed at least annually for impairment. At March 31, 2011, the balance of the NCO trade name was $82.6 million.

 

Trade name also includes certain trade names which are not considered to have indefinite lives and are therefore subject to amortization. At March 31, 2011, the gross carrying amount of these trade names was $2.0 million, and the accumulated amortization was $1.2 million.

 

Other intangible assets subject to amortization consist of customer relationships and non-compete agreements. The following represents the other intangible assets subject to amortization (amounts in thousands):

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

438,421

 

$

260,229

 

$

438,332

 

$

244,288

 

Non-compete agreements

 

3,372

 

2,488

 

3,372

 

2,345

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

441,793

 

$

262,717

 

$

441,704

 

$

246,633

 

 

The Company recorded amortization expense for intangible assets of $16.2 million and $16.1 million during the three months ended March 31, 2011and 2010, respectively.

 

The following represents the Company’s expected amortization expense from these other intangible assets over the next five years (amounts in thousands):

 

For the Years Ended
December 31,

 

Estimated
Amortization Expense

 

 

 

 

 

2011

 

$

64,148

 

2012

 

59,856

 

2013

 

53,599

 

2014

 

15,762

 

2015

 

2,605

 

 

10



Table of Contents

 

9.              Long-Term Debt:

 

Long-term debt consisted of the following (amounts in thousands):

 

 

 

March 31, 2011

 

December 31, 2010

 

Senior term loan

 

$

491,763

 

$

507,220

 

Senior revolving credit facility

 

5,000

 

10,000

 

Senior subordinated notes

 

200,000

 

200,000

 

Senior notes

 

165,000

 

165,000

 

Capital leases and other

 

6,861

 

7,133

 

Less current portion

 

(15,688

)

(22,124

)

 

 

$

852,936

 

$

867,229

 

 

Senior Credit Facility:

 

The Company has a senior credit facility (“Credit Facility”) with a syndicate of financial institutions that consists of a term loan and a $75.0 million revolving credit facility. The Company is required to make quarterly principal repayments of approximately $1.5 million on the term loan until its maturity in May 2013, at which time its remaining balance outstanding is due. The Company is also required to make quarterly prepayments of 75 percent of the excess cash flow from the Company’s purchased accounts receivable, and annual prepayments of 75 percent or 50 percent of its excess annual cash flow, based on its leverage ratio, less the amounts paid during the year from the purchased accounts receivable excess cash flow prepayments. The revolving credit facility requires no minimum principal payments until its maturity in December 2012. The availability of the revolving credit facility is reduced by any unused letters of credit ($6.7 million at March 31, 2011). As of March 31, 2011, the Company had $63.3 million of remaining availability under the revolving credit facility.

 

On March 25, 2011, the Company amended the Credit Facility to, among other things, adjust certain financial covenants, including increasing maximum leverage ratios and decreasing minimum interest coverage ratios, extending the maturity of the revolving credit facility from November 15, 2011 to December 31, 2012 and reduce the maximum borrowing capacity to $75.0 million through November 15, 2011 and $67.5 million thereafter, and permit the Company to sell all or a portion of its portfolios of purchased accounts receivable.

 

All borrowings bear interest at an annual variable rate, based on either the prime rate (3.25 percent at March 31, 2011), the federal funds rate (0.10 percent at March 31, 2011) or LIBOR (0.26 percent 30-day LIBOR at March 31, 2011) plus an applicable margin, which is based on the type of rate and the Company’s funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio, as defined in the loan agreement, subject to certain interest rate minimum requirements. The Company is charged a quarterly commitment fee on the unused portion of the revolving credit facility at an annual rate ranging from 0.50 percent to 0.75 percent. The effective interest rate on the Credit Facility was approximately 8.60 percent and 9.23 percent for the three months ended March 31, 2011 and 2010, respectively.

 

Borrowings under the Credit Facility are collateralized by substantially all of the Company’s assets. The Credit Facility contains certain financial and other covenants such as maintaining a maximum leverage ratio and a minimum interest coverage ratio, and includes restrictions on, among other things, acquisitions, the incurrence of additional debt, investments, investments in purchased accounts receivable, disposition of assets, liens and dividends and other distributions.

 

At March 31, 2011, the Company’s leverage ratio was 6.03, compared to the covenant maximum of 6.75, and the interest coverage ratio was 1.76, compared to the covenant minimum of 1.60. The Company was in compliance with all required financial covenants and was not aware of any events of default as of March 31, 2011.

 

11



Table of Contents

 

9.              Long-Term Debt (continued):

 

Senior Credit Facility (continued):

 

Management believes that it will be able to maintain compliance with these covenants over the next twelve months. The Company’s ability to maintain compliance with the financial covenants will be highly dependent on the Company’s results of operations and, to the extent necessary, the Company’s ability to implement remedial measures such as further reductions in operating costs. If the Company were to enter into an agreement with its lenders for future covenant compliance relief or waivers, such covenant relief or waiver could result in additional fees and higher interest expense.

 

If an event of default, such as failure to comply with covenants, and the failure to negotiate and obtain any required relief from the lenders, were to occur under the Credit Facility, the Company would not be able to borrow under the revolving credit facility and the lenders would be entitled to declare all amounts outstanding under the Credit Facility immediately due and payable and foreclose on the pledged assets. Under these circumstances, the acceleration of the payment of the Company’s debt would have a material adverse effect on its business.

 

Senior Notes and Senior Subordinated Notes:

 

The Company has $165.0 million of floating rate senior notes due November 2013 (“Senior Notes”) and $200.0 million of 11.875 percent senior subordinated notes due November 2014 (“Senior Subordinated Notes”) (collectively, “the Notes”). The Notes are guaranteed, jointly and severally, on a senior basis with respect to the Senior Notes and on a senior subordinated basis with respect to the Senior Subordinated Notes, in each case by all of the Company’s existing and future domestic restricted subsidiaries (other than certain subsidiaries and joint ventures engaged in financing the purchase of delinquent accounts receivable portfolios and certain immaterial subsidiaries).

 

The Senior Notes are senior unsecured obligations and are senior in right of payment to all existing and future senior subordinated indebtedness, including the Senior Subordinated Notes, and all future subordinated indebtedness. The Senior Notes bear interest at an annual rate equal to LIBOR plus 4.875 percent, reset quarterly. The effective interest rate of the Senior Notes was approximately 5.17 percent and 5.14 percent for the three months ended March 31, 2011 and 2010, respectively. The Company may redeem the Senior Notes, in whole or in part, at any time at varying redemption prices depending on the redemption date, plus accrued and unpaid interest.

 

The Senior Subordinated Notes are unsecured senior subordinated obligations and are subordinated in right of payment to all existing and future senior indebtedness, including the Senior Notes and borrowings under the Credit Facility. The Company may redeem the Senior Subordinated Notes, in whole or in part, at any time at varying redemption prices depending on the redemption date, plus accrued and unpaid interest.

 

The indentures governing the Notes contain a number of covenants that limit the Company’s and its restricted subsidiaries’ ability, among other things, to: incur additional indebtedness and issue certain preferred stock, pay certain dividends, acquire shares of capital stock, make payments on subordinated debt or make investments, place limitations on distributions from restricted subsidiaries, issue or sell capital stock of restricted subsidiaries, guarantee indebtedness, sell or exchange assets, enter into transactions with affiliates, create certain liens, engage in unrelated businesses, and consolidate, merge or transfer all or substantially all of the Company’s assets and the assets of its subsidiaries on a consolidated basis. As of March 31, 2011, the Company was in compliance with all required covenants. In addition, upon a change of control, the Company is required to offer to repurchase all of the Notes then outstanding, at a purchase price equal to 101 percent of their principal amount, plus any accrued interest to the date of repurchase.

 

12



Table of Contents

 

10.       Income Taxes:

 

The Company recorded income tax expense of $1.9 million and $3.0 million for the three months ended March 31, 2011 and 2010, respectively. The Company’s income tax expense differs from the amount of income tax determined by applying the statutory U.S. federal income tax rate to pre-tax income (loss) primarily as a result of the recognition of a valuation allowance on certain domestic net deferred tax assets and income tax expense attributable to state and foreign jurisdictions.

 

In general, the Company is required to use an estimated annual effective tax rate to measure the tax benefit or tax expense recognized in an interim period. The income tax expense for the three months ended March 31, 2011 was calculated based on the results of operations for the period and does not reflect an estimated annual effective rate.

 

As a result of cumulative losses incurred by the Company since 2007, a valuation allowance was established due to the uncertainty that federal and certain state deferred tax assets would be realized in future years. The Company increased its valuation allowance by $15.5 million to $126.2 million as March 31, 2011 from $110.7 million as of December 31, 2010, primarily as a result of federal and certain state deferred tax assets exceeding deferred tax liabilities (after consideration for any net deferred tax liabilities associated with non-amortizable assets such as goodwill and certain trade names).

 

The Company has also considered future taxable income and ongoing prudent and feasible tax-planning strategies in assessing the need for the valuation allowance.  On a quarterly basis, management assesses whether it remains more likely than not that the deferred tax assets will not be realized.  In the event the Company determines at a future time that it could realize its deferred tax assets in excess of the net amount recorded, the Company will reduce its deferred tax asset valuation allowance and decrease income tax expense in the period when the Company makes such determination.

 

11.       Stockholders’ Equity:

 

Preferred Stock and Common Stock:

 

The Company is authorized to issue three classes of capital stock: Preferred Stock, par value $0.01 per share, Class L Common Stock, par value $0.01 per share (“Class L”) and Class A common stock, par value $0.01 per share (“Class A”). Shares of Class L, Class A and three series of Preferred Stock: Series A 14 percent PIK Preferred Stock (“Series A”), Series B-1 19 percent PIK Preferred Stock (“Series B-1”), and Series B-2 19 percent Preferred Stock (“Series B-2”), are issued and outstanding.

 

Series A is entitled to a quarterly “paid-in-kind” dividend at an annual rate of 14 percent and Series B-1 is entitled to a quarterly “paid-in-kind” dividend at an annual rate of 19 percent. The following presents the Series A and Series B-1 shares issued for the “paid-in-kind” dividends (shares in thousands):

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2011

 

2010

 

Series A

 

115

 

101

 

Series B-1

 

12

 

10

 

 

13



Table of Contents

 

11.       Stockholders’ Equity (continued):

 

Noncontrolling Interests:

 

The following table summarizes the activity in stockholders’ equity attributable to NCO Group, Inc. and noncontrolling interests (amounts in thousands):

 

 

 

NCO Group, Inc.
Stockholders’
Equity

 

Noncontrolling
Interests

 

Total
Stockholders’
Equity

 

 

 

 

 

 

 

 

 

Balance at January 1, 2011

 

$

80,406

 

$

6,520

 

$

86,926

 

Stock-based compensation

 

113

 

 

113

 

Distributions to noncontrolling interests, net

 

 

(883

)

(883

)

Net loss

 

(41,191

)

(2,110

)

(43,301

)

Accumulated other comprehensive income

 

1,946

 

 

1,946

 

Balance at March 31, 2011

 

$

41,274

 

$

3,527

 

$

44,801

 

 

Comprehensive Income (Loss):

 

Comprehensive income (loss) was as follows (amounts in thousands):

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

Net loss attributable to NCO Group, Inc.

 

$

(41,191

)

$

(15,272

)

Foreign currency translation adjustments

 

1,558

 

687

 

Net losses on cash flow hedges reclassified into earnings, net of tax

 

388

 

893

 

Comprehensive loss - NCO Group, Inc.

 

(39,245

)

(13,692

)

Net (loss) income attributable to noncontrolling interests

 

(2,110

)

934

 

Total comprehensive loss

 

$

(41,355

)

$

(12,758

)

 

12.       Derivative Financial Instruments:

 

The Company enters into forward exchange contracts to minimize the impact of currency fluctuations on transactions and cash flows. These contracts may be designated as cash flow hedges. The Company had forward exchange contracts for the purchase of 907.1 million Philippine pesos and 6.8 million Canadian dollars outstanding at March 31, 2011, which mature throughout the remainder of 2011.

 

The Company had interest rate swap agreements to minimize the impact of LIBOR fluctuations on interest payments on the Company’s floating rate debt, which matured during the first quarter of 2011. The interest rate swaps covered an aggregate notional amount of $293.7 million. The Company was required to pay the counterparties quarterly interest payments at a weighted average fixed rate ranging from 3.41 to 3.44 percent, and received from the counterparties variable quarterly interest payments based on LIBOR. The net interest paid or received was included in interest expense. On March 25, 2009, the Company amended its senior credit facility, which amendment included a minimum LIBOR of 2.50 percent. This amendment caused the existing interest rate swaps to become ineffective and, as of March 25, 2009, these interest rate swaps were not accounted for as cash flow hedges. Accordingly, the fair market value of the interest rate swaps at March 25, 2009 is being amortized to interest expense, using the effective interest rate method, over the remaining lives of the interest rate swap agreements, and future changes in the fair market value of these interest rate swaps after March 25, 2009 are recorded in interest expense.

 

The Company has embedded derivatives relating to the contingent payment provision in its nonrecourse credit facility relating to purchased accounts receivable, and relating to the sellers’ participation in collections that are in excess of minimum targets for certain portfolios of purchased accounts receivable.

 

14



Table of Contents

 

12.       Derivative Financial Instruments (continued):

 

The following summarizes the fair value of the Company’s derivatives, none of which were designated as hedges (amounts in thousands):

 

 

 

Balance Sheet

 

Fair Value

 

 

 

Location

 

March 31, 2011

 

December 31, 2010

 

Asset derivatives

 

 

 

 

 

 

 

Forward exchange contracts

 

Other current assets

 

$

160

 

 

 

Total asset derivatives

 

 

 

$

160

 

 

 

 

 

 

 

 

 

 

 

Liability derivatives

 

 

 

 

 

 

 

Interest rate swaps

 

Accrued expenses

 

$

 

$

1,489

 

Forward exchange contracts

 

Accrued expenses

 

110

 

 

Embedded derivatives

 

Long-term debt and accrued expenses

 

2,383

 

2,486

 

Total liability derivatives

 

 

 

$

2,493

 

$

3,975

 

 

The following summarizes the effect of derivatives on the Company, none of which were designated as hedges (amounts in thousands):

 

 

 

 

 

For the Three Months Ended March 31,

 

 

 

 

 

2011

 

2010

 

 

 

 

 

Amount of Gain

 

Amount of Gain

 

 

 

Location of Gain (Loss)

 

(Loss) Recognized

 

(Loss) Recognized

 

 

 

Recognized in Earnings

 

in Earnings

 

in Earnings

 

 

 

 

 

 

 

 

 

Forward exchange contracts

 

Other income (expense)

 

$

 

$

198

 

Interest rate swaps (after March 25, 2009)

 

Interest expense

 

(6

)

(1,396

)

Amortization of interest rate swaps

 

Interest expense

 

(610

)

(1,402

)

Embedded derivatives

 

Interest expense

 

(161

)

500

 

Total

 

 

 

$

(777

)

$

(2,100

)

 

13.       Commitments and Contingencies:

 

Purchase Commitments:

 

The Company enters into noncancelable agreements with various telecommunications companies and other vendors that require minimum purchase commitments. These agreements expire between 2011 and 2012. The following represents the future minimum payments, by year and in the aggregate, under noncancelable purchase commitments (amounts in thousands):

 

2011

 

$

9,725

 

2012

 

7,392

 

 

 

 

 

 

 

$

17,117

 

 

The Company incurred $3.1 million and $3.2 million of expense from vendors associated with these purchase commitments for the three months ended March 31, 2011 and 2010, respectively.

 

15



Table of Contents

 

13.       Commitments and Contingencies (continued):

 

Litigation and Investigations:

 

The Company is party, from time to time, to various legal proceedings, regulatory investigations, client audits and tax examinations incidental to its business. The Company continually monitors these legal proceedings, regulatory investigations, client audits and tax examinations to determine the impact and any required accruals. See “Item 3. Legal Proceedings” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

Attorneys General:

 

From time to time, the Company receives subpoenas or other similar information requests from various states’ Attorneys General, requesting information relating to the Company’s debt collection practices in such states. The Company responds to such inquires or investigations and provides certain information to the respective Attorneys General offices. The Company believes it is in compliance with the laws of the states in which it does business relating to debt collection practices in all material respects. However, no assurance can be given that any such inquiries or investigations will not result in a formal investigation or an enforcement action. Any such enforcement actions could result in fines as well as the suspension or termination of the Company’s ability to conduct business in such states.

 

Other:

 

The Company is involved in other legal proceedings, regulatory investigations, client audits 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, client audits or tax examinations will have a materially adverse effect on the financial condition or results of operations of the Company.

 

14.       Segment Reporting:

 

As of March 31, 2011, the Company’s business consisted of three operating segments: ARM, CRM and Portfolio Management. The accounting policies of the segments are the same as those described in note 2, “Accounting Policies.”

 

ARM provides accounts receivable management services to consumer and commercial accounts for all market sectors including financial services, healthcare, retail and commercial, telecommunications, utilities, education, and government. ARM serves clients of all sizes in local, regional and national markets in North America, Europe and Australia through offices in North America, Asia, Europe and Australia. In addition to traditional accounts receivable collections, these services include developing the client relationship beyond bad debt recovery and delinquency management, and delivering cost-effective accounts receivable solutions to all market sectors. ARM also provides accounts receivable management services to Portfolio Management. ARM recorded revenue of $8.3 million and $13.7 million for intercompany services to Portfolio Management for the three months ended March 31, 2011 and 2010, respectively.

 

CRM provides customer relationship management services to clients in North America through offices in North America and Asia.

 

Portfolio Management purchases and manages defaulted consumer accounts receivable from consumer creditors such as banks, finance companies, retail merchants, utilities, healthcare companies and other consumer oriented companies.

 

The following presents total assets, net of any intercompany balances, for each segment (amounts in thousands):

 

 

 

March 31, 2011

 

December 31, 2010

 

ARM

 

$

1,002,236

 

$

1,004,573

 

CRM

 

143,474

 

151,626

 

Portfolio Management

 

53,440

 

81,514

 

Total assets

 

$

1,199,150

 

$

1,237,713

 

 

16



Table of Contents

 

14.       Segment Reporting (continued):

 

The following tables present the revenue, payroll and related expenses, selling, general, and administrative expenses, reimbursable costs and fees, restructuring charges, income (loss) from operations before depreciation and amortization and capital expenditures for each segment (amounts in thousands):

 

 

 

For the Three Months Ended March 31, 2011

 

 

 

ARM

 

CRM

 

Portfolio
Management

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

324,128

 

$

68,381

 

$

(9,483

)

$

(8,303

)

$

374,723

 

 

 

 

 

 

 

 

 

 

 

 

 

Payroll and related expenses

 

117,947

 

50,605

 

585

 

 

169,137

 

Selling, general and admin. expenses

 

87,288

 

14,184

 

8,602

 

(8,173

)

101,901

 

Reimbursable costs and fees

 

85,063

 

 

 

(130

)

84,933

 

Restructuring charges

 

9,816

 

2,355

 

5

 

 

12,176

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations before depreciation and amortization

 

$

24,014

 

$

1,237

 

$

(18,675

)

$

 

$

6,576

 

Capital expenditures

 

$

6,487

 

$

850

 

$

 

$

 

$

7,337

 

 

 

 

For the Three Months Ended March 31, 2010

 

 

 

ARM

 

CRM

 

Portfolio
Management

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

345,481

 

$

76,534

 

$

15,274

 

$

(13,720

)

$

423,569

 

 

 

 

 

 

 

 

 

 

 

 

 

Payroll and related expenses

 

128,670

 

56,406

 

1,192

 

 

186,268

 

Selling, general and admin. expenses

 

96,583

 

14,152

 

14,192

 

(13,395

)

111,532

 

Reimbursable costs and fees

 

84,671

 

 

 

(325

)

84,346

 

Restructuring charges

 

279

 

12

 

1,143

 

 

1,434

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations before depreciation and amortization

 

$

35,278

 

$

5,964

 

$

(1,253

)

$

 

$

39,989

 

Capital expenditures

 

$

4,001

 

$

1,957

 

$

 

$

 

$

5,958

 

 

15.       Related Party Transactions:

 

The Company pays OEP a management fee of $3.0 million per year, plus reimbursement of expenses, for management, advice and related services. During the three months ended March 31, 2011 and 2010, the Company incurred $750,000 relating to such management fees, which were included in selling, general and administrative expenses.

 

OEP is managed by OEP Holding Corporation, a wholly owned indirect subsidiary of JPM, and JPM is a client of the Company. The Company received fees for providing services to JPM of $2.2 million and $2.8 million for the three months ended March 31, 2011 and 2010, respectively. Additionally, an affiliate of Citigroup is an investor in the Company, and Citigroup is a client of the Company. The Company received fees for providing services to Citigroup of $8.3 million and $13.0 million for the three months ended March 31, 2011 and 2010, respectively. At March 31, 2011 and December 31, 2010, the Company had accounts receivable of $1.4 million and $1.5 million, respectively, due from Citigroup.

 

The Company has certain corporate banking relationships with affiliates of JPM and is charged market rates for these services.

 

17



Table of Contents

 

16.  Recently Issued and Proposed Accounting Guidance:

 

In July 2010, the FASB issued amended guidance for disclosures about financing receivables and allowances for credit losses. The guidance requires further disaggregated disclosures that improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The new disclosure requirements were effective for the Company for the annual reporting period ending December 31, 2010. Certain disclosures related to allowance and modification activities were effective for the Company for reporting periods beginning January 1, 2011. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.

 

In December 2010, the FASB issued amended guidance for business combinations, specifically related to disclosures of supplementary pro forma information. The amended guidance specifies that if comparative financial statements are presented, then revenue and earnings of the combined entity should be disclosed as though the business combination, which occurred during the current year, had occurred as of the beginning of the comparable prior annual reporting period only. The amended guidance also expands the supplemental pro forma information disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination. The amended guidance is effective for the Company for acquisitions occurring on or after January 1, 2011. The Company does not expect the adoption of this guidance to have a material impact on its financial condition or results of operations.

 

In December 2010, the FASB issued amended guidance for goodwill and other intangible assets, specifically related to when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. Under the amended guidance, if a reporting unit’s carrying amount is zero or negative then step 2 of the goodwill impairment test is required to be performed if it is more likely than not that a goodwill impairment exists. The Company adopted this amended guidance January 1, 2011, and it did not have a material impact on its financial condition or results of operations.

 

17.  Subsidiary Guarantor Financial Information:

 

The Notes are fully and unconditionally guaranteed, jointly and severally, by certain domestic 100 percent owned subsidiaries of the Company (collectively, the “Guarantors”). Non-guarantors consist of all non-domestic subsidiaries, certain subsidiaries engaged in financing the purchase of delinquent accounts receivable portfolios, portfolio joint ventures (which are engaged in portfolio financing transactions) and certain immaterial subsidiaries (collectively, the “Non-Guarantors”). The following tables present the consolidating financial information for the Company (Parent), the Guarantors and the Non-Guarantors, together with eliminations, as of and for the periods indicated.

 

18



Table of Contents

 

17.  Subsidiary Guarantor Financial Information (continued):

 

NCO GROUP, INC.

Consolidating Balance Sheet

March 31, 2011

(Unaudited)

(Amounts in thousands)

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Eliminations

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

11,834

 

$

13,563

 

$

 

$

25,397

 

Accounts receivable, trade, net of allowance for doubtful accounts

 

 

151,826

 

20,041

 

 

171,867

 

Purchased accounts receivable, current portion

 

 

11,432

 

11,741

 

 

23,173

 

Deferred income taxes

 

(10,468

)

17,094

 

2,486

 

 

9,112

 

Prepaid expenses and other current assets

 

1,415

 

49,344

 

15,920

 

 

66,679

 

Total current assets

 

(9,053

)

241,530

 

63,751

 

 

296,228

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

70,752

 

25,358

 

 

96,110

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

446,482

 

34,394

 

 

480,876

 

Trade name, net of accumulated amortization

 

 

81,882

 

1,525

 

 

83,407

 

Customer relationships and other intangible assets, net of accumulated amortization

 

 

170,653

 

8,423

 

 

179,076

 

Purchased accounts receivable, net of current portion

 

 

14,474

 

12,261

 

 

26,735

 

Investment in subsidiaries

 

742,606

 

(21,814

)

 

(720,792

)

 

Deferred income taxes

 

330

 

1,167

 

2,997

 

 

4,494

 

Other assets

 

11,350

 

19,316

 

1,558

 

 

32,224

 

Total other assets

 

754,286

 

712,160

 

61,158

 

(720,792

)

806,812

 

Total assets

 

$

745,233

 

$

1,024,442

 

$

150,267

 

$

(720,792

)

$

1,199,150

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, current portion

 

$

13,586

 

$

245

 

$

1,857

 

$

 

$

15,688

 

Intercompany payable (receivable)

 

231,070

 

(319,520

)

88,450

 

 

 

Income taxes payable

 

 

 

4,423

 

 

4,423

 

Accounts payable

 

750

 

16,946

 

2,852

 

 

20,548

 

Accrued expenses

 

10,831

 

70,945

 

16,213

 

 

97,989

 

Accrued compensation and related expenses

 

 

30,681

 

15,400

 

 

46,081

 

Deferred revenue, current portion

 

 

30,011

 

633

 

 

30,644

 

Deferred income taxes

 

 

5

 

1,176

 

 

 

1,181

 

Total current liabilities

 

256,237

 

(170,687

)

131,004

 

 

216,554

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

468,771

 

378,509

 

5,656

 

 

852,936

 

Deferred income taxes

 

(30,986

)

78,278

 

(108

)

 

47,184

 

Deferred revenue, net of current portion

 

 

658

 

 

 

658

 

Other long-term liabilities

 

9,937

 

13,939

 

13,141

 

 

37,017

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Total NCO Group, Inc. stockholders’ equity

 

41,274

 

723,745

 

(2,953

)

(720,792

)

41,274

 

Noncontrolling interests

 

 

 

3,527

 

 

3,527

 

Total stockholders’ equity

 

41,274

 

723,745

 

574

 

(720,792

)

44,801

 

Total liabilities and stockholders’ equity

 

$

745,233

 

$

1,024,442

 

$

150,267

 

$

(720,792

)

$

1,199,150

 

 

19



Table of Contents

 

17.  Subsidiary Guarantor Financial Information (continued):

 

NCO GROUP, INC.

Consolidating Balance Sheet

December 31, 2010

(Unaudited)

(Amounts in thousands)

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Eliminations

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

 19,409

 

$

 13,668

 

$

 

$

 33,077

 

Accounts receivable, trade, net of allowance for doubtful accounts

 

 

153,526

 

17,824

 

 

171,350

 

Purchased accounts receivable, current portion

 

 

16,576

 

13,107

 

 

29,683

 

Deferred income taxes

 

(10,468

)

17,094

 

2,458

 

 

9,084

 

Prepaid expenses and other current assets

 

1,587

 

21,800

 

28,151

 

 

51,538

 

Total current assets

 

(8,881

)

228,405

 

75,208

 

 

294,732

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

71,472

 

27,617

 

 

99,089

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

438,837

 

41,920

 

 

480,757

 

Trade name, net of accumulated amortization

 

 

80,661

 

2,847

 

 

83,508

 

Customer relationships and other intangible assets, net of accumulated amortization

 

 

182,734

 

12,337

 

 

195,071

 

Purchased accounts receivable, net of current portion

 

 

29,726

 

19,198

 

 

48,924

 

Investment in subsidiaries

 

754,036

 

(16,347

)

 

(737,689

)

 

Deferred income taxes

 

330

 

1,167

 

2,752

 

 

4,249

 

Other assets

 

11,037

 

18,713

 

1,633

 

 

31,383

 

Total other assets

 

765,403

 

735,491

 

80,687

 

(737,689

)

843,892

 

Total assets

 

$

 756,522

 

$

 1,035,368

 

$

 183,512

 

$

 (737,689

)

$

 1,237,713

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, current portion

 

$

 20,014

 

$

 245

 

$

 1,865

 

$

 

$

 22,124

 

Intercompany payable (receivable)

 

189,799

 

(289,904

)

100,105

 

 

 

Income taxes payable

 

 

 

4,662

 

 

4,662

 

Accounts payable

 

750

 

16,305

 

2,732

 

 

19,787

 

Accrued expenses

 

6,749

 

54,046

 

30,485

 

 

91,280

 

Accrued compensation and related expenses

 

 

23,517

 

13,061

 

 

36,578

 

Deferred revenue, current portion

 

 

30,698

 

601

 

 

31,299

 

Deferred income taxes

 

 

5

 

1,153

 

 

 

1,158

 

Total current liabilities

 

217,312

 

(165,088

)

154,664

 

 

206,888

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

487,801

 

374,263

 

5,165

 

 

867,229

 

Deferred income taxes

 

(38,495

)

79,609

 

4,649

 

 

45,763

 

Deferred revenue, net of current portion

 

 

696

 

 

 

696

 

Other long-term liabilities

 

9,498

 

10,286

 

10,427

 

 

30,211

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Total NCO Group, Inc. stockholders’ equity

 

80,406

 

735,602

 

2,087

 

(737,689

)

80,406

 

Noncontrolling interests

 

 

 

6,520

 

 

6,520

 

Total stockholders’ equity

 

80,406

 

735,602

 

8,607

 

(737,689

)

86,926

 

Total liabilities and stockholders’ equity

 

$

 756,522

 

$

 1,035,368

 

$

 183,512

 

$

 (737,689

)

$

 1,237,713

 

 

20



Table of Contents

 

17.  Subsidiary Guarantor Financial Information (continued):

 

NCO GROUP, INC.

Consolidating Statement of Operations

For the Three Months Ended March 31, 2011

(Unaudited)

(Amounts in thousands)

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

 

$

 292,545

 

$

 65,522

 

$

 (59,623

)

$

 298,444

 

Portfolio

 

 

(10,438

)

1,784

 

 

(8,654

)

Reimbursable costs and fees

 

 

84,887

 

46

 

 

84,933

 

Total revenues

 

 

366,994

 

67,352

 

(59,623

)

374,723

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Payroll and related expenses

 

2

 

173,943

 

43,509

 

(48,317

)

169,137

 

Selling, general and administrative expenses

 

1,006

 

87,066

 

25,135

 

(11,306

)

101,901

 

Reimbursable costs and fees

 

 

84,887

 

46

 

 

84,933

 

Depreciation and amortization expense

 

 

21,043

 

5,006

 

 

26,049

 

Restructuring charges

 

 

10,573

 

1,603

 

 

12,176

 

Total operating costs and expenses

 

1,008

 

377,512

 

75,299

 

(59,623

)

394,196

 

(Loss) income from operations

 

(1,008

)

(10,518

)

(7,947

)

 

(19,473

)

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest and investment income

 

6

 

148

 

(55

)

 

99

 

Interest expense

 

(12,846

)

(8,301

)

(681

)

 

(21,828

)

Interest (expense) income to affiliate

 

(6,905

)

8,491

 

(1,586

)

 

 

Subsidiary (loss) income

 

(12,788

)

(4,105

)

 

16,893

 

 

Other expense, net

 

 

(194

)

 

 

(194

)

 

 

(32,533

)

(3,961

)

(2,322

)

16,893

 

(21,923

)

(Loss) income before income taxes

 

(33,541

)

(14,479

)

(10,269

)

16,893

 

(41,396

)

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

7,650

 

(1,265

)

(4,480

)

 

1,905

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

(41,191

)

(13,214

)

(5,789

)

16,893

 

(43,301

)

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net loss attributable to noncontrolling interests

 

 

 

(2,110

)

 

(2,110

)

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to NCO Group, Inc.

 

$

 (41,191

)

$

 (13,214

)

$

 (3,679

)

$

 16,893

 

$

 (41,191

)

 

21



Table of Contents

 

17.  Subsidiary Guarantor Financial Information (continued):

 

NCO GROUP, INC.

Consolidating Statement of Operations

For the Three Months Ended March 31, 2010

(Unaudited)

(Amounts in thousands)

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

 

$

 309,344

 

$

 77,565

 

$

 (63,983

)

$

 322,926

 

Portfolio

 

 

8,051

 

8,246

 

 

16,297

 

Reimbursable costs and fees

 

 

84,286

 

60

 

 

84,346

 

Total revenues

 

 

401,681

 

85,871

 

(63,983

)

423,569

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Payroll and related expenses

 

4

 

190,165

 

43,374

 

(47,275

)

186,268

 

Selling, general and administrative expenses

 

1,084

 

96,023

 

31,133

 

(16,708

)

111,532

 

Reimbursable costs and fees

 

 

84,286

 

60

 

 

84,346

 

Depreciation and amortization expense

 

 

21,932

 

5,798

 

 

27,730

 

Restructuring charges

 

 

177

 

1,257

 

 

1,434

 

Total operating costs and expenses

 

1,088

 

392,583

 

81,622

 

(63,983

)

411,310

 

(Loss) income from operations

 

(1,088

)

9,098

 

4,249

 

 

12,259

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest and investment income

 

 

(864

)

952

 

 

88

 

Interest expense

 

(15,282

)

(7,803

)

(516

)

 

(23,601

)

Interest (expense) income to affiliate

 

(2,983

)

4,776

 

(1,793

)

 

 

Subsidiary income (loss)

 

3,235

 

834

 

 

(4,069

)

 

Other income (expense), net

 

128

 

(172

)

 

 

(44

)

 

 

(14,902

)

(3,229

)

(1,357

)

(4,069

)

(23,557

)

(Loss) income before income taxes

 

(15,990

)

5,869

 

2,892

 

(4,069

)

(11,298

)

 

 

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

(718

)

1,963

 

1,795

 

 

3,040

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

(15,272

)

3,906

 

1,097

 

(4,069

)

(14,338

)

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interests

 

 

 

934

 

 

934

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to NCO Group, Inc.

 

$

 (15,272

)

$

 3,906

 

$

 163

 

$

 (4,069

)

$

 (15,272

)

 

22



Table of Contents

 

17.  Subsidiary Guarantor Financial Information (continued):

 

NCO GROUP, INC

Consolidating Statement of Cash Flows

For the Three Months Ended March 31, 2011

(Unaudited

(Amounts in thousands)

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

 (8,036

)

$

 10,256

 

$

 9,804

 

$

 12,024

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Purchases of accounts receivable

 

 

 

(340

)

(340

)

Collections applied to principal of purchased accounts receivable

 

 

6,869

 

5,122

 

11,991

 

Purchases of property and equipment

 

 

(6,827

)

(510

)

(7,337

)

Other

 

 

673

 

 

673

 

Net cash (used in) provided by investing activities

 

 

715

 

4,272

 

4,987

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Repayment of notes payable

 

 

(74

)

(385

)

(459

)

Net repayments of borrowings under revolving credit facility

 

(5,000

)

 

 

(5,000

)

Repayment of borrowings under senior term loan

 

(15,458

)

 

 

(15,458

)

Borrowings under (repayments of) intercompany notes payable

 

31,228

 

(18,472

)

(12,756

)

 

Payment of fees related to debt

 

(2,734

)

 

 

(2,734

)

Return of investment in subsidiary to noncontrolling interests

 

 

 

(883

)

(883

)

Net cash provided by (used in) financing activities

 

8,036

 

(18,546

)

(14,024

)

(24,534

)

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate on cash

 

 

 

(157

)

(157

)

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

(7,575

)

(105

)

(7,680

)

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of the period

 

 

19,409

 

13,668

 

33,077

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of the period

 

$

 

$

 11,834

 

$

 13,563

 

$

 25,397

 

 

23



Table of Contents

 

17.  Subsidiary Guarantor Financial Information (continued):

 

NCO GROUP, INC

Consolidating Statement of Cash Flows

For the Three Months Ended March 31, 2010

(Unaudited

(Amounts in thousands)

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

 (12,095

)

$

 38,308

 

$

 10,911

 

$

 37,124

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Purchases of accounts receivable

 

 

(5,523

)

(307

)

(5,830

)

Collections applied to principal of purchased accounts receivable

 

 

10,180

 

10,649

 

20,829

 

Purchases of property and equipment

 

 

(5,032

)

(926

)

(5,958

)

Other

 

 

20

 

 

20

 

Net cash (used in) provided by investing activities

 

 

(355

)

9,416

 

9,061

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Repayment of notes payable

 

 

(79

)

(4,334

)

(4,413

)

Net repayments of revolving credit facility

 

(17,000

)

 

 

(17,000

)

Repayment of borrowings under senior term loan

 

(25,803

)

 

 

(25,803

)

Borrowings under (repayments of) intercompany notes payable

 

57,495

 

(42,391

)

(15,104

)

 

Payment of fees related to debt

 

(2,597

)

 

 

(2,597

)

Return of investment in subsidiary to noncontrolling interests

 

 

 

(1,264

)

(1,264

)

Net cash provided by (used in) financing activities

 

12,095

 

(42,470

)

(20,702

)

(51,077

)

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate on cash

 

 

 

(229

)

(229

)

 

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(4,517

)

(604

)

(5,121

)

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of the period

 

 

18,984

 

20,237

 

39,221

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of the period

 

$

 

$

 14,467

 

$

 19,633

 

$

 34,100

 

 

24



Table of Contents

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

Certain statements included in this Quarterly Report on Form 10-Q, other than historical facts, are forward-looking statements (as such term is defined in the Securities Exchange Act of 1934, as amended, 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;

·                  economic conditions;

·                  the Company’s business and growth strategy;

·                  fluctuations in quarterly operating results;

·                  the integration of acquisitions;

·                  the final outcome of the Company’s litigation with its former landlord;

·                  statements as to liquidity and compliance with debt covenants;

·                  the effects of terrorist attacks, war and the economy on the Company’s business;

·                  expected increases in operating efficiencies;

·                  anticipated trends in the business process outsourcing industry;

·                  estimates of future cash flows and allowances for impairments of purchased accounts receivable;

·                  estimates of intangible asset impairments and amortization expense of customer relationships and other intangible assets;

·                  the effects of legal proceedings, regulatory investigations and tax examinations;

·                  the effects of changes in accounting guidance; and

·                  statements as to trends or the Company’s or management’s beliefs, expectations and opinions.

 

The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” “would,” “should,” “guidance,” “potential,” “continue,” “project,” “forecast,” “confident,” and similar expressions are typically used to identify forward-looking statements. These statements are based on assumptions and assessments made by the Company’s management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Forward-looking statements are not guarantees of the Company’s future performance and are subject to risks and uncertainties and may be affected by various factors that may cause actual results, developments and business decisions to differ materially from those in the forward-looking statements. Some of the factors that may cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements include:

 

·                  risks related to the instability in the financial markets;

·                  risks related to adverse capital and credit market conditions;

·                  the ability of governmental and regulatory bodies to stabilize the financial markets;

·                  risks related to the domestic and international economies;

·                  risks related to derivative transactions;

·                  risks related to the Company’s ability to grow internally;

·                  risks related to the Company’s ability to compete;

·                  risks related to the Company’s substantial indebtedness, its ability to service such debt and its ability to comply with debt covenants;

·                  risks related to the Company’s ability to meet liquidity needs;

·                  the risk that the Company will not be able to implement its growth strategy as and when planned;

·                  risks associated with growth and 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 related to the timing of contracts;

·                  risks related to purchased accounts receivable;

·                  risks related to possible impairment of goodwill and other intangible assets;

·                  the Company’s dependence on senior management;

·                  risks related to security and privacy breaches;

·                  risks related to union organizing efforts at the Company’s facilities;

 

25



Table of Contents

 

·                  risks associated with technology;

·                  risks related to the final outcome of the Company’s litigation with its former landlord;

·                  risks related to litigation, regulatory investigations and tax examinations;

·                  risks related to past or possible future terrorist attacks;

·                  risks related to natural disasters or the threat or outbreak of war or hostilities;

·                  the risk that the Company will not be able to improve margins;

·                  risks related to the Company’s international operations;

·                  risks related to the availability of qualified employees, particularly in new or more cost-effective locations;

·                  risks related to currency fluctuations;

·                  risks related to reliance on independent telecommunications service providers;

·                  risks related to concentration of the Company’s clients in the financial services, telecommunications and healthcare sectors;

·                  risks related to the possible loss of key clients or loss of significant volumes from key clients; and

·                  risks related to changes in government regulations.

 

The Company can give no assurance that any of the events anticipated by the forward-looking statements will occur or, if any of them does, what impact they will have on our results of operations and financial condition. 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. For additional information concerning the risks that affect us, see our Annual Report on Form 10-K for the year ended December 31, 2010 and “Part II. Other Information - Item 1A. Risk Factors” of this Report on Form 10-Q.

 

Overview

 

We are a holding company and conduct substantially all of our business operations through our subsidiaries. We are an international provider of business process outsourcing services, referred to as BPO, primarily focused on accounts receivable management, referred to as ARM, and customer relationship management, referred to as CRM, serving a wide range of clients in North America and abroad through our global network of over 100 offices.

 

Historically, we have participated in the purchased accounts receivable business on an opportunistic basis. Beginning in 2009, we significantly reduced our purchases of accounts receivable. This decision resulted from declines in liquidation rates, competition for purchased accounts receivable and the continued uncertainty of collectibility, as well as potential regulatory changes affecting the purchased accounts receivable business.

 

We operate our business in three segments: ARM, CRM and Portfolio Management.

 

In April 2011, Portfolio Management sold a portion of its portfolio of purchased accounts receivable. In connection with the sale, we recorded a write-down of the value of the purchased accounts receivable of $18.6 million for the three months ended March 31, 2011. We may decide to sell additional portions of our portfolio of purchased accounts receivable in the future, which could result in further write-downs.

 

Our operating costs consist principally of payroll and related costs; selling, general and administrative costs; and depreciation and amortization. Payroll and related expenses consist of wages and salaries, commissions, bonuses, and benefits for all of our employees, including management and administrative personnel. Selling, general and administrative expenses include telephone, postage and mailing costs, outside collection attorneys and other third-party collection services providers, and other collection costs, as well as expenses that directly support operations, including facility costs, equipment maintenance, sales and marketing, data processing, professional fees, and other management costs. Our payroll and related expenses may increase or decrease due to changes in the value of the U.S. dollar against the Canadian dollar and the Philippine peso.

 

During the fourth quarter of 2010, we identified $58.3 million of reimbursable costs and fees received from clients associated with certain contractual arrangements acquired in connection with the acquisition of TSYS Total Debt Management that were incorrectly recorded on a net basis, as an offset to selling, general and administrative expenses. Revenue should have included these reimbursable costs and fees, with an equal and offsetting amount charged to operating expenses, due to the fact that we acted as principal and assumed overall risk in the transactions under these contractual arrangements. The adjustment was made in the fourth quarter of 2010 and reflected in the statement of operations for the year ended December 31, 2010. The adjustment was not material to the previously issued financial statements. Revenue and operating expenses for the three months ended March 31, 2010 have been

 

26



Table of Contents

 

revised to reflect the reimbursable costs and fees in both revenue and operating expenses in the statement of operations.

 

The challenging economic environment in the U.S. has impacted our business over the course of 2009 and 2010, continuing into 2011. Factors such as reduced availability of credit for consumers, a depressed real estate market, high unemployment and other factors have had a negative impact on the ability and willingness of consumers to pay their debts and a negative impact on our clients’ businesses, which has adversely affected our results of operations, collections and revenue.

 

Further changes to the economic conditions in the U.S., either positive or negative, could have a significant impact on our business, including, but not limited to:

 

·                  further impairment charges to our goodwill, trade name and purchased accounts receivable;

·                  fluctuations in the volume of placements of accounts and the collectability of those accounts for our ARM contingency fee based services;

·                  volume fluctuations in our ARM fixed fee based services;

·                  volume fluctuations in our CRM services; and,

·                  variability in the collectability of existing portfolios.

 

Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

 

Revenue.  Revenue decreased $48.8 million, or 11.5 percent, to $374.7 million for the three months ended March 31, 2011, from $423.6 million for the three months ended March 31, 2010.

 

Revenue by segment (dollars in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

% of

 

 

 

% of

 

 

 

 

 

 

 

2011

 

Revenue

 

2010

 

Revenue

 

$ Change

 

% Change

 

ARM

 

$

324,128

 

86.5

%

$

345,481

 

81.5

%

$

(21,353

)

(6.2

)%

CRM

 

68,381

 

18.2

%

76,534

 

18.1

%

(8,153

)

(10.7

)%

Portfolio Management

 

(9,483

)

(2.5

)%

15,274

 

3.6

%

(24,757

)

(162.1

)%

Eliminations

 

(8,303

)

(2.2

)%

(13,720

)

(3.2

)%

5,417

 

(39.5

)%

Total

 

$

374,723

 

100.0

%

$

423,569

 

100.0

%

$

(48,846

)

(11.5

)%

 

ARM’s revenue for the three months ended March 31, 2011 and 2010, included $8.3 million and $13.7 million, respectively, of intercompany revenue from Portfolio Management which was eliminated upon consolidation.

 

The decrease in ARM’s revenue was primarily attributable to the weaker third-party collection environment and lower volumes in the first-party collections business during 2011 and a $5.4 million decrease in fees from collection services performed for Portfolio Management. ARM’s revenue for the three months ended March 31, 2011 and 2010 included $85.1 million and $84.7 million, respectively, of reimbursable costs and fees (discussed in more detail below).

 

The decrease in CRM’s revenue was primarily due to lower volumes from certain existing clients, attributable to the impact of the economy on the clients’ business, partially offset by increased client volume related to the implementation of new contracts during 2010 and into 2011.

 

Portfolio Management’s revenue for the three months ended March 31, 2011, included an $18.6 million write-down of certain portfolios of purchased accounts receivable, which were sold in April 2011. Revenue for the three months ended March 31, 2011 also included a $1.5 million net recovery of previously recorded impairment charges, which reduced the valuation allowance against the carrying value of the portfolios, compared to a net recovery of $1.4 million for the three months ended March 31, 2010. Portfolio Management’s collections decreased $14.9 million, or 44.2 percent, to $18.8 million for the three months ended March 31, 2011, from $33.7 million for the three months ended March 31, 2010. Excluding the effect of the write-down and the net recoveries, Portfolio Management’s revenue represented 40.0 percent of collections for the three months ended March 31, 2011, as compared to 40.6 percent of collections for the three months ended March 31, 2010. The decrease in revenue and

 

27



Table of Contents

 

collections was primarily a result of the decision to minimize further investments in purchased accounts receivable during 2010 and 2011.

 

Payroll and related expenses.  Payroll and related expenses decreased $17.1 million to $169.1 million for the three months ended March 31, 2011, from $186.2 million for the three months ended March 31, 2010, and increased as a percentage of revenue to 45.1 percent from 44.0 percent.

 

Payroll and related expenses by segment (dollars in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

% of

 

 

 

% of

 

 

 

 

 

 

 

2011

 

Revenue

 

2010

 

Revenue

 

$ Change

 

% Change

 

ARM

 

$

117,947

 

36.4

%

$

128,670

 

37.2

%

$

(10,723

)

(8.3

)%

CRM

 

50,605

 

74.0

%

56,406

 

73.7

%

(5,801

)

(10.3

)%

Portfolio Management

 

585

 

(6.2

)%

1,192

 

7.8

%

(607

)

(50.9

)%

Eliminations

 

 

 

 

 

 

 

Total

 

$

169,137

 

45.1

%

$

186,268

 

44.0

%

$

(17,131

)

(9.2

)%

 

The decrease in ARM’s payroll and related expenses as a percentage of revenue was primarily due to cost saving initiatives, including off-shoring of back-office functions and ongoing restructuring.

 

The slight increase in CRM’s payroll and related expenses as a percentage of revenue was primarily a result of leveraging its infrastructure over the lower revenue base.

 

Portfolio Management outsources all of its collection services to ARM and, therefore, has a relatively small fixed payroll cost structure.

 

Selling, general and administrative expenses.  Selling, general and administrative expenses decreased $9.6 million to $101.9 million for the three months ended March 31, 2011 from $111.5 million for the three months ended March 31, 2010, and increased as a percentage of revenue to 27.2 percent from 26.3 percent.

 

Selling, general and administrative expenses by segment (dollars in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

% of

 

 

 

% of

 

 

 

 

 

 

 

2011

 

Revenue

 

2010

 

Revenue

 

$ Change

 

% Change

 

ARM

 

$

87,288

 

26.9

%

$

96,583

 

28.0

%

$

(9,295

)

(9.6

)%

CRM

 

14,184

 

20.7

%

14,152

 

18.5

%

32

 

0.2

%

Portfolio Management

 

8,602

 

(90.7

)%

14,192

 

92.9

%

(5,590

)

(39.4

)%

Eliminations

 

(8,173

)

98.4

%

(13,395

)

97.6

%

5,222

 

(39.0

)%

Total

 

$

101,901

 

27.2

%

$

111,532

 

26.3

%

$

(9,631

)

(8.6

)%

 

The decrease in ARM’s selling, general and administrative expenses as a percentage of revenue was primarily due to cost saving initiatives, including ongoing restructuring of facilities.

 

The increase in CRM’s selling, general and administrative expenses as a percentage of revenue was primarily attributable to leveraging its infrastructure over the lower revenue base.

 

The decrease in Portfolio Management’s selling, general and administrative expenses resulted from a $5.4 million decrease in fees for collection services provided by ARM, which was due to the reduction in purchases of accounts receivable, since these servicing fees are based on collections. Included in Portfolio Management’s selling, general and administrative expenses for the three months ended March 31, 2011 and 2010, was $8.3 million and $13.7 million, respectively, of intercompany expense from ARM, for services provided to Portfolio Management, which was eliminated in consolidation.

 

28



Table of Contents

 

Reimbursable costs and fees.  Reimbursable costs and fees consist of court costs, legal fees and repossession fees, representing out-of-pocket expenses that are reimbursed by our clients. Reimbursable costs and fees of $84.9 million and $84.3 million for the three months ended March 31, 2011 and 2010, respectively, are recorded as both revenue and operating expenses on the statement of operations.

 

Restructuring charges.  During the three months ended March 31, 2011, we incurred restructuring charges of $12.2 million, related to streamlining the cost structure of the Company’s operations. The charges consisted primarily of costs associated with the closing of redundant facilities and severance. This compares to $1.4 million of restructuring charges for the three months ended March 31, 2010. The severance accrual recorded for the three months ended March 31, 2011, included approximately $3.4 million related to termination benefits provided to our former President and Chief Executive Officer, who remains as our Chairman of the Board of Directors.

 

Depreciation and amortization.  Depreciation and amortization decreased to $26.0 million for the three months ended March 31, 2011, from $27.7 million for the three months ended March 31, 2010. The decrease was primarily attributable to lower depreciation resulting from more assets becoming fully depreciated.

 

Other income (expense).  Interest expense decreased to $21.8 million for the three months ended March 31, 2011, from $23.6 million for the three months ended March 31, 2010. Interest expense for the three months ended March 31, 2011 and 2010 included $777,000 and $2.3 million, respectively, of net losses from interest rate swap agreements and embedded derivatives. Other expense, net for the three months ended March 31, 2010 included approximately $198,000 of net gains resulting from foreign exchange contracts.

 

Income tax expense.  For the three months ended March 31, 2011, we recorded income tax expense of $1.9 million on a pre-tax loss of $41.4 million, or an effective income tax rate of (4.6) percent. For the three months ended March 31, 2010, we recorded income tax expense of $3.0 million on a pre-tax loss of $11.3 million, or an effective tax rate of (26.9) percent. The Company’s income tax expense differs from the amount of income tax determined by applying the statutory U.S. federal income tax rate to pre-tax income (loss) primarily as a result of the recognition of a valuation allowance on certain domestic net deferred tax assets and income tax expense attributable to state and foreign jurisdictions.

 

Liquidity and Capital Resources

 

Our primary sources of cash are cash flows from operations, including collections on purchased accounts receivable, bank borrowings, and equity and debt offerings. Cash has been used for acquisitions, repayments of bank borrowings, purchases of equipment, purchases of accounts receivable, and working capital to support our growth.

 

The cash flow from our contingency collection business and our purchased portfolio business is dependent upon our ability to collect from consumers and businesses. Many factors, including the economy and our ability to hire and retain qualified collectors and managers, are essential to our ability to generate cash flows. The cash flows from our first-party collections and our CRM businesses are dependent upon the volume of business that our clients place with us. Fluctuations in these factors that cause a negative impact on our business could have a material impact on our expected future cash flows.

 

The capital and credit markets have experienced significant volatility in the recent past and if this continues, it is possible that our ability to access the capital and credit markets may be limited. Our senior notes and senior subordinated notes are assigned ratings by certain rating agencies. Changes in our business environment, operating results, cash flows, or financial position could impact the ratings assigned by these rating agencies. Significant changes in assigned ratings could also significantly affect the costs of borrowing, which could have a material impact on our financial condition and results of operations.

 

We have a senior credit facility that consists of a term loan ($491.8 million outstanding as of March 31, 2011) and a $75.0 million revolving credit facility ($5.0 million outstanding as of March 31, 2011). Additionally, we have $165.0 million of floating rate senior notes and $200.0 million 11.875 percent senior subordinated notes outstanding. As a result, we are significantly leveraged.

 

Borrowings under the senior credit facility are collateralized by substantially all of our assets. The senior credit facility contains certain financial and other covenants such as maintaining a maximum leverage ratio and a minimum interest coverage ratio, and includes restrictions on, among other things, acquisitions, the incurrence of

 

29



Table of Contents

 

additional debt, investments, investments in purchased accounts receivable, disposition of assets, liens and dividends and other distributions.

 

On March 25, 2011, we amended our senior credit facility to, among other things, adjust certain financial covenants, including increasing certain maximum leverage ratios and decreasing certain minimum interest coverage ratios, extend the maturity date of the revolving credit facility from November 15, 2011 to December 31, 2012 and reduce the maximum borrowing capacity to $75.0 million through November 15, 2011 and $67.5 million thereafter, and permit us to sell all or a portion of our portfolios of accounts receivable. We believe we will be able to maintain compliance with such covenants over the next twelve months.

 

At March 31, 2011, our leverage ratio was 6.03, compared to the covenant maximum of 6.75, and our interest coverage ratio was 1.76, compared to the covenant minimum of 1.60. We were in compliance with all required financial covenants under our senior credit facility and we were not aware of any events of default as of March 31, 2011.

 

Our ability to maintain compliance with the financial covenants under our senior credit facility will be highly dependent on our results of operations and, to the extent necessary, our ability to implement remedial measures such as further reductions in operating costs. If we were to enter into an agreement with our lenders for future covenant compliance relief, such relief could result in additional fees and higher interest expense.

 

The economic and business climate in 2010 and into 2011 continued to be very difficult and there is uncertainty as to whether the economic and business climate in 2011 will improve. In addition, other factors, such as the loss of a significant client or reduced client volumes, may impact our ability to meet our debt covenants in the future. Therefore, no assurance can be given that we will be able to maintain compliance with our financial covenants in future periods.

 

If an event of default, such as failure to comply with covenants, were to occur under the senior credit facility and we were not able to obtain an amendment or waiver from the lenders, we would not be able to borrow under the revolving credit facility and the lenders would be entitled to declare all amounts outstanding under the senior credit facility immediately due and payable and foreclose on the pledged assets. In addition, the acceleration of the amounts due under the senior credit facility could be an event of default under our Senior Notes and Senior Subordinated Notes and entitle the holders to accelerate the payment of these obligations. Under these circumstances, the acceleration of the payment of our debt would have a material adverse effect on our business.

 

Our senior credit facility, as amended, does not give us the ability to use available excess cash flow to repurchase our senior notes and senior subordinated notes. However, our senior credit facility, as amended, permits us to repurchase our senior notes and senior subordinated notes out of the net cash proceeds of new equity issuances. We are aware that our senior notes and senior subordinated notes may trade at substantial discounts to their face amounts. We or our stockholders may from time to time seek to retire or purchase our outstanding notes through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Our stockholders who acquire such notes may seek to contribute them to us, for retirement, in exchange for the issuance of additional equity. The amounts involved may be material.

 

Cash Flows from Operating Activities.  Cash provided by operating activities was $12.0 million for the three months ended March 31, 2011, compared to $37.1 million for the three months ended March 31, 2010. The decrease was primarily attributable to lower operating results for the three months ended March 31, 2011.

 

Cash Flows from Investing Activities.  Cash provided by investing activities was $5.0 million for the three months ended March 31, 2011, compared to $9.1 million for the three months ended March 31, 2010. The decrease in cash provided by investing activities was primarily attributable to lower collections of purchased accounts receivable, net of purchases, as well as higher purchases of property and equipment.

 

Cash Flows from Financing Activities.  Cash used in financing activities was $24.5 million for the three months ended March 31, 2011, compared to $51.1 million for the three months ended March 31, 2010. The decrease in cash used in financing activities was due primarily to lower total repayments of borrowings under our senior credit facility during the three months ended March 31, 2011, as compared to the prior year period.

 

Senior Credit Facility.  Our senior credit facility is with a syndicate of financial institutions and consists of a term loan and a $75.0 million revolving credit facility. We are required to make quarterly principal repayments of

 

30



Table of Contents

 

approximately $1.5 million on the term loan until its maturity in May 2013, at which time its remaining balance outstanding is due. We are also required to make quarterly prepayments of 75 percent of the excess cash flow from our purchased accounts receivable, and annual prepayments of 75 percent or 50 percent of our excess annual cash flow, based on our leverage ratio, less the amounts paid during the year from the purchased accounts receivable excess cash flow prepayments. The revolving credit facility requires no minimum principal payments until its maturity in December 2012. At March 31, 2011, the balance outstanding on the term loan was $491.8 million and there was $5.0 million outstanding on the revolving credit facility. The availability of the revolving credit facility is reduced by any unused letters of credit ($6.7 million at March 31, 2011). As of March 31, 2011, we had $63.3 million of remaining availability under the revolving credit facility.

 

All borrowings bear interest at an annual variable rate, based on either the prime rate (3.25 percent at March 31, 2011), the federal funds rate (0.10 percent at March 31, 2011) or LIBOR (0.26 percent 30-day LIBOR at March 31, 2011) plus an applicable margin, which is based on the type of rate and our funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio, as defined in the loan agreement, subject to certain interest rate minimum requirements. We are charged a quarterly commitment fee on the unused portion of the revolving credit facility at an annual rate ranging from 0.50 percent to 0.75 percent. The effective interest rate on the senior credit facility was approximately 8.60 percent and 9.23 percent for the three months ended March 31, 2011 and 2010, respectively.

 

Senior Notes and Senior Subordinated Notes.  We have $165.0 million of floating rate senior notes due November 2013, referred to as the Senior Notes, and $200.0 million of 11.875 percent senior subordinated notes due November 2014, referred to as the Senior Subordinated Notes, collectively referred to as the Notes. The Notes are guaranteed, jointly and severally, on a senior basis with respect to the Senior Notes and on a senior subordinated basis with respect to the Senior Subordinated Notes, in each case by all of our existing and future domestic restricted subsidiaries (other than certain subsidiaries and joint ventures engaged in financing the purchase of delinquent accounts receivable portfolios and certain immaterial subsidiaries). The Senior Notes bear interest at an annual rate equal to LIBOR plus 4.875 percent, reset quarterly.

 

For a description of the covenants and other material terms of the Notes, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

Contractual Obligations. There have been no material changes, outside the ordinary course of our business, to our contractual obligations as reported in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

Market Risk

 

We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes, foreign currency exchange rate fluctuations, changes in corporate tax rates, and inflation. We employ risk management strategies that may include the use of derivatives, such as interest rate swap agreements, interest rate cap agreements, and foreign currency forwards and options to manage these exposures. As of March 31, 2011, none of our derivatives were accounted for as hedges. We do not enter into derivatives for trading purposes.

 

Foreign Currency Risk.  Foreign currency exposures arise from transactions denominated in a currency other than the functional currency and from foreign denominated revenue and profit translated into U.S. dollars. The primary currencies to which we are exposed include the Philippine peso, the Canadian dollar, the British pound and the Australian dollar. Due to the size of the Philippine operations, we currently use forward exchange contracts to limit potential losses in earnings or cash flows from adverse foreign currency exchange rate movements. These contracts are entered into to protect against the risk that the eventual cash flows resulting from such contracts will be adversely affected by changes in exchange rates. Our objective is to maintain economically balanced currency risk management strategies that provide adequate downside protection.

 

Interest Rate Risk.  At March 31, 2011, we had $663.5 million in outstanding variable rate borrowings. A material change in interest rates could adversely affect our operating results and cash flows. A 25 basis-point increase in interest rates could increase our annual interest expense by $125,000 for each $50 million of variable debt outstanding for the entire year.

 

31



Table of Contents

 

Critical Accounting Policies and Estimates

 

General.  The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. We believe the following accounting policies and estimates are the most critical and could have the most impact on our results of operations: goodwill, other intangible assets and purchase accounting, revenue recognition for purchased accounts receivable, income taxes, and allowance for doubtful accounts. These are described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in note 2 to our 2010 financial statements, both of which are included in our Annual Report on Form 10-K for the year ended December 31, 2010. During the three months ended March 31, 2011, we did not make any material changes to our estimates or methods by which estimates are derived with regard to our critical accounting policies.

 

Recently Issued Accounting Guidance

 

For a discussion of recently issued accounting guidance, see note 16 in our Notes to Consolidated Financial Statements included in this Form 10-Q.

 

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

 

Included in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Report on Form 10-Q.

 

Item 4.  Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of March 31, 2011. Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of the end of the period covered by this Report, our disclosure controls and procedures were effective in reaching a reasonable level of assurance that the (i) information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Our management, with the participation of our chief executive officer and chief financial officer, also conducted an evaluation of our internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), to determine whether any changes occurred during the quarter ended March 31, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there were no such changes during the quarter ended March 31, 2011.

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all controls systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

32



Table of Contents

 

Part II.  Other Information

 

Item 1.    Legal Proceedings

 

The Company is party, from time to time, to various legal proceedings, regulatory investigations, client audits and tax examinations incidental to its business. The Company continually monitors these legal proceedings, regulatory investigations, client audits and tax examinations to determine the impact and any required accruals. See “Item 3. Legal Proceedings” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

Attorneys General:

 

From time to time, the Company receives subpoenas or other similar information requests from various states’ Attorneys General, requesting information relating to the Company’s debt collection practices in such states. The Company responds to such inquires or investigations and provides certain information to the respective Attorneys General offices. The Company believes it is in compliance with the laws of the states in which it does business relating to debt collection practices in all material respects. However, no assurance can be given that any such inquiries or investigations will not result in a formal investigation or an enforcement action. Any such enforcement actions could result in fines as well as the suspension or termination of the Company’s ability to conduct business in such states.

 

Other:

 

The Company is involved in other legal proceedings, regulatory investigations, client audits 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 the financial condition or results of operations of the Company.

 

Item 1A.       Risk Factors

 

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, referred to as the “2010 Form 10-K”, which could materially affect our business, financial condition or future results. The risk factors in our 2010 Form 10-K have not materially changed. The risks described in our 2010 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3.    Defaults Upon Senior Securities

 

None

 

Item 4.    [Removed and Reserved]

 

Item 5.    Other Information

 

(a)     None.

 

(b)     Not applicable

 

33



Table of Contents

 

Item 6.    Exhibits

 

10.1         Employment Agreement, dated as of March 18, 2011, between NCO Group, Inc. and Ronald A. Rittenmeyer (incorporated by reference to Exhibit 10.1 filed with NCO Group, Inc.’s Current Report on Form 8-K filed on March 24, 2011).

 

10.2         Fourth Amendment to Credit Agreement dated as of March 25, 2011 by and among NCO Group, Inc., NCO Financial Systems, Inc., certain guarantors under the Credit Agreement, Citizens Bank of Pennsylvania as the administrative agent, Citizens Bank of Pennsylvania as sole issuing bank and certain lenders (incorporated by reference to Exhibit 10.41 filed with NCO Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2010).

 

12            Statement of Computation of Ratio of Earnings to Fixed Charges.

 

31.1         Certification of Chief Executive Officer pursuant to Rule 15d-14(a) promulgated under the Exchange Act.

 

31.2         Certification of Chief Financial Officer pursuant to Rule 15d-14(a) promulgated under the Exchange Act.

 

32.1         Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2         Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

34



Table of Contents

 

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

NCO Group, Inc.

 

 

 

 

Date:    May 13, 2011

By:

 /s/ Ronald A. Rittenmeyer

 

 

Ronald A. Rittenmeyer

 

 

President and Chief Executive Officer

 

 

(principal executive officer)

 

 

 

 

 

 

Date:    May 13, 2011

By:

 /s/ John R. Schwab

 

 

John R. Schwab

 

 

Executive Vice President, Finance

 

 

and Chief Financial Officer

 

 

(principal financial and accounting officer)

 

35



Table of Contents

 

Exhibit Index

 

Exhibit No.

 

Description

 

 

 

10.1

 

Employment Agreement, dated as of March 18, 2011, between NCO Group, Inc. and Ronald A. Rittenmeyer (incorporated by reference to Exhibit 10.1 filed with NCO Group, Inc.’s Current Report on Form 8-K filed on March 24, 2011).

 

 

 

10.2

 

Fourth Amendment to Credit Agreement dated as of March 25, 2011 by and among NCO Group, Inc., NCO Financial Systems, Inc., certain guarantors under the Credit Agreement, Citizens Bank of Pennsylvania as the administrative agent, Citizens Bank of Pennsylvania as sole issuing bank and certain lenders (incorporated by reference to Exhibit 10.41 filed with NCO Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2010).

 

 

 

12

 

Statement of Computation of Ratio of Earnings to Fixed Charges.

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 15d-14(a) promulgated under the Exchange Act.

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 15d-14(a) promulgated under the Exchange Act.

 

 

 

32.1

 

Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

36