<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996, or
/ / Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to
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COMMISSION FILE NUMBER 0-21639
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NCO GROUP, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA
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(State or other jurisdiction of incorporation or organization)
1740 Walton Road, Blue Bell, Pennsylvania
- -------------------------------------------------------------------------------
(Address of principal executive offices)
23-2858652
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(IRS Employer Identification Number)
19422
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(Zip Code)
610-832-1440
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(Registrant's telephone number including area code)
NOT APPLICABLE
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(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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes____ No _____X*____
The number of shares outstanding of each of the issuer's classes of
common stock was 6,713,447 shares of common stock, no par value, outstanding as
of December 18, 1996
* Registrant became subject to the filing requirements of Securities Exchange
Act of 1934 on November 6, 1996 when its registration statement on Form S-1
(Registration no. 333-11745) was declared effective.
<PAGE>
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NCO GROUP, INC.
- --------------------------------------------------------------------------------
INDEX
PAGE
Part I FINANCIAL INFORMATION
Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Income -
Three months and nine months ended
September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1996 and 1995 6
Pro Forma Consolidated Balance Sheet - September 30, 1996 8
Pro Forma Consolidated Statement of Income -
Nine months ended September 30, 1996 10
Notes to Consolidated Financial Statements 11
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15
PART II OTHER INFORMATION 19
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Shareholders
Item 5. Other information
Item 6. Exhibits and Reports on 8-K
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
NCO GROUP, INC.
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
------------- ------------
ASSETS 1996 1995
----------- -----------
Current assets:
Cash and cash equivalents $ 1,089,983 $ 804,550
Available-for-sale securities 331,163 299,488
Accounts receivable, trade, net of 4,378,670 1,394,801
allowance for doubtful accounts
Accounts receivable, purchased 21,134 7,745
Notes receivable 100,000
Prepaid expenses and other current assets 343,813 118,793
----------- -----------
Total current assets 6,164,763 2,725,377
Funds held in trust for clients
Property and equipment, net 2,705,095 637,133
Other assets:
Goodwill, net of accumulated amortization 14,449,868 2,636,271
Covenants, net of accumulated amortization 201,875
Acquired account inventory, net 60,538 138,623
Deferred tax benefit 68,382
Deferred financing costs 350,615 279,014
Other assets 246,641 227,826
----------- -----------
Total other assets 15,377,919 3,281,734
----------- -----------
$24,247,777 $ 6,644,244
=========== ===========
The accompanying notes are an integral part of this statement
<PAGE>
NCO GROUP, INC.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------ ------------
<S> <C> <C>
Current liabilities:
Long term debt, current portion $ 342,610 $ 46,171
Capitalized lease obligations, current portion 113,759
Corporate taxes payable 167,753
Accounts payable 547,772 221,562
Accrued expenses 1,097,085 565,734
Accrued repayment guarantee 190,004
Accrued compensation and related expenses 1,018,493 777,985
Unearned revenue, net of related costs 57,132 302,384
------------ ------------
Total current liabilities 3,534,608 1,913,836
Funds held in trust for clients
Long-term liabilities:
Long term debt, net of current portion 15,049,500 2,592,906
Unearned revenue, net of related costs 393,675 86,155
Convertible note 1,000,000
Capitalized lease obligations, net of current portion 258,464
Commitments and contingencies
Shareholders' equity:
Common Stock 537,326 537,326
Unexercised warrants 177,294 177,294
Unrealized gain on securities 41,001 41,339
Retained earnings 3,255,909 1,378,261
Note receivable, Shareholder (82,873)
------------ ------------
Total Shareholders' equity 4,011,530 2,051,347
------------ ------------
$ 24,247,777 $ 6,644,244
============ ============
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE>
NCO GROUP, INC.
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------------ ---------------------------------------
1995 1996 1995 1996
---------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Revenues $ 3,480,485 $ 7,714,803 $ 9,026,743 $ 20,257,467
Operating costs and expenses:
Payroll and related expenses 1,849,043 3,630,042 4,809,942 9,583,937
Selling, general and administrative 1,044,403 2,501,251 2,785,061 6,595,877
expenses
Depreciation and amortization expense 90,691 400,476 206,561 823,290
---------------- ---------------- ------------------ -----------------
2,984,137 6,531,769 7,801,564 17,003,104
---------------- ---------------- ------------------ -----------------
Income from operations 496,348 1,183,034 1,225,179 3,254,363
Other income (expense):
Interest and investment income 18,569 33,419 43,129 80,834
Interest expense (54,451) (249,405) (102,756) (606,899)
Loss on disposal of assets (49,082)
---------------- ---------------- ------------------ -----------------
(35,882) (215,986) (108,709) (526,065)
---------------- ---------------- ------------------ -----------------
Income before provision for income taxes 460,466 967,048 1,116,470 2,728,298
Income tax benefit, net of expense 1,328 1,328
---------------- ---------------- ------------------ -----------------
Net income $ 460,466 $ 968,376 $ 1,116,470 $ 2,729,626
================ ================ ================== =================
Pro forma:
Historical income before income taxes $ 460,466 $ 967,048 $ 1,116,470 $ 2,728,298
Pro forma provision for income taxes 184,186 388,409 446,588 1,092,409
================ ================ ================== =================
Pro forma net income $ 276,280 $ 578,639 $ 669,882 $ 1,635,889
================ ================ ================== =================
Pro forma net income per share $ 0.06 $ 0.12 $ 0.14 $ 0.34
================ ================ ================== =================
Pro forma weighted average shares
outstanding 4,752,780 4,752,780 4,747,718 4,752,780
================ ================ ================== =================
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE>
NCO GROUP, INC
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
---------------------------------------
1995 1996
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,116,470 $ 2,729,626
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 130,075 284,459
Loss on disposal of equipment 49,082
Gain on sale of securities (2,353) (338)
Amortization of goodwill and covenants 76,485 538,396
Amortization of deferred financing costs 10,389 58,399
Provision for doubtful accounts 3,808 383
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, trade (536,021) (1,459,651)
Notes receivable (38,943) 155,856
Acquired accounts inventory 79,409 78,085
Accounts receivable, purchased 44,038 (13,389)
Prepaid expenses 2,311 (151,986)
Deferred tax benefit (152,306)
Other assets (17,308) 52,467
Accounts payable 25,997 326,210
Corporate taxes payable 17,487 167,753
Accrued expenses 597,781 (749,551)
Accrued repayment guarantee 190,004
Accrued compensation and related costs (34,738) 240,508
Unearned revenue 3,908 (72,943)
---------------- ---------------
Net cash provided by operating activities 1,527,877 2,221,982
Cash flows from investing activities:
Purchase of property and equipment (126,855) (708,121)
Purchase of securities (107,171) (159,562)
Proceeds from sale of securities 79,929 127,887
Purchase of covenants (201,875)
Payment of deferred financing costs (130,000)
Net cash paid for acquisitions (1,734,633) (12,520,307)
---------------- ---------------
Net cash used in investing activities (1,888,730) (13,591,978)
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE>
NCO GROUP, INC
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
---------------------------------------
1995 1996
------------------ -----------------
<S> <C> <C>
Cash flows from financing activities:
Repayment of notes payable (1,059,696) (125,466)
Borrowings under credit agreement 2,450,000 12,550,000
Payment of fees to acquire new debt (134,163)
Issuance of common stock 188,000
Decrease in notes receivable - shareholders 82,873
Distributions to shareholders (1,036,014) (851,978)
---------------- ---------------
Net cash provided by financing activities 408,127 11,655,429
---------------- ---------------
Net increase in cash 47,274 285,433
Cash and equivalents at beginning of period 526,018 804,550
---------------- ---------------
================ ===============
Cash and equivalents at end of period $ 573,292 $ 1,089,983
================ ===============
Supplemental disclosures of cash flow information:
Cash paid for interest 99,586 519,499
Noncash investing and financing activities:
Note receivable - shareholder 82,873
Fair value of assets acquired 2,145,578 4,087,253
Liabilities assumed from acquisitions 416,334
Warrants issued with debt 177,294
Property acquired under capital leases 348,586
Convertible note payable, issued for acquisition 1,000,000
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Balance Sheet
September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Historical Offering Pro Forma
ASSETS NCO Adjustments (1) Adjusted
----------------- -------------------- -------------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,089,983 $ 10,887,584 $ 11,977,567
Available-for-sale securities 331,163 331,163
Accounts receivable, trade, net of allowance 4,378,670 4,378,670
for doubtful accounts
Accounts receivable, purchased 21,134 21,134
Notes receivable
Prepaid expenses and other current assets 343,813 (135,491) 208,322
----------------- -------------------- -------------------
Total current assets 6,164,763 10,752,093 16,916,856
Funds held in trust for clients
Property and equipment, net 2,705,095 2,705,095
Other assets:
Goodwill, net of accumulated amortization 14,449,868 14,449,868
Covenants, net of accumulated amortization 201,875 201,875
Acquired account inventory, net 60,538 60,538
Deferred tax benefit 68,382 68,382
Deferred financing costs 350,615 350,615
Other assets 246,641 246,641
----------------- -------------------- -------------------
Total other assets 15,377,919 15,377,919
----------------- -------------------- -------------------
$ 24,247,777 $ 10,752,093 $ 34,999,870
================= ==================== ===================
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Balance Sheet
September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Historical Offering Pro Forma
LIABILITIES AND SHAREHOLDERS' EQUITY NCO Adjustments (1) Adjusted
----------------- -------------------- -------------------
<S> <C> <C> <C>
Current liabilities:
Long term debt, current portion $ 342,610 $ $ 342,610
Capitalized lease obligations, current portion 113,759 113,759
Corporate taxes payable 167,753 167,753
Accounts payable 547,772 547,772
Accrued expenses 1,097,085 1,097,085
Accrued repayment guarantee 190,004 190,004
Accrued compensation and related expenses 1,018,493 1,018,493
Unearned revenue, net of related costs 57,132 57,132
----------------- -------------------- -------------------
Total current liabilities 3,534,608 3,534,608
Funds held in trust for clients
Long-term liabilities:
Long term debt, net of current portion 15,049,500 (18,246,851) 49,500
3,246,851
Unearned revenue, net of related costs 393,675 393,675
Convertible note 1,000,000 1,000,000
Capitalized lease obligations, net of current portion 258,464 258,464
Commitments and contingencies
Shareholders' equity:
Common Stock 537,326 28,998,944 29,260,851
(275,419)
Unexercised warrants 177,294 177,294
Unrealized gain on securities 41,001 41,001
Retained earnings 3,255,909 (3,246,851) 284,477
275,419
----------------- -------------------- -------------------
Total Shareholders' equity 4,011,530 25,752,093 29,763,623
----------------- -------------------- -------------------
$ 24,247,777 $ 10,752,093 $ 34,999,870
================= ==================== ===================
</TABLE>
(1) Gives effect to: (i) the issuance of 2.5 million shares of common stock at
$13 per share, net of commissions and offering expenses, utilized to repay
acquisition-related debt of $15.0 million and to fund the distribution of
undistributed S Corporation earnings of $3.2 million.
The accompanying notes are an integral part of this statement
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Statements of Income
Nine months ended September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Historical
---------------------------------- Acquisition
NCO MAB Adjustments
--------------- --------------- -------------------
<S> <C> <C> <C>
Revenues $ 20,257,467 $ 9,162,744 $
Operating costs and expenses:
Payroll and related expenses 9,583,937 5,870,416 (1,025,025)(1)
Selling, general and administrative expenses 6,595,877 3,255,089
Depreciation and amortization expense 823,290 337,295 29,515 (1)
--------------- --------------- -------------------
17,003,104 9,462,800 (995,510)
--------------- --------------- -------------------
Income from operations 3,254,363 (300,056) 995,510
Other income (expense):
Interest and investment income 80,834
Interest expense (606,899) (50,974)
--------------- --------------- -------------------
(526,065) (50,974)
--------------- --------------- -------------------
Income before tax provision 2,728,298 (351,030) 995,510
Pro forma provision for taxes (2) 1,328 (83,924)
--------------- --------------- -------------------
Pro forma net income $ 2,729,626 $ (434,954) $ 995,510
=============== =============== ===================
Pro forma net income per share
Pro forma weighted average shares outstanding
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE>
<TABLE>
<CAPTION>
Offering Pro Forma As
Pro Forma Adjustments Adjusted
------------------ ------------------ ---------------------
<S> <C>
Revenues $ 29,420,211 $ $ 29,420,211
Operating costs and expenses:
Payroll and related expenses 14,429,328 14,429,328
Selling, general and administrative expenses 9,850,966 9,850,966
Depreciation and amortization expense 1,190,100 1,190,100
------------------ ------------------ ---------------------
25,470,394 25,470,394
------------------ ------------------ ---------------------
Income from operations 3,949,817 3,949,817
Other income (expense):
Interest and investment income 80,834 80,834
Interest expense (657,873) 479,668 (1) (178,205)
------------------ ------------------ ---------------------
(577,039) 479,668 (97,371)
------------------ ------------------ ---------------------
Income before tax provision 3,372,778 479,668 3,852,446
Pro forma provision for taxes (2) 1,328 (1,554,978) (2) (1,637,574)
------------------ ------------------ ---------------------
Pro forma net income $ 3,374,106 $ (1,075,310) $ 2,214,872
================== ================== =====================
Pro forma net income per share $ 0.36
=====================
Pro forma weighted average shares outstanding 6,107,400
=====================
</TABLE>
(1) Gives effect to: (i) the acquisition of Management Adjustment Bureau as if
it occurred on January 1, 1996; (ii) the reduction of certain redundant
operating costs and expenses that were immediately identifiable at the time of
the MAB acquisition; (iii) the elimination of interest expense associated with
acquisition-related debt assumed to be repaid with offering proceeds;(iv)the
issuance of 1,604,620 shares of common stock at $13 per share, net of
commissions and offering expenses, sufficient to repay acquisition-related debt
of $15.0 million and to fund the distribution of undistributed S Corporation
earnings of $3.2 million.
(2) Historical provision for taxes includes $155,309 adjustment for a deferred
tax asset in NCO and $83,928 adjustment for a deferred tax liability in MAB
attributable to the termination of their respective S Corporation elections. Pro
forma net income tax has been computed as if the Company had been fully subject
to federal and state income taxes for all periods presented.
<PAGE>
NCO GROUP, INC.
Notes to Financial Statements
(Unaudited)
1. Nature of Operations:
NCO Group, Inc. (the "Company") is a leading provider of accounts receivable
management and related services utilizing an extensive teleservices
infrastructure. The Company's client base is comprised of companies in the
following industries: education, financial services, healthcare,
telecommunications, utilities and government entities.
Effective September 3, 1996, the Company reorganized its corporate structure. At
September 3, 1996, the shareholders of NCO Financial Systems, Inc. contributed
each of their shares of common stock in exchange for one share common stock of
the Company, a recently formed corporation. The Company effected a 46.56 for 1
stock split in September 1996 and increased the number of authorized shares to
5,000,000 shares of preferred stock and 25,000,000 shares of common stock. All
per share and related amounts have been adjusted to reflect the stock exchange
and stock split.
Simultaneously with the contribution of NCO Financial Systems, Inc. common
stock, three additional subsidiaries of NCO Group, Inc. were formed. Prior to
September 3, 1996, NCO Financial Systems, Inc. was the only company within NCO
Group, Inc. to have operations.
2. Summary of Significant Accounting Policies:
Revenue Recognition:
The Company generates revenues from contingency fees and contractual services.
Contingency fee revenue is recognized upon collection of funds on behalf of
clients. Contractual services revenue is deferred and recognized as services are
performed.
Income Taxes:
The Company had elected to be taxed as an "S Corporation" under the Internal
Revenue Code and the Pennsylvania Tax Code. While this election was in effect,
no provision was made for income taxes by the Company since all income was taxed
directly to, and losses and tax credits were utilized directly by, the
shareholders of the Company.
The Company terminated its S Corporation status on September 3, 1996. Upon
termination of its S Corporation status, the Company adopted SFAS No. 109,
"Accounting for Income Taxes". This standard requires an asset and liability
approach that takes into account changes in tax rates when valuing the deferred
tax amounts to be reported in the balance sheet.
Upon termination of the S Corporation status and upon adoption of SFAS 109, the
Company recorded a net deferred tax asset of $155,309, offset by a deferred tax
liability of approximately $83,924. The net deferred tax asset results primarily
from differences in the treatment of unearned revenue and acquired account
inventory. The deferred tax liability results primarily from Management
Adjustment Bureau, Inc. using the cash basis of accounting for income tax
purposes and the accrual basis of accounting for financial reporting purposes.
<PAGE>
Credit Policy:
The Company has two types of arrangements under which it collects its
contingency fee revenue. For certain clients, the Company remits funds collected
on behalf of the client, net of the related contingency fees while, for other
clients, the Company remits gross funds, collected on behalf of clients, and
bills the client separately for its contingency fees. Management carefully
monitors its client relationships in order to minimize its credit risk and
generally does not require collateral. In the event of collection delays from
clients, management may at its discretion change from the gross remittance
method to the net remittance method.
Goodwill and Acquisition Costs:
Goodwill represents the excess of purchase price over the fair market value of
the net assets of the acquired business. Goodwill is amortized on a
straight-line basis over 15 to 25 years. The recoverability of goodwill is
periodically reviewed by the Company. In making such determination with respect
to goodwill, the Company evaluates the operating cash flows of the underlying
business which gave rise to such amount.
Deferred Financing Costs:
Deferred financing costs relate to debt issuance costs incurred which are
capitalized and amortized over the term of the debt.
Estimates Utilized in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Earnings Per Share:
On September 3, 1996, the shareholders of NCO Financial Systems, Inc. (Note 1)
contributed each of their shares of common stock in exchange for one share of
the Company's common stock. The Company effected a 46.56-for-1 stock split in
September 1996. All per share and related amounts contained in these financial
statements and notes have been adjusted to reflect the stock exchange and stock
split.
Pro forma net income per share was computed by dividing the pro forma net income
for the nine months ended September 30, 1996 and 1995 by the pro forma weighted
average number of shares outstanding. Pro forma weighted average shares
outstanding are based on the weighted average number of shares outstanding
including common equivalent shares giving retroactive effect as of January 1,
1995 to the stock split. All outstanding options and warrants have been treated
as common equivalent shares in calculating pro forma net income per share, using
the treasury stock method and the initial public offering price of $13.00 per
share, only when their effect would be dilutive. The pro forma weighted average
number of shares outstanding have also been adjusted to include the number of
common shares (250,000) that the Company would have needed to issue at the
initial public offering price of $13.00 per share to fund the distribution of
previously taxed but undistributed S Corporation earnings through the date on
which the Company terminated its S Corporation status ($3,246,851).
<PAGE>
Interim Financial Information:
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended September
30, 1996 are not necessarily indicative of the results that may be expected for
the year ending December 30, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on September 11, 1996, as amended.
3. Acquisitions:
On September 5, 1996, the Company purchased all the outstanding stock of
Management Adjustment Bureau, Inc. ("MAB") for $8,000,000 in cash and a
$1,000,000 convertible note. The purchase price was allocated based upon the
estimated fair market value of the acquired assets and liabilities which
resulted in goodwill of $8,050,000.
On January 3, 1996, the Company purchased certain assets of Trans Union
Corporation Collections Division ("TCD") for $4,750,000 in cash. The purchase
price was allocated based upon the estimated fair market value of property,
accounts receivable and an agreement not to compete which resulted in goodwill
in the amount of $3,681,000.
On August 1, 1995, the Company purchased certain assets of Eastern Business
Services, Inc. ("Eastern") for approximately $2,041,000 comprised of $1,625,000
in cash and $416,000 of liabilities assumed. The purchase price was allocated
primarily based upon the estimated fair market values of accounts receivable and
equipment purchased less notes payable and funds due to clients which resulted
in goodwill in the amount of $1,812,000.
4. Funds Held in Trust for Clients:
In the course of the Company's regular business activities as an accounts
receivable management company, 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 in trust for clients and their offsetting liability of $4,010,726 and
$1,426,709 at September 30, 1996 and 1995, respectively, have been shown net for
financial statement presentation purposes.
5. Long-Term Debt:
In July 1995, the Company entered into a revolving credit agreement which
provided for borrowings up to $7,000,000 to be utilized for working capital and
qualified acquisition indebtedness of the Company. The line of credit is
collateralized by substantially all the assets of the Company. The revolving
credit agreement contains, among other provisions, requirements for maintaining
defined levels of working capital, net worth and various financial ratios, and
restrictions on capital expenditures, qualified acquisitions, and distributions
to shareholders.
The Company recorded deferred charges of approximately $311,000 in connection
with the acquisition of the revolving credit agreement, which consisted
primarily of bank charges, legal fees and warrants issued to the bank
exercisable into an aggregate of 175,531 shares of the Company's common stock.
The warrants expire on July 31, 2005 and are currently exercisable at a nominal
exercise price.
<PAGE>
In August 1996 the credit agreement was increased to $15,000,000 to provide
financing for the acquisition of MAB and the bank received a warrant for 46,560
shares, exercisable at the initial public offering price, as consideration. The
bank agreed to increase the credit agreement to $25,000,000 upon completion of
the Company's initial public offering and received, as consideration, a warrant
for an additional 18,500 shares, exercisable at the initial public offering
price of $13.00 per share. The increase in the credit agreement to $25,000,000
was completed in December 1996.
6. Subsequent Events:
On November 13, 1996, the Company completed its initial public offering, selling
2,875,000 shares of common stock including 375,000 over-allotment shares sold by
existing shareholders. The Offering raised net proceeds of approximately $30.2
million for the Company. The Company used or intends to use the proceeds to
reduce its long-term debt, pay S Corporation earnings to the shareholders as of
September 3, 1996, and for working capital and other general corporate purposes
including possible acquisitions.
7. Investment Considerations
In analyzing whether to make, or to continue, an investment in the Company
investors should consider, among other factors, the information contained in
this Report on Form 10-Q and certain risk factors and other information more
particularly described in the Company's Registration Statement on Form S-1 filed
with the Securities and Exchange Commission on September 11, 1996, as amended.
<PAGE>
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The information contained in this Report on Form 10-Q, other than historical
facts, contains forward-looking statements (as such term is defined in the
Securities Exchange Act of 1934, and the regulations thereunder) including,
without limitation, statements as to the Company's objective to grow through
strategic acquisitions, the Company's ability to realize operating efficiencies
in the integration of MAB, trends in the Company's future operating performance,
the classification of the Company's investment portfolio, and statements as to
the Company's or management's beliefs, expectations and opinions.
Forward-looking statements are subject to risks and uncertainties and may be
affected by various factors which may cause actual results to differ materially
from those in the forward-looking statements. In addition to the factors
discussed in this Report, certain risks, uncertainties and other factors,
including, without limitation the risk that the Company will not be able to
realize operating efficiencies in the integration of MAB, risks associated with
growth and future acquisitions, fluctuations in quarterly operating results, and
the other risks detailed from time to time in the Company's filings with the
Securities and Exchange Commission, including its Registration Statement on Form
S-1, filed on September 11, 1996, as amended, can cause actual results and
developments to be materially different from those expressed or implied by such
forward-looking statements.
Pro Forma Compared to Actual Results of Operations
Pro forma operating data for the quarter ended September 30, 1996 and the
nine months ended September 30, 1996 assume that the Management Adjustment
Bureau, Inc. ("MAB") acquisition was consummated on January 1, 1996. Pro forma
adjustments have been made to reflect the elimination of certain expenses that
were immediately identifiable at the time of the acquisitions, including the
immediate elimination of certain redundant collection and administrative
personnel. At the time of the acquisition, MAB had a higher cost structure than
the Company. The Company intends to leverage its infrastructure to realize
additional operating efficiencies in order to bring the cost structure of MAB in
line with NCO's current operating results. These other costs savings include (i)
further reduction in payroll and related expenses relating primarily to
redundant collections and administrative personnel, (ii) further reductions in
facilities costs, and (iii) reduction of certain expenses such as telephone,
mailing and data processing. Management believes it will realize these cost
savings, although no assurances can be given that such cost savings will be
realized. Due to the higher cost structures of the acquired business and the
fact that all expected expense savings are not reflected in pro forma
adjustments, certain pro forma operating percentages compare unfavorably to
actual operating percentages for the periods under consideration.
<PAGE>
Quarter ended September 30, 1996 Compared to Quarter ended September 30, 1995
Revenue. Revenue increased $4.2 million or 121.7% to $7.7 million for the
nine-month period ended September 30, 1996 from $3.5 million for the comparable
period in 1995. Of this increase, $1.2 million was attributable to the MAB
acquisition completed in September 1996, $1.8 million was attributable to the
Collection Division of Trans Union Corporation ("TCD") acquisition, and $218,000
was attributable to the Eastern Business Services ("Eastern") acquisition.
Additionally, the Company experienced 35.8% internal growth from the addition of
new clients and a growth in business from existing clients. Revenue from other
related services, which became an area of focus in 1996, increased $232,000 to
$238,000 for the quarter ended September 30, 1996 from $6,000 for the comparable
period in 1995.
Payroll and related expenses. Payroll and related expenses increased $1.8
million to $3.6 million for the quarter ended September 30, 1996 from $1.8
million for the comparable period in 1995, but decreased as a percentage of
revenue to 47.1% from 53.1%. The decrease in payroll and related expenses as a
percentage of revenue was primarily the result of spreading the cost of
management and administrative personnel over a larger revenue base and the
increased utilization of "on-line" computer services and other outside services,
as well as the elimination of duplicative administrative staff following the TCD
and Eastern acquisitions. These efficiencies were offset in part by higher
payroll and related expenses of MAB as a percentage of its revenue. The effect
was minimal due to only one month of the operations of MAB being included in the
income statements.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.5 million to $2.5 million for the quarter
ended September 30, 1996, from $1.0 million for the comparable period in 1995,
and increased as a percentage of revenue to 32.4% from 30.0%. A large part of
the increase in selling, general and administrative expenses as a percentage of
revenue was due to the increased costs associated with litigation management
services performed by the Company on behalf of its clients in states where the
laws are more conducive to the utilization of the legal process for recovery of
debts. The Company also experienced increased costs as a result of the increased
use of national data bases and credit reporting services associated with an
increase in contingency based revenues. These increases were offset in part by
operating efficiencies resulting from the TCD acquisition. The effect of the
operations of MAB were minimal due to only one month of operations being
included in the income statements.
Depreciation and amortization. Depreciation and amortization increased to
$400,000 for the quarter ended September 30, 1996 from $91,000 for the
comparable period in 1995. Of this increase, $143,000 was a result of the MAB
and TCD and Eastern acquisitions. The remaining $166,000 consisted of
amortization of deferred financing charges and depreciation resulting from
normal capital expenditures.
Other income (expense). Interest expense increased $195,000 for the quarter
ended September 30, 1996 from the comparable period in 1995, primarily due to
increased borrowings associated with the acquisitions of MAB and TCD.
<PAGE>
Income tax benefit, net of expense. Income tax expense for the quarter
ended September 30, 1996 was $154,000, of which $151,000 was current and $3,000
was deferred. This was offset by the recognition of a deferred tax benefit of
$155,000 attributable to the termination of the S Corporation election by the
Company.
Net income. Net income was $968,000 and $460,000 for the quarter ended
September 30, 1996 and 1995, respectively. Net income pro forma for taxes
increased to $579,000 for the quarter ended September 30, 1996 from $276,000 for
the comparable period in 1995, a 109.4% increase. Net income pro forma for taxes
includes a provision for federal and state income taxes at an assumed rate of
40% for the quarters ended September 30, 1996 and 1995.
Nine months ended September 30, 1996 Compared to Nine months ended September 30,
1995
Revenue. Revenue increased $11.2 million or 124.4% to $20.3 million for the
nine-month period ended September 30, 1996 from $9.0 million for the comparable
period in 1995. Of this increase, $1.2 million was attributable to the MAB
acquisition completed in September 1996, $5.5 million was attributable to the
TCD acquisition completed in January 1996, and $1.2 million was attributable to
a full nine months of revenue from the Eastern acquisition in 1996 versus three
months in 1995. This was partially offset by a decrease in revenue from the BRM
acquisition to $938,000 for the nine months ended September 30, 1996 from $1.1
million for the comparable period in 1995. Additionally, the Company experienced
44.9% internal growth from the addition of new clients and a growth in business
from existing clients. Of this internal growth, $1.3 million of the increase was
due to a full nine months of revenue in 1996 from a government contract awarded
in April 1995. Revenue from other related services, which became an area of
focus in 1996, increased $819,000 to $921,000 for the nine months ended
September 30, 1996 from $102,000 for the comparable period in 1995.
Payroll and related expenses. Payroll and related expenses increased $4.8
million to $9.6 million for the nine months ended September 30, 1996 from $4.8
million for the comparable period in 1995, but decreased as a percentage of
revenue to 47.3% from 53.3%. The decrease in payroll and related expenses as a
percentage of revenue was primarily the result of spreading the cost of
management and administrative personnel over a larger revenue base and the
increased utilization of "on-line" computer services and other outside services,
as well as the elimination of duplicative administrative staff following the TCD
and Eastern acquisitions. These efficiencies were offset in part by higher
payroll and related expenses of MAB as a percentage of its revenue. The effect
was minimal due to only one month of the operations of MAB being included in the
income statements.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $3.8 million to $6.6 million for the nine
months ended September 30, 1996, from $2.8 million for the comparable period in
1995, and increased as a percentage of revenue to 32.6% from 30.9%. A large part
of the increase in selling, general and administrative expenses as a percentage
of revenue was due to the increased costs associated with litigation management
services performed by the Company on behalf of its clients in states where the
laws are more conducive to the utilization of the legal process for recovery of
debts. In addition, the Company experienced increased costs as a result of the
increased use of national data bases and credit reporting services associated
with an increase in contingency based revenues. These increases were offset in
part by operating efficiencies resulting from the TCD acquisition. The effect of
the operations of MAB were minimal due to only one month of operations being
included in the income statements.
<PAGE>
Depreciation and amortization. Depreciation and amortization increased to
$823,000 for the nine months ended September 30, 1996 from $207,000 for the
comparable period in 1995. Of this increase, $408,000 was a result of the MAB,
TCD and Eastern acquisitions. The remaining $208,000 consisted of amortization
of deferred financing charges and depreciation resulting from normal capital
expenditures.
Other income (expense). Interest expense increased $504,000 for the nine
months ended September 30, 1996 from the comparable period in 1995, primarily
due to increased borrowings associated with the acquisitions of MAB, TCD and
Eastern. Also included in other income (expense) for nine months ended September
30, 1995 was a loss from the disposal of assets of $49,000.
Income tax benefit, net of expense. Income tax expense for the nine months
ended September 30, 1996 was $154,000, of which $151,000 was current and $3,000
was deferred. This was offset by the recognition of a deferred tax benefit of
$155,000 attributable to the termination of the S Corporation election by the
Company.
Net income. Net income was $2.7 million and $1.1 million for the
quarter ended September 30, 1996 and 1995, respectively. Net income pro forma
for taxes increased to $1.6 million for the nine months ended September 30, 1996
from $670,000 for the comparable period in 1995, a 144.2% increase. Net income
pro forma for taxes includes a provision for federal and state income taxes at
an assumed rate of 40% for the quarters ended September 30, 1996 and 1995.
Liquidity and Capital Resources
Cash provided by operating activities was $2.2 million for the quarter
ended September 30, 1996, and $1.5 million for the same period last year. The
increase in cash provided by operations was primarily due to the increase in net
income for the period to $2.7 million for the nine months ended September 30,
1996 compared to $1.1 million for the same period last year, and the increase in
non-cash charges, primarily depreciation and amortization, to $881,000 for the
nine months ended September 30, 1996 compared to $267,000 for the same period
last year. These increases were offset by a $1.5 million increase in accounts
receivable for the nine months ended September 30, 1996 compared to a $536,000
increase for the same period last year and a $102,000 increase in accounts
payable and accrued expenses for the nine months ended September 30, 1996
compared to a $610,000 increase for the same period last year.
Cash used in investing activities was $13.6 million for the nine months
ended September 30, 1996 compared to $1.8 million for the same period last year.
The increase in each period was primarily due to the acquisition of MAB, TCD and
Eastern. In September 1996, the Company purchased all the outstanding stock of
MAB at a cost of $8.0 million in cash and the issuance of a $1.0 million,
five-year convertible note to the principal shareholder of MAB. The note is
convertible into the Common Stock of the Company at the initial public offering
price of $13.00 per share, and bears interest payable monthly at a rate of 8%
per annum. In January 1996, the Company purchased all the assets of TCD at a
cost of $4.8 million in cash. In August 1995, the Company purchased certain
assets of Eastern for $1.6 million in cash and the assumption of a non-interest
bearing note payable of $252,000 and certain other accounts payable in the
amount of $209,000. The Company financed the cash portion of these acquisitions
with bank borrowings. These acquisitions collectively resulted in goodwill of
$13.5 million.
<PAGE>
Cash provided by financing activities was $11.7 million for the quarter
ended September 30, 1996 compared with $386,000 for the same period last year.
Bank borrowings have been the Company's primary source of cash from financing
activities and have been used for the acquisition of MAB, TCD and Eastern and,
along with cash provided by operations, for distributions to shareholders. The
Company borrowed $12.6 million from its bank for the quarter ended September 30,
1996 and $2.5 million for the same period last year. Distributions to
shareholders were $852,000 for the nine months ended September 30, 1996 and $1.0
million for the same period last year. In November 1996, the Company distributed
undistributed S Corporation earnings of approximately $3.2 million using a
portion of the net proceeds from the Company's initial public offering (the
"Offering").
In July 1995 the Company entered into a revolving credit agreement which
provided for borrowings up to $7.0 million at an interest rate equal to prime
plus 1.375%, which was subsequently increased to $15 million, to be utilized for
working capital and qualified acquisitions. As of September 30, 1996 and 1995,
the outstanding balance under the revolving credit line was $15.0 million and
$2.5 million, respectively. The balance of $15.0 million was subsequently paid
off with a portion of the proceeds of the Offering. The revolving credit line is
collateralized by substantially all the assets of the Company and includes
certain financial covenants such as maintaining minimum levels of working
capital, net worth and other financial ratios, and includes restrictions on,
among other things, capital expenditures, qualified acquisitions, and
distributions to shareholders. Subsequent to the Offering, the bank increased
the revolving credit facility to $25.0 million and decreased the rate of
interest to 2.5% over LIBOR.
In connection with entering into the revolving credit agreement in July
1995, the Company recorded deferred charges of approximately $135,000 relating
primarily to bank and legal fees. The Company also issued a warrant to the bank
exercisable for an aggregate of 175,531 shares of the Company's common stock.
The warrant expires on July 31, 2005 and is exercisable for nominal
consideration. The warrant has been capitalized on the balance sheet as a
deferred charge and is being amortized over the four-year life of the credit
facility. In connection with the expansion of the line of credit in September
1996, the Company recorded deferred charges of $120,000 primarily relating to
bank charges and legal fees. In addition, the Company issued an additional
warrant to the bank for 46,560 shares of Common Stock at the initial public
offering price of $13.00 per share. The Company also granted an additional
warrant to purchase 18,500 shares of Common Stock at the initial public offering
price of $13.00 per share in consideration for the commitment to increase the
revolving credit facility to $25.0 million. The increase in the revolving credit
facility was completed in December 1996. All the warrants are currently
exercisable.
On November 13, 1996, the Company completed its initial public offering,
selling 2,875,000 shares of common stock including 375,000 over-allotment shares
sold by existing shareholders. The Offering raised net proceeds of approximately
$30.2 million for the Company. After offering expenses, repayment of acquisition
debt and the distribution of S Corporation earnings, the Company has available
for working capital and general corporate purposes, as well as possible future
acquisitions, proceeds of approximately $10.9 million, in addition to existing
cash of $1.1 million, as well as $25 million available for borrowing from the
bank on the revolving credit facility.
<PAGE>
The Company believes that funds generated from operations, together with
existing cash, the net proceeds from the Offering and available credit under its
revolving credit line will be sufficient to finance its current operations and
planned capital expenditure requirements and internal growth at least through
1997. However, the Company could require additional debt or equity financing if
it were to make any significant acquisitions for cash. The Company has no
current commitments or agreements with respect to any acquisitions, and there
can be no assurance that any acquisitions will be consummated
The Company accounts for corporate income taxes in accordance with the
Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"). Upon the
termination of the S Corporation election by NCO Financial Systems, Inc. on
September 1, 1996 and upon application of SFAS No. 109, the Company recorded a
deferred tax asset of $155,000, representing cumulative temporary differences.
This deferred tax asset is offset by the $84,000 deferred tax liability recorded
by MAB upon termination of its S Corporation election immediately prior to its
acquisition by NCO Group, Inc.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None - not applicable
Item 2. Changes in Securities
Previously reported in the Company's Registration Statement on
Form S-1 (Registration no. 333-11745) filed with the Securities
and Exchange Commission on September 11, 1996, as amended.
Item 3. Defaults Upon Senior Securities
None - not applicable
Item 4. Submission of Matters to a Vote of Shareholders
By written consent dated September 27, 1996, shareholders
unanimously approved: (i) the Amended and Restated Articles of
Incorporation of the Company; (ii) the Amended and Restated Bylaws
of the Company; (iii) the Company's Amended and Restated 1995
Stock Option Plan; (iv) the Company's 1996 Stock Option Plan; and
(v) the Company's 1996 Stock Option Plan for Non-Employee
Directors.
Item 5. Other Information
None - not applicable
Item 6. Exhibits and Reports on 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
Signatures
Pursuant to the requirement 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.
Date: December 20, 1996 By: /s/ Michael J. Barrist
-----------------------
Michael J. Barrist
Chairman and Chief
Executive Officer
Date: December 20, 1996 By: /s/ Steven L. Winokur
---------------------
Steven L. Winokur
Vice President, Finance and
Chief Financial Officer
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<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,089,983
<SECURITIES> 331,163
<RECEIVABLES> 4,492,341
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<TOTAL-LIABILITY-AND-EQUITY> 24,247,777
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