<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 June 30, 1997, 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)
515 Pennsylvania Avenue, Fort Washington, Pennsylvania
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(Address of principal executive offices)
23-2858652
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(IRS Employer Identification Number)
19034
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(Zip Code)
215-793-9300
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(Registrant's telephone number including area code)
1740 Walton Road, Blue Bell, Pennsylvania 19422
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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 X No
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The number of shares outstanding of each of the issuer's classes of
common stock was 8,779,868 shares common stock, no par value, outstanding as of
August 8, 1997
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NCO GROUP, INC.
INDEX
PAGE
Part I FINANCIAL INFORMATION
Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets -
December 31, 1996 and June 30, 1997 3
Consolidated Statements of Income -
Three months and six months ended
June 30, 1996 and 1997 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1996 and 1997 5
Pro Forma Consolidated Statement of Income -
Six months ended June 30, 1997 6
Notes to Consolidated Financial Statements 7
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
PART II 16
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
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<PAGE>
Part 1 - Financial Information
Item 1 - Financial Statements
NCO GROUP, INC.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1996 1997
---------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,058,798 $ 6,972,592
Accounts receivable, trade, net of
allowance for doubtful accounts of $79,000
and $293,697, respectively 4,701,364 10,053,247
Other current assets 499,815 393,002
---------------- ----------------
Total current assets 17,259,977 17,418,841
Funds held in trust for clients
Property and equipment, net 2,830,062 6,349,025
Other assets:
Intangibles, net of accumulated amortization 14,673,155 37,287,000
Deferred taxes 70,760 48,369
Deferred financing costs 684,390 609,372
Other assets 308,011 737,077
---------------- ----------------
Total other assets 15,736,316 38,681,818
---------------- ----------------
Total assets $ 35,826,355 $ 62,449,684
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 46,946 $ 53,609
Capitalized lease obligations, current portion 62,131 178,666
Corporate taxes payable 216,709 1,379,102
Accounts payable 657,647 2,237,730
Accrued expenses 1,044,536 2,905,616
Accrued compensation and related expenses 1,376,982 1,965,070
Unearned revenue, net of related costs 225,817 115,367
---------------- ----------------
Total current liabilities 3,630,768 8,835,160
Funds held in trust for clients
Long-term liabilities:
Long term debt, net of current portion 1,091,901 10,451,659
Capitalized lease obligations, net of current portion 385,683 294,506
Unearned revenue, net of related costs 70,385 107,388
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized,
no shares issued and outstanding
Common stock, no par value, 25,000,000 shares authorized,
6,713,447 and 7,058,625 shares issued and outstanding
at December 31, 1996 and June 30, 1997, respectively. 29,362,326 37,577,206
Unexercised warrants 396,054 1,271,054
Retained earnings 889,238 3,912,711
---------------- ----------------
Total shareholders' equity 30,647,618 42,760,971
---------------- ----------------
Total liabilities and shareholders' equity $ 35,826,355 $ 62,449,684
================ ================
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
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NCO GROUP, INC.
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------------- ------------------------------------
1996 1997 1996 1997
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue $ 6,498,704 $ 21,162,052 $ 12,542,664 $ 39,238,809
Operating costs and expenses:
Payroll and related expenses 2,956,417 10,536,556 5,953,895 19,582,666
Selling, general and administrative
expenses 2,163,348 6,759,862 4,094,626 12,691,436
Depreciation and amortization expense 222,539 826,654 422,814 1,543,121
----------------- ---------------- ---------------- ----------------
Total operating costs and expenses 5,342,304 18,123,072 10,471,335 33,817,223
----------------- ---------------- ---------------- ----------------
Income from operations 1,156,400 3,038,980 2,071,329 5,421,586
Other income (expense):
Interest and investment income 30,391 69,013 47,415 162,321
Interest expense (185,371) (247,042) (357,494) (422,192)
----------------- ---------------- ---------------- ----------------
(154,980) (178,029) (310,079) (259,871)
----------------- ---------------- ---------------- ----------------
Income before provision for income taxes 1,001,420 2,860,951 1,761,250 5,161,715
Income tax expense 1,144,268 - 2,138,242
----------------- ---------------- ---------------- ----------------
Net income $ 1,001,420 $ 1,716,683 $ 1,761,250 $ 3,023,473
================= ================ ================ ================
Pro Forma Pro Forma
----------------- ----------------
Historical income before income taxes $ 1,001,420 $ 1,761,250
Pro forma provision for income taxes 400,068 704,000
----------------- ---------------
Pro forma net income $ 601,352 $ 1,057,250
================= ================
Net income per share $ 0.13 $ 0.23 $ 0.22 $ 0.40
================= ================ ================ ================
Weighted average shares outstanding 4,733,549 7,591,916 4,733,549 7,481,537
================= ================ ================ ================
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
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NCO GROUP, INC
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
------------------------------------
1996 1997
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,761,250 $ 3,023,473
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 150,008 598,870
Amortization of intangibles 237,670 869,234
Amortization of deferred financing costs 35,135 75,017
Gain on disposal of equipment (9,043)
Gain on sales of securities (8,925)
Provision for doubtful accounts 33,000 83,025
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, trade (646,041) (892,401)
Notes receivable 100,000
Other current assets 70,896 348,430
Deferred taxes 106,315
Other assets (26,679) 85,257
Accounts payable (39,539) (847,125)
Corporate taxes payable 1,151,193
Accrued expenses 302,199 1,158,418
Accrued compensation and related costs (227,562) (36,872)
Unearned revenue (31,982) (73,447)
---------------- ----------------
Net cash provided by operating activities 1,700,387 5,649,387
Cash flows from investing activities:
Purchase of property and equipment (426,069) (1,625,171)
Purchase of securities (53,307)
Proceeds from sale of securities 39,566
Net cash paid for acquisitions (4,875,839) (17,257,020)
---------------- ----------------
Net cash used in investing activities (5,315,649) (18,882,191)
Cash flows from financing activities:
Repayment of notes payable (80,543) (203,402)
Borrowings under credit agreement 4,550,000 8,350,000
Payment of fees to acquire new debt
Decrease in notes receivable, shareholders 82,873
Distributions to shareholders (751,845)
---------------- ----------------
Net cash provided by financing activities 3,800,485 8,146,598
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 185,223 (5,086,206)
Cash and cash equivalents at beginning of period 804,550 12,058,798
---------------- ----------------
Cash and cash equivalents at end of period $ 989,773 $ 6,972,592
================ ================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 323,097 $ 356,266
Cash paid for income taxes 965,370
Noncash investing and financing activities:
Fair value of assets acquired 982,018 7,986,816
Liabilities assumed from acquisitions 3,400,271
Convertible note payable, issued for acquisition 900,000
Warrants issued for acquisitions 875,000
Common stock issued for acquisitions 8,214,880
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
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NCO Group, Inc.
Pro Forma Consolidated Statements of Income
For the Six Months Ended June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Historical
---------------------------------- Offering and
NCO Group, Acquired Acquisition Pro Forma
Inc. Companies (1) Adjustments (1) Combined
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenue $ 39,238,809 $ 2,841,578 $ - $ 42,080,387
Operating costs and expenses:
Payroll and related expenses 19,582,666 1,381,883 (103,258) 20,861,291
Selling, general and administrative expenses 12,691,436 1,159,470 (54,093) 13,796,813
Depreciation and amortization expense 1,543,121 156,915 (27,378) 1,672,658
---------------- ---------------- ----------------- ----------------
Total operating costs and expenses 33,817,223 2,698,268 (184,729) 36,330,762
---------------- ---------------- ----------------- ----------------
Income from operations 5,421,586 143,310 184,729 5,749,625
Other income (expense):
Interest and investment income 162,321 162,321
Interest expense (422,192) (273) 305,066 (117,399)
---------------- ---------------- ----------------- ----------------
(259,871) (273) 305,066 44,922
---------------- ---------------- ----------------- ----------------
Income before provision for income taxes 5,161,715 143,037 489,795 5,794,547
Income tax expense 2,138,242 262,150 2,400,392
---------------- ---------------- ----------------- ----------------
Net income $ 3,023,473 $ 143,037 $ 227,645 $ 3,394,155
================ ================ ================= ================
Net income per share $ 0.43
================
Weighted average shares outstanding 7,951,604
================
</TABLE>
(1) Gives effect to: (i) the acquisitions of Goodyear & Associates, CMS A/R
Services, Tele-Research Center and CRW Financial, Inc., Collections Division as
if they had occurred on January 1, 1997; (ii) the reduction of certain redundant
operating costs and expenses that were immediately identifiable at the time of
the acquisitions; (iii) the issuance of 76,923 shares of stock in connection
with the conversion of a $1.0 million seller-financed note payable. (iv) the
issuance of 331,779 shares of common stock at $29.50 per share (the price to the
public in the Company's public offering completed in July 1997), net of
commissions and offering expenses, which would be sufficient to repay
acquisition-related debt of $8.35 million; (v) the elimination of additional
interest expense associated with acquisition-related debt assumed to be repaid
on January 1, 1997 with the proceeds of the Company's July 1997 public offering
The accompanying notes are an integral part of this consolidated statement.
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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 located
throughout the United States in the following sectors: financial services,
government, education, healthcare, commercial and retail, telecommunications,
and utilities.
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.
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.
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 businesses. 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.
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<PAGE>
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:
Earnings per share were computed by dividing the pro forma net income for the
three and six month periods ended June 30, 1997 and 1996 by the pro forma
weighted average number of shares outstanding. Pro forma net income amounts are
used because the 1996 historical net income does not include the impact of
federal and state income taxes as if the Company had been subject to income
taxes. Pro forma weighted average shares outstanding are based on the weighted
average number of shares outstanding including common equivalent shares. 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 for periods before the
initial public offering, only when their effect would be dilutive. For June 30,
1996, the pro forma weighted average number of shares outstanding have also been
adjusted to include the number of shares of common stock (250,000 shares) that
the Company would have needed to issue at the initial public offering price of
$13.00 per share to finance the distribution of undistributed S Corporation
earnings through the date on which the Company terminated its S Corporation
status. Fully diluted earnings per share are not materially different from
primary earnings per share.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share." This
Statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement is effective for financial statements issued for
periods ending after December 15, 1997; earlier application is not permitted.
This Statement requires restatement of all prior-period EPS data presented. The
Company is currently evaluating the impact, if any, adoption of SFAS No. 128
will have on its financial statements.
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 six month periods ended June 30,
1997 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997 or for any other interim period. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K, as amended, filed
with the Securities and Exchange Commission on March 31, 1997.
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<PAGE>
3. Acquisitions:
On January 3, 1996 the Company purchased certain assets of Trans Union
Corporation Collections Division ("TCD") for $4,750,000 in cash. TCD provided
accounts receivable management services, principally to the telecommunications,
utility and healthcare sectors from offices in Pennsylvania, Ohio and Kansas.
This acquisition resulted in goodwill of $3.7 million.
On September 5, 1996 the Company purchased the outstanding stock of Management
Adjustment Bureau, Inc. ("MAB") for $9,000,000 comprised of $8,000,000 in cash
and a $1,000,000 convertible note. The note is convertible into 76,923 shares of
the Company's Common Stock, at any time, and bears interest payable monthly at a
rate of 8.0% per annum with principal due in September 2001. This note was
converted to Common Stock in July 1997. MAB, based in Buffalo, New York,
provided accounts receivable management services, principally to the education,
financial services, telecommunications and utility sectors. This acquisition
resulted in goodwill of $8.7 million.
On January 22, 1997, NCO purchased all of the outstanding stock of Goodyear &
Associates, Inc. ("Goodyear") for $4.5 million in cash and a $900,000
convertible note. The note is convertible into 42,503 shares of the Company's
Common Stock, at any time, and bears interest payable monthly at a rate of 8.0%
per annum with principal due in January 2002. Goodyear, based in Charlotte,
North Carolina, provided accounts receivable management services principally to
the telecommunications, education, and utility sectors. Goodyear's revenues in
1996 were $5.5 million. This acquisition resulted in goodwill of $5.3 million.
On January 30, 1997, NCO purchased certain assets of Tele-Research Center, Inc.
("TRC") for $1.6 million in cash. TRC, located in Philadelphia, Pennsylvania,
provided market research, data collection, and other teleservices to market
research companies as well as end-users. TRC's revenues in 1996 were $1.8
million. This acquisition resulted in goodwill of $1.6 million.
On January 31, 1997, NCO purchased substantially all the assets of CMS A/R
Services ("CMSA/R"), formerly a division of CMS Energy Corporation, owner of
Consumers Energy, one of the nation's largest utility companies, for $5.1
million in cash. Specializing in the utility industry, CMSA/R, located in
Jackson, Michigan, provided a wide range of accounts receivable management
services in addition to traditional recovery of delinquent accounts including
project outsourcing, early intervention, and database management services.
CMSA/R's revenues in 1996 were $6.8 million. This acquisition resulted in
goodwill of $3.3 million.
On February 2, 1997, NCO purchased substantially all the assets of CRW
Financial, Inc. Collections Division ("CRWCD") for $3.75 million in cash,
345,178 shares of its Common Stock and warrants for 250,000 shares of common
stock. The purchase price was valued at approximately $12.8 million. CRWCD
provided accounts receivable management services principally to the
telecommunications, education, financial, government and utility sectors from 14
offices located throughout the United States. In addition, CRWCD had a
commercial collections division. CRWCD's revenues in 1996 were $25.9 million.
Due to the consolidation or closing of certain CRWCD branch offices, and the
loss of certain contracts during 1996, revenue for CRWCD for 1997 is anticipated
to be 10-15% lower than the revenue shown on the historical financial
statements. This acquisition resulted in goodwill of $12.4 million.
The acquisitions of Goodyear, TRC, CMSA/R, and CRWCD are known collectively as
the "1997 Acquisitions."
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 of $6,151,087 and $3,835,409 at June 30, 1997
and December 31, 1996, respectively, have been shown net of their offsetting
liability for financial statement presentation purposes.
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<PAGE>
5. Long-term debt
In July 1995, the Company entered into a $7,000,000 revolving credit agreement.
In connection with the agreement, the bank received a warrant for 175,531 shares
of Common Stock, exercisable at a nominal value. The line of credit is
collateralized by substantially all the assets of the Company and contains,
among other provisions, requirements for maintaining defined levels of working
capital, net worth, capital expenditures, various financial ratios and
restrictions on distributions to shareholders. In September 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 $13.00
per share. In December 1996, the bank increased the credit agreement to
$25,000,000 and received a warrant to purchase an additional 18,500 shares,
exercisable at $13.00 per share.
The Company financed the acquisitions of the 1997 Acquisitions by borrowing
$7.35 million on its revolving credit facility and financed the remainder
through funds raised in the initial public offering and through its existing
working capital. During March 1997, the Company borrowed an additional $1.0
million to fund the reduction of accounts payable assumed as part of the CRWCD
acquisition. The line of credit was repaid in full with funds raised in the
Company's public offering of stock in July 1997.
6. Subsequent Event
On July 8, 1997, the Company completed a public offering (the "Offering")
selling 2,875,000 shares of common stock at a price to the public of $29.50 per
share, including 1,444,000 shares issued by the Company, 433,579 shares and
375,000 over-allotment shares sold by existing shareholders, 50,320 shares
acquired by employees through the exercise of stock options, 150,000 shares
acquired by the Company's bank (Mellon Bank, N.A.) through the exercise of stock
warrants, 76,923 shares acquired through the conversion of the Company's
convertible note, and 345,178 shares acquired by CRW Financial, Inc. in
connection with the acquisition by NCO of CRWCD. The proceeds of the offering,
after underwriting discounts and expenses, were approximately $39.4 million.
After the offering, the Company has 8,779,868 shares of Common Stock
outstanding.
7. Investment Considerations
In analyzing whether to make, or to continue, an investment in the Company
investors should consider, among other factors, certain risk factors and other
information contained in the Company's filings with the Securities and Exchange
Commission, including, without limitation, the Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 31, 1997, as amended, and
the Company's Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on September 11, 1996, as amended.
A copy of the Annual Report on Form 10-K can be obtained, without charge except
for exhibits, by written request to Steven L. Winokur, Vice-President,
Finance/CFO, NCO Group, Inc., 515 Pennsylvania Avenue, Ft. Washington, PA 19034.
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<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 and internal growth, the Company's ability to
realize operating efficiencies in the integration of its acquisitions, 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
its acquisitions, 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 the Company's Annual Report on Form 10-K, filed on March
31, 1997, 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 six month period ended June 30, 1997
assume that the 1997 Acquisitions were consummated on January 1, 1997. Pro forma
adjustments have been made to reflect the elimination of certain expenses that
were immediately identifiable at the time of the acquisitions. For instance, pro
forma adjustments to the 1997 Acquisitions include the elimination of
approximately 110 redundant administrative and collection personnel, the
reduction of the salaries of the principal shareholder of Goodyear, the closing
or consolidation of four existing call centers, as well as the downsizing of
three call centers into customer service locations. At the time of the
acquisitions, the acquired companies had a higher cost structure than that of
the Company's core business. The Company intends to leverage its infrastructure
to realize additional operating efficiencies in order to bring the cost
structure of the acquired companies 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 with respect to the acquired
companies, 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. Due to the
consolidation or closing of certain CRWCD branch offices, and the loss of
certain contracts during 1996, revenue for CRWCD for 1997 is anticipated to be
10% to 15% lower than CRWCD's revenue for 1996.
Three months Ended June 30, 1997 Compared to Three Months ended June 30, 1996
Revenue. Revenue increased $14.7 million or 226.2% to $21.2 million for the
three months ended June 30, 1997 from $6.5 million for the comparable period in
1996. The addition of new clients and growth in business from existing clients
represented $1.6 million of the additional revenue. In addition, $3.5 million of
revenue was attributable to the MAB acquisition completed in September 1996,
$5.6 million was attributable to the CRWCD acquisition completed in February
1997, and $4.0 million was attributable to the Goodyear, CMS A/R, and TRC
acquisitions completed in January 1997.
Payroll and related expenses. Payroll and related expenses increased $7.5
million to $10.5 million for the three months ended June 30, 1997 from $3.0
million for the comparable period in 1996, and increased as a percentage of
revenue to 49.8% from 45.5%. Payroll and related expenses increased as a
percentage of revenue primarily as a result of the businesses acquired in the
MAB acquisition and the 1997 Acquisitions having a higher cost structure than
that of the Company. This increase was partially offset by spreading the cost of
management and administrative personnel over a larger revenue base.
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<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $4.6 million to $6.8 million for the three
months ended June 30, 1997 from $2.2 million for the comparable period in 1996,
and decreased as a percentage of revenue to 31.9% from 33.3%. The businesses
acquired in the CRWCD and CMS A/R acquisitions have a higher cost structure than
that of the Company and the Company has continued to experience increased costs
as a result of changes in business mix which require the increased use of
national databases and credit reporting services. These increases were offset by
operating efficiencies obtained by spreading selling, general and administrative
expenses over a larger revenue base.
Depreciation and amortization. Depreciation and amortization increased to
$827,000 for the three months ended June 30, 1997 from $223,000 for the
comparable period in 1996. Of this increase, $507,000 was a result of the MAB
acquisition and the 1997 Acquisitions. The remaining $97,000 consisted of
amortization of deferred financing charges and depreciation resulting from
normal capital expenditures incurred in the ordinary course of business.
Other income (expense). Interest expense increased to $247,000 for the
three months ended June 30, 1997 from $185,000 for the comparable period in
1996. Although the Company's revolving credit facility had been repaid with a
portion of the net proceeds from the Company's Initial Public Offering in
November 1996 (the "IPO"), the Company borrowed $8.4 million on its revolving
credit facility to partially finance the 1997 Acquisitions. Additionally, the
Company issued a $1.0 million convertible note payable in connection with the
MAB acquisition in September 1996, and an $800,000 convertible note payable in
connection with the Goodyear acquisition in January 1997. Investment income
increased to $69,000 for the three months ended June 30, 1997 from $30,000 for
the comparable period in 1996. This increase was primarily attributable to the
investment of funds remaining from the IPO as well as an increase in operating
funds and funds held in trust for clients.
Income tax expense. Income tax expense for the three months ended June 30,
1997 was $1.1 million and was computed using an assumed rate of 41.4% after
giving effect to non-deductible goodwill resulting from certain of the acquired
companies. The Company was an S Corporation as of June 30, 1996 and,
accordingly, there was no provision for income taxes. The pro forma provision
for income of $400,000 for the three months ended June 30, 1996 was computed
utilizing an assumed rate of 40.0% after giving effect to non-deductible
goodwill.
Net income. Net income increased to $1.7 million for the three months ended
June 30, 1997 from the pro forma net income of $601,000 for the comparable
period in 1996, a 182.9% increase.
Six months Ended June 30, 1997 Compared to Six Months ended June 30, 1996
Revenue. Revenue increased $26.7 million or 212.8% to $39.2 million for the
six months ended June 30, 1997 from $12.5 million for the comparable period in
1996. The addition of new clients and growth in business from existing clients
represented $2.9 million of the additional revenue. In addition, $6.9 million of
revenue was attributable to the MAB acquisition completed in September 1996,
$9.8 million was attributable to the CRWCD acquisition completed in February
1997, and $7.1 million was attributable to the Goodyear, CMS A/R, and TRC
acquisitions completed in January 1997.
Payroll and related expenses. Payroll and related expenses increased $13.6
million to $19.6 million for the six months ended June 30, 1997 from $6.0
million for the comparable period in 1996, and increased as a percentage of
revenue to 49.9% from 47.5%. Payroll and related expenses increased as a
percentage of revenue primarily as a result of the businesses acquired in the
MAB acquisition and the 1997 Acquisitions having a higher cost structure than
that of the Company. This increase was partially offset by spreading the cost of
management and administrative personnel over a larger revenue base.
-12-
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $8.6 million to $12.7 million for the six
months ended June 30, 1997 from $4.1 million for the comparable period in 1996,
and decreased as a percentage of revenue to 32.3% from 32.6%. The businesses
acquired in the CRWCD and CMS A/R acquisitions have a higher cost structure than
that of the Company and the Company has continued to experience increased costs
as a result of changes in business mix which require the increased use of
national databases and credit reporting services. These increases were offset by
operating efficiencies obtained by spreading selling, general and administrative
expenses over a larger revenue base.
Depreciation and amortization. Depreciation and amortization increased to
$1.5 million for the six ended June 30, 1997 from $423,000 for the comparable
period in 1996. Of this increase, $901,000 was a result of the MAB acquisition
and the 1997 Acquisitions. The remaining $176,000 consisted of amortization of
deferred financing charges and depreciation resulting from normal capital
expenditures incurred in the ordinary course of business.
Other income (expense). Interest expense increased to $422,000 for the six
months ended June 30, 1997 from $357,000 for the comparable period in 1996.
Although the Company's revolving credit facility had been repaid with a portion
of the net proceeds from the IPO, the Company borrowed $8.4 million on its
revolving credit facility to partially finance the 1997 Acquisitions.
Additionally, the Company issued a $1.0 million convertible note payable in
connection with the MAB acquisition in September 1996, and an $800,000
convertible note payable in connection with the Goodyear acquisition in January
1997. Investment income increased $115,000 to $162,000 for the six months ended
June 30, 1997 from the comparable period in 1996. This increase was primarily
attributable to the investment of funds remaining from the IPO as well as an
increase in operating funds and funds held in trust for clients.
Income tax expense. Income tax expense for the six months ended June 30,
1997 was $2.1 million and was computed using an assumed rate of 41.4% after
giving effect to non-deductible goodwill resulting from certain of the acquired
companies. The Company was an S Corporation as of June 30, 1996 and,
accordingly, there was no provision for income taxes. The pro forma provision
for income of $704,000 for the six months ended June 30, 1996 was computed
utilizing an assumed rate of 40.0% after giving effect to non-deductible
goodwill.
Net income. Net income in 1997 increased to $3.0 million for the six months
ended June 30, 1997 from the pro forma net income of $1.1 million for the
comparable period in 1996, a 172.7% increase.
Liquidity and Capital Resources
In November 1996, the Company completed its IPO of 2,500,000 share of its
Common Stock at a price of $13.00 per share. The net proceeds to the Company
were $28.8 million. The Company's primary sources of cash have historically been
cash flow from operations and bank borrowings, and, in 1996, the net proceeds
from the IPO. Cash has been used for acquisitions, distributions to
shareholders, purchases of equipment and working capital to support the
Company's growth.
Cash provided by operating activities was $5.6 million during the six
months ended June 30, 1997, and $1.7 million for the comparable period in 1996.
The increase in cash provided by operations was primarily due to the increase in
net income to $3.0 million for the six months ended June 30, 1997 compared to
$1.8 million for the comparable period in 1996, and the increase in non-cash
charges, primarily depreciation and amortization, to $1.5 million during the six
months ended June 30, 1997 compared to $423,000 for the comparable period in
1996. Additionally, accrued corporate taxes, which did not exist at June 30,
1996, increased to $1.2 million and accounts payable and accrued expenses
increased $274,000 at during the six months ended June 30, 1997 compared to
$35,000 in the comparable period in 1996. Approximately $1.0 million of accounts
payable and accrued expenses in acquired companies were reduced in order to
bring the balances in line with NCO's payment policies. These increases were
offset by a $892,000 increase in accounts receivable in the six months ended
June 30, 1997 compared to a $646,000 increase in the comparable period in 1996.
-13-
<PAGE>
Cash used in investing activities was $18.9 million during the six months
ended June 30, 1997 compared to $5.3 million for the comparable period in 1996.
The increase was primarily due to the 1997 Acquisitions during the first quarter
of 1997 versus the acquisition of TCD during the first quarter of 1996. In
February 1997, NCO purchased substantially all of the assets of CRWCD for $3.75
million in cash, 345,178 shares of Common Stock and warrants for 250,000 shares
of Common Stock. In January 1997, the Company purchased substantially all of the
assets of CMS A/R for $5.1 million in cash, certain assets of TRC for $1.6
million in cash and all of the outstanding stock of Goodyear for $4.5 million in
cash and a $900,000 Convertible Note. The Note is convertible into an aggregate
of 42,503 shares of Common Stock at any time and bears interest payable monthly
at a rate 8.0% per annum with principal due in January 2002. The Company
financed the cash portion of the purchase price for the 1997 Acquisitions with
borrowings of $7.4 million under its Credit Agreement and financed the balance
with proceeds of its IPO and existing working capital. During March 1997, the
Company borrowed an additional $1.0 million under the Credit Agreement to pay
certain accounts payable assumed as part of the CRWCD acquisition. In addition,
the company has accrued $627,000 of acquisition related expenses. The 1997
Acquisitions collectively resulted in goodwill of $23.3 million.
During the six months ended June 30, 1997, capital expenditures were
$1.6 million compared to $426,000 in comparable period in 1996.
Cash provided by financing activities was $8.1 million during the six
months ended June 30, 1997 compared to $3.8 million for the comparable period in
1996. Bank borrowings had been the Company's primary source of cash from
financing activities and were used for acquisitions and, along with cash
provided by operations, for distributions to shareholders. The Company raised
net proceeds of approximately $28.8 million in the IPO of which $15.0 million
was used to repay outstanding indebtedness under the Credit Agreement and
approximately $3.2 million was used to pay undistributed S Corporation earnings.
Total distributions to shareholders were $752,000 for the six months ended June
30, 1996.
In July 1995, the Company entered into a revolving credit agreement with
Mellon Bank, N.A. which provided for borrowings up to $7.0 million at an
interest rate equal to prime plus 1.375%, which was subsequently increased to
$15.0 million in September 1996, to be utilized for working capital and
strategic acquisitions. Subsequent to the IPO, Mellon Bank, N.A. increased the
revolving credit facility to $25.0 million and decreased the rate of interest to
2.5% over LIBOR. Mellon Bank, N.A. reduced the interest rate to 1.5% over
LIBOR upon the completion of the Company's public offering in July 1997.
Outstanding borrowings under the Credit Agreement at June 30, 1997 and 1996 were
$8.4 and $7.0 million, respectively. The revolving credit line is collateralized
by substantially all the assets of the Company and includes certain financial
covenants such as maintaining minimum working capital and net worth requirements
and includes restrictions on, among other things, capital expenditures and
distributions to shareholders. The outstanding borrowings on the revolving
credit facility were repaid in full with the proceeds of the Offering in
July 1997.
In connection with entering into the original Credit Agreement, 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 175,351 shares of the Company's Common Stock. The warrant expires
on July 31, 2005 and is exercisable for nominal consideration. A portion of this
warrant was exercised in July 1997 for 150,000 shares sold in connection with
the Company's public offering. In connection with the increase of the line of
credit available under the Credit Agreement in September 1996 and December 1996,
the Company recorded deferred charges of $261,000 primarily relating to bank
charges and legal fees. In addition, the Company issued additional warrants to
the bank for an aggregate of 65,060 shares of Common Stock exercisable at $13.00
per share. The warrants have been capitalized on the balance sheet as a deferred
charge and are being amortized over the life of the credit facility and are
currently exercisable.
On July 8, 1997, the Company completed a public offering selling
2,875,000 shares of common stock including 1,444,000 shares issued by the
Company, 433,579 shares and 375,000 over-allotment shares sold by existing
shareholders, 50,320 shares acquired by employees through the exercise of stock
options, 76,923 shares acquired through the conversion of the Company's
convertible note, 150,000 shares acquired by the Company's bank (Mellon Bank,
N.A.) through the exercise of a portion of their stock warrants, and 345,178
shares acquired by CRW Financial, Inc. in connection with the acquisition by NCO
of the Collections Division of CRW Financial, Inc. The Company raised
approximately $39.4 million in the offering.
-14-
<PAGE>
The Company believes that funds generated from operations, together with
existing cash, the net proceeds from the offering completed in July 1997 and
available borrowings under its Credit Agreement will be sufficient to finance
its current operations and planned capital expenditure requirements and internal
growth at least through June 30, 1998. 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.
-15-
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
-----------------
The Company is involved in legal proceedings from time to time in the
ordinary course of its business. Management believes that none of these
legal proceedings will have a materially adverse effect on the financial
condition or results of operations of the Company.
Item 2. Changes in Securities
---------------------
All sales of unregistered securities during the six months ended June
30, 1997 have been previously reported in the Company's Registration
Statement on Form S-1 filed with the Commission on June 11, 1997 (File
No. 333-28943).
On July 8, 1997, the Company issued 150,000 shares of Common Stock upon
the exercise of a warrant issued to an affiliate of Mellon Bank in
connection with the Company's Credit Agreement and 76,923 shares of
Common Stock upon the conversion of the Company's $1.0 million
Convertible Note issued pursuant to the MAB acquisition. These shares
were issued by the Company in reliance upon the exemption from the
registration requirements provided by Section 4(2)of the Securities Act
and were subsequently sold by the holders in the Company's public
offering completed on such date.
On July 8, 1997, the Company issued 50,320 shares of Common Stock upon
the exercise of a stock options granted to certain employees of the
Company. These shares were issued to the employees in reliance upon the
exemption from the registration requirements provided by Section 4(2) of
the Securities Act and/or Rule 701 promulgated under the Securities Act.
These shares were subsequently sold by the holders in the Company's
public offering completed on such date.
Item 3. Defaults Upon Senior Securities
-------------------------------
None - not applicable
<PAGE>
Item 4. Submission of Matters to a Vote of Shareholders
-----------------------------------------------
The Annual Meeting of Shareholders of the Company was held on June 23,
1997. At the Annual Meeting, the Shareholders elected Michael J. Barrist
for a term of three years as described below:
Name For Withhold Authority
---- --- ------------------
Michael J. Barrist 6,043,483 24,900
The terms of the following directors continued after the Annual Meeting:
Charles C. Piola, Jr., Bernard R. Miller, Eric S. Siegel and Allen F.
Wise.
In addition, the Shareholders approved an amendment to the 1996 Stock
Option Plan and ratified the award of certain option grants as follows:
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
5,857,757 203,861 1,928 4,837
Finally, the Shareholders approved amendments to the 1996 Non-Employee
Director Stock Option Plan and ratified the award of certain option
grants as follows:
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
5,634,182 424,436 4,928 4,837
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
Date of Report Item Reported
-------------- -------------
4/08/97 Item 7 - Goodyear, TRC and CMSA/R acquisitions
(financial statements)
4/18/97 Item 7 - CRWCD acquisition (financial statements)
16
<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: August 14, 1997 By: /s/ Michael J. Barrist
----------------------
Michael J. Barrist
Chairman and Chief
Executive Officer
Date: August 14, 1997 By: /s/ Steven L. Winokur
---------------------
Steven L. Winokur
Vice President, Finance and
Chief Financial Officer
-17-
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<ARTICLE> 5
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,972,592
<SECURITIES> 0
<RECEIVABLES> 10,346,944
<ALLOWANCES> 293,697
<INVENTORY> 0
<CURRENT-ASSETS> 17,418,841
<PP&E> 7,998,592
<DEPRECIATION> 1,649,567
<TOTAL-ASSETS> 62,449,684
<CURRENT-LIABILITIES> 8,835,160
<BONDS> 0
0
0
<COMMON> 37,577,206
<OTHER-SE> 5,183,765
<TOTAL-LIABILITY-AND-EQUITY> 62,449,684
<SALES> 39,238,809
<TOTAL-REVENUES> 39,238,809
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 33,741,041
<LOSS-PROVISION> 76,182
<INTEREST-EXPENSE> 259,871
<INCOME-PRETAX> 5,161,715
<INCOME-TAX> 2,138,242
<INCOME-CONTINUING> 3,023,473
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,023,473
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