<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
-----------------------------------
Date of Report (Date of earliest event reported): January 22, 1997
NCO Group, Inc.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Pennsylvania 0-21639 23-2858652
- ------------------------------------ ------------------------------- ---------------------------------
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
1740 Walton Road
Blue Bell, Pennsylvania 19422-0987
----------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (610) 832-1440
--------------
===============================================================================
<PAGE>
NCO Group, Inc. is amending Item 7(a) and Item 7(b) of: (i) its Current
Report on Form 8-K filed with the Securities and Exchange Commission on February
6, 1997 with respect to the acquisition of the stock of Goodyear & Associates,
Inc. ("Goodyear") to supply certain financial statements and pro forma financial
information; (ii) its Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 14, 1997 with respect to the acquisition of
substantially all of the assets of Tele-Research Center, Inc. and Strategic
Information, Inc. (collectively, "TRC") to supply certain pro forma financial
information and to indicate that no financial statements are required or are
being filed with respect to such acquisition; and (iii) its Current Report on
Form 8-K filed with the Securities and Exchange Commission on February 18, 1997
with respect to the acquisition of substantially all of the assets of CMSA/R
Services, Inc. ("CMSA/R") to supply certain financial statements and pro forma
financial information.
Based on a review of the requirements of Form 8-K and Regulation S-X,
the Company believes that financial statements and pro-forma financial
information with respect to the Goodyear, TRC and CMSA/R acquisitions are not
required; however, the Company is voluntarily providing the information
contained herein.
Item 7. Financial Statements and Exhibits.
The following financial statements and pro forma financial
information are being filed as part of this report:
(a) Financial Statements of Businesses Acquired.
Financial Statements of Goodyear:
Report of Independent Accountants
Balance Sheets as of December 31, 1996 and 1995
Statements of Operations and Retained Earnings for the years
ended December 31, 1996 and 1995
Statements of Cash Flows for the years
ended December 31, 1996 and 1995
Notes to Financial Statements
Financial Statements of CMSA/R:
Report of Independent Accountants
Balance Sheets as of December 31, 1996 and 1995
Statements of Income for the years
ended December 31, 1996 and 1995
Statements of Common Stockholder's Equity for the years
ended December 31, 1996 and 1995
Statements of Cash Flows for the years
ended December 31, 1996 and 1995
Notes to Financial Statements
-1-
<PAGE>
(b) Pro Forma Financial Information.
Basis of Presentation
Pro Forma Consolidated Balance Sheets as of December 31, 1996
Pro Forma Consolidated Statements of Income for the year ended
December 31, 1996
Notes to Consolidated Pro Forma Financial Statements
-2-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NCO GROUP, INC.
By: /s/ Steven L. Winokur
----------------------------
Vice President, Finance
and Chief Financial Officer
Date: April 7, 1997
-3-
<PAGE>
Coopers Coopers & Lybrand L.L.P.
& Lybrand
a professional services firm
REPORT ON AUDITS OF FINANCIAL STATEMENTS OF
GOODYEAR & ASSOCIATES, INC.
as of December 31, 1996 and 1995
F-1
<PAGE>
Coopers Coopers & Lybrand L.L.P.
& Lybrand
a professional services firm
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholder
Goodyear & Associates, Inc.:
We have audited the accompanying balance sheets of Goodyear & Associates, Inc.
(the "Company") as of December 31, 1996 and 1995, and related statements of
operations and retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Goodyear & Associates, Inc. as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand, LLP
Charlotte, North Carolina
January 10, 1997
F-2
<PAGE>
GOODYEAR & ASSOCIATES, INC.
BALANCE SHEETS
December 31, 1996 and 1995
----------
ASSETS 1996 1995
------ ---- ----
Current assets:
Cash $161,490 $ 4,975
Cash held for clients 83,124 437,430
Accounts receivable 435,774 428,112
Prepaid expenses 53,964 51,219
---------- ----------
Total current assets 734,352 921,736
Furniture and equipment, net 514,110 461,485
Cash surrender value of life insurance policies 26,777 24,119
---------- ----------
$1,275,239 $1,407,340
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of capital lease obligations $ 82,117 $ 68,249
Current portion of long-term debt 33,590
Accounts payable 52,252 19,476
Accrued liabilities 157,431 126,783
Income taxes payable 11,200 9,900
Collections due to clients 83,124 437,430
---------- ----------
Total current liabilities 386,124 695,428
Capital lease obligations, net of current
portion 95,041 113,035
Long-term debt, net of current portion 5,912
Deferred income taxes 53,306 35,306
---------- ----------
Total liabilities 534,471 849,681
---------- ----------
Stockholder's equity:
Common stock, $10 par value; 10,000 shares
authorized; 500 shares issued and
outstanding 5,000 5,000
---------- ----------
Retained earnings 735,768 552,659
---------- ----------
Total stockholder's equity 740,768 557,659
---------- ----------
$1,275,239 $1,407,340
========== ==========
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
GOODYEAR & ASSOCIATES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
for the years ended December 31, 1996 and 1995
----------
1996 1995
---- ----
Operating revenue $5,454,500 $4,030,557
Operating expenses 5,128,774 3,747,742
---------- ----------
Operating income 325,726 282,815
---------- ----------
Other income (expense):
Loss on disposition of assets (41,901)
Interest expense (27,253) (25,099)
Other income 1,636 34,353
---------- ----------
(25,617) (32,647)
---------- ----------
Income before income taxes 300,109 250,168
Provision for income taxes 117,000 100,000
---------- ----------
Net income 183,109 150,168
Retained earnings, beginning of year 552,659 402,491
---------- ----------
Retained earnings, end of year $ 735,768 $ 552,659
========== ==========
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
GOODYEAR & ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996 and 1995
-----------
1996 1995
---- ----
Cash flows from operating activities:
Net income $183,109 $150,168
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 169,323 106,820
Deferred income taxes 18,000 12,100
Loss on disposition of furniture and equipment 41,901
Changes in operating assets and liabilities:
Accounts receivable (7,662) (26,214)
Prepaid expenses (2,745) (35,094)
Accounts payable 32,776 19,476
Accrued liabilities 30,648 3,097
Income taxes payable 1,300 (135,668)
-------- --------
Net cash provided by operating activities 424,749 136,586
-------- --------
Cash flows from investing activities:
Additions to furniture and equipment (114,129) (184,386)
Increase in cash surrender value of life
insurance policies (2,658) (3,581)
Proceeds from sale of furniture and equipment 15,441
-------- --------
Net cash used in investing activities (116,787) (172,526)
-------- --------
Cash flows from financing activities:
Cash overdraft 22,968
Proceeds from long-term debt 75,000 50,000
Repayment of long-term debt (114,502) (10,498)
Repayment of capitalized lease obligations (111,945) (59,851)
-------- --------
Net cash provided by (used in) by
financing activities (151,447) 2,619
-------- --------
Net increase (decrease) in cash 156,515 (33,321)
Cash, beginning of year 4,975 38,296
-------- --------
Cash, end of year $ 161,490 $ 4,975
========= ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 27,253 $ 25,099
========= ========
Cash paid for income taxes $ 98,326 $193,647
========= ========
Noncash transaction, lease obligation
incurred for equipment $ 107,819 $186,986
========= ========
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
GOODYEAR & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
------------
1. Description of Organization and Summary of Significant Accounting Policies:
ORGANIZATION -- Goodyear & Associates, Inc. (The "Company") was incorporated,
under the laws of the State of North Carolina, on July 29, 1974. The Company
is engaged principally in the collection of past due accounts for corporate
customers principally located in the southeastern United States.
Approximately forty-six percent of the Company's accounts receivable at
December 31, 1996 were due from four customers who are owned by a common
parent.
USE OF ESTIMATES -- 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 periods. Actual results could differ from those
estimates.
CASH -- Cash consists principally of demand deposits which are held by two
high-quality financial institutions.
CASH HELD FOR CLIENTS -- Cash held for clients consists primarily of demand
deposits resulting from cash collected on behalf of and payable to the
Company's clients.
FURNITURE AND EQUIPMENT -- Furniture and equipment are carried at cost, net
of accumulated depreciation and amortization. Depreciation is provided
primarily using the straight-line method over the estimated useful lives of
the assets or lease term, if shorter. Additions and improvements are
capitalized and repair and maintenance costs are charged to expenses as
incurred.
INCOME TAXES -- The Company has adopted the provisions of Financial
Accounting Standard (FAS) 109, "Accounting for Income Taxes", for the
purposes of reporting deferred income tax liabilities. Deferred income tax
liabilities result principally from temporary differences in depreciation
and amortization reported for income tax and financial reporting purposes.
F-6
<PAGE>
GOODYEAR & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
-------------
2. Furniture and Equipment:
Furniture and equipment consist of the following at December 31:
1996 1995
---- ----
Office furniture and equipment $ 730,272 $605,466
Vehicles 6,772 12,730
Equipment under capital lease 348,150 249,326
---------- --------
1,085,194 867,522
Less accumulated depreciation and amortization 571,084 406,037
---------- --------
$ 514,110 $461,485
========== ========
Depreciation expense was $105,390 and $69,060 in 1996 and 1995, respectively.
Amortization expense on equipment under capital lease was $63,933 and $39,760
in 1996 and 1995, respectively. Accumulated amortization on equipment under
capital lease was $112,352 and $48,418 at December 31, 1996 and 1995,
respectively.
3. Lease Obligations:
The Company leases certain equipment under capital leases. The lease
obligations are collateralized by the related leased equipment. Future
minimum leases payments at December 31, 1996 under the capital lease are as
follows:
1997 $93,884
1998 75,906
1999 27,284
-------
197,074
Less amounts representing interest 19,916
-------
Present value of net minimum lease payments 177,158
Less current portion 82,117
-------
$ 95,041
========
F-7
<PAGE>
GOODYEAR & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
------------
3. Lease Obligations, continued:
The Company leases office space and automobiles under noncancelable operating
leases. Future minimum payments at December 31, 1996 under noncancelable
operating leases as follows:
1997 $224,738
1998 215,678
1999 209,187
2000 34,864
-------
Total $684,467
========
Total rental expense under the leases was $221,590 in 1996 and $171,761 in
1995.
4. Financing Arrangements:
The Company has a line of credit of $200,000 expiring in March 31, 1997, with
an interest rate of prime plus .50% at December 31, 1996. There were no
borrowings under the line of credit at December 31, 1996. The Company intends
to renew the line of credit under similar terms and conditions during 1997.
5. Income Taxes.
The income tax provision for the years ended December 31 consisted of the
following:
1996 1995
---- ----
Current $ 99,000 $ 87,900
Deferred 18,000 12,100
-------- --------
$117,000 $100,000
======== ========
Deferred income tax liabilities of $53,306 and $35,306 at December 31, 1996
and 1995, respectively, result principally from temporary differences in
capital lease amortization and depreciation reported for income tax and
financial reporting purposes.
F-8
<PAGE>
GOODYEAR & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
------------
6. Related Party Transactions:
As of December 31, 1995, the Company had a receivable from its stockholder
included in accounts receivable in the amount of $16,127.
During 1995, the Company paid $8,250 to its stockholder for rent of office
space.
7. Retirement Plan:
The Company sponsors a deferred 401(k) savings plan benefitting substantially
all employees. In 1996 and 1995, the Company matched employee contributions
at a rate of fifty (50) percent to a maximum of four (4) percent of employee
annual salary. The Company's 401(k) contribution totaled approximately
$41,000 in 1996 and $32,300 in 1995.
F-9
<PAGE>
ARTHUR ANDERSEN LLP
CMS A/R SERVICES, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
F-10
<PAGE>
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To the Board of Directors
CMS A/R Services, Inc.:
We have audited the accompanying balance sheets of CMS A/R SERVICES, INC. (a
Michigan corporation and wholly owned subsidiary of CMS Utility Services, Inc.)
as of December 31, 1996 and 1995, and the related statements of income, common
stockholder's equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CMS A/R Services, Inc. as
of December 31, 1996 and 1995 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen, LLP
Detroit, Michigan
February 21, 1997
F-11
<PAGE>
CMS A/R SERVICES, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 356,078 $ 84,194
Accounts receivable:
Affiliates 148,180 154,240
Customers 983,755 641,538
Other 78,033 88,122
---------- ----------
Total current assets 1,566,046 968,094
---------- ----------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 290,705 241,411
Office equipment 2,437,638 2,355,056
Capital leases 887,217 891,880
---------- ----------
3,615,560 3,488,347
Less -- accumulated depreciation and
amortization (2,576,925) (2,682,570)
---------- ----------
Net property and equipment 1,038,635 805,777
---------- ----------
OTHER ASSETS:
Deferred taxes 876,000 967,000
Other 90,567 87,164
---------- ----------
Total other assets 966,567 1,054,164
---------- ----------
Total assets $3,571,248 $2,828,035
========== ==========
LIABILITIES AND COMMON STOCKHOLDER'S EQUITY 1996 1995
------ ---- ----
CURRENT LIABILITIES:
Accounts payable:
Affiliates $ 254,773 $ 33,425
Trade 371,191 114,697
Note payable to affiliate 83,000 372,000
Capital lease obligations 183,862 190,835
Accrued expenses 448,808 378,877
---------- ----------
Total current liabilities 1,341,634 1,089,834
---------- ----------
NON-CURRENT LIABILITIES:
Capital lease obligations 520,940 330,573
Deferred taxes 5,895 --
Postretirement benefits 697,022 784,716
Other 4,008 4,674
---------- ----------
Total non-current liabilities 1,227,865 1,119,963
--------- ---------
COMMON STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 100,000
shares authorized; 51,510 shares
issued and outstanding 51,510 51,510
Additional paid-in capital 4,618,490 4,618,490
Revaluation capital 1,848 --
Accumulated deficit (3,670,099) (4,051,762)
---------- ----------
Total common stockholder's equity 1,001,749 618,238
---------- ----------
Total liabilities and common
stockholder's equity $3,571,248 $2,828,035
========== ==========
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE>
CMS A/R SERVICES, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
------ ------
OPERATING REVENUES $6,790,849 $5,031,023
OPERATING EXPENSES:
Operating 5,618,532 4,279,390
Depreciation and amortization 295,021 263,213
General taxes 242,809 213,580
---------- ----------
Total operating expenses 6,156,362 4,756,183
---------- ----------
PRETAX OPERATING INCOME 634,487 274,840
OTHER INCOME (EXPENSE):
Interest income 20,473 33,829
Interest expense (66,193) (37,039)
---------- ----------
Total other income (expense) (45,720) (3,210)
---------- ----------
INCOME BEFORE INCOME TAXES 588,767 271,630
PROVISION FOR INCOME TAXES 207,104 95,907
---------- ----------
NET INCOME $ 381,663 $ 175,723
========== ==========
The accompanying notes are an integral part of the financial statements.
F-13
<PAGE>
CMS A/R SERVICES, INC.
STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Additional
Common Paid-in Revaluation Accumulated
Stock Capital Capital Deficit
------ ---------- ----------- -----------
BALANCE AT JANUARY 1, 1995 $51,510 $4,618,490 $ -- $(4,227,485)
Net income -- -- -- 175,723
------- ---------- ------ -----------
BALANCE AT DECEMBER 31, 1995 51,510 4,618,490 -- (4,051,762)
Net income -- -- -- 381,663
Change in unrealized
investment -- gain -- -- 1,848 --
------- ---------- ------ -----------
BALANCE AT DECEMBER 31, 1996 $51,510 $4,618,490 $1,848 $(3,670,099)
======= ========== ====== ===========
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE>
CMS A/R SERVICES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 381,663 $ 175,723
Adjustments to reconcile net income to net
cash provided from operations--
Depreciation 295,021 263,213
Unrealized gain 1,848 --
Deferred taxes 96,895 70,000
Changes in assets and liabilities that provided
(used) cash--
Accounts receivable (336,157) (411,462)
Other current assets 10,089 (46,978)
Other non-current assets (3,403) (1,237)
Accounts payable 477,842 (43,333)
Accrued expenses 69,931 287,941
Other non-current liabilities (88,360) (98,329)
--------- ---------
Net cash flows provided by operating activities 905,369 195,538
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES--
Purchases of property and equipment, net (133,380) (226,750)
Proceeds from sale of equipment -- 21,094
--------- ---------
Net cash flows used in investing activities (133,380) (205,656)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease payments of long-term debt (211,105) (111,340)
Borrowings (payments) on note payable to
affiliate, net (289,000) 167,000
--------- ---------
Net cash flows provided by (used in) financing
activities (500,105) 55,660
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 271,884 45,542
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 84,194 38,652
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 356,078 $ 84,194
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for--
Interest $ 66,193 $ 37,039
========= =========
Income taxes $ 100,000 $ 78,000
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS --
Property and equipment acquired through capital leases $ 394,499 $ 431,183
========= =========
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE>
CMS A/R SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
CMS A/R Services, Inc. (the "Company"), a Michigan corporation, is a wholly
owned subsidiary of CMS Utility Services, Inc. (the "Parent") and a
second-tier subsidiary of CMS Enterprises Company which is a wholly owned
subsidiary of CMS Energy Corporation (the "Ultimate Parent"). The Company is
engaged in the business of providing receivables management, teleservices and
accounts collection services.
Revenue Recognition
Revenues are generally recognized at the time the related service is provided
to the customer. During the years ended December 31, 1996 and 1995, 53% and
55%, respectively, of operating revenues and as of December 31, 1996 and
1995, 68% and 28%, respectively, of outstanding accounts receivable were from
two customers (Consumers Energy Company and Commonwealth Edison Company).
Income Taxes
Pursuant to a Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes", deferred tax assets and liabilities are
determined at the end of each period based on differences between the
financial statement bases of assets and liabilities and the tax bases of
those same assets and liabilities, using the currently enacted statutory tax
rates. Deferred income tax expense is measured by the change in the net
deferred income tax assets or liabilities during the year.
Property and Equipment
Property and equipment consists of furniture, fixtures, equipment and
capital leases (see Note 2), which are stated at cost less accumulated
depreciation and amortization.
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the respective assets. Asset lives
range from 5 to 7 years for furniture, fixtures and equipment.
F-16
<PAGE>
CMS A/R SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Basis of Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumption 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.
Cash Flows
All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents.
(2) LEASES
The Company leases certain property and equipment used in its operations. As
of December 31, 1996, the future minimum lease payments under noncancelable
capital and operating leases are as follows:
Capital Operating
Leases Leases
------ ------
1997 $232,464 $171,456
1998 218,064 13,728
1999 203,664 --
2000 158,709 --
-------- --------
Total minimum lease payments 812,901 $185,184
========
Less -- amount representing interest 108,099
-------
Capital lease obligations $704,802
========
Rent expense under operating leases amounted to $230,308 and $216,636 for
the years ended December 31, 1996 and 1995, respectively.
F-17
<PAGE>
CMS A/R SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
(3) BENEFIT PLANS
Pension
The Company participates in the Ultimate Parent's trusted non-contributory
defined benefit pension plan ("the Plan"). The Company's assets and
accumulated and projected benefit obligations are not distinguishable from
the aggregate amounts of such assets and obligations in the Plan. As of
December 31, 1996 and 1995, the fair value of the Plan's assets exceed both
the accumulated and projected benefit obligation. Pension expense for the
years ended December 31, 1996 and 1995 was approximately $23,000 and $32,000,
respectively.
For the years ended December 31, 1996 and 1995, the weighted average discount
rate was 7.75% and 7.5%, respectively, the assumed rate of compensation
increase was 4.0% and 4.5%, respectively, and the expected long-term rate of
return on assets was 9.25% for both years.
Other Postretirement Benefits
The Company provides health care and life insurance benefit plans for its
employees and retirees through its participation in the Ultimate Parent's
plans ("the postretirement plans"). The postretirement plans are
noncontributory and are being funded under the Internal Revenue Code
guidelines.
As of December 31, 1996, the actuary assumed that retiree health care costs
would increase 8.5 percent in 1997 then decrease gradually to 6 percent in
2004 and thereafter. The health care cost trend rate assumption significantly
affects the amounts reported. For example, a 1 percentage point increase in
each year would increase the accumulated postretirement benefit obligation as
of December 31, 1996 by approximately 16% and the aggregate of the service
and interest cost components of net periodic postretirement benefits costs
for 1996 by approximately 22%.
F-18
<PAGE>
CMS A/R SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
The weighted average discount rate used for the years ended December 31, 1996
and 1995 was 7.75% and 7.5%, respectively. The expected long-term rate on
plan assets for the years ended December 31, 1996 and 1995 was 7.0% for both
years. The 1996 and 1995 net postretirement benefits costs for the health
care benefits and life insurance benefits were comprised of $24,152 and
$30,346 for service, respectively, and $78,032 and $110,349 for interest,
respectively.
The Company's accumulated and projected benefit obligations are not
distinguishable from the aggregate amounts of the postretirement plans. The
recorded liability included in the accompanying Balance Sheets is based on an
allocation of the Ultimate Parent's obligations under the postretirement
plans. The obligations have been allocated to the Company primarily based on
the number of its employees compared to the total number of employees of the
Ultimate Parent.
Supplemental Executive Retirement Plan ("SERP")
Certain management employees qualify for benefits under the Ultimate Parent's
SERP. The SERP expense for the years ended December 31, 1996 and 1995 was
$6,785 and $290, respectively. In 1988, a trust was established and partially
funded. The SERP is a non-qualified plan under the Internal Revenue Code and
the trust assets are included in the consolidated assets of the Company. As
of December 31, 1996 and 1995, the Company's trust assets were $90,567 and
$87,614, respectively, and the projected benefit obligation was $57,239 and
$50,454, respectively. An unrealized gain on the trust assets of $1,848 was
recognized in 1996.
(4) INCOME TAXES
The Company joins the Ultimate Parent in filing a consolidated tax return.
Income taxes are generally allocated to each subsidiary based on their
separate taxable amount. The Company practices full deferred accounting for
temporary differences. Any alternative minimum tax ("AMT") paid generally
becomes a tax credit that can be carried forward indefinitely to reduce
regular tax liabilities in future periods when regular taxes paid exceed the
tax calculated for AMT.
F-19
<PAGE>
CMS A/R SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
The principal components of the Company's deferred tax assets (liabilities)
recognized in the accompanying Balance Sheets as of December 31 are as follows:
1996 1995
--------- --------
Property and equipment $ 16,000 $ 35,000
AMT carryforward 639,000 685,000
Employee benefit obligations (includes
postretirement benefits) 221,000 246,000
Other (5,895) 1,000
--------- --------
Total deferred tax assets, net $870,105 $967,000
========= ========
Gross deferred tax assets $876,000 $967,000
Gross deferred tax liabilities (5,895) --
--------- --------
Total deferred tax assets, net $870,105 $967,000
========= ========
The components of the Company's provision for income taxes for the years ended
December 31 are as follows:
1996 1995
--------- --------
Current federal income taxes $110,209 $ 25,907
Deferred income taxes 96,895 70,000
--------- --------
Provision for income taxes $207,104 $ 95,907
========= ========
F-20
<PAGE>
CMS A/R SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
(5) RELATED PARTY TRANSACTIONS
During the years ended December 31, 1996 and 1995, the Company transacted with
several companies affiliated by common ownership.
The Company invoiced Consumers Energy Company, an affiliate owned by the
Ultimate Parent, $2,412,409 and $2,399,499 for collection and credit card
services provided during the years ended December 31, 1996 and 1995,
respectively. As of December 31, 1996 and 1995, $134,885 and $115,184,
respectively, were included in accounts receivable - affiliates in the
accompanying Balance Sheets.
The Company funds its obligation under its postretirement benefit plan through
the Ultimate Parent. For the year ended December 31, 1996, the Ultimate Parent
had funded for the Company $189,878 of this obligation. This amount is included
in accounts payable - affiliates as of December 31, 1996 in the accompanying
Balance Sheets.
(6) NOTE PAYABLE TO AFFILIATE
The Company funds its working capital requirements through intercompany
borrowings from the Parent and invests any cash in excess of current working
capital requirements with the Parent. The Company was in a borrowing position of
$83,000 and $372,000 as of December 31, 1996 and 1995, respectively. These are
reflected in the accompanying Balance Sheets as note payable to affiliate.
(7) SUBSEQUENT EVENT
On January 21, 1997, the Company entered into an asset purchase agreement with
an unrelated third party providing for the sale of substantially all of the
Company's assets exclusively associated with its receivables management,
teleservices and accounts collection business.
F-21
<PAGE>
Pro Forma Consolidated Financial Statements
Basis of Presentation
The Pro Forma Consolidated Balance Sheet as of December 31, 1996 and the Pro
Forma Consolidated Statement of Income for the year ended December 31, 1996 are
based on the historical financial statements of NCO Group, Inc. (NCO),
Management Adjustment Bureau, Inc. (MAB), Goodyear & Associates, Inc.
(Goodyear), CMS A/R Services (CMSA/R), and Tele-Research Center, Inc. (TRC). The
Pro Forma Consolidated Balance Sheet has been prepared assuming the Goodyear,
CMSA/R and TRC acquisitions occurred on December 31, 1996. The Pro Forma
Consolidated Statement of Income for the year ended December 31, 1996 has been
prepared assuming the MAB, Goodyear, CMSA/R and TRC acquisitions occurred on
January 1, 1996.
The Pro Forma Consolidated Financial Statements do not purport to represent what
NCO's actual results of operations or financial position would have been had the
acquisitions occurred as of such dates, or to project NCO's results of
operations or financial position for any period or date, nor does it give effect
to any matters other than those described in the notes thereto. In addition, the
allocations of purchase price to the assets and liabilities of Goodyear, CMSA/R
and TRC are preliminary and the final allocations may differ from the amounts
reflected herein. The unaudited Pro Forma Consolidated Financial Statements
should be read in conjunction with the other financial statements and notes
thereto filed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
F-22
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Balance Sheets
December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
NCO Group, Goodyear & CMS A/R Tele-Research Acquisition Pro Forma
ASSETS Inc. Associates Services Inc. Adjustments Combined
------------- ------------ ------------ -------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $12,058,798 $ 161,490 $ 356,078 $ 13,741 $ (4,500,000)(1) $ 4,609,457
(30,000)(1)
(3,100,000)(2)
(30,000)(2)
(298,909)(2)
(13,741)(3)
(8,000)(3)
Accounts receivable, trade, net of
allowance for doubtful accounts 4,701,364 435,774 1,131,935 71,422 129,755 (2) 6,398,828
(71,422)(3)
Other current assets 499,815 53,964 78,033 16,981 (48,266)(2) 583,546
(16,981)(3)
------------ ----------- ----------- ---------- ------------- ----------
Total current assets 17,259,977 651,228 1,566,046 102,144 (7,987,564) 11,591,831
Funds held in trust for clients
Property and equipment, net 2,830,062 514,110 1,038,635 8,854 (264,110)(1) 3,615,329
(523,368)(2)
11,146 (3)
Other assets:
Intangibles, net of accumulated
amortization 14,673,155 5,223,342 (1) 25,062,604
3,486,107 (2)
1,680,000 (3)
Deferred taxes 70,760 876,000 (876,000)(2) 70,760
Deferred financing costs 684,390 684,390
Other assets 308,011 26,777 90,567 (90,567)(2) 334,788
------------- ------------ ------------ ---------- --------------- -----------
Total other assets 15,736,316 26,777 966,567 - 9,422,882 26,152,542
------------- ------------ ------------ ---------- --------------- -----------
Total assets $35,826,355 $1,192,115 $3,571,248 $ 110,998 $ 658,986 $41,359,702
============= ============ ============ ========== =============== ===========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-23
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Balance Sheets
December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
NCO Group, Goodyear & CMS A/R Tele-Research Acquisition Pro Forma
LIABILITIES AND SHAREHOLDERS' EQUITY Inc. Associates Services Inc. Adjustments Combined
----------- ----------- --------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Current liabilities:
Long-term debt, current portion $ 46,946 $ - $ - $ - $ - $ 46,946
Capitalized lease obligations, current
portion 62,131 82,117 183,862 (183,862)(2) 144,248
Corporate taxes payable 216,709 11,200 227,909
Accounts payable 657,647 52,252 625,964 (625,964)(2) 709,899
Accrued expenses 1,044,536 157,431 448,808 38,425 270,000 (1) 1,783,967
220,000 (2)
(448,808)(2)
92,000 (3)
(38,425)(3)
Accrued compensation and related expenses 1,376,982 26,496 (26,496)(3) 1,376,982
Unearned revenue, net of related costs 225,817 225,817
Other current liabilities 83,000 (83,000)(2) -
----------- ---------- -------- ----------- -------------- ----------
Total current liabilities 3,630,768 303,000 1,341,634 64,921 (824,555) 4,515,768
Long-term liabilities:
Long term debt, net of current portion 1,091,901 900,000 (1) 5,591,901
2,000,000 (2)
1,600,000 (3)
Capitalized lease obligations,
net of current portion 385,683 95,041 520,940 (520,940)(2) 480,724
Other liabilities 53,306 706,925 (706,925)(2) 53,306
Unearned revenue, net of related costs 70,385 70,385
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
4,213,447 shares issued and outstanding
at December 31, 1996 and 1995
respectively 29,362,326 5,000 51,510 1,000 (5,000)(1) 29,362,326
(51,000)(2)
(1,000)(3)
Additional paid in capital 4,620,338 (4,620,338)(2)
Unexercised warrants 396,054 396,054
Retained earnings 889,238 735,768 (3,670,099) 45,077 (735,768)(1) 889,238
3,670,099 (2)
(45,077)(3)
----------- ---------- -------- ----------- -------------- ----------
Total shareholders' equity 30,647,618 740,768 1,001,749 46,077 (1,788,594) 30,647,618
----------- ---------- -------- ----------- -------------- ----------
Total liabilities and shareholders' equity $35,826,355 $1,192,115 $3,571,248 $ 110,998 $ 658,986 $41,359,702
=========== ========== ========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-24
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Statements of Income
For the Year Ended December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Historical
--------------------------------------------------------------------------
NCO Group, Management Goodyear & CMS A/R Tele-Research
Inc. Adj. Bureau(4) Associates Services Inc.
------------- -------------------- ------ ------------- --------------
<S> <C> <C> <C> <C> <C>
Revenue $30,760,452 $ 9,162,744 $5,454,500 $ 6,790,849 $ 1,917,607
Operating costs and expenses:
Payroll and related expenses 14,651,384 5,870,416 3,339,926 2,933,754 1,139,791
Selling, general and
administrative expenses 10,032,216 3,255,089 1,619,526 2,927,587 633,426
Depreciation and amortization
expense 1,253,867 337,295 169,322 295,021 11,341
----------- ------------- ---------- ------------ ------------
Total operating costs and
expense 25,937,467 9,462,800 5,128,774 6,156,362 1,784,558
----------- ------------- ---------- ------------ ------------
Income from operations 4,822,985 (300,056) 325,726 634,487 133,049
Other income (expense):
Interest and investment
income 242,380 20,473
Interest expense (817,951) (50,974) (27,253) (66,193) (75)
Other 1,636
----------- ------------- ---------- ------------ ------------
(575,571) (50,974) (25,617) (45,720) (75)
----------- ------------- ---------- ------------ ------------
Income before provision
for income taxes 4,247,414 (351,030) 300,109 588,767 132,974
Income tax expense 612,748 83,924 117,000 207,104
----------- ------------- ---------- ------------ ------------
Net income (loss) $ 3,634,666 $ (434,954) $ 183,109 $ 381,663 $ 132,974
=========== ============ ========= =========== ============
Pro forma:
Historical income before
income taxes
Pro forma provision for
income taxes
Pro forma net income
Pro forma net income
per share
Pro forma weighted
average shares
outstanding
</TABLE>
<PAGE>
RESTUBBED TABLE
<TABLE>
<CAPTION>
Acquisition Pro Forma
Adjustments Combined
----------- ----------
<S> <C> <C>
Revenue $54,086,152
Operating costs and expenses:
Payroll and related expenses (376,175)(5) 26,358,496
(543,200)(6)
(451,400)(8)
(84,000)(9)
(122,000)
Selling, general and
administrative expenses 18,467,844(7)
Depreciation and amortization
expense 126,462 (11) 2,193,308
---------- ----------
Total operating costs and
expense (1,353,366) 47,019,648
---------- ----------
Income from operations 1,353,366 7,066,504
Other income (expense):
Interest and investment
income 262,853
Interest expense 359,470 (12) (602,976)
Other 1,636
---------- ----------
359,470 (338,487)
---------- ----------
Income before provision
for income taxes 1,712,836 6,728,017
Income tax expense 1,020,776
---------- ----------
Net income (loss) $1,712,836 $5,707,241
========== ==========
Pro forma:
Historical income before
income taxes $6,728,017
Pro forma provision for
income taxes 2,903,345(13)
----------
Pro forma net income $3,824,672
==========
Pro forma net income
per share $ 0.61(14)
==========
Pro forma weighted
average shares
outstanding 6,242,660
==========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-25
<PAGE>
Notes to Consolidated
Pro Forma Financial Statements
(Unaudited)
To date, all of the Company's acquisitions have been accounted for under the
purchase method of accounting with the results of the acquired companies
included in the Company's statements of income beginning on the date of
acquisition.
(1) Gives effect to the acquisition of Goodyear, as if it occurred on December
31, 1996, for $4.5 million in cash and the issuance of a $900,000
convertible note payable to Goodyear's principal shareholder. In addition,
the Company recognized $30,000 of direct closing costs related to the
acquisition and accrued $270,000 of costs related to the termination of
employees and other items. After allocating the purchase price to the
estimated fair market value of the assets acquired and liabilities assumed,
the Company recognized $5,223,342 of goodwill.
(2) Gives effect to the acquisition of CMSA/R, as if it occurred on December
31, 1996, for $5.1 million in cash of which $2,000,000 was borrowed from
the Company's credit facility. In addition, the Company recognized $30,000
of direct closing costs related to the acquisition and accrued $220,000 of
costs related to the termination of employees and other items. After
allocating the purchase price to the estimated fair market value of the
assets acquired and liabilities assumed, the Company recognized $3,486,107
of goodwill. The historical balance sheet presented for CMSA/R includes
assets and liabilities of the acquired company which were not acquired in
this transaction. These assets and liabilities have been eliminated for pro
forma purposes.
(3) Gives effect to the acquisition of TRC, as if it occurred on December 31,
1996 for $1.6 million in cash which was borrowed from the Company's credit
facility. In addition, the Company recognized $8,000 of direct closing
costs related to the acquisition and accrued $92,000 of costs related to
the acquisition. After allocating the purchase price to the estimated fair
market value of the assets acquired and liabilities assumed, the Company
recognized $1,680,000 of goodwill. The historical balance sheet presented
for TRC includes assets and liabilities of the acquired company which were
not acquired in this transaction. These assets and liabilities have been
eliminated for pro forma purposes.
(4) Represents the results of operations prior to the acquisition of MAB in
September 1996.
(5) Reflects the reduction in salary of MAB's principal shareholder (who is no
longer active in the day-to-day operations of MAB's business), pursuant to
a new employment agreement.
(6) Reflects the elimination of payroll and related expenses relating to the
elimination of certain redundant collection and administration personnel
costs immediately identifiable at the time of the acquisition of MAB.
F-26
<PAGE>
Notes to Consolidated
Pro Forma Financial Statements
(Unaudited)
(7) Includes a non-recurring charge of $190,000 recorded by MAB to account for
potential losses related to certain repayment guarantees made on behalf of
third parties.
(8) Reflects the reduction in salary of Goodyear's principal shareholders (who
are no longer active in the day-to-day operations of Goodyear's business),
pursuant to a new employment agreement.
(9) Reflects the elimination of payroll and related expenses relating to the
elimination of certain redundant administration personnel costs immediately
identifiable at the time of the acquisition of Goodyear.
(10) Reflects the elimination of payroll and related expenses relating to the
elimination of certain redundant administration personnel costs immediately
identifiable at the time of the acquisition of CMSA/R.
(11) Reflects amortization expense assuming MAB, Goodyear, CMSA/R and TRC had
been acquired on January 1, 1996. In addition, reflects the elimination of
depreciation and amortization expense related to assets revalued or not
acquired by NCO as part of the acquisition of CMSA/R and TRC.
(12) Reflects the elimination of interest expense on current and long-term debt
which was not assumed with the acquisitions, or was repaid with the
proceeds of the Company's initial public offering as if the repayment had
occurred on January 1, 1996. Also reflects the interest expense
attributable to additional borrowings on the Company's credit facility in
connection with the acquisition of CMSA/R and TRC.
(13) Reflects estimated provision for income taxes, at an assumed rate of 40%
after giving consideration to non-deductible goodwill expenses, assuming
the Company had converted from an S Corporation to a C Corporation on
January 1, 1996.
(14) Pro forma net income per share was computed by dividing the pro forma net
income for the year ended December 31, 1996 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 share equivalents giving retroactive effect as of January
1, 1996 to the 46.56-for-one stock split and the issuance of 1,604,620
shares of common stock (at $13.00 per share) net of estimated underwriting
discounts and offering expenses payable by the Company, to result in net
proceeds sufficient to finance the $3.2 million S Corporation distribution
and repay $15,000,000 of acquisition-related debt.
F-27
