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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 March 31, 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)
1740 Walton Road, Blue Bell, Pennsylvania
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(Address of principal executive offices)
23-2858652
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(IRS Employer Identification Number)
19422
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(Zip Code)
610-832-1440
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(Registrant's telephone number including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of
common stock was 7,058,625 shares of common stock, no par value, outstanding as
of May 12, 1997
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NCO GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
Part I FINANCIAL INFORMATION
Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
<S> <C> <C>
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 3
Consolidated Statements of Income -
Three months ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 1997 and 1996 5
Pro Forma Consolidated Statement of Income -
Three months ended March 31, 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 14
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
</TABLE>
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Part 1 - Financial Information
Item 1 - Financial Statements
NCO GROUP, INC.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1997 1996
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Current assets:
<S> <C> <C>
Cash and cash equivalents $ 5,793,016 $ 12,058,798
Accounts receivable, trade, net of
allowance for doubtful accounts of $279,300 and $79,000, respectively 11,122,643 4,701,364
Other current assets 631,284 499,815
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Total current assets 17,546,943 17,259,977
Funds held in trust for clients
Property and equipment, net 5,365,069 2,830,062
Other assets:
Intangibles, net of accumulated amortization 37,089,886 14,673,155
Deferred taxes 8,666 70,760
Deferred financing costs 653,213 684,390
Other assets 771,766 308,011
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Total other assets 38,523,531 15,736,316
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Total assets $ 61,435,543 $ 35,826,355
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 52,727 $ 46,946
Capitalized lease obligations, current portion 129,048 62,131
Corporate taxes payable 1,081,382 216,709
Accounts payable 2,011,363 657,647
Accrued expenses 4,104,255 1,044,536
Accrued compensation and related expenses 2,018,959 1,376,982
Unearned revenue, net of related costs 153,450 225,817
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Total current liabilities 9,551,184 3,630,768
Funds held in trust for clients
Long-term liabilities:
Long term debt, net of current portion 10,328,989 1,091,901
Capitalized lease obligations, net of current portion 403,691 385,683
Unearned revenue, net of related costs 107,388 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,
7,058,625 and 6,713,447 shares issued and outstanding
at March 31, 1997 and December 31, 1996 respectively. 37,577,206 29,362,326
Unexercised warrants 1,271,054 396,054
Retained earnings 2,196,031 889,238
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Total shareholders' equity 41,044,291 30,647,618
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Total liabilities and shareholders' equity $ 61,435,543 $ 35,826,355
============= ============
</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
March 31,
----------------------------------
1997 1996
----------------------------------
<S> <C> <C>
Revenue $ 18,076,757 $ 6,043,960
Operating costs and expenses:
Payroll and related expenses 9,046,110 2,997,478
Selling, general and administrative
expenses 5,931,574 1,931,278
Depreciation and amortization expense 716,467 200,275
-------------- --------------
Total operating costs and expenses 15,694,151 5,129,031
-------------- --------------
Income from operations 2,382,606 914,929
Other income (expense):
Interest and investment income 93,308 17,024
Interest expense (175,150) (172,123)
-------------- --------------
(81,842) (155,099)
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Income before provision for income taxes 2,300,764 759,830
Income tax expense 993,974 -
-------------- --------------
Net income $ 1,306,790 $ 759,830
============== ==============
Pro Forma
--------------
Historical income before income taxes $ 759,830
Pro forma provision for income taxes 303,932
==============
Pro forma net income $ 455,898
==============
Net income per share $ 0.18 $ 0.10
============== ==============
Weighted average shares outstanding 7,371,157 4,733,549
============== ==============
</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 Three Months Ended
March 31,
----------------------------------
1997 1996
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Cash flows from operating activities:
<S> <C> <C>
Net income $ 1,306,793 $ 759,830
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 269,158 65,582
Amortization of intangibles 403,975 106,898
Amortization of deferred financing costs 43,334 27,795
Provision for doubtful accounts 91,828 9,982
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, trade (1,978,519) (810,920)
Notes receivable 100,000
Other current assets 126,694 (33,887)
Deferred taxes 39,644
Other assets 50,568 4,563
Accounts payable (1,073,492) 307,539
Corporate taxes payable 822,617 41,309
Accrued expenses 1,310,644 626,278
Accrued compensation and related costs 17,017 (387,202)
Unearned revenue (35,364) (29,005)
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Net cash provided by operating activities 1,394,897 788,762
Cash flows from investing activities:
Purchase of property and equipment (311,503) (280,391)
Purchase of securities (16,063)
Proceeds from sale of securities 24,636
Net cash paid for acquisitions (15,556,862) (4,515,534)
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Net cash used in investing activities (15,868,365) (4,787,352)
Cash flows from financing activities:
Repayment of notes payable (130,157) (17,067)
Borrowings under credit agreement 8,350,000 4,550,000
Payment of fees to acquire new debt (12,157) (10,916)
Decrease in notes receivable, shareholders 82,873
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Net cash provided by financing activities 8,207,686 4,604,890
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Net increase (decrease) in cash and cash equivalents (6,265,782) 606,300
Cash and cash equivalents at beginning of period 12,058,798 804,550
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Cash and cash equivalents at end of period $ 5,793,016 $ 1,410,850
============= ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 141,600 $ 137,727
Cash paid for income taxes 181,206
Noncash investing and financing activities:
Fair value of assets acquired 7,986,816 680,983
Liabilities assumed from acquisitions 3,400,271
Warrants issued for acquisitions 875,000
Common stock issued for acquisitions 8,214,880
Convertible note payable, issued for acquisition 900,000
</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 Three Months Ended March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Historical
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NCO Group, Acquired Acquisition Pro Forma
Inc. Companies (1) Adjustments (1) Combined
---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Revenue $ 18,076,757 $ 2,841,578 $ - $ 20,918,335
Operating costs and expenses:
Payroll and related expenses 9,046,110 1,381,883 (103,258) 10,324,735
Selling, general and administrative expenses 5,931,574 1,159,470 (54,093) 7,036,951
Depreciation and amortization expense 716,467 156,915 (27,378) 846,004
-------------- -------------- -------------- -------------
Total operating costs and expenses 15,694,151 2,698,268 (184,729) 18,207,690
-------------- -------------- -------------- -------------
Income from operations 2,382,606 143,310 184,729 2,710,645
Other income (expense):
Interest and investment income 93,308 93,308
Interest expense (175,150) (273) (49,000) (224,423)
-------------- -------------- -------------- -------------
(81,842) (273) (49,000) (131,115)
-------------- -------------- -------------- -------------
Income before provision for income taxes 2,300,764 143,037 135,729 2,579,530
Income tax expense 993,974 120,431 1,114,405
-------------- -------------- -------------- -------------
Net income $ 1,306,790 $ 143,037 $ 15,298 $ 1,465,125
============== ============== ============== =============
Net income per share $ 0.18 $ 0.20
============== =============
Weighted average shares outstanding 7,371,157 7,432,522
============== =============
</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 increase in amortization expense as if the
acquisitions had occurred on January 1, 1997 ; (iv) the elimination of
depreciation and amortization expense related to assets revalued or not acquired
by NCO as part of the acquisitions; and (v) the additional interest expense
associated with acquisition-related debt .
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 in the
following industries: financial services, government entities, education,
healthcare, telecommunications, utilities, and commercial and retail entities.
Effective September 3, 1996, the Company reorganized its corporate structure. At
September 3, 1996, the shareholders of NCO Financial Systems, Inc. contributed
each of their shares of common stock in exchange for one share common stock of
the Company, a recently formed corporation. The Company effected a 46.56 for 1
stock split in September 1996 and increased the number of authorized shares to
5,000,000 shares of preferred stock and 25,000,000 shares of common stock. All
per share and related amounts have been adjusted to reflect the stock exchange
and stock split.
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.
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Deferred Financing Costs:
Deferred financing costs relate to debt issuance costs incurred which are
capitalized and amortized over the term of the debt.
Estimates Utilized in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Earnings Per Share:
On September 3, 1996, the shareholders of NCO Financial Systems, Inc. (Note 1)
contributed each of their shares of common stock in exchange for one share of
the Company's common stock. The Company effected a 46.56-for-1 stock split in
September 1996. All per share and related amounts contained in these financial
statements and notes have been adjusted to reflect the stock exchange and stock
split.
Earnings per share were computed by dividing the pro forma net income for the
three months ended March 31, 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. 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. 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 the three month period
ending March 31, 1996, only when their effect would be dilutive. 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 month period ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in the 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 industries 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 the Company's Common Stock, at any time, at $13.00 per share and bears
interest payable monthly at a rate of 8.0% per annum with principal due in
September 2001. MAB, based in Buffalo, New York, provided accounts receivable
management services, principally to the education, financial services,
telecommunications and utility industries. This acquisition resulted in goodwill
of $8,511,000.
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 the Company's Common Stock, at
any time, at $21.175 per share 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 industries. Goodyear's revenues
in 1996 were $5.5 million. This acquisition resulted in goodwill of $5.1
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 certain 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 certain 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 industries 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 $11.0 million.
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 $5,832,231 and $3,835,409 at March 31, 1997
and December 31, 1996, respectively, have been shown net of their offsetting
liability for financial statement presentation purposes.
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
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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 of 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 Goodyear, CMSA/R, TRC and CRWCD,
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.
6. 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.
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Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The information contained in this Report on Form 10-Q, other than
historical facts, contains forward-looking statements (as such term is defined
in the Securities Exchange Act of 1934, and the regulations thereunder)
including, without limitation, statements as to the Company's objective to grow
through strategic acquisitions, the Company's ability to realize operating
efficiencies in the integration of 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 quarter ended March 31, 1997 assume that
the Goodyear & Associates, Inc. ("Goodyear"), CMS A/R Services, Inc. ("CMSA/R"),
Tele-Research Center, Inc. ("TRC") and CRW Financial, Inc. Collections Division
("CRWCD") 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, including the
immediate elimination of certain redundant collection and administrative
personnel. At the time of the acquisitions, the acquired companies had a higher
cost structure than that of the NCO 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,
although no assurances can be given that such cost savings will be realized. Due
to the higher cost structures of the acquired businesses 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.
Quarter ended March 31, 1997 Compared to Quarter ended March 31, 1996
Revenue. Revenue increased $12.0 million or 199.1% to $18.1 million for the
three-month period ended March 31, 1997 from $6.1 million for the comparable
period in 1996. The addition of new clients and growth in business from existing
clients represented $1.3 million of the additional revenue. In addition, $3.4
million of revenue was attributable to the MAB acquisition completed in
September 1996, $4.1 million of was attributable to the CRWCD acquisition
completed in February 1997, and $3.2 million was attributable to the Goodyear,
CMSA/R, and TRC acquisitions completed in January 1997. 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.
Payroll and related expenses. Payroll and related expenses increased $6.0
million to $9.0 million for the quarter ended March 31, 1997 from $3.0 million
for the comparable period in 1996, and increased as a percentage of revenue to
50.0% from 49.6%. Payroll and related expenses increased as a percentage of
revenue primarily as a result of the recent 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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Selling, general and administrative expenses. Selling, general and
administrative expenses increased $4.0 million to $5.9 million for the quarter
ended March 31, 1997 from $1.9 million for the comparable period in 1996, and
increased as a percentage of revenue to 32.8% from 32.0%. Selling, general and
administrative expenses increased as a percentage of revenue primarily as a
result of the recent acquisitions having a higher cost structure than that of
the Company. The Company also experienced increased costs as a result of the
increased use of national data bases and credit reporting services associated
with an increase in contingency based revenues.
Depreciation and amortization. Depreciation and amortization increased to
$716,000 for the quarter ended March 31, 1997 from $200,000 for the comparable
period in 1996. Of this increase, $394,000 was a result of the MAB, Goodyear,
CMSA/R, TRC, and CRWCD acquisitions. The remaining $122,000 consisted of
amortization of deferred financing charges and depreciation resulting from
normal capital expenditures.
Other income (expense). Interest expense increased $3,000 to $175,000 for
the quarter ended March 31, 1997 from the comparable period in 1996. Although
all debt had been repaid after the Company's initial public offering in November
1996, there were borrowings of $8.35 million attributable to the acquisitions of
CMSA/R, TRC and CRWCD during the quarter ended March 31, 1997. Investment income
increased $76,000 to $93,000 for the quarter ended March 31, 1997 from the
comparable period in 1996. This increase was primarily attributable to the
investment of funds remaining from the initial public offering as well as an
increase in funds held in trust for clients.
Income tax expense. Income tax expense for the quarter ended March 31, 1997
was $994,000. The Company was an S Corporation as of March 31, 1996 and,
accordingly, there was no provision for income taxes. The pro forma provision
for income taxes has been computed utilizing an assumed rate of 40% for the
quarter ended March 31, 1996. Income tax expense for the quarter ended March 31,
1997 was higher than the assumed rate of 40% due to the non-deductible goodwill
associated with certain of the acquisitions.
Net income. Pro forma net income increased to $1.3 million for the quarter
ended March 31, 1997 from $456,000 for the comparable period in 1996, a 186.6%
increase.
Liquidity and Capital Resources
The Company's primary sources of cash have historically been cash flow from
operations and bank borrowings. Cash has been used for acquisitions of accounts
receivable management companies and S Corporation distributions to shareholders,
and for purchases of equipment and working capital to support the Company's
growth.
Cash provided by operating activities was $1.4 million during the first
quarter of 1997, and $800,000 million for the comparable period in 1996. The
increase in cash provided by operations was primarily due to the increase in net
income to $1.3 million in 1996 compared to $760,000 in 1996, and the increase in
non-cash charges, primarily depreciation and amortization, to $808,000 during
the first quarter of 1997 compared to $210,000 for the comparable quarter in
1996. These increases were offset by a $2.0 million increase in accounts
receivable in 1997 compared to a $811,000 increase in 1996 and a $254,000
decrease in accounts payable and accrued expenses in 1997 compared to a $547,000
increase 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.
Cash used in investing activities was $15.9 million during the first
quarter of 1997 compared to $4.8 million for the comparable period in 1996. The
increase was primarily due to the acquisitions of Goodyear, CMSA/R, TRC and
CRWCD during the first quarter of 1997 versus the acquisition of TCD during the
first quarter of 1996.
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 industries from offices in Pennsylvania, Ohio and Kansas.
This acquisition resulted in goodwill of $3.7 million.
-12-
<PAGE>
On January 22, 1997, NCO purchased all of the outstanding stock of Goodyear
for $4.5 million in cash and a $900,000 convertible note. The note is
convertible into the Company's Common Stock, at any time, at $21.175 per share
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 provides
accounts receivable management services principally to the telecommunications,
education, and utility industries. Goodyear's revenues in 1996 were $5.5
million. This acquisition resulted in goodwill of $5.1 million.
On January 30, 1997, NCO purchased certain assets of TRC, for $1.6 million
in cash. TRC, located in Philadelphia, Pennsylvania, provides 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 certain assets of 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 certain assets of CRWCD for $3.75
million in cash, 345,178 shares of its Common Stock and warrants for 250,000
shares of common stock. The acquisition was valued at approximately $12.8
million. CRWCD provided accounts receivable management services principally to
the telecommunications, education, financial, government and utility industries
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.
This acquisition resulted in goodwill of $11.0 million.
The Company has begun to realize operating efficiencies from the Goodyear,
CMSA/R, TRC and CRWCD acquisitions and has begun to eliminate redundant
collection and administrative personnel, consolidate office locations, and
reduce selling, general and administrative expenses to levels more consistent
with NCO's current operating results. In addition, the Company has reduced the
payroll and related expenses associated with the former principal shareholder of
Goodyear.
Cash provided by financing activities was $8.2 million during the first
quarter of 1997 compared with $4.6 for the comparable period in 1996. During the
first quarter of 1996, bank borrowings were the Company's primary source of cash
from financing activities and were used for the acquisition of TCD and, along
with cash provided by operations, for S Corporation distributions to
shareholders. Following the completion of the Company's initial public offering
in November 1996, the Company used a portion of the proceeds to repay the
outstanding bank debt.
The Company financed the acquisitions of Goodyear, CMS A/R Services, TRC
and CRWCD, 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 Company believes that funds generated from operations, together with
existing cash, the remaining net proceeds from the Offering and available credit
under its revolving credit line will be sufficient to finance its current
operations and planned capital expenditure requirements and internal growth at
least through 1997. However, the Company may raise additional debt or equity
financing to fund any future acquisitions.
-13-
<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
---------------------
Previously reported in the Company's Annual Report on Form 10-K,
filed on March 31, 1997, as amended.
Item 3. Defaults Upon Senior Securities
-------------------------------
None - not applicable
Item 4. Submission of Matters to a Vote of Shareholders
-----------------------------------------------
None - not applicable
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
-------------- -------------
2/06/97 Item 2 - Goodyear Acquisition
2/14/97 Item 2 - TRC Acquisition
2/18/97 Item 2 - CMSA/R and CRWCD Acquisitions
2/18/97 Item 2 - TRC Acquisition (Amendment)
-14-
<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: May 12, 1997 By: /s/ Michael J. Barrist
----------------------
Michael J. Barrist
Chairman and Chief
Executive Officer
Date: May 12, 1997 By: /s/ Steven L. Winokur
---------------------
Steven L. Winokur
Vice President, Finance and
Chief Financial Officer
-15-
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<PERIOD-START> JAN-01-1997
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