<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
-----------------------------------
Date of Report (Date of earliest event reported): August 20, 1999
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 (Commission File Number) (I.R.S. Employee
of Identification Number)
incorporation or
organization)
</TABLE>
515 Pennsylvania Avenue
Fort Washington, Pennsylvania 19034
--------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (215) 793-9300
================================================================================
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On August 20, 1999, NCO Group, Inc. ("NCO") acquired Compass
International Services Corporation ("Compass") by the merger of Cardinal
Acquisition Corporation ("Newco"), a wholly-owned subsidiary of NCO, into
Compass, with Compass becoming a wholly-owned subsidiary of NCO (the "Merger").
In consideration of the Merger, the stockholders of Compass received a total of
approximately 3.3 million shares of common stock, no par value, of NCO ("NCO
Common Stock") in exchange for all of the outstanding shares of capital stock of
Compass. Additionally, NCO assumed all outstanding stock options of Compass,
which have been converted in the Merger into options to purchase up to
approximately 215,000 shares of NCO Common Stock. The transaction was accounted
for under the purchase method of accounting and treated as a tax free
reorganization.
Compass is one of the leading providers of accounts receivable
management services and other complementary outsourced services. Compass'
revenue for fiscal year ended December 31, 1998, exclusive of revenue
attributable to the Print and Mail Division, was approximately $105.5 million,
on a pro forma basis.
Risks Associated with Recent Acquisitions.
- ------------------------------------------
The businesses acquired by NCO in the fourth quarter of 1998 and in
1999 and acquired in the Compass acquisition had combined pro forma revenues of
$307.0 million in 1998 which was 171.5% of NCO's revenue of $179.0 million in
1998, prior to the restatement to reflect the acquisition of JDR Holdings, Inc.
If NCO is unable to successfully integrate these new business into NCO's
operations, NCO may not be able to realize expected operating efficiencies,
eliminate redundant costs or operate the businesses profitably. The integration
of these businesses is subject to a number of risks, including risks that:
o These acquisitions could divert management's attention from
the daily operations of NCO and otherwise require additional
management, operational and financial resources;
o the conversion of the acquired companies computer and
operating systems into NCO's systems may take longer or cost
more than expected;
o NCO may be unable to retain clients or key employees of the
acquired companies; and
o the acquired companies might have additional liabilities and
problems that NCO did not anticipate at the time of the
acquisitions.
Forward Looking Statements
- --------------------------
Certain statements included in this Current Report on Form 8-K, other
than historical facts, are forward-looking statements (as such term is defined
in the Securities Exchange Act of 1934, and the regulations thereunder) which
are intended to be covered by the safe harbors created thereby.
-1-
<PAGE>
Forward-looking statements include, without limitation, statements as to the
Company's objective to grow through strategic acquisitions and internal growth,
the impact of acquisitions on the Company's earnings, the Company's ability to
realize operating efficiencies in the integration of its acquisitions, trends in
the Company's future operating performance, Year 2000 compliance, the effects of
legal or governmental proceedings, the effects of changes in accounting
pronouncements 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, risks relating to Year 2000 compliance 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 for the year ended December 31, 1998, filed on March 31, 1999, and the
Company's Registration Statement on Form S-4, filed on July 20, 1999, can cause
actual results and developments to be materially different from those expressed
or implied by such forward-looking statements.
Item 7. Financial Statements and Exhibits.
---------------------------------
The following exhibits are being filed as part of this report:
(a) Financial Statements of businesses acquired.
Incorporated by reference to the Compass Annual Report on
Form 10-K filed with the Securities and Exchange Commission
on March 31, 1999, as amended on Form 10-K/A filed on April
30, 1999, and the Compass Form 10-Q filed with the Securities
Exchange Commission on August 13, 1999.
(b) Pro Forma Financial Information.
Pro Forma Consolidated Financial Statements..............F-1
(c) Exhibits.
--------
Number Title
1.* Agreement and Plan of Merger, dated as of May 12,
1999, by and among NCO, Compass and Newco.
*Incorporated by reference to NCO's Proxy/Registration Statement on
Form S-4 (Registration No. 333-83229), filed with the Securities Exchange
Commission on July 20, 1999, as amended.
-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/ Michael J. Barrist
---------------------------------
Michael J. Barrist,
Chairman of the Board, President
and Chief Executive Officer
Date: September 1, 1999
-3-
<PAGE>
Pro Forma Consolidated Financial Statements
Basis of Presentation
The Pro Forma Consolidated Balance Sheet as of June 30, 1999 and the Pro
Forma Consolidated Statements of Income for the six months ended June 30, 1999
and the year ended December 31, 1998 are based on the historical financial
statements of NCO Group, Inc. ("NCO"); FCA International Ltd. ("FCA");
MedSource, Inc. ("MedSource"); and Medaphis Services Corporation ("MSC")
(collectively the "1998 Acquisitions"); Co-Source Corporation ("Co-Source"); and
Compass International Services Corporation ("Compass"). All of NCO's
acquisitions listed above have been accounted for assuming the use of the
purchase method of accounting with the results of the acquired companies
included in NCO's historical statements of income beginning on the date of
acquisition.
The Pro Forma Consolidated Balance Sheet as of June 30, 1999 has been
prepared assuming the Compass acquisition was completed on June 30, 1999. The
Compass acquisition gives effect to the sale of its print and mail division
prior to the acquisition of Compass by NCO.
The Pro Forma Consolidated Statement of Income for the six months ended June
30, 1999 has been prepared assuming the Co-Source and Compass acquisitions were
completed on January 1, 1999. The Compass acquisition gives effect to the sale
of its print and mail division prior to the acquisition of Compass by NCO.
The Pro Forma Consolidated Statement of Income for the year ended December
31, 1998 has been prepared assuming the FCA, MedSource, MSC, Co-Source and
Compass acquisitions were completed on January 1, 1998. The Compass acquisition
gives effect to the sale of its print and mail division prior to the acquisition
of Compass by NCO.
The Pro Forma Consolidated Balance Sheet and Statements of Income do not
purport to represent what NCO's actual financial position or results of
operations would have been had the acquisitions occurred as of such dates, or to
project NCO's financial position or results of operations 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 MSC, Co-Source and Compass are preliminary and the final
allocations may differ from the amounts reflected herein. The unaudited Pro
Forma Consolidated Balance Sheet and Statements of Income should be read in
conjunction with NCO's consolidated financial statements and notes thereto, and
the historical financial statements of Compass which are included in this
Current Report on Form 8-K.
F-1
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Balance Sheet
June 30, 1999
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
NCO Compass Acquisition
Historical Pro-Forma (1) Adjustments (2) Pro Forma
----------- ------------- --------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 30,972 $ 3,962 $ - $ 34,934
Accounts receivable, trade, net ................ 70,417 13,499 - 83,916
Purchased accounts receivable .................. 4,143 - - 4,143
Deferred taxes ................................. 740 877 - 1,617
Other current assets ........................... 4,964 1,987 - 6,951
--------- --------- -------- ---------
Total current assets ...................... 111,236 20,325 - 131,561
Property and equipment, net ........................ 34,195 6,821 - 41,016
Other assets:
Intangibles, net of accumulated
amortization ................................. 441,182 112,264 21,804 575,250
Other assets ................................... 5,506 593 - 6,099
--------- --------- -------- ---------
Total other assets ....................... 446,688 112,857 21,804 581,349
--------- --------- -------- ---------
Total assets ....................................... $ 592,119 $ 140,003 $ 21,804 $ 753,926
========= ========= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion ................ $ 866 $ 6,939 $ - $ 7,805
Corporate taxes payable ........................ 8,126 7,599 - 15,725
Accounts payable ............................... 7,012 4,689 - 11,701
Accrued expenses ............................... 20,249 6,171 10,000 36,420
Accrued compensation and related expenses ...... 11,948 2,160 - 14,108
--------- --------- -------- ---------
Total current liabilities ................. 48,201 27,558 10,000 85,759
Long-term liabilities:
Long-term debt, net of current portion ......... 298,347 20,781 - 319,128
Deferred taxes ................................. 9,052 273 - 9,325
Other long-term liabilities .................... 10,931 - - 10,931
Shareholders' equity
Common stock ................................... 193,690 87,680 13,835 295,205
Unexercised warrants ........................... 2,800 - - 2,800
Stock options issued for business combination .. - - 1,680 1,680
Foreign currency translation adjustment ........ (1,156) - - (1,156)
Retained earnings .............................. 30,254 3,711 (3,711) 30,254
--------- --------- -------- ---------
Total shareholders' equity ................ 225,588 91,391 11,804 328,783
--------- --------- -------- ---------
Total liabilities and shareholders' equity ......... $ 592,119 $ 140,003 $ 21,804 $ 753,926
========= ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these pro forma
consolidated financial statements.
F-2
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Statement of Income
For the Six Months Ended June 30, 1999
(Unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Co-Source Compass Acquisition
NCO(3) Historical(4) Pro Forma(5) Adjustments Pro Forma
--------- ------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenue...................................... $ 206,568 $ 24,643 $ 52,668 $ - $ 283,879
Operating costs and expenses:
Payroll and related expenses............. 109,612 14,810 26,218 - 150,640
Selling, general and administrative
expenses............................... 57,234 5,632 20,763 - 83,629
Depreciation and amortization expense.... 9,363 698 2,472 1,159(6) 13,692
Non-recurring acquisiton costs........... 4,601 - - - 4,601
--------- -------- -------- -------- ---------
Total operating costs and expenses... 180,810 21,140 49,453 1,159 252,562
--------- -------- -------- -------- ---------
Income (loss) from operations................ 25,758 3,503 3,215 (1,159) 31,317
Other income (expense):
Interest and investment income........... 500 258 - - 758
Interest expense......................... (7,257) (1,076) (1,633) (2,592)(7) (12,558)
--------- -------- -------- -------- ---------
(6,757) (818) (1,633) (2,592) (11,800)
--------- -------- -------- -------- ---------
Income (loss) before provision for income
taxes...................................... 19,001 2,685 1,582 (3,751) 19,517
Income tax expense (benefit)................. 8,974 1,034 1,112 (1,024)(8) 10,096
--------- -------- -------- -------- ---------
Net income (loss)........................... 10,027 1,651 470 (2,727) 9,421
Accretion of preferred stock to
to redemption value........................ (377) - - - (377)
--------- -------- -------- -------- ---------
Net income (loss) applicable to
common shareholders........................ $ 9,650 $ 1,651 $ 470 $ (2,727) $ 9,044
========= ======== ======== ======== =========
Net income per share:
Basic.................................... $ 0.45 $ 0.37(9)
Diluted.................................. $ 0.43 $ 0.35(9)
Weighted average shares outstanding:
Basic.................................... 21,466 24,770(10)
Diluted.................................. 22,411 25,785(11)
</TABLE>
The accompanying notes are an integral part of these pro forma
consolidated financial statements.
F-3
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Statement of Income
For the Year Ended December 31, 1998
(Unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 Co-Source Compass
NCO(3) Acquisitions(12) Pro Forma(13) Pro Forma(14)
--------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue............................................ $ 229,952 $ 127,570 $ 61,123 $ 105,750
Operating costs and expenses:
Payroll and related expenses................... 119,314 80,824 37,640 49,454
Selling, general and administrative expenses... 66,588 40,850 13,833 37,749
Depreciation and amortization expense.......... 9,851 10,074 1,675 4,154
--------- --------- -------- ---------
Total operating costs and expenses........ 195,753 131,748 53,148 91,357
--------- --------- -------- ---------
Income (loss) from operations...................... 34,199 (4,178) 7,975 14,393
Other income (expense):
Interest and investment income................. 1,135 147 503 -
Interest expense............................... (3,858) (1,223) (3,536) (2,180)
--------- --------- -------- ---------
(2,723) (1,076) (3,033) (2,180)
--------- --------- -------- ---------
Income (loss) before provision for income taxes.... 31,476 (5,254) 4,942 12,213
Income tax expense (benefit)....................... 13,131 881 2,023 5,687
--------- --------- -------- ---------
Net income (loss)................................. 18,345 (6,135) 2,919 6,526
Accretion of preferred stock to
to redemption value.............................. (1,604) - - -
--------- --------- -------- ---------
Net income (loss) applicable to
common shareholders.............................. $ 16,741 $ (6,135) $ 2,919 $ 6,526
========= ========= ======== =========
Net income per share:
Basic.......................................... $ 0.91
Diluted........................................ $ 0.85
Weighted average shares outstanding:
Basic.......................................... 18,324
Diluted........................................ 19,758
</TABLE>
<PAGE>
[RESTUB]
<TABLE>
<CAPTION>
Acquisition Offering Pro Forma
Adjustments Pro Forma Adjustments(19) As Adjusted
------------ --------- --------------- -----------
<S> <C> <C> <C> <C>
Revenue............................................ $ (4,521)(15) $ 519,874 $ - $ 519,874
Operating costs and expenses:
Payroll and related expenses................... - 287,232 - 287,232
Selling, general and administrative expenses... - 159,020 - 159,020
Depreciation and amortization expense.......... (892)(16) 24,862 - 24,862
-------- --------- --------- ---------
Total operating costs and expenses........ (892) 471,114 - 471,114
-------- --------- --------- ---------
Income (loss) from operations...................... (3,629) 48,760 - 48,760
Other income (expense):
Interest and investment income................. - 1,785 - 1,785
Interest expense............................... (15,386)(17) (26,183) 2,435 (23,748)
-------- --------- --------- ---------
(15,386) (24,398) 2,435 (21,963)
-------- --------- --------- ---------
Income (loss) before provision for income taxes.... (19,015) 24,362 2,435 26,797
Income tax expense (benefit)....................... (8,819)(18) 12,903 974 13,877
-------- --------- --------- ---------
Net income (loss)................................. (10,196) 11,459 1,461 12,920
Accretion of preferred stock to
to redemption value.............................. - (1,604) - (1,604)
-------- --------- --------- ---------
Net income (loss) applicable to
common shareholders.............................. $(10,196) $ 9,855 $ 1,461 $ 11,316
======== ========= ========= =========
Net income per share:
Basic.......................................... $ 0.46 $ 0.47(20)
Diluted........................................ $ 0.43 $ 0.44(20)
Weighted average shares outstanding:
Basic.......................................... 21,628(10) 24,198(21)
Diluted........................................ 23,132(11) 25,702(21)
</TABLE>
The accompanying notes are an integral part of these pro forma
consolidated financial statements.
F-4
<PAGE>
Notes to Pro Forma Consolidated
Financial Statements
(Unaudited)
(1) Gives effect to Compass' sale of its print and mail division on August 20,
1999, prior to NCO's acquisition of Compass, for approximately $35.0
million in cash, including adjustments to: (i) repay $35.0 million of
Compass' outstanding debt; and (ii) record a liability of approximately
$7.5 million for taxes resulting from the gain on the sale of the print and
mail division. NCO's acquisition of Compass was contingent upon the sale of
its print and mail division.
(2) Gives effect to the following acquisition related adjustments: (i) the
recognition of goodwill; (ii) the stock issued to finance the Compass
acquisition; and (iii) the accrual of acquisition related expenses. The
accrual of acquisition related expenses includes: (i) professional fees
related to the acquisitions; (ii) termination costs relating to certain
redundant personnel scheduled to be eliminated upon the completion of the
Compass acquisition; and (iii) certain future rental obligations
attributable to facilities which are scheduled to be closed upon the
completion of the Compass acquisition. The Compass goodwill will be
amortized on a straight-line basis over 40 years. A portion of the Compass
goodwill is deductible for income tax purposes. The allocation of the
purchase price paid for Compass is as follows (dollars in thousands):
Compass
---------
Net tangible assets acquired ................. $ (20,873)
Acquisition related adjustments:
Accrued acquisition expenses ............. (10,000)
Goodwill and other intangible assets ......... 134,068
---------
Consideration paid* .......................... $ 103,195
=========
* The consideration paid for Compass includes approximately 3.3 million
shares of NCO common stock valued at approximately $101.5 million, based
on the five day average closing price around the time the acquisition
was announced to the public, and stock options to purchase approximately
215,000 shares of NCO common stock valued at approximately $1.7 million.
(3) Reflects the restatement of NCO's historical financial information for the
March 31, 1999 acquisition of JDR Holdings, Inc. using the
pooling-of-interests method of accounting.
(4) Represents the historical results of operations of Co-Source from January
1, 1999 to May 21, 1999.
F-5
<PAGE>
(5) Represents the historical results of operations of Compass from January 1,
1999 to June 30, 1999 with pro forma adjustments to present the sale of
Compass' print and mail division as if it occurred on January 1, 1999, as
follows (dollars in thousands):
Income (Loss)
From Net
Compass Pro Forma Revenue Operations Income (Loss)
------------------------------- -------- ------------- -------------
Compass historical............. $ 81,593 $ 2,512 $ (586)
Less:
Sale of the print and mail
division* .................. 28,925 (703) (1,056)
-------- ------- -------
$ 52,668 $ 3,215 $ 470
======== ======= =======
* The print and mail division's results of operations from January 1,
1999 to June 30, 1999 reflects approximately $1.7 million of
selling, general and administrative expenses and $734,000 of
interest expense that was allocated to the division by Compass. The
allocation of these expenses was based on the percentage of the
print and mail division's revenues to Compass' consolidated
revenues and Compass' cash investment in the print and mail
division. An income tax benefit in the amount $533,000 was
allocated based upon the percentage of the print and mail
division's loss before income taxes to Compass' consolidated income
before income taxes. These allocations are considered by Compass'
management to be reasonable.
(6) Gives effect to the adjustment to amortization expense assuming the
Co-Source and Compass acquisitions had occurred on January 1, 1999, as
follows (dollars in thousands):
Adjustment to
Acquisition Amortization
--------------------------------------- --------------
Co-Source ............................. $ 989
Compass ............................... 170
------
$1,159
======
(7) Reflects interest expense on borrowings related to the Co-Source
acquisition as if it occurred on January 1, 1999. The interest expense was
calculated using an estimated interest rate of approximately 7.25% and
outstanding debt of $130.1 million.
(8) Adjusts the estimated income tax expense, after giving consideration to
non-deductible goodwill expense, as if the Co-Source and Compass
acquisitions occurred on January 1, 1999.
(9) Includes: (i) payroll and related expenses of $1.2 million attributable to
certain redundant personnel costs scheduled to be eliminated upon the
completion of the Compass acquisition; and (ii) rental and related
operating costs of $1.4 million attributable to facilities which are
scheduled to be closed upon the completion of the Compass acquisition. Net
income per share-basic and net income per share-diluted would have been
$0.43 and $0.41, respectively, on a pro forma basis assuming the
acquisition occurred on January 1, 1999 and those costs had not been
incurred.
(10) Gives effect to the issuance of approximately 3.3 million shares of common
stock to finance the Compass acquisition.
(11) Gives effect to: (i) the dilution resulting from warrants to purchase
250,000 shares of NCO common stock issued to finance a portion of the
Co-Source acquisition; and (ii) the issuance of approximately 3.3 million
shares of common stock to finance the Compass acquisition.
F-6
<PAGE>
(12) Represents the combined historical results of operations of the 1998
Acquisitions for the periods prior to their acquisition by NCO, as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Income (Loss)
Date of From Net
1998 Acquisitions Acquisition Revenue Operations Income (Loss)
------------------------ -------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
FCA* ................... 5/5/98 $ 19,340 $ (6,895) $ (7,055)
MedSource............... 7/1/98 11,028 537 (366)
MSC..................... 11/30/98 97,202 2,180 1,286
-------- -------- --------
$127,570 $ (4,178) $ (6,135)
======== ======== ========
</TABLE>
* Includes adjustments required to convert FCA's historical results of
operations from January 1, 1998 to May 4, 1998, the period prior to the
acquisition, to U.S. GAAP and gives effect to the conversion from
Canadian dollars to U.S. dollars, based on the applicable exchange
rate.
(13) Represents the pro forma results of operations of Co-Source from January 1,
1998 to December 31, 1998 including adjustments to present the acquisition
of International Accounting Systems, Inc. ("IAS") completed by Co-Source on
August 5, 1998, as follows (dollars in thousands):
Income From Net
Co-Source Pro Forma Revenue Operations Income (Loss)
---------------------------- -------- ---------- -------------
Co-Source historical........ $ 57,559 $ 7,854 $ 3,168
Plus:
IAS acquisition* ......... 3,564 87 103
Pro forma adjustments**... - 34 (352)
-------- ------- -------
$ 61,123 $ 7,975 $ 2,919
======== ======= =======
* The acquisition of IAS was accounted for under the purchase method
of accounting with the results of the acquired companies included
in Co-Source's historical statements of income beginning on the
date of acquisition. These adjustments give effect to the
acquisition of IAS as if it occurred on January 1, 1998.
** Reflects: (i) elimination of expenses for professional fees
incurred in connection with the acquisition; (ii) additional
amortization expense assuming the IAS acquisition occurred on
January 1, 1998; and (ii) additional interest expense on
acquisition-related borrowings as if the IAS acquisition had
occurred on January 1, 1998.
F-7
<PAGE>
(14) Represents the pro forma results of operations of Compass from January 1,
1998 to December 31, 1998 including adjustments to present the acquisitions
completed by Compass in 1998 and the sale of Compass' print and mail
division as if they occurred on January 1, 1998, as follows (dollars in
thousands):
Income (Loss)
From Net
Compass Pro Forma Revenue Operations Income (Loss)
---------------------------- --------- -------------- -------------
Compass historical.......... $ 127,140 $ 12,842 $ 6,007
Plus:
Compass acquisitions*..... 49,965 8,827 7,648
Pro forma adjustments**... - (896) (4,310)
Less:
Sale of the print and mail
division*** ............. 71,355 6,380 2,819
--------- -------- --------
$ 105,750 $ 14,393 $ 6,526
========= ======== ========
* During 1998, Compass completed fourteen acquisitions. All of these
acquisitions were accounted for under the purchase method of
accounting with the results of the acquired companies included in
Compass' historical statements of income beginning on the date of
acquisition. These adjustments give effect to the Compass
acquisitions as if they occurred on January 1, 1998.
** Reflects: (i) additional amortization expense assuming the Compass
acquisitions occurred on January 1, 1998; and (ii) additional
interest expense on acquisition-related borrowings as if the
Compass acquisitions had occurred on January 1, 1998.
***The print and mail division's pro forma results of operations for
the year ended December 31, 1998 reflects approximately $1.9
million of selling, general and administrative expenses and $1.0
million of interest expense that were allocated to the division by
Compass. The allocation of these expenses was based on the
percentage of the print and mail division's revenues to Compass'
consolidated revenues and Compass' cash investment in the print and
mail division. Income tax expense in the amount $2.2 million was
allocated based upon the percentage of the print and mail
division's income before income taxes to Compass' consolidated
income before income taxes. These allocations are considered by
Compass' management to be reasonable.
(15) Gives effect to the reduction of revenue to conform MSC's revenue
recognition policy to that of NCO.
(16) Gives effect to: (i) the adjustment to amortization expense assuming the
1998 Acquisitions, the Co-Source acquisition and the Compass acquisition
had occurred on January 1, 1998; and (ii) the elimination of depreciation
and amortization expense related to assets revalued or not acquired, as
follows (dollars in thousands):
Adjustment to Adjustment to Net
Acquisition Amortization Depreciation Adjustment
----------------------- ------------- ------------- ----------
FCA.................... $ 684 $ (2,785) $(2,101)
MedSource.............. 304 (129) 175
MSC.................... (1,582) (772) (2,354)
Co-Source ............. 2,618 - 2,618
Compass................ 770 - 770
------- ------- -------
$ 2,794 $(3,686) $ (892)
======= ======= =======
F-8
<PAGE>
(17) Reflects interest expense on borrowings related to the 1998 Acquisitions
and the Co-Source acquisition as if they occurred on January 1, 1998. The
interest expense was calculated using an estimated interest rate of
approximately 7.70% and 7.25%, respectively, and outstanding debt of $211.5
million and $130.1 million, respectively.
(18) Adjusts the estimated income tax expense, after giving consideration to
non-deductible goodwill expense, as if the 1998 Acquisitions, the Co-Source
acquisition and the Compass acquisition occurred on January 1, 1998.
(19) Reflects the elimination of interest expense on debt assumed to be repaid
with a portion of the proceeds from the NCO's June 1998 public offering of
4,469,366 shares of common stock, including the 469,366 shares of common
stock sold in July 1998 in connection with the underwriters' exercise of
the over-allotment option, at a price to the public of $21.50 (the "1998
Offering") as if it occurred on January 1, 1998.
(20) Includes: (i) payroll and related expenses of $8.7 million attributable to
certain redundant personnel costs immediately eliminated at the time of the
1998 Acquisitions and scheduled to be eliminated upon the completion of the
Compass acquisition; and (ii) rental and related operating costs of $4.7
million attributable to facilities which were closed at the time of the
1998 Acquisitions and are scheduled to be closed upon the completion of the
Compass acquisition. Net income per share-basic and net income per
share-diluted would have been $0.81 and $0.77, respectively, on a pro forma
basis assuming the acquisitions occurred on January 1, 1998 and those costs
had not been incurred.
(21) Gives effect to the issuance of 4,469,366 shares of common stock, including
the 469,366 shares of common stock sold in July 1998 in connection with the
underwriters' exercise of the over-allotment option, in connection with the
1998 Offering as if it occurred on January 1, 1998.
F-9
