<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): May 21, 1999
NCO GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Pennsylvania 0-21639 23-2858652
- ------------------------------------ --------------------------------- ---------------------------------
<S> <C> <C>
(State or other jurisdiction (Commission File (I.R.S. Employer
of Number) 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.
Amendment to Form 8-K
- ---------------------
On June 4, 1999, NCO Group, Inc. ("NCO") filed a Current Report on Form
8-K with the SEC to report the acquisition of Co-Source Corporation, including
its wholly-owned subsidiaries, Milliken & Michaels, Inc., Metropolitan Consumer
Collection Services, Inc. and International Account Systems, Inc. (collectively,
"Co-Source"). NCO is amending such Current Report on Form 8-K to provide
historical financial statements of Co-Source and pro forma combined financial
information of NCO.
Item 5. Other Events.
Employment Matters
- ------------------
Thomas V. Cefalu, III, Co-Source's former President and Chief Executive
Officer, resigned on June 11, 1999. NCO appointed Louis A. Molettiere, formerly
the Vice President of Marketing for Co-Source, as its Divisional Chief Executive
Officer for Commercial Services.
Item 7. Financial Statements and Exhibits.
The following exhibits are being filed as part of this report:
<TABLE>
<CAPTION>
(a) Financial Statements of Businesses Acquired.
<S> <C> <C> <C>
Report of Independent Auditors.....................................................F-1
Consolidated Balance Sheet as of December 31, 1998.................................F-2
Consolidated Statement of Income for the year ended
December 31, 1998...............................................................F-3
Consolidated Statement of Changes in Shareholders' Equity
for the year ended December 31, 1998............................................F-4
Consolidated Statement of Cash Flows for the year ended
December 31, 1998..............................................................F-5
Notes to Consolidated Financial Statements.........................................F-6
Consolidated Balance Sheet as of March 31, 1999 (unaudited).......................F-17
Consolidated Statements of Income for the three months
ended March 31, 1999 and 1998 (unaudited).....................................F-18
Consolidated Statements of Cash Flows for three months
ended March 31, 1999 and 1998 (unaudited).....................................F-19
Notes to Consolidated Financial Statements (unaudited)............................F-20
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(b) Pro Forma Financial Information.
Pro forma financial information of NCO giving effect to the
acquisition of Co-Source..........................................................F-22
(c) Exhibits
Number Title
------ -----
2.1 Stock Purchase Agreement among Co-Source Corporation, its
Shareholders and Optionholders, H.I.G. - DCI Investments, L.P. and
NCO (previously filed). NCO will furnish to the Securities and
Exchange Commission a copy of any omitted schedule upon request
4.1 Form of Warrant to purchase NCO common stock (previously filed).
10.1 Fourth Amended and Restated Credit Agreement
dated as of May 20, 1999 by and among NCO,
its U.S. Subsidiaries, the Financial
Institutions listed therein as Lenders and
Mellon Bank, N.A. as administrative agent
(previously filed). NCO will furnish to the
Securities and Exchange Commission a copy of
any omitted schedule upon request.
23.1 Consent of Ernst & Young LLP.
</TABLE>
-3-
<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/ Paul E. Weitzel, Jr.
------------------------------------------------
Paul E. Weitzel, Jr., Executive Vice President,
Corporate Development
Date: August 4, 1999
-4-
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Co-Source Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Co-Source
Corporation and Subsidiaries as of December 31, 1998, and the related
consolidated statements of income, shareholders' equity and cash flows for the
year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Co-Source Corporation and Subsidiaries at December 31, 1998, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
New Orleans, Louisiana
April 2, 1999, except for Note 12, as
to which the date is May 21, 1999
F-1
<PAGE>
Co-Source Corporation and Subsidiaries
Consolidated Balance Sheet
December 31, 1998
<TABLE>
<CAPTION>
Assets
<S> <C>
Current assets:
Cash and cash equivalents $ 3,310,137
Accounts receivable, less allowance for doubtful receivables of $270,284 2,799,110
Prepaid expenses 125,559
Deferred income taxes 289,994
-----------
Total current assets 6,524,800
Funds held in trust for clients
Property and equipment, net 2,617,878
Goodwill, less accumulated amortization of $1,578,607 42,597,737
Deferred financing costs, less accumulated amortization of $219,712 947,575
Other assets 23,354
-----------
Total assets $52,711,344
===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 2,359,162
Accrued salaries 2,158,395
Current maturities of long-term debt 2,048,410
-----------
Total current liabilities 6,565,967
Funds held in trust for clients
Long-term debt, less current maturities 32,481,715
Deferred income taxes 1,157,147
Accrued consulting fees 1,925,000
Commitments and contingencies
Shareholders' equity:
Class A Common Stock, $.01 par value; 150,000 shares authorized; 77,273
shares issued and outstanding 773
Class B Convertible Common Stock, $.01 par value; 14,000 shares authorized; 13,636 shares
issued and outstanding 136
Class C Common Stock, $.01 par value; 10,000 shares authorized; 9,091 shares issued and
outstanding 91
Class D Common Stock, $.01 par value; 25,000 shares authorized; none issued --
-----------
1,000
Paid-in capital 5,499,000
Retained earnings 5,081,515
-----------
Total shareholders' equity 10,581,515
-----------
Total liabilities and shareholders' equity $52,711,344
===========
</TABLE>
See accompanying notes.
F-2
<PAGE>
Co-Source Corporation and Subsidiaries
Consolidated Statement of Income
For the year ended December 31, 1998
Revenues $ 57,559,286
Cost of operations:
Direct operating 33,929,699
Selling, general and administrative 12,702,913
Consulting and management fees 1,600,000
Depreciation and amortization 1,472,357
------------
49,704,969
------------
Income from operations 7,854,317
Other income (expense):
Interest expense (2,967,564)
Interest income 476,405
------------
Income before income taxes 5,363,158
Income taxes 2,194,657
------------
Net income $ 3,168,501
============
See accompanying notes.
F-3
<PAGE>
Co-Source Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
For the year ended December 31, 1998
<TABLE>
<CAPTION>
Common Paid-In Retained
Stock Capital Earnings Total
-------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Balances at January 1, 1998 $1,000 $5,499,000 $1,913,014 $ 7,413,014
Net income -- -- 3,168,501 3,168,501
------ ---------- ---------- -----------
Balances at December 31, 1998 $1,000 $5,499,000 $5,081,515 $10,581,515
====== ========== ========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
Co-Source Corporation and Subsidiaries
Consolidated Statement of Cash Flows
For the year ended December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Operating activities
Net income $ 3,168,501
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,472,357
Deferred income taxes 831,251
Accrued consulting fees 1,100,000
Changes in operating assets and liabilities:
Accounts receivable, net (265,055)
Prepaid expenses and other assets (59,701)
Accounts payable and accrued liabilities 3,189
Accrued salaries (573,161)
------------
Net cash provided by operating activities 5,677,381
------------
Investing activities
Purchases of property and equipment (787,995)
Acquisitions of capital stock of collection business, net of cash acquired
of $111,878
(10,795,399)
------------
Net cash used in investing activities (11,583,394)
------------
Financing activities
Proceeds from issuance of long-term debt 38,500,000
Principal payments on long-term debt (32,601,256)
Deferred financing costs (328,660)
------------
Net cash provided by financing activities 5,570,084
------------
Net decrease in cash and cash equivalents (335,929)
Cash and cash equivalents, beginning of year 3,646,066
------------
Cash and cash equivalents, end of year $ 3,310,137
============
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 2,853,861
============
Income taxes $ 1,492,680
============
Supplemental disclosures of noncash investing and financing activities:
Acquisitions of business:
Fair value of assets acquired $ 11,892,449
Less fair value of liabilities assumed 1,097,050
------------
$ 10,795,399
============
</TABLE>
See accompanying notes.
F-5
<PAGE>
Co-Source Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Formation and Organization of Business
On April 15, 1997 (commencement of operations), H.I.G. P-XI Holding, Inc.
purchased substantially all of the net assets of Milliken & Michaels, Inc. and
certain affiliated companies. On July 24, 1998, H.I.G. P-XI Holding, Inc.
changed its name to Co-Source Corporation. Co-Source Corporation had no
operations prior to this acquisition. The transaction was recorded using the
purchase method of accounting for business combinations. The purchase price,
including all acquisition costs, was allocated to the acquired assets and
liabilities at April 15, 1997 to reflect their estimated fair values at the date
of acquisition. The cost of the acquisition exceeded the fair value of
identifiable net assets by approximately $33.6 million and has been recorded as
goodwill.
On August 5, 1998, Co-Source Corporation purchased all of the capital stock of
International Account Systems, Inc. for approximately $11.3 million. The
transaction was recorded using the purchase method of accounting for business
combinations. The purchase price, including all acquisition costs, was allocated
to the acquired assets and liabilities at August 5, 1998 to reflect their
estimated fair values at the date of acquisition. The cost of the acquisition
exceeded the fair value of identifiable net assets by approximately $10.6
million and has been recorded as goodwill.
The following summarizes unaudited pro forma results of operations for the year
ended December 31, 1998, assuming the acquisition of International Account
Systems, Inc. had occurred as of January 1, 1998. The pro forma information is
provided for informational purposes only. It is based on historical information,
and does not necessarily reflect the actual results that would have occurred,
nor is it indicative of future results of operations of the consolidated
entities:
(Unaudited)
Revenue $61,123,000
===========
Net income $ 2,920,000
===========
These consolidated financial statements include the accounts of Co-Source
Corporation and its wholly owned subsidiaries (collectively referred to as the
Company). All significant intercompany balances and transactions have been
eliminated in consolidation.
Description of Business
The Company's primary business is to provide accounts receivable collection
services and other related services. The Company's primary markets are in the
United States and Canada. The Company operates in a state-regulated environment
and is subject to periodic review and renewal procedures by the licensing boards
of the various states in which the Company operates.
F-6
<PAGE>
Co-Source Corporation and Subsidiaries
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies
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 period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. The Company maintains
its cash in bank deposit accounts which at times may exceed federally insured
limits. The Company has not experienced nor does it anticipate any losses on
such accounts.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Leasehold improvements are amortized over the lease term.
Depreciation on all other property and equipment is provided using the
straight-line method over seven years, the assets' estimated useful lives.
Revenue Recognition
Collection fee income is recognized when debtor accounts placed with the Company
are collected by the Company or its clients. Fees received for legal management
services are recognized when they become nonrefundable under the terms of the
Company's agreements with its clients. Credit losses have been within
management's expectations.
Stock Options
The Company accounts for stock options under Accounting Principles Board Opinion
No. 25 (APB 25) for expense recognition purposes. Under APB 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
F-7
<PAGE>
Co-Source Corporation and Subsidiaries
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
Income Taxes
Deferred income taxes are determined by the liability method in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
Goodwill
Goodwill, representing cost in excess of fair value of identifiable net assets
acquired, is being amortized on the straight-line method over 40 years. The
carrying value of goodwill is reviewed for impairment whenever events or changes
in circumstances indicate that it might not be recoverable under the provisions
of Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
Deferred Financing Costs
Debt issuance costs are deferred and amortized over the term of the related
credit facility.
3. Property and Equipment
December 31
1998
-----------
Computer equipment $1,355,121
Telephone equipment 809,864
Furniture and fixtures 583,181
Leasehold improvements 397,101
Vehicles 51,604
----------
3,196,871
Less accumulated depreciation and amortization 578,993
----------
$2,617,878
==========
Depreciation expense was $393,012 in 1998.
F-8
<PAGE>
Co-Source Corporation and Subsidiaries
Notes to Consolidated Financial Statements
4. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents. The carrying amounts approximate fair value because
of the short maturity of these instruments.
Long-term debt. The fair value of the Company's long-term debt is estimated
using discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. Long-term debt
carrying amounts approximate fair value at December 31, 1998.
5. Long-Term Debt
<TABLE>
<CAPTION>
<S> <C>
December 31
1998
-----------
Notes payable to lenders (Term Loan A), interest rates ranging from 7.78% to
8.5% at December 31, 1998, payable in varying quarterly installments
beginning November 1, 1998 with a final payment of remaining principal due
August 1, 2003, collateralized by substantially all assets of the Company $15,000,000
Notes payable to lenders (Term Loan B), interest rate of 9% at December 31,
1998, payable in varying quarterly installments beginning November 1, 2003
with a final payment of remaining principal due August 1, 2005,
collateralized by substantially all assets of the Company 19,500,000
Notes payable to banks, interest rates ranging from 7.5% to 9% at December 31,
1998, payable in varying monthly installments and maturing in 1999, 2000,
and 2001. Notes are collateralized by vehicles 30,125
-----------
34,530,125
Less current maturities 2,048,410
-----------
$32,481,715
===========
</TABLE>
On April 15, 1997, the Company entered into a credit agreement with a lender
under which the Company was provided credit facilities totaling $31,500,000. The
credit agreement consisted of three term loans totaling $29,500,000 and a
revolving line of credit for $2,000,000. The proceeds of the loans were used to
finance the purchase of Milliken & Michaels, Inc. and certain affiliated
companies.
F-9
<PAGE>
Co-Source Corporation and Subsidiaries
Notes to Consolidated Financial Statements
5. Long-Term Debt (continued)
On August 5, 1998, the Company's aforementioned credit agreement was amended and
restated under which the Company was provided credit facilities totaling
$41,500,000. The amended and restated credit agreement consisted of two term
loans totaling $38,500,000 and a revolving line of credit for $3,000,000. The
increase in the amount outstanding under the amended credit agreement allowed
the Company to finance the acquisition of all of the capital stock of
International Account Systems, Inc. The credit agreement provides for interest
at an annual rate equal to LIBOR or the prime rate, plus an applicable margin.
Beginning in 1999, the credit agreement also requires that a portion of the
Company's excess cash flow be applied to reduce the outstanding balances on the
term loans.
The revolving line of credit consists of a maximum borrowing capacity of
$3,000,000, all of which is currently available. The interest rate on the line
of credit is based upon LIBOR or the prime rate, plus an applicable margin
(7.78% to 9% as of December 31, 1998). An annual commitment fee of 0.5% of the
unused loan commitment is payable under the revolving line of credit. Commitment
fees totaled $12,208 for the year ended December 31, 1998. As of December 31,
1998, there were no amounts outstanding on this line.
The credit agreement requires the Company to meet certain financial ratios and
places restrictions on certain activities, such as the payment of dividends and
capital expenditures. The Company was in compliance with the terms of the credit
agreement at December 31, 1998.
The scheduled principal payments on the long-term debt for each of the next five
years and thereafter are as follows:
1999 $ 2,048,410
2000 3,251,054
2001 3,244,174
2002 3,445,946
2003 5,478,041
Thereafter 17,062,500
-----------
$34,530,125
===========
6. Funds Held in Trust for Clients
Funds associated with the collection of debtor accounts and client advances for
legal services are held on behalf of clients. In accordance with certain state
regulations, these funds are maintained in trust accounts until disbursed to
clients. Funds held in trust for clients of $7,249,541 at December 31, 1998 have
been shown net of their offsetting liability for financial statement
presentation.
F-10
<PAGE>
Co-Source Corporation and Subsidiaries
Notes to Consolidated Financial Statements
7. Capital Structure
Holders of all classes of Common Stock are entitled to one vote per share and
vote as a single class. Distributions must first be paid ratably to each
shareholder equal to the aggregate unreturned original cost of outstanding
shares. In certain situations, each share of Class B Common Stock shall be
automatically converted into shares of Class D Common Stock. The conversion rate
is dependent upon the achievement of certain operating results.
At December 31, 1998, the Company had a total of 11,800 stock appreciation
rights outstanding which were granted in 1997. The stock appreciation rights
will vest or become exercisable upon the occurrence of either a sale of the
Company or a qualified public offering. Upon exercise, each right allows the
holder to receive the excess of the value of one share of common stock as of the
date of exercise over the value of one share of common stock at the grant date,
payable in cash at the discretion of the Company.
In February 1998, the Company adopted the 1998 Stock Option Plan, which
authorized 5,000 shares of incentive stock options. The stock options grant each
holder the option to purchase shares of the Company's common stock at the value
of such shares as of the grant date. The options vest fully and become
exercisable seven years from the grant date; however, the vesting may be
accelerated upon the sale of the Company and upon achievement of various target
levels of profitability. During 1998, the Company granted 2,575 stock options
for Class D Common Stock at an exercise price of $55 per share, of which none
were exercised or forfeited.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its stock-based compensation arrangements. The alternative fair
value accounting provided for under Statement of Financial Accounting Standards
No 123, Accounting for Stock-Based Compensation (SFAS No. 123), required use of
option valuation models that were not developed for use in valuing employee
stock options. The effect of applying SFAS No. 123 to the Company's stock-based
awards does not result in net loss that is materially different from amounts
reported.
F-11
<PAGE>
Co-Source Corporation and Subsidiaries
Notes to Consolidated Financial Statements
8. Income Taxes
Significant components of the Company's deferred tax liabilities and assets as
of December 31, 1998 were as follows:
Deferred tax liabilities:
Goodwill $1,703,604
Deferred financing costs 249,007
Prepaid expenses 48,968
Property and equipment 4,136
----------
Total deferred tax liabilities 2,005,715
Deferred tax assets:
Accounts receivable 105,411
Accounts payable 163,614
Accrued salaries 68,706
Accrued consulting fees 750,750
Organizational and start-up costs 50,081
----------
Total deferred tax assets 1,138,562
==========
Net deferred tax liabilities $ 867,153
==========
Significant components of income taxes for the year ended December 31, 1998 were
as follows:
Current:
Federal $1,080,522
State 282,884
----------
1,363,406
----------
Deferred:
Federal 724,680
State 106,571
----------
831,251
----------
Total $2,194,657
==========
F-12
<PAGE>
Co-Source Corporation and Subsidiaries
Notes to Consolidated Financial Statements
8. Income Taxes (continued)
A reconciliation of the U. S. statutory income tax rate to the effective tax
rate is as follows:
U. S. statutory income tax rate 34.0%
State taxes, net of federal 4.9
Nondeductible goodwill and other expenses 2.3
Other (.3)
-----
Effective tax rate 40.9%
=====
9. Commitments and Contingencies
Operating Leases
The Company leases office facilities under various operating leases. Certain
leases have varying escalating clauses based on fixed dollar increases or on the
consumer price index.
Future minimum obligations under operating leases having initial or remaining
noncancelable terms in excess of one year are as follows:
1999 $ 2,384,867
2000 2,468,048
2001 1,921,122
2002 1,105,968
2003 948,473
Thereafter 4,213,062
===========
$13,041,540
===========
Rental expense for operating leases totaled $2,057,478 for the year ended
December 31, 1998. Lease payments to related parties totaled $353,229 during
1998.
Management Agreement
The Company has a management agreement with its majority shareholder which
provides for a $500,000 annual management fee for financial and strategic
advisory services. Management fees totaled approximately $500,000 for the year
ended December 31, 1998.
F-13
<PAGE>
Co-Source Corporation and Subsidiaries
Notes to Consolidated Financial Statements
9. Commitments and Contingencies (continued)
Litigation
In the ordinary course of business, the Company becomes involved in various
lawsuits and claims. Management, after consultation with legal counsel, does not
expect that any liability which may arise out of any asserted or unasserted
claims would have a material effect on the Company's financial position, results
of operations or cash flows.
Consulting and Noncompete Agreement
The Company has a consulting and noncompete agreement with the previous owner of
Milliken & Michaels, Inc. and certain affiliated companies. This agreement
provides for payments totaling $5,500,000, payable on the fifth anniversary of
the closing (April 15, 2002). Contractual payments under this agreement can be
used as security for and to satisfy payments for certain potential losses and
contingencies which may arise throughout the term of this agreement. The Company
is accruing the cost of the agreement on a straight-line basis over its term.
The Company accrued $1,100,000 for the year ended December 31, 1998 related to
this agreement.
10. Defined Contribution Plan
Two of the Company's subsidiaries have separate employee benefit plans under
Section 401(k) of the Internal Revenue Code for the benefit of employees meeting
certain eligibility requirements. Milliken & Michaels, Inc. has a plan under
which employees may contribute up to 12% of their eligible compensation to the
plan on a pretax basis, and the Company provides a matching contribution of 50%
of each participating employee's contribution up to a maximum of 8% of the
participant's compensation. International Account Systems, Inc. has a plan under
which employees may contribute up to 4% of their eligible compensation to the
plan on a pretax basis, and the Company provides a matching contribution of 100%
of each participating employee's contribution. The Company's expense related to
the plans was approximately $319,000 for the year ended December 31, 1998.
11. Impact of Year 2000 (Unaudited)
The Problem. The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, or engage in
similar normal business activities.
F-14
<PAGE>
Co-Source Corporation and Subsidiaries
Notes to Consolidated Financial Statements
11. Impact of Year 2000 (Unaudited) (continued)
The Company's State of Readiness. The Company has developed and is in the
process of implementing a plan to modify its information technology to be ready
for the Year 2000. The Company's third-party hardware and software data
processing systems are Year 2000 compliant or are being upgraded or replaced in
the normal course of business. The Company expects the project to be complete by
mid-to-late 1999.
Costs. Because the Company's information technology systems have been regularly
upgraded and replaced as part of the Company's ongoing efforts to maintain
high-grade technology, the Company's Year 2000 compliance costs are expected to
be relatively low and are being funded with cash flows from operations.
Management does not believe that significant additional costs will be required
for Year 2000 compliance.
Risks. The Company believes that it has taken reasonable steps to assess its
internal systems and prepare them for Year 2000 issues. However, if those steps
prove inadequate, the Company's daily business process could be interrupted or
delayed, which could have a material adverse effect on the Company's operations.
The Company has been monitoring the progress of its major customers and
suppliers on Year 2000 issues, and is surveying those major suppliers who have
not yet provided adequate disclosure to the Company on their Year 2000
compliance efforts. The Company will complete its assessment of such suppliers'
Year 2000 compliance by mid-1999 to enable it to take actions deemed necessary
to avoid any significant disruption in its business. However, the Company must
largely rely upon representations of such third parties in making its
assessment. Accordingly, it is possible that the operations of the Company could
be adversely affected to a material extent by noncompliance of significant
suppliers or customers.
Contingency Plan. The Company has a contingency plan for dealing with the
possibility that its current systems or those of its major suppliers may prove
inadequate. The plan consists of the allocation of additional personnel and
outside contractors to correct any unforeseen deficiencies in the Company's
proprietary software, and the use of alternative suppliers or products for
non-proprietary company systems or noncompliant suppliers.
F-15
<PAGE>
Co-Source Corporation and Subsidiaries
Notes to Consolidated Financial Statements
12. Subsequent Event
On May 21, 1999, Co-Source Funding, Inc., a Delaware corporation, a wholly owned
subsidiary of NCO Group, Inc., purchased all of the outstanding capital stock of
Co-Source Corporation, including its wholly owned subsidiaries, Milliken &
Michaels, Inc., Metropolitan Consumer Collection Services, Inc. and
International Account Systems, Inc., for approximately $122.7 million in cash
and warrants to purchase an aggregate of 250,000 shares of NCO Group Inc.'s
common stock. In connection with the acquisition, the Company paid $4,697,083,
canceling all amounts due under the consulting and noncompete agreement with a
previous owner. These financial statements do not reflect the effects of the
sale of the Company as of and for the year ended December 31, 1998.
F-16
<PAGE>
Co-Source Corporation and Subsidiaries
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Assets March 31, 1999
---------------------
Current assets:
Cash and cash equivalents $ 3,974,322
Accounts receivables, less allowance for doubtful
receivables of $250,284 3,324,751
Prepaid expenses 213,868
Deferred income taxes 230,633
-----------
Total current assets 7,743,574
Funds held in trust for clients
Property and equipment, net 2,557,532
Goodwill, less accumulated amortization of $1,854,709 42,321,635
Deferred financing costs, less accumulated amortization of $255,695 911,592
Other assets 57,180
-----------
Total assets $53,591,513
===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 2,440,946
Accrued salaries 1,990,569
Current maturities of long-term debt 2,446,444
-----------
Total current liabilities 6,877,959
Funds held in trust for clients
Long-term debt, less current maturities 31,663,801
Deferred income taxes 1,224,718
Accrued consulting fees 2,200,000
Commitments and contingencies
Shareholders' equity:
Class A Common Stock, $.01 par value; 150,000 shares authorized; 77,273
shares issued and outstanding 773
Class B Convertible Common Stock, $.01 par value; 14,000 shares
authorized; 13,636 shares issued and outstanding 136
Class C Common Stock, $.01 par value; 10,000 shares authorized; 9,091
shares issued and outstanding 91
Class D Common Stock, $.01 par value; 25,000 shares authorized; none issued
-
-----------
1,000
Paid-in capital 5,499,000
Retained earnings 6,125,035
-----------
Total shareholders' equity 11,625,035
-----------
Total liabilities and shareholders' equity $53,591,513
===========
</TABLE>
See accompanying notes.
F-17
<PAGE>
Co-Source Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31, 1999 March 31, 1998
--------------- ----------------
<S> <C> <C>
Revenues $15,559,092 $13,748,235
Cost of operations:
Direct operating 9,123,426 8,095,068
Selling, general and administrative 3,393,077 2,921,156
Consulting and management fees 400,000 400,000
Depreciation and amortization 436,733 317,161
----------- -----------
13,353,236 11,733,385
----------- -----------
Income from operations 2,205,856 2,014,850
Other income (expense):
Interest expense (706,079) (676,343)
Interest income 103,855 98,190
Other 98,152 --
----------- -----------
Income before income taxes 1,701,784 1,436,697
Income taxes 658,264 567,398
----------- -----------
Net income $ 1,043,520 $ 869,299
=========== ===========
</TABLE>
See accompanying notes.
F-18
<PAGE>
Co-Source Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
Operating activities March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Net income $1,043,520 $ 869,299
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 436,733 317,161
Deferred income taxes 126,932 84,077
Accrued consulting fees 275,000 275,000
Changes in operating assets and liabilities:
Accounts receivable, net (525,641) 61,807
Prepaid expenses and other assets (122,135) (44,479)
Accounts payable and accrued liabilities 81,784 677,682
Accrued salaries (167,826) (768,734)
---------- ----------
Net cash provided by operating activities 1,148,367 1,471,813
---------- ----------
Investing activities
Purchases of property and equipment, net (64,302) (84,238)
---------- ----------
Net cash used in investing activities (64,302) (84,238)
---------- ----------
Financing activities
Principal payments on long-term debt (419,880) (562,500)
Draws on revolving credit facility 350,000 --
Principal payments on revolving credit facility (350,000) --
---------- ----------
Net cash used in financing activities (419,880) (562,500)
---------- ----------
Net increase in cash and cash equivalents 664,185 825,075
Cash and cash equivalents, beginning of period 3,310,137 3,646,066
---------- ----------
Cash and cash equivalents, end of period $3,974,322 $4,471,141
========== ==========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 753,436 $ 686,178
========== ==========
Income taxes $ 156,040 $ 5,000
========== ==========
</TABLE>
See accompaning notes.
F-19
<PAGE>
Co-Source Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. Basis of Presentation
The interim unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. 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 only normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three-month period ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999 or for any other interim period.
2. Long-Term Debt
The Company has an amended and restated credit agreement which provides credit
facilities totaling $41,500,000. The amended and restated credit agreement
consists of two term loans totaling $38,500,000 and a revolving line of credit
for $3,000,000. The credit agreement provides for interest at an annual rate
equal to LIBOR or the prime rate, plus an applicable margin.
The revolving line of credit consists of a maximum borrowing capacity of
$3,000,000, all of which is currently available. The interest rate on the line
of credit is based upon LIBOR or the prime rate, plus an applicable margin. An
annual commitment fee of 0.5% of the unused loan commitment is payable under the
revolving line of credit. As of March 31, 1999, there were no amounts
outstanding on this line.
The credit agreement requires the Company to meet certain financial ratios and
places restrictions on certain activities, such as the payment of dividends and
capital expenditures. Beginning in 1999, the credit agreement also requires that
a portion of the Company's excess cash flow be applied to reduce the outstanding
balances on the term loans.
3. Funds Held in Trust for Clients
Funds associated with the collection of debtor accounts and client advances for
legal services are held on behalf of clients. In accordance with certain state
regulations, these funds are maintained in trust accounts until disbursed to
clients. Funds held in trust for clients of $7,873,010 at March 31, 1999 have
been shown net of their offsetting liability for financial statement
presentation.
F-20
<PAGE>
Co-Source Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
4. Subsequent Event
On May 21, 1999, Co-Source Funding, Inc., a Delaware corporation, a wholly owned
subsidiary of NCO Group, Inc., purchased all of the outstanding capital stock of
Co-Source Corporation, including its wholly owned subsidiaries, Milliken &
Michaels, Inc., Metropolitan Consumer Collection Services, Inc. and
International Account Systems, Inc., for approximately $122.7 million in cash
and warrants to purchase an aggregate of 250,000 shares of NCO Group Inc.'s
common stock. In connection with the acquisition, the Company paid $4,697,083 to
a previous owner of the Company, canceling all amounts due under the consulting
and noncompete agreement with this previous owner. These financial statements do
not reflect the effects of the sale of the Company.
F-21
<PAGE>
Pro Forma Consolidated Financial Statements
Basis of Presentation
The Pro Forma Consolidated Balance Sheet as of March 31, 1999 and the Pro
Forma Consolidated Statements of Income for the three months ended March 31,
1999 and the year ended December 31, 1998 are based on the historical financial
statements of NCO Group, Inc. ("NCO" or the "Company"); FCA International Ltd.
("FCA"); MedSource, Inc. ("MedSource"); and Medaphis Services Corporation
("MSC") (collectively the "1998 Acquisitions"); and Co-Source Corporation
("Co-Source"). All of NCO's acquisitions listed above have been accounted for
under 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 March 31, 1999 has been
prepared assuming the Co-Source acquisition was completed on March 31, 1999.
The Pro Forma Consolidated Statement of Income for the three months ended
March 31, 1999 has been prepared assuming the Co-Source acquisition was
completed on January 1, 1999.
The Pro Forma Consolidated Statement of Income for the year ended December
31, 1998 has been prepared assuming the FCA, MedSource, MSC and Co-Source
acquisitions were completed on January 1, 1998.
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 and Co-Source 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 Co-Source which have been included elsewhere in this Current
Report on Form 8-K/A.
F-22
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Balance Sheet
March 31, 1999
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
NCO Co-Source Acquisition
Historical Historical Adjustments (1) Pro Forma
---------- ---------- --------------- ---------
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 23,890 $ 3,974 $ (3,974) $ 23,890
Accounts receivable, trade, net 61,397 3,325 -- 64,722
Purchased accounts receivable 1,359 -- -- 1,359
Deferred taxes 1,107 231 -- 1,338
Other current assets 4,306 214 -- 4,520
---------- ---------- ---------- ----------
Total current assets 92,059 7,744 (3,974) 95,829
Property and equipment, net 29,523 2,558 -- 32,081
Other assets:
Intangibles, net of accumulated amortization 299,020 43,233 87,615 429,868
Other assets 5,172 57 -- 5,229
---------- ---------- ---------- ----------
Total other assets 304,192 43,290 87,615 435,097
---------- ---------- ---------- ----------
Total assets $ 425,774 $ 53,592 $ 83,641 $ 563,007
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 10,236 $ 2,446 $ (2,446) $ 10,236
Corporate taxes payable 3,711 -- -- 3,711
Accounts payable 7,435 2,441 -- 9,876
Accrued expenses 12,530 -- 2,700 15,230
Accrued compensation and related expenses 12,013 1,991 -- 14,004
---------- ---------- ---------- ----------
Total current liabilities 45,925 6,878 254 53,057
Long-term liabilities:
Long term debt, net of current portion 154,368 31,664 94,536 280,568
Deferred taxes 6,379 1,225 751 8,355
Other long-term liabilities 4,216 2,200 (2,200) 4,216
Shareholders' equity
Common stock 193,384 1 (1) 193,384
Paid-in capital -- 5,499 (5,499) --
Unexercised warrants 875 -- 1,925 2,800
Stock options issued for business combination -- -- -- --
Foreign currency translation adjustment (2,106) -- -- (2,106)
Retained earnings 22,733 6,125 (6,125) 22,733
---------- ---------- ---------- ----------
Shareholders' equity 214,886 11,625 (9,700) 216,811
---------- ---------- ---------- ----------
Total liabilities and shareholders' equity $ 425,774 $ 53,592 $ 83,641 $ 563,007
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these pro forma
consolidated financial statements.
F-23
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Statement of Income
For the Three Months Ended March 31, 1999
(Unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Co-Source Acquisition
NCO (2) Historical (3) Adjustments Pro Forma
------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue ..................................................... $ 95,864 $ 15,559 $ - $ 111,423
Operating costs and expenses:
Payroll and related expenses ............................ 51,060 9,421 - 60,481
Selling, general and administrative expenses ............ 26,915 3,495 - 30,410
Depreciation and amortization expense ................... 4,419 437 663 (4) 5,519
Non-recurring acquisiton costs .......................... 4,601 - - 4,601
-------- --------- ------- ---------
Total operating costs and expenses ................. 86,995 13,353 663 101,011
-------- --------- ------- ---------
Income (loss) from operations ............................... 8,869 2,206 (663) 10,412
Other income (expense):
Interest and investment income .......................... 219 202 - 421
Interest expense ........................................ (2,999) (706) (1,534) (5) (5,239)
-------- --------- ------- ---------
(2,780) (504) (1,534) (4,818)
-------- --------- ------- ---------
Income (loss) before provision for income taxes ............. 6,089 1,702 (2,197) 5,594
Income tax expense (benefit) ................................ 3,583 658 (646) (6) 3,595
-------- --------- ------- ---------
Net income (loss) .......................................... 2,506 1,044 (1,551) 1,999
Accretion of preferred stock to
to redemption value ....................................... (377) - - (377)
-------- --------- ------- ---------
Net income (loss) applicable to
common shareholders ....................................... $ 2,129 $ 1,044 $ (1,551) $ 1,622
======== ========= ======= =========
Net income per share:
Basic ................................................... $ 0.10 $ 0.08
Diluted ................................................. $ 0.10 $ 0.07
Weighted average shares outstanding:
Basic ................................................... 21,440 21,440
Diluted ................................................. 22,476 22,546 (7)
</TABLE>
F-24
<PAGE>
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 Acquisition
NCO (2) Acquisitions (8) Pro Forma (9) Adjustments
------- ---------------- ------------- -----------
<S> <C> <C> <C> <C>
Revenue ................................................. $ 229,952 $ 127,570 $ 61,123 $ (4,521)(10)
Operating costs and expenses:
Payroll and related expenses ........................ 119,314 80,824 37,640 -
Selling, general and administrative expenses ........ 66,588 40,850 13,833 -
Depreciation and amortization expense ............... 9,851 10,074 1,675 (1,662)(11)
--------- --------- -------- --------
Total operating costs and expenses ............. 195,753 131,748 53,148 (1,662)
--------- --------- -------- --------
Income (loss) from operations ........................... 34,199 (4,178) 7,975 (2,859)
Other income (expense):
Interest and investment income ...................... 1,135 147 503 -
Interest expense .................................... (3,858) (1,223) (3,536) (14,914)(12)
--------- --------- -------- --------
(2,723) (1,076) (3,033) (14,914)
--------- --------- -------- --------
Income (loss) before provision for income taxes ......... 31,476 (5,254) 4,942 (17,773)
Income tax expense (benefit) ............................ 13,131 881 2,023 (8,720)(13)
--------- --------- -------- --------
Net income (loss) ...................................... 18,345 (6,135) 2,919 (9,053)
Accretion of preferred stock to
to redemption value ................................... (1,604) - - -
--------- --------- -------- --------
Net income (loss) applicable to
common shareholders ................................... $ 16,741 $ (6,135) $ 2,919 $ (9,053)
========= ========= ======== ========
Net income per share:
Basic ............................................... $ 0.91
Diluted ............................................. $ 0.85
Weighted average shares outstanding:
Basic ............................................... 18,324
Diluted ............................................. 19,758
</TABLE>
The accompanying notes are an integral part of these pro forma
consolidated financial statements.
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Offering Pro Forma
Pro Forma Adjustments (14) As Adjusted
--------- ---------------- -----------
<S> <C> <C> <C>
Revenue .................................................... $ 414,124 $ - $ 414,124
Operating costs and expenses:
Payroll and related expenses ........................... 237,778 - 237,778
Selling, general and administrative expenses ........... 121,271 - 121,271
Depreciation and amortization expense .................. 19,938 - 19,938
--------- ------- ---------
Total operating costs and expenses ................ 378,987 - 378,987
--------- ------- ---------
Income (loss) from operations .............................. 35,137 - 35,137
Other income (expense):
Interest and investment income ......................... 1,785 - 1,785
Interest expense ....................................... (23,531) 2,435 (21,096)
--------- ------- ---------
(21,746) 2,435 (19,311)
--------- ------- ---------
Income (loss) before provision for income taxes ............ 13,391 2,435 15,826
Income tax expense (benefit) ............................... 7,315 974 8,289
--------- ------- ---------
Net income (loss) ......................................... 6,076 1,461 7,537
Accretion of preferred stock to
to redemption value ...................................... (1,604) - (1,604)
--------- ------- ---------
Net income (loss) applicable to
common shareholders ...................................... $ 4,472 $ 1,461 $ 5,933
========= ======= =========
Net income per share:
Basic .................................................. $ 0.21 $ 0.24
Diluted ................................................ $ 0.23 $ 0.26
Weighted average shares outstanding:
Basic .................................................. 21,743 24,313
Diluted ................................................ 19,828 (7) 22,398
</TABLE>
The accompanying notes are an integral part of these pro forma
consolidated financial statements.
F-25
<PAGE>
Notes to Pro Forma Consolidated
Financial Statements
(Unaudited)
(1) Gives effect to the following acquisition related adjustments: (i) the
elimination of cash, deferred taxes, debt and other obligations not
acquired from Co-Source; (ii) the recognition of goodwill; (iii) the debt
borrowed against NCO's credit facility to finance the acquisition of
Co-Source; (iv) the warrants issued to finance a portion of the acquisition
of Co-Source; (v) the additional deferred financing fees that resulted from
the increase in the credit facility to fund the acquisition of Co-Source;
and (vi) the accrual of acquisition related expenses. The accrual of
acquisition related expenses includes: (i) professional fees related to the
acquisition of Co-Source; and (ii) termination costs relating to certain
redundant personnel immediately eliminated at the time of the Co-Source
acquisition. The Co-Source goodwill will be amortized on a straight-line
basis over 40 years. A portion of the Co-Source goodwill is deductible for
income tax purposes. The allocation of the purchase price paid for
Co-Source is as follows (dollars in thousands):
Deferred
Co-Source Financing Fees Combined
---------- -------------- --------
Net tangible assets acquired ............. $ (31,608) $ -- $ (31,608)
Acquisition related adjustments:
Cash and cash equivalents .............. (3,974) -- (3,974)
Accrued acquisition expenses ........... (2,700) -- (2,700)
Deferred taxes ......................... (751) -- (751)
Debt repaid prior to acquisition ....... 34,110 -- 34,110
Obligations repaid prior to acquisition 2,200 -- 2,200
Goodwill and other intangible assets ..... 127,348 3,500 130,848
--------- --------- ---------
Consideration paid* ...................... $ 124,625 $ 3,500 $ 128,125
========= ========= =========
* The consideration paid for Co-Source includes cash of $122.7 million and
a warrant to purchase 250,000 shares of NCO common stock valued at
approximately $1.9 million.
(2) 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.
(3) Represents the historical results of operations of Co-Source from January
1, 1999 to March 31, 1999.
(4) Gives effect to the increase in amortization expense assuming the Co-Source
acquisition had occurred on January 1, 1999.
(5) 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 7.0% and
outstanding debt of $126.2 million.
(6) Adjusts the estimated income tax expense, after giving consideration to
non-deductible goodwill expense, as if the Co-Source acquisition occurred
on January 1, 1999.
(7) Gives effect to the dilution resulting from the warrants to purchase
250,000 shares of NCO common stock issued to finance a portion of the
Co-Source acquisition.
F-26
<PAGE>
(8) 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.
(9) 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 Compass on
August 5, 1998, as follows (dollars in thousands):
<TABLE>
<CAPTION>
Income From Net
Co-Source Pro Forma Revenue Operations Income (Loss)
------------------------------- ---------- ------------ -------------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
* 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.
(10) Gives effect to the reduction of revenue to conform MSC's revenue
recognition policy to that of NCO.
(11) Gives effect to: (i) the increase in amortization expense assuming the 1998
Acquisitions and the Co-Source 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):
<TABLE>
<CAPTION>
Adjustment Adjustment Net
to to
Acquisition Amortization Depreciation Adjustment
--------------------------------------- ------------- ------------- ------------
<S> <C> <C> <C>
FCA....................................... $ 684 $ (2,785) $(2,101)
MedSource................................. 304 (129) 175
MSC....................................... (1,582) (772) (2,354)
Co-Source ................................ 2,618 - 2,618
--------- -------- -------
$ 2,024 $(3,686) $(1,662)
========= ======== =======
</TABLE>
F-27
<PAGE>
(12) 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 7.7% and 7.0%, respectively, and outstanding debt of $211.5
million and $126.2 million, respectively.
(13) Adjusts the estimated income tax expense, after giving consideration to
non-deductible goodwill expense, as if the 1998 Acquisitions and the
Co-Source acquisition occurred on January 1, 1998.
(14) Reflects the elimination of interest expense on debt assumed to be repaid
with a portion of the proceeds from the Company'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.
(15) Includes: (i) payroll and related expenses of $6.5 million attributable to
certain redundant personnel costs immediately eliminated at the time of the
FCA, MedSource and MSC acquisitions; and (ii) rental and related operating
costs of $3.4 million attributable to facilities which were closed at the
time of the FCA, MedSource and MSC acquisitions. Net income per share -
basic and net income per share - diluted would have been $0.49 and $0.53,
respectively, on a pro forma basis assuming the acquisitions occurred on
January 1, 1998 and those costs had not been incurred.
(16) 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-28
<PAGE>
Consent of Independent Auditors
We consent to the incorporation by reference in the Proxy/Registration Statement
(Form S-4 No. 333-83229) of NCO Group, Inc. and in the related prospectus of our
report dated April 2, 1999 (except for Note 12, as to which the date is May 21,
1999), with respect to the consolidated financial statements of Co-Source
Corporation and Subsidiaries included in this Form 8-K/A of NCO Group, Inc.
/s/ ERNST & YOUNG LLP
New Orleans, Louisiana
July 30, 1999
