<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): November 30, 1998
NCO GROUP, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Pennsylvania 0-21639 23-2858652
- ------------------------------- ----------------------- ----------------------
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) (Identification Number)
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>
On December 15, 1998, NCO Group, Inc. ("NCO") filed a Current Report on
Form 8-K with the SEC to report, among other things, the acquisition of all of
the outstanding stock of Medaphis Services Corporation. NCO is amending such
Current Report on Form 8-K to provide the financial information required by Item
7 of the Current Report on Form 8-K.
NCO Group, Inc. recognizes all contingency fee revenue upon the
collection of funds by, or on behalf of, clients. Medaphis Services Corporation
recognized contingency fee revenue for services rendered based on its estimate
of the fees that will be invoiced when collections on patient accounts are
received, less appropriate allowances for potentially uncollectable amounts. The
estimated fees are included in Medaphis Services Corporation's balance sheet as
"Accounts receivable, unbilled."
NCO Group, Inc. was aware of the difference in accounting methods at
the time of the Medaphis Services Corporation acquisition, and accordingly,
changed Medaphis Services Corporation's revenue recognition policy after the
acquisition to conform to that of NCO Group, Inc. The pro forma financial
statements included elsewhere in this filing on Form 8-K have been adjusted to
conform the revenue recognition policy used by Medaphis Services Corporation in
their historical financial statements.
The Securities and Exchange Commission is currently reviewing Medaphis
Services Corporation's revenue recognition policy. If, as a result of this
review, the management of Medaphis Services Corporation determines that their
financial statements need to be modified, the financial statements and the
corresponding pro forma adjustments will be updated accordingly.
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>
Medaphis Services Corporation -- Report of Independent Accountants..............................F-1
Consolidated Balance Sheets as of December 31, 1996 and 1997 and as of
September 30, 1998 (unaudited)...........................................................F-2
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and
1997 and for the nine months ended September 30, 1997 and 1998 (unaudited)...............F-3
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996
and 1997 and for the nine months ended September 30, 1997 and 1998 (unaudited)...........F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995,
1996 and 1997 and for the nine months ended September 30, 1998 (unaudited)...............F-5
Notes to Financial Statements...................................................................F-6
(b) Pro Forma Financial Information.
--------------------------------
Pro Forma Consolidated Financial Statements ....................................................F-7
</TABLE>
<PAGE>
(c) Exhibits
--------
Number Title
------ -----
1. Amended and Restated Stock Purchase
Agreement by and between NCO and Medaphis
Corporation dated as of October 15, 1998 as
amended and restated on November 30, 1998.
NCO will furnish to the Securities and
Exchange Commission a copy of any omitted
schedule upon request. (previously filed)
2. Third Amended and Restated Credit Agreement
dated as of November 30, 1998 by and among
NCO, its U.S. Subsidiaries, the Financial
Institutions listed therein as Lenders and
Mellon Bank, N.A. as administrative agent.
NCO will furnish to the Securities and
Exchange Commission a copy of any omitted
schedule upon request. (previously filed)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NCO GROUP, INC.
By: /s/ Steven L. Winokur
-------------------------------------
Executive Vice President, Finance,
Chief Financial Officer and Treasurer
Date: February 16, 1999
<PAGE>
Report of Independent Accountants
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of certain subsidiaries of Medaphis Services Corporation (a wholly
owned subsidiary of Medaphis Corporation) at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 15, on October 16, 1998, Medaphis Corporation entered
into a definitive agreement to sell the Company, subject to certain conditions
of closing.
PricewaterhouseCoopers LLP
Atlanta, Georgia
October 28, 1998
F-1
<PAGE>
MEDAPHIS SERVICES CORPORATION
(a wholly owned subsidiary of Medaphis Corporation)
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share data)
<TABLE>
<CAPTION>
December 31, September 30,
----------------------- ------------
1996 1997 1998
-------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents ............................. $ 2,228 $ 2,453 $ 2,413
Restricted cash ....................................... 3,892 3,358 5,413
Accounts receivable, billed (less allowances of $1,100,
$1,000 and $3,300) ................................. 11,845 16,307 14,377
Accounts receivable, unbilled ......................... 11,119 12,335 14,200
Other ................................................. 594 649 579
-------- -------- --------
Total current assets .......................... 29,678 35,102 36,982
Property and equipment .................................. 9,803 13,069 12,395
Intangible assets ....................................... 56,003 53,429 52,986
Due from Parent ......................................... 14,278 8,679 12,745
Other ................................................... -- 2,081 3,210
-------- -------- --------
$109,762 $112,360 $118,318
======== ======== ========
Current Liabilities:
Accounts payable ...................................... $ 1,911 $ 2,315 $ 1,784
Accrued compensation .................................. 4,038 4,637 5,692
Accrued expenses ...................................... 7,366 5,614 6,643
Current portion of capital lease obligations .......... 53 58 35
Deferred income taxes ................................. 1,964 1,976 2,539
-------- -------- --------
Total current liabilities ..................... 15,332 14,600 16,693
Capital lease obligations ............................... 250 192 170
Deferred income taxes ................................... 3,798 4,356 6,354
-------- -------- --------
Total liabilities ............................. 19,380 19,148 23,217
-------- -------- --------
Commitments and contingencies (Note 12)
Stockholders' Equity:
Common stock, voting, $1.00 par value, 1,000
authorized in 1996, 1997 and 1998; issued and
outstanding, 100 in 1996, 1997 and 1998............... -- -- --
Paid-in capital ....................................... 68,479 68,479 68,479
Retained earnings ..................................... 21,903 24,733 26,622
-------- -------- --------
Total stockholders' equity .................... 90,382 93,212 95,101
-------- -------- --------
$109,762 $112,360 $118,318
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
MEDAPHIS SERVICES CORPORATION
(a wholly owned subsidiary of Medaphis Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------------------- -----------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue .................. $67,356 $87,553 $95,484 $71,163 $77,157
Revenue from affiliates .. 1,727 1,323 1,213 928 948
------- ------- ------- ------- -------
Total revenue .. 69,083 88,876 96,697 72,091 78,105
------- ------- ------- ------- -------
Salaries and wages ....... 37,995 52,251 61,217 45,490 48,340
Other operating expenses . 14,835 20,788 25,258 18,909 21,299
Depreciation ............. 2,075 2,354 3,387 2,205 3,695
Amortization ............. 1,386 2,002 2,028 1,508 1,569
------- ------- ------- ------- -------
Total expenses . 56,291 77,395 91,890 68,112 74,903
------- ------- ------- ------- -------
Income before income taxes 12,792 11,481 4,807 3,979 3,202
Income tax expense ....... 5,162 4,686 1,977 1,631 1,313
------- ------- ------- ------- -------
Net income ..... $ 7,630 $ 6,795 $ 2,830 $ 2,348 $ 1,889
======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
MEDAPHIS SERVICES CORPORATION
(a wholly owned subsidiary of Medaphis Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------- ------------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income ............................... $ 7,630 $ 6,795 $ 2,830 $ 2,348 $ 1,889
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .......... 3,461 4,356 5,415 3,713 5,264
Deferred income taxes .................. 1,799 2,287 570 (347) 2,561
Changes in assets and liabilities,
excluding effects of acquisitions and
divestitures:
Restricted cash ..................... (385) (26) 534 (923) (2,054)
Accounts receivable, billed ......... (1,114) (70) (4,462) (2,874) 1,930
Accounts receivable, unbilled ....... (4,215) (3,949) (1,216) (875) (1,865)
Accounts payable .................... 167 676 404 (565) (531)
Accrued compensation ................ 128 1,462 599 (419) 1,055
Accrued expenses .................... 915 582 (4) 1,094 1,495
Other, net .......................... (399) -- (1,884) (1,124) (1,025)
-------- -------- -------- -------- --------
Net cash provided by operating
activities ................... 7,987 12,113 2,786 28 8,719
-------- -------- -------- -------- --------
Cash Flows From Investing Activities:
Acquisitions, net of cash acquired .. (18,319) (3,626) (861) (814) (356)
Purchases of property and equipment . (1,557) (6,467) (6,904) (5,498) (3,056)
Software development costs .......... -- (74) (342) (331) (1,235)
-------- -------- -------- -------- --------
Net cash used for investing
activities ................... (19,876) (10,167) (8,107) (6,643) (4,647)
-------- -------- -------- -------- --------
Cash Flows From Financing Activities:
Intercompany (repayments) borrowings, net (7,170) (2,842) 5,546 7,050 (4,112)
Capital contribution from Parent ......... 17,202 3,000 -- -- --
-------- -------- -------- -------- --------
Net cash provided by (used for)
financing activities ......... 10,032 158 5,546 7,050 (4,112)
-------- -------- -------- -------- --------
Cash and Cash Equivalents:
Net change ............................... (1,857) 2,104 225 435 (40)
Balance at beginning of period ........... 1,981 124 2,228 2,228 2,453
-------- -------- -------- -------- --------
Balance at end of period ................. $ 124 $ 2,228 $ 2,453 $ 2,663 $ 2,413
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
MEDAPHIS SERVICES CORPORATION
(a wholly owned subsidiary of Medaphis Corporation)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Total
Paid-in Retained Stockholders'
Capital Earnings Equity
------- ------- -------
<S> <C> <C> <C>
Balance at December 31, 1994, unaudited $48,277 $ 7,478 $55,755
Capital contribution from Parent ....... 17,202 -- 17,202
Net income ............................. -- 7,630 7,630
------- ------- -------
Balance at December 31, 1995 ........... $65,479 $15,108 $80,587
======= ======= =======
Capital contribution from Parent ....... 3,000 -- 3,000
Net income ............................. -- 6,795 6,795
------- ------- -------
Balance at December 31, 1996 ........... $68,479 $21,903 $90,382
======= ======= =======
Net income ............................. -- 2,830 2,830
------- ------- -------
Balance at December 31, 1997 ........... $68,479 $24,733 $93,212
======= ======= =======
Net income ............................. -- 1,889 1,889
------- ------- -------
Balance at September 30, 1998, unaudited $68,479 $26,622 $95,101
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
MEDAPHIS SERVICES CORPORATION
(a wholly owned subsidiary of Medaphis Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. These consolidated financial statements include the
accounts of certain subsidiaries of Medaphis Services Corporation, which is a
wholly owned subsidiary of Medaphis Corporation ("Medaphis" or the "Parent").
The legal structure of Medaphis Services Corporation includes two wholly owned
subsidiaries, AssetCare, Inc. ("AssetCare") and National Healthcare
Technologies, Inc. ("NHTI"). Solely for the special purpose of these financial
statements, the Parent has excluded all assets, liabilities and activities of
NHTI and Medaphis Services Corporation's printing operation (the "Laser Center")
from the assets, liabilities and activities of Medaphis Services Corporation. As
a result, all references to the "Company" or "Hospital Services" contained in
these financial statements represent the accounts and activities of Medaphis
Services Corporation, excluding the accounts and activities of NHTI and the
Laser Center.
As further discussed in Note 10, the Parent has allocated certain costs
incurred by the Parent related to certain shared services, including executive
offices, human resources, insurance, legal, payroll processing, external
reporting, management information systems and certain other administrative
expenses provided by the Parent to all subsidiaries. The Parent has not
allocated any interest charges as there are no specific borrowings related to
the Company.
Nature of Operations. Hospital Services provides business management
services primarily to hospitals throughout the United States. The Company's
business management services generally include: electronic and manual claims
submission, automated patient billing, past due and delinquent accounts
receivable collection and patient eligibility programs. The Company historically
has not experienced any significant losses related to individual clients,
classes of clients or groups of clients in any geographical area.
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition. Fees for the Company's business management services are
primarily based on a percentage of net collections on clients' patient accounts
and revenue is recognized as business management services are performed. Certain
facilities management contracts are billed on a fixed fee basis. Revenue related
to such contracts is recognized based on the related contract terms, which
typically includes monthly invoicing and payment. Accounts receivable, billed,
represents amounts invoiced to clients. Accounts receivable, unbilled,
represents amounts recognized for services rendered but not yet invoiced and is
based on the Company's estimate of the fees that will be invoiced when
collections on patient accounts are received, less appropriate allowances for
potentially uncollectible amounts.
Long-term contracts. Certain contracts include performance incentives to the
Company, or guarantees, for, or by, the Company. For guarantees by the Company,
loss accruals, if any, are recorded as management determines the probability and
amount required on any applicable contracts. These performance incentives are
accrued over the remaining life of the applicable contract when the Company
believes it has sufficient historical information to estimate such amounts and
collection is reasonably assured. At December 31, 1997 and September 30, 1998,
other assets include $1.4 million and $2.8 million (unaudited), respectively, of
unbilled receivables related to a performance incentive that the Company expects
to settle in April 1999 related to a single contract.
Cash and Cash Equivalents. Cash and cash equivalents include all highly
liquid investments with an initial maturity of no more than three months.
Restricted Cash. Restricted cash principally represents amounts collected on
behalf of certain clients, a portion of which is held in trust until remitted to
such clients.
Property and Equipment. Property and equipment, including equipment under
capital leases, are stated at cost. Depreciation is computed using the straight
line method over the estimated useful lives of the assets, generally ten years
for furniture and fixtures, three to ten years for equipment, and leasehold
improvements are depreciated over the term of the lease.
F-6
<PAGE>
Intangible Assets. Intangible assets are composed principally of goodwill,
client lists and software development costs.
Goodwill and Client Lists. Goodwill represents the excess of the cost of the
businesses acquired over the fair value of net identifiable assets at the date
of the acquisition and is amortized using the straight line method. The Company
amortizes goodwill over a period of 40 years as management believes that these
assets have an indeterminate life. Management believes that Hospital Services'
value is in the differentiated service business it operates, which outlasts the
individual clients that make it up, and that the current base of business, which
has made Hospital Services a leader in healthcare business management services,
provides the foundation for continued growth. Management continually monitors
events and circumstances both within the Company and within the industry which
could warrant revisions to the Company's estimated useful life of goodwill. If
the Company ever determines that a reduction in the amortization period is
necessary, it could have a material impact on the Company's results of
operations. Client lists are amortized using the straight line method over their
estimated period of benefit, generally 7 to 20 years.
The Company monitors events and changes in circumstances that could indicate
carrying amounts of intangible assets may not be recoverable. When events or
changes in circumstances are present that indicate the carrying amount of
intangible assets may not be recoverable, the Company assesses the
recoverability of intangible assets by determining whether the carrying value of
such intangible assets will be recovered through undiscounted expected future
cash flows. Should the Company determine that the carrying values of specific
intangible assets are not recoverable, the Company would record a charge to
reduce the carrying value of such assets to their fair values. The Company
determines fair value based on discounted expected future cash flows during the
period of benefit. No impairment losses related to goodwill or client lists have
ever been recorded. The Company believes that the recorded amounts of goodwill
and client lists are recoverable at December 31, 1997 and September 30, 1998.
Software Development Costs. Software development costs represent the costs
incurred in the development or the enhancement of software utilized in providing
the Company's business management systems and services. Software development
costs are capitalized after the preliminary project stage is completed and
management has committed to the software project. Capitalization ceases when the
software project is substantially complete and ready for its intended use.
Software development costs are amortized using the straight line method over the
estimated economic lives of the assets, which are generally three to five years.
Stock-based Compensation Plans. The Company accounts for its stock-based
compensation plans under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25"). In Note 8, the Company presents
the disclosure requirements of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-based Compensation" ("SFAS No. 123"). SFAS No. 123
requires that companies which elect to not account for stock-based compensation
as prescribed by that statement shall disclose, among other things, the pro
forma effects on net income as if SFAS No. 123 had been adopted.
Income Taxes. The provisions for income taxes have been prepared as if the
Company was an independent entity for all periods presented and in accordance
with the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109").
Unaudited Financial Statements. The information presented as of September
30, 1998, and for the nine months ended September 30, 1997 and September 30,
1998, has not been audited. In the opinion of management, the unaudited balance
sheet and the unaudited statements of operations and cash flows include all
adjustments, consisting solely of normal recurring adjustments, necessary to
present fairly, in accordance with the basis of presentation described above,
the Company's balance sheet as of September 30, 1998, and the Company's results
of operations and cash flows for the nine months ended September 30, 1997 and
September 30, 1998. The interim results of operations are not necessarily
indicative of results which may occur for the full fiscal year.
2. BUSINESS COMBINATIONS
The Company acquired either substantially all of the assets or all of the
outstanding capital stock of each of the following businesses which were
accounted for using the purchase method of accounting:
<TABLE>
<CAPTION>
Acquisition
Company Acquired Consideration Date
---------------- ------------- ----
(in thousands)
<S> <C> <C>
CBT Financial Services, Inc.............................................. $ 3,000 February 1996
The Receivables Management Division of MedQuist, Inc. ("RMD")............ $ 17,202 December 1995
</TABLE>
F-7
<PAGE>
The Company's acquisitions of these businesses were funded by the Parent.
For purposes of these financial statements, such funding is treated as a capital
contribution in the respective period.
Each of the foregoing acquisitions has been recorded using the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the assets acquired and liabilities assumed based on their estimated fair value
as of the date of acquisition. The operating results of the acquired businesses
are included in the Company's consolidated statements of operations from the
respective dates of acquisition. The following unaudited pro forma financial
information presents the results of the Company for the year ended December 31,
1995, as if the acquisition of RMD had occurred on January 1, 1995. The pro
forma information does not purport to be indicative of the results that would
have been obtained if the operations had actually been combined during the
period presented and is not necessarily indicative of operating results to be
expected in future periods. The pro forma impact on 1996 was not material for
separate presentation.
<TABLE>
<CAPTION>
1995
(unaudited)
-----------
(in
thousands)
<S> <C>
Revenue................................................................................. $87,098
Net income.............................................................................. 9,008
</TABLE>
With respect to each of the acquisitions above, the fair value of the net
tangible assets acquired was not significant; as a result, substantially all of
the aggregate purchase price was allocated to goodwill and other intangibles as
follows: goodwill -- $14.9 million and client lists -- $3.6 million. The
remainder of the purchase price was allocated among various net tangible assets.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
--------------------------- 1998
1996 1997 (unaudited)
----------- ----------- ------------
(in thousands)
<S> <C> <C> <C>
Furniture and fixtures.......................................... $ 3,418 $ 3,307 $ 3,413
Equipment....................................................... 15,094 17,733 20,507
Leasehold improvements.......................................... 795 1,378 1,554
-------- -------- --------
19,307 22,418 25,474
Less accumulated depreciation................................... 9,504 9,349 13,079
-------- -------- --------
$ 9,803 $ 13,069 $ 12,395
======== ======== ========
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
September
December 31, 30,
------------------------ 1998
1996 1997 (unaudited)
---------- ---------- -----------
(in thousands)
<S> <C> <C> <C>
Goodwill.......................................................... $51,887 $50,999 $50,890
Client lists...................................................... 9,470 9,470 9,470
Software development costs........................................ 74 416 1,651
------- ------- -------
61,431 60,885 62,011
Less accumulated amortization..................................... 5,428 7,456 9,025
------- ------- -------
$56,003 $53,429 $52,986
======= ======= =======
</TABLE>
Amortization expense on goodwill and client lists was approximately $1.4
million, $2.0 million, $2.0 million and $1.5 million (unaudited) for the years
ended December 31, 1995, 1996, 1997 and the nine-month period ended September
30, 1998, respectively. The goodwill and client lists balance, net of
accumulated amortization, was $55.9 million, $53.0 million and $51.4 million
(unaudited) at December 31, 1996, 1997 and September 30, 1998.
F-8
<PAGE>
Expenditures on capitalized software development costs were approximately
$74,000, $342,000 and $1.2 million (unaudited) in 1996, 1997 and the nine-month
period ended September 30, 1998, respectively. Amortization expense related to
the Company's capitalized software costs totaled approximately $23,000 and
$83,000 (unaudited) for the year ended December 31, 1997 and the nine-month
period ended September 30, 1998, respectively. The Company did not incur
capitalized software development costs in 1995.
5. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
--------------------------- 1998
1996 1997 (unaudited)
----------- ----------- ------------
(in thousands)
<S> <C> <C> <C>
Accrued costs of businesses acquired........................ $2,316 $ 729 $ 264
Funds due clients........................................... 3,892 3,358 5,413
Deferred revenue............................................ 251 1,063 174
Other....................................................... 907 464 792
------ ------ ------
$7,366 $5,614 $6,643
====== ====== ======
</TABLE>
6. LEASE COMMITMENTS
The Company leases office space and equipment under noncancelable operating
leases which expire at various dates through 2008. Rent expense was $1.8
million, $2.6 million, $3.0 million and $2.5 million (unaudited) for the years
ended December 31, 1995, 1996, 1997 and the nine-month period ended September
30, 1998, respectively.
Future minimum lease payments under noncancelable operating leases beginning
in the fourth quarter of 1998 are as follows (in thousands):
Fourth quarter of 1998........................... $ 939
1999............................................. 3,446
2000............................................. 3,080
2001............................................. 2,517
2002............................................. 1,514
Thereafter....................................... 1,189
--------
$ 12,685
========
7. CAPITAL LEASE OBLIGATIONS
The Company's capital leases consist of leases for equipment. The carrying
amounts of capital lease obligations reflected in the Company's balance sheets
approximate fair value of such instruments due to the fixed rates on the capital
lease obligations which approximate market rates.
The aggregate maturities of capital lease obligations are as follows (in
thousands):
Fourth quarter of 1998............................. $ 13
1999............................................... 25
2000............................................... 17
2001............................................... 18
2002............................................... 20
Thereafter......................................... 112
------
$ 205
======
In addition, certain of the Company's property and equipment are leased by
the Parent under master lease arrangements which qualify as capital leases. The
obligations under such master lease arrangements are not transferable, in parts,
to Hospital Services or any other party. Accordingly, the Company has recorded a
liability associated with such leased equipment as a reduction of the Due from
Parent amount.
F-9
<PAGE>
8. COMMON STOCK OPTIONS AND STOCK AWARDS
The Parent has several stock option plans, including a Non-Qualified Stock
Option Plan, a Non-Qualified Stock Option Plan for Employees of Acquired
Companies, and a Non-Qualified Stock Option Plan for Non-executive Employees, in
which the employees of the Company participate. Each plan provides for the
participant to purchase shares of the Parent's common stock. Granted options
expire 10 to 11 years after the date of grant and generally vest over a three to
five year period. The Company sponsors no separate stock option plans.
The following table summarizes the activity related to the Company's
employees who participate in the stock option plans of the Parent:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------
1995 1996 1997
--------------------------- ------------------------------ ------------------------------
Shares Weighted-Average Shares Weighted-Average Shares Weighted-Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
-------- ----------------- ----------- ----------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding as of
January 1............ 739 $ 8.67 842 $ 12.36 886 $ 10.11
Granted................ 168 27.06 444 14.88 660 5.85
Exercised.............. (45) 4.86 (118) 6.37 (21) 7.44
Canceled............... (20) 12.78 (282) 25.95 (558) 9.77
------- ------ ------
Options outstanding as of
period end........... 842 $ 12.42 886 $ 10.11 967 $ 7.45
======= ====== ======
Options exercisable as of
period end........... 369 $ 6.15 390 $ 7.60 497 $ 6.74
Weighted-average fair
value of options
granted during the
year................. $ 14.14 $ 6.50 $ 2.36
</TABLE>
The following table summarizes information about stock options held at
December 31, 1997 by employees of the Company who participate in the Parent's
Stock Option Plans:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- ----------------------------------
Number Weighted- Number
Outstanding at Average Exercisable at
December 31, Remaining Weighted- December 31,
1997 Contractual Average 1997 Weighted-Average
Range of Exercise Prices (000) Life Exercise Price (000) Exercise Price
------------------------ -------------- ------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$2.00 to $4.00.... 170 3.43 $ 2.48 170 $ 2.48
$5.38 to $7.44.... 563 8.98 5.38 191 5.38
$7.50 to $8.50.... 51 6.61 7.51 40 7.51
$9.88 to $10.00... 54 7.84 9.93 24 9.88
$13.75 to $16.50.. 74 7.10 15.76 55 15.90
$25.00 to $37.00.. 55 8.80 30.45 17 28.53
--- ---
$2.00 to $37.00... 967 7.66 7.45 497 6.74
=== ===
</TABLE>
On October 25, 1996 and April 25, 1997, the Compensation Committee of the
Board of Directors of the Parent approved adjustments of the exercise price for
certain outstanding employee stock options, which had an exercise price of
$15.00 and above and $5.50 and above, respectively. The revised exercise prices
of $9.875 and $5.375, respectively, were established by reference to the closing
price of the Parent's Common Stock on October 25, 1996 and April 25, 1997,
respectively. The outstanding options held by the executive officers of the
Parent were adjusted as part of such option restrikes, but no adjustments were
made to any options held by directors or former employees of the Parent. In
approving the adjustments, the Compensation Committee relied upon the views of
its outside advisors with respect to the legal, accounting and compensation
issues associated with the action and took into consideration, among other
things, the following factors: (i) the Parent historically had paid salaries
which were at or below market levels and had made up for lower salaries through
stock option grants to employees; (ii) the Parent historically had used stock
options as its principal long-term incentive program; (iii) the highly skilled
employees of the Parent possessed marketable skills; and (iv) senior management
of the Parent believed that there was potential for increased attrition among
its key employees and that adjustment of the exercise price of the outstanding
options would significantly help to mitigate such risk.
The Company accounts for its stock-based compensation plans under APB No.
25. As a result, the Company has not recognized compensation expense for stock
options granted from the Parent's plans with an exercise price equal to the
quoted market price of the
F-10
<PAGE>
Parent's Common Stock on the date of grant and which vest based solely on
continuation of employment by the recipient of the option award. For SFAS No.
123 purposes, the fair value of each option grant and stock based award has been
estimated as of the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1995 1996 1997
--------- --------- -------
<S> <C> <C> <C>
Expected life (years)....................................... 5.66 4.88 4.33
Risk-free interest rate..................................... 6.30% 6.25% 6.39%
Dividend rate............................................... 0.00% 0.00% 0.00%
Expected volatility......................................... 26.68% 46.88% 54.09%
</TABLE>
Had compensation cost been determined consistent with SFAS No. 123,
utilizing the assumptions detailed above, the Company's net income would have
decreased to the following pro forma amounts:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1995 1996 1997
------------ ------------ --------
(in thousands, except per share data)
<S> <C> <C> <C>
Net income:
As reported............................................... $7,630 $6,795 $2,830
Pro forma................................................. $7,534 $6,425 $2,642
</TABLE>
Because the method of accounting under SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that expected in future years.
9. INCOME TAXES
The Company is included in the Parent's consolidated federal income tax
return. As such, it does not pay federal taxes directly to the federal
government. Accordingly, the Company has recorded current tax liabilities as a
reduction of the Due from Parent amount.
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1996 1997
---------- ---------- ---------
(in thousands)
<S> <C> <C> <C>
Current:
Federal......................................................... $2,698 $1,918 $1,111
State........................................................... 665 481 296
Deferred:
Federal......................................................... 1,564 1,989 496
State........................................................... 235 298 74
------ ------ ------
Income tax expense................................................ $5,162 $4,686 $1,977
====== ====== ======
</TABLE>
A reconciliation between the amount determined by applying the federal
statutory rate to income before income taxes and income tax expense is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1995 1996 1997
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Income tax expense at federal statutory rate...................... $ 4,349 $ 3,904 $ 1,634
State taxes, net of federal benefit............................... 439 317 195
Nondeductible goodwill amortization............................... 124 163 119
Other............................................................. 250 302 29
------- ------- -------
$ 5,162 $ 4,686 $ 1,977
======= ======= =======
</TABLE>
For the nine month periods ended September 30, 1997 and 1998, the Company
recorded income tax expense based on its estimated effective tax rate for the
respective full year. For purposes of interim financial reporting, the Company
has preliminarily recorded such income tax expense as an adjustment to the
deferred tax liability.
F-11
<PAGE>
Deferred taxes are recorded based upon differences between the financial
statement and tax bases of assets and liabilities and available tax credit
carryforwards. The components of deferred taxes as of December 31, 1996 and 1997
are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1997
-------- --------
(in thousands)
<S> <C> <C>
Current:
Accounts receivable, unbilled................................................... $ (4,093) $ (4,569)
Acquisition accruals............................................................ 531 637
Accrued expenses................................................................ 528 863
Other deferred tax liabilities.................................................. 1,070 1,093
-------- --------
$ (1,964) $ (1,976)
======== ========
Noncurrent:
Net operating loss carryforwards................................................ $ 3,599 $ 3,599
Valuation allowance............................................................. (3,599) (3,599)
Depreciation and amortization................................................... (3,786) (4,742)
Other deferred tax liabilities.................................................. (12) 386
-------- --------
$ (3,798) $ (4,356)
======== ========
</TABLE>
As of December 31, 1997, the Company had federal net operating loss
carryforwards ("NOLs") for income tax purposes of approximately $9.2 million
which expire at various dates between 2003 and 2009 related primarily to NOL's
acquired in connection with business combinations. The Internal Revenue Code of
1986, as amended, may impose substantial limitations on the use of NOLs. As such
restrictions exist, the Company has provided a full valuation allowance on such
amounts.
10. RELATED PARTY TRANSACTIONS
As a wholly owned subsidiary of the Parent, the Company engages in a variety
of transactions and shared services with the Parent and other affiliated
organizations. See Note 1 for a description of the reporting entity. Certain
amounts have been recorded in the accompanying financial statements for the
expenses incurred by the Parent to present the financial position, results of
operations and cash flows of the Company as an independent entity. Costs
previously incurred by Medaphis on behalf of the Company include executive
offices, human resources, payroll processing, legal, external reporting,
management information systems and other general and administrative services.
The Parent has allocated such costs to the Company as outlined below (in
thousands):
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
------------------------------ -------------------
Management Services Provided Basis of Allocations 1995 1996 1997 1997 1998
---------------------------- -------------------- -------- -------- -------- -------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Executive, treasury and tax percentage of total revenue $ 294 $ 596 $ 1,856 $ 1,313 $ 991
Payroll and human resources percentage of total employees 386 701 612 493 566
Information systems percentage of total assets 9 312 913 420 604
Accounting, legal and other general specific identification and
and administrative various other methods 490 784 1,320 1,094 886
------- ------- ------- ------- -------
$ 1,179 $ 2,393 $ 4,701 $ 3,320 $ 3,047
======= ======= ======= ======= =======
</TABLE>
Management believes that the basis of allocations detailed above is
reasonable. However, the incremental costs which represent the expenses the
Company would have incurred on a stand alone basis, are lower. Management
estimates these incremental costs would have been $0.8 million, $1.2 million,
$1.6 million, $1.1 million (unaudited) and $1.2 million (unaudited) for the
years ended December 31, 1995, 1996 and 1997 and for the nine months ended
September 30, 1997 and 1998, respectively.
The Due from Parent amount represents the net cash advanced to the Parent
from the operating cash flows generated by the Company, less advances from the
Parent to fund operating activities, less income tax expense that was currently
payable on a separate Company basis (Note 9), less the amounts due to the Parent
for property and equipment used in the Company's operations that were covered by
non-transferable capital lease agreements entered into by the Parent with
financial institutions (Note 7) and less the Parent overhead allocations
discussed above. The Due from Parent amount is noninterest bearing.
F-12
<PAGE>
The nature and amount of significant transactions or services with other
affiliated organizations are outlined below (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------------- ---------------------
Affiliate Nature of transaction 1995 1996 1997 1997 1998
--------- --------------------- ---------- ---------- ---------- ---------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE
Medaphis Physician Services
Corporation ("MPSC") Collection services $ 1,727 $ 1,323 $ 1,213 $ 928 $ 948
======== ======== ======== ======== ========
EXPENSES
Impact Innovations Group Consulting services $ -- $ -- $ (63) $ -- $ (217)
Laser Center Printing services (1,962) (3,073) (3,445) (2.512) (3.013)
NHTI Electronic claims -- (153) (234) (173) (149)
-------- -------- -------- -------- --------
processing
$ (1,962) $ (3,226) $ (3,742) $ (2.685) $ (3.379)
======== ======== ======== ======== ========
</TABLE>
As stated above, the Company is a wholly owned subsidiary of the Parent and
has numerous transactions and relationships with the Parent. Consolidated
condensed financial information of the Parent is presented below as of and for
the year ended December 31, 1997:
December 31, 1997
-----------------
(in
thousands)
Current assets.................................. $212,436
Noncurrent assets............................... 661,591
Current liabilities............................. 118,939
Noncurrent liabilities.......................... 253,307
Revenue......................................... 572,625
Net loss........................................ (19,303)
11. MAJOR CUSTOMER
The Company has one client whose revenue represents a significant portion of
the Company's total revenue. Revenue from this client accounted for 18%, 26% and
26% (unaudited) of total revenue for the years ended December 31, 1996, 1997 and
the nine months ended September 30, 1998, respectively.
This revenue is generated through numerous contracts with varying terms.
Such contracts are generally for a one year term with options to continue
servicing the client on a month to month basis. The largest of these contracts,
which represented 16%, 41% and 54% (unaudited) of the total revenue from this
client for the periods ended December 31, 1996, 1997 and the nine months ended
September 30, 1998, respectively, will expire in November of 1998.
12. CONTINGENCIES
There is currently no pending or threatened litigation which will have a
material adverse effect upon the Company's financial condition or upon the
results of its operations. To date, the Company has not been involved in any
litigation that has had a material adverse effect upon the Company. However, in
connection with providing past due or delinquent credit collection services,
AssetCare operates in a litigation-intensive environment, and has, from time to
time, been, and in the future expects to be, named as a party in litigation
incidental to its collection operations. In the past, AssetCare has successfully
defeated these claims or settled them for nominal amounts. The Company believes
that any such future litigation will not have a material adverse effect upon the
Company's financial condition or upon the results of its operations.
13. EMPLOYEE BENEFIT PLANS
The Company participates in a defined contribution plan administered by the
Parent whereby employees meeting certain eligibility requirements can make
specified contributions to the plan, a percentage of which are matched by the
Company. The Company's contribution expense was $240,000, $335,000, $351,000 and
$293,000 (unaudited) for the years ended December 31, 1995, 1996, 1997, and the
nine-month period ended September 30, 1998, respectively.
F-13
<PAGE>
In May 1996, the Parent's stockholders approved the adoption of the Medaphis
Corporation Employee Stock Purchase Plan ("ESPP") in which eligible employees of
the Parent and its subsidiaries, including employees of the Company, can
purchase shares of the Parent's common stock at a price equal to the lesser of
85% of the fair market value of the Parent's common stock on the first date of
the purchase period or the last date of the purchase period. The maximum number
of shares authorized by this plan is 1,000,000 of which 720,266 shares are
remaining. The ESPP requires the Parent's stockholder approval to increase the
number of shares authorized under the plan.
14. CASH FLOW INFORMATION
Supplemental disclosures of cash flow information and non-cash investing and
financing activities were as follows:
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
-------------------------------- --------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Non-cash investing and financing
activities:
Liabilities assumed in
acquisitions............ $3,409 $ 875 $ -- $ -- $ --
Additions to capital lease
obligations............. 130 208 -- -- --
</TABLE>
15. SUBSEQUENT EVENT
On October 16, 1998, the Parent entered into a definitive agreement to sell
the Company for $107.5 million with an additional purchase price adjustment of
up to $10.0 million subject to the achievement of various operational targets in
1999. Upon closing, the Parent has come to an agreement with its lenders to
release all liens against the Company's assets. The transaction is subject to
regulatory approval and is expected to be consummated before year end.
F-14
<PAGE>
Pro Forma Consolidated Financial Statements
Basis of Presentation
The Pro Forma Consolidated Balance Sheet as of September 30, 1998 and the
Pro Forma Consolidated Statements of Income for the nine months ended September
30, 1998 and the year ended December 31, 1997 are based on the historical
financial statements of NCO Group, Inc. ("NCO" or the "Company"); Tele-Research
Center, Inc. ("Tele-Research"); CMS A/R Services ("CMS A/R"); the Collection
Division of CRW Financial, Inc. ("CRWCD"); Credit Acceptance Corporation
("CAC"); ADVANTAGE Financial Services, Inc. ("AFS"); the Collection Division of
American Financial Enterprises, Inc. ("AFECD"); The Response Center ("TRC"); FCA
International Ltd. ("FCA"); MedSource, Inc. ("MedSource"); and Medaphis Services
Corporation ("MSC") (collectively, the "Acquisitions"). 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 September 30, 1998 has been
prepared assuming the MSC acquisition was completed on September 30, 1998.
The Pro Forma Consolidated Statement of Income for the nine months ended
September 30, 1998 has been prepared assuming the TRC, FCA, MedSource and MSC
acquisitions were completed on January 1, 1998.
The Pro Forma Consolidated Statement of Income for the year ended December
31, 1997 has been prepared assuming the Tele-Research, CMS A/R, CRWCD, CAC, and
AFS acquisitions (collectively, the "1997 Acquisitions"); the AFECD, TRC, FCA,
and MedSource acquisitions (collectively, the "1998 Pre-MSC Acquisitions"); and
the MSC acquisition, were completed on January 1, 1997.
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 FCA, MedSource and MSC 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 MSC which has been included elsewhere in
this Current Report on Form 8-K.
F-15
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Balance Sheet
September 30, 1998
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Acquisition
NCO MSC Adjustments(1) Pro Forma
-------- -------- --------------- ---------
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 27,571 $ 2,413 $ (2,413) $ 27,571
Accounts receivable, trade, net 29,341 28,577 (14,200) 43,718
Deferred taxes - - - -
Other current assets 1,239 579 - 1,818
-------- -------- -------- --------
Total current assets 58,151 31,569 (16,613) 73,107
Property and equipment, net 14,031 12,395 (6,145) 20,281
Other assets:
Intangibles, net of accumulated amortization 157,596 52,986 50,525 261,107
Deferred financing costs 9,081 - - 9,081
Deferred taxes - - - -
Other assets 4,999 15,955 (12,745) 8,209
-------- -------- -------- --------
Total other assets 171,676 68,941 37,780 278,397
-------- -------- -------- --------
Total assets $243,858 $112,905 $ 15,022 $371,785
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 1,453 $ - $ - $ 1,453
Capitalized lease obligations, current portion 243 35 - 278
Corporate taxes payable 2,564 - - 2,564
Accounts payable 4,791 1,784 - 6,575
Accrued expenses 6,462 1,230 11,516 19,208
Accrued compensation and related expenses 6,468 5,692 - 12,160
Accrued pension and other benefits, current 995 - - 995
Deferred taxes - 2,539 (2,539) -
-------- -------- -------- --------
Total current liabilities 22,976 11,280 8,977 43,233
Long-term liabilities:
Long term debt, net of current portion 25,500 - 107,500 133,000
Capitalized lease obligations, net of current
portion 828 170 - 998
Deferred taxes - 6,354 (6,354) -
Accrued pension and other benefits, net of current
portion 4,683 - - 4,683
Redeemable Preferred Stock - - - -
Shareholders' equity
Preferred stock - - - -
Common stock 171,777 - - 171,777
Paid in capital - 68,479 (68,479) -
Unexercised warrants 875 - - 875
Cumulative translation adjustment (658) - - (658)
Treasury stock, at cost - - - -
Retained earnings (deficit) 17,877 26,622 (26,622) 17,877
-------- -------- -------- --------
Shareholders' equity 189,871 95,101 (95,101) 189,871
-------- -------- -------- --------
Total liabilities and shareholders' equity $243,858 $112,905 $ 15,022 $371,785
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-16
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Statement of Income
For the Nine Months Ended September 30, 1998
(Unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
NCO TRC FCA MedSource
Historical Historical(2) Historical(3) Historical(4)
---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue ................................................. $118,019 $788 $19,340 $11,028
Operating costs and expenses:
Payroll and related expenses ........................ 60,722 429 14,267 6,073
Selling, general and administrative expenses ........ 34,709 162 8,995 3,751
Depreciation and amortization expense ............... 4,927 7 2,973 667
-------- ---- ------- -------
Total operating costs and expenses ............. 100,358 598 26,235 10,491
-------- ---- ------- -------
Income (loss) from operations ........................... 17,661 190 (6,895) 537
Other income (expense):
Interest and investment income ...................... 810 - 107 40
Interest expense .................................... (1,283) - (135) (1,088)
-------- ---- ------- -------
(473) - (28) (1,048)
-------- ---- ------- -------
Income (loss) before provision for income taxes ......... 17,188 190 (6,923) (511)
Income tax expense (benefit) ............................ 7,274 - 132 (145)
-------- ---- ------- -------
Net income (loss) ...................................... $ 9,914 $190 $(7,055) $ (366)
======== ==== ======= =======
Net income per share:
Basic ............................................... $ 0.65
========
Diluted ............................................. $ 0.63
========
Weighted average shares outstanding:
Basic ............................................... 15,256
========
Diluted ............................................. 15,769
========
</TABLE>
<PAGE>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
Pro Forma
MSC Acquisition Offering As
Historical Adjustments Pro Forma Adjustments(10) Adjusted
---------- ----------- --------- --------------- --------
<S> <C> <C> <C> <C> <C>
Revenue ................................................. $78,105 $(1,865)(5) $225,415 $ - $225,415
Operating costs and expenses:
Payroll and related expenses ........................ 48,340 - 129,831 - 129,831
Selling, general and administrative expenses ........ 21,299 - 68,916 - 68,916
Depreciation and amortization expense ............... 5,264 (3,810)(6) 10,028 - 10,028
------- ------- -------- ----- --------
Total operating costs and expenses ............. 74,903 (3,810) 208,775 - 208,775
------- ------- -------- ----- --------
Income (loss) from operations ........................... 3,202 1,945 16,640 - 16,640
Other income (expense):
Interest and investment income ...................... - (69)(7) 888 - 888
Interest expense .................................... - (8,110)(8) (10,616) 2,450 (8,166)
------- ------- -------- ----- --------
- (8,179) (9,728) 2,450 (7,278)
------- ------- -------- ----- --------
Income (loss) before provision for income taxes ......... 3,202 (6,234) 6,912 2,450 9,362
Income tax expense (benefit) ............................ 1,313 (4,889)(9) 3,685 980 4,665
Net income (loss) ...................................... $ 1,889 $(1,345) $ 3,227 $1,470 $ 4,697
------- ------- -------- ----- --------
Net income per share:
Basic ............................................... $ 0.21 $ 0.26 (11)
======== ========
Diluted ............................................. $ 0.20 $ 0.26 (11)
======== ========
Weighted average shares outstanding:
Basic ............................................... 15,256 17,826 (12)
======== ========
Diluted ............................................. 15,769 18,339 (12)
======== ========
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-17
<PAGE>
<TABLE>
<CAPTION>
NCO 1997 Acquisitions 1998 Pre-MSC MSC
Historical Historical(13) Acquisitions(14) Historical
---------- ----------------- ---------------- ----------
<S> <C> <C> <C> <C>
Revenue ............................................... $85,284 $ 8,621 $94,490 $96,697
Operating costs and expenses:
Payroll and related expenses ...................... 42,502 5,656 54,356 61,217
Selling, general and administrative expenses ...... 27,947 3,731 32,613 25,258
Depreciation and amortization expense ............. 3,369 257 3,048 5,415
Reorganization charges ............................ - - 1,517 -
------- ------- ------- -------
Total operating costs and expenses ........... 73,818 9,644 91,534 91,890
------- ------- ------- -------
Income (loss) from Operations ......................... 11,466 (1,023) 2,956 4,807
Other income (expense):
Interest and investment income .................... 1,020 14 484 -
Interest expense .................................. (591) (12) (2,538) -
Loss on disposal of fixed assets .................. (41) - - -
------- ------- ------- -------
388 2 (2,054) -
------- ------- ------- -------
Income before provision fr income taxes: .............. 11,854 (1,021) 902 4,807
Income tax expense .................................... 4,780 - 129 1,977
------- ------- ------- -------
Net income (loss) ..................................... $ 7,074 $ 1,021) $ 773 $ 2,830
------- ------- ------- -------
Net income per share:
Basic ............................................. $ 0.59
=======
Diluted ........................................... $ 0.57
=======
Weighted aveerage shares outstanding
Basic ............................................. 11,941
=======
Diluted ........................................... 12,560
=======
</TABLE>
<PAGE>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
Acquisition Offering Pro Forma
Adjustments Pro Forma Adjustments (19) As Adjusted
<S> <C> <C> <C> <C>
Revenue ............................................... $ (1,216)(5) $ 283,876 $ - $283,876
Operating costs and expenses:
Payroll and related expenses ...................... - 163,731 - 163,731
Selling, general and administrative expenses ...... - 89,549 - 89,549
Depreciation and amortization expense ............. 518 (15) 12,607 - 12,607
Reorganization charges ............................ - 1,517 - 1,517
-------- --------- ------- -------
Total operating costs and expenses ........... 518 267,404 - 267,404
-------- --------- ------- -------
Income (loss) from Operations ......................... (1,734) 16,472 - 16,472
Other income (expense):
Interest and investment income .................... - 1,518 - 1,518
Interest expense .................................. (13,761)(16) (16,902) 5,816 (11,086)
Loss on disposal of fixed assets .................. - (41) - (41)
-------- --------- ------- -------
(13,761) (15,425) 5,816 (9,609)
-------- --------- ------- -------
Income before provision fr income taxes: .............. (15,495) 1,047 5,816 6,863
Income tax expense .................................... (4,796)(17) 2,090 2,109 4,199
-------- --------- ------- -------
Net income (loss) ..................................... $ (10,699) $ (1,043) $ 3,707 $ 2,664
======== ========= ======= =======
Net income per share:
Basic ............................................. $ (0.08) $ 0.15(20)
Diluted ........................................... $ (0.07) $ 0.16(20)
Weighted aveerage shares outstanding
Basic ............................................. 12,732(18) 17,201 (21)
======= =======
Diluted ........................................... 13,364(18) 17,833 (21)
======= =======
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-18
<PAGE>
Notes to Pro Forma Consolidated
Financial Statements
(Unaudited)
(1) Gives effect to the following acquisition related adjustments: (i) the
elimination of cash, affiliate receivables and deferred taxes not acquired;
(ii) the reduction of accounts receivable to conform MSC's revenue
recognition policy to that of NCO; (iii) the revaluation of property and
equipment to its fair value; (iv) the recognition of goodwill; (v) the debt
borrowed against NCO's credit facility to finance the acquisition; and (vi)
the accrual of acquisition related expenses. The accrual of acquisition
related expenses includes: (i) professional fees related to the
acquisition; (ii) termination costs relating to certain redundant personnel
immediately eliminated at the time of the MSC acquisition; and (iii)
certain future rental obligations attributable to facilities which were
closed at the time of the MSC acquisition. The MSC goodwill will be
amortized on a straight-line basis over 40 years. All of the MSC goodwill
is deductible for income tax purposes. The allocation of the purchase price
paid for MSC is as follows (dollars in thousands):
Sept. 30,
Acquisition of MSC 1998
------------------ ----------
Net tangible assets acquired ............ $42,115
Acquisition related adjustments:
Cash and cash equivalents .............. (2,413)
Accounts receivable, unbilled .......... (14,200)
Property, plant and equipment .......... (6,145)
Affiliate receivable ................... (12,745)
Accrued acquisition expenses ........... (11,516)
Deferred taxes ......................... 8,893
Goodwill ................................ 103,511
-------
Cash paid for MSC...................... $107,500
========
(2) Represents the historical results of operations of TRC from January 1, 1998
to February 5, 1998, the period prior to the acquisition.
(3) 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.
(4) Represents the historical results of operations of MedSource from January
1, 1998 to June 30, 1998, the period prior to the acquisition.
(5) Gives effect to the reduction of revenue to conform MSC's revenue
recognition policy to that of NCO.
(6) Gives effect to: (i) the increase in amortization expense assuming the TRC,
FCA, MedSource and MSC acquisitions 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 Adjustment
to Increase to Decrease Net
Acquisition Amortization Depreciation Adjustment
---------------------------- ------------ ------------ -----------
TRC......................... $ 45 $ (3) $ 42
FCA......................... 684 (2,785) (2,101)
MedSource................... 304 (129) 175
MSC......................... 831 (2,757) (1,926)
------ ------- ------
$1,864 $(5,674) $(3,810)
====== ======= =======
F-19
<PAGE>
(7) Reflects the elimination of interest income on funds assumed to be used for
the TRC acquisition as if it occurred on January 1, 1998.
(8) Reflects interest expense on borrowings related to the FCA, MedSource and
MSC acquisitions as if they occurred on January 1, 1998. The interest
expense was calculated using an estimated interest rate of 7.7% and
outstanding debt of $69.0 million, $35.0 million and $107.5 million,
respectively.
(9) Adjusts the estimated income tax expense, after giving consideration to
non-deductible goodwill expense, as if the TRC, FCA, MedSource and MSC
acquisitions occurred on January 1, 1998.
(10) 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.
(11) 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 $0.60 and $0.58,
respectively, on a pro forma basis assuming the acquisitions occurred on
January 1, 1998 and those costs had not been incurred.
(12) 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.
(13) Represents the combined historical results of operations of the 1997
Acquisitions for the periods prior to their acquisition by NCO, as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Pre-Acquisition
------------------------------------
Income (Loss) Net
Date of From Income
1997 Acquisitions Acquisition Revenue Operations (Loss)
-------------------------- ----------- ------- ------------- ------
<S> <C> <C> <C> <C>
Tele-Research............. 1/30/97 $ 296 $ 97 $ 97
CMS A/R................... 1/31/97 539 53 53
CRWCD..................... 2/2/97 2,006 (7) (8)
CAC....................... 10/1/97 1,570 (403) (391)
AFS....................... 10/1/97 4,210 (763) (772)
------ ------- -------
$8,621 $(1,023) $(1,021)
====== ======= =======
</TABLE>
(14) Represents the combined historical results of operations of the 1998
Pre-MSC Acquisitions for the year ended December 31, 1997, as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Pre-Acquisition
-------------------------------------------
Income (Loss) Net
Date of From Income
1998 Pre-MSC Acquisitions Acquisition Revenue Operations (Loss)
------------------------- ----------- ------- ------------- ------
<S> <C> <C> <C> <C>
AFECD.................... 1/1/98 $ 1,562 $ 272 $ 272
TRC...................... 2/2/98 7,993 1,274 1,274
FCA * ................... 5/5/98 62,224 236 (88)
MedSource Pro Forma ** .. 7/1/98 22,711 1,174 (685)
------- ------ ------
$94,490 $2,956 $ 773
======= ====== ======
F-20
<PAGE>
</TABLE>
* Includes adjustments required to convert FCA's historical results of
operations for the year ended December 31, 1997 to U.S. GAAP and gives
effect to the conversion from Canadian dollars to U.S. dollars, based
on the applicable exchange rate.
** Represents the historical results of operations of MedSource for the
year ended December 31, 1997 with pro forma adjustments to present the
acquisitions completed by MedSource in 1997 (the "MedSource
Acquisitions") as if they occurred on January 1, 1997, as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Income (Loss) Net
Date of From Income
MedSource Pro Forma Acquisition Revenue Operations (Loss)
------------------------------------------- ------------ ---------- --------------- -------------
<S> <C> <C> <C> <C>
MedSource Historical....................... 7/1/98 $12,458 $ 76 $ (360)
MedSource Acquisitions*:
Healthcare Business Management Ltd.
And ECC of Pittsburgh, Inc............ 7/1/97 975 (262) (180)
World Credit, Inc.......................... 7/1/97 2,865 285 232
MAC/TCS, Inc............................ 8/30/97 4,790 852 483
AllStates Credit Services, Inc. ........... 10/1/97 1,623 578 327
Pro Forma Adjustments **................. - (355) (1,187)
-------- ------- --------
$ 22,711 $ 1,174 $ (685)
======== ======= =======
</TABLE>
* All of MedSource's acquisitions were accounted for under the purchase
method of accounting with the results of the acquired companies included
in MedSource's historical statements of income beginning on the date of
acquisition.
**Reflects: (i) amortization expense assuming the MedSource Acquisitions
occurred on January 1, 1997; and (ii) interest expense on
acquisition-related borrowings as if the MedSource Acquisitions had
occurred on January 1, 1997.
(15) Gives effect to: (i) the increase in amortization expense assuming the 1997
Acquisitions, the 1998 Pre-MSC Acquisitions, and the MSC acquisition had
occurred on January 1, 1997; and (ii) the elimination of depreciation and
amortization expense related to assets revalued or not acquired.
(16) Reflects interest expense on borrowings related to the 1997 Acquisitions,
the 1998 Pre-MSC Acquisitions, and the MSC acquisition as if they occurred
on January 1, 1997. The interest expense was calculated using an estimated
interest rate of 7.7% and outstanding debt of $69.0 million, $35.0 million
and $107.5 million for the FCA, MedSource and MSC acquisitions,
respectively.
(17) Adjusts the estimated income tax expense, after giving consideration to
non-deductible goodwill expense, as if the 1997 Acquisitions, the 1998
Pre-MSC Acquisitions, and the MSC acquisition occurred on January 1, 1997.
(18) Gives effect to: (i) the issuance of 517,767 shares of common stock and
warrants exercisable for 375,000 shares of common stock in connection with
the acquisition of CRWCD; (ii) the issuance of 1,425,753 shares of common
stock in the July 1997 offering at the public offering price of $19.67 per
share (the "1997 Offering") which, net of the underwriting discount and
offering expenses paid by NCO, would be sufficient to repay acquisition
related debt of $8.4 million and to fund the acquisitions of AFECD and TRC;
and (iii) the issuance of 46,442 shares of common stock issued in
connection with the acquisition of AFS.
F-21
<PAGE>
(19) Reflects the elimination of interest expense on debt assumed to be repaid
with a portion of the proceeds from the 1998 Offering, including the shares
of common stock sold in July 1998 in connection with the underwriters'
exercise of the over-allotment option.
(20) Includes: (i) payroll and related expenses of $12.9 million attributable to
certain redundant personnel costs immediately eliminated at the time of the
1997 Acquisitions, the 1998 Pre-MSC Acquisitions, and the MSC acquisition;
and (ii) rental and related operating costs of $3.8 million attributable to
facilities which were closed at the time of the 1997 Acquisitions, the 1998
Pre-MSC Acquisitions, and the MSC acquisition. Net income per share - basic
and net income per share - diluted would have been $0.77 and $0.75,
respectively, on a pro forma basis assuming the acquisitions occurred on
January 1, 1997 and those costs had not been incurred.
(21) Gives effect to the issuance of 4,469,366 shares of common stock in the
1998 Offering, including the 469,366 shares of common stock sold in July
1998 in connection with the underwriters' exercise of the over-allotment
option, as if it occurred on January 1, 1997.
F-22
