<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-21639
NCO GROUP, INC.
---------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2858652
------------ ----------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
515 Pennsylvania Ave.
Ft. Washington, Pennsylvania 19034-3313
---------------------------- ----------
(Address of principal (Zip Code)
executive offices)
Registrant's Telephone Number, Including Area Code (215) 793-9300
--------------
Securities Registered Pursuant to Section 12(b) of the Act: None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common stock, no par value 25,547,631
--------------------------- ----------
(Title of Class) (Number of Shares Outstanding
as of April 7, 2000)
Indicate by check mark whether the Registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant is $582,502,000 (1)
<PAGE>
-----------------
(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of the Company's common stock outstanding, reduced by the amount of
common stock held by officers, directors and shareholders owning 10% or more of
the Company's common stock, multiplied by $29.938, the last reported sale price
for the Company's common stock on April 7, 2000. The information provided shall
in no way be construed as an admission that any officer, director or 10%
shareholder in the Company may be deemed an affiliate of the Company or that he
is the beneficial owner of the shares reported as being held by him, and any
such inference is hereby disclaimed. The information provided herein is included
solely for record keeping purposes of the Securities and Exchange Commission.
Purpose of Amendment
The registrant hereby amends the following items, financial statement exhibits,
or other portions of its Annual Report on Form 10-K for the year ended December
31, 1999, as set forth in the pages attached hereto.
Item 8. - Financial Statements and Supplementary Data (see page F-1)
-------------------------------------------
The registrant is filing this amendment to amend the 1999 amounts designated as
"Cash paid for interest" and "Cash paid for income taxes" included in note 16 to
NCO Group, Inc.'s Consolidated Financial Statements (see page F-24)
Exhibit No. 23.1 - Consent of PricewaterhouseCoopers LLP.
-------------------------------------
Exhibit No. 23.2 - Consent of Arthur Andersen LLP.
------------------------------
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
NCO GROUP, INC.
Date: April 11, 2000 By: /s/ Michael J. Barrist
-------------------------
Michael J. Barrist, Chairman of the Board,
President and Chief Executive Officer
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
<S> <C>
Financial Statements:
Report of Independent Accountants...............................................................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 ...................................................F-4
Consolidated Statements of Income for each of the three years
in the period ended December 31, 1999......................................................................F-5
Consolidated Statements of Redeemable Preferred Stock and Shareholders' Equity for each of the three years
in the period ended December 31, 1999......................................................................F-6
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1999......................................................................F-7
Notes to Consolidated Financial Statements......................................................................F-8
Financial Statement Schedules:
For the years ended December 31, 1997, 1998 and 1999:
II - Valuation and Qualifying Accounts......................................................................S-1
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareholders of NCO Group, Inc.:
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements listed in the index appearing under Item
14(a)(1) present fairly, in all material respects, the financial position of NCO
Group, Inc. and its subsidiaries at December 31, 1998 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14(a)(2)
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and the financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. The consolidated financial statements and the financial statement
schedule give retroactive effect to the merger of JDR Holdings, Inc. on March
31, 1999 in a transaction accounted for as a pooling of interests, as described
in Note 3 to the consolidated financial statements. We did not audit the
financial statements of JDR Holdings, Inc., which statements reflect total
assets of $35,145,119 as of December 31, 1998 and total revenues of $22,788,523
and $50,976,251 for the period from May 29, 1997 to December 31, 1997 and for
the year ended December 31, 1998, respectively. Those statements were audited by
other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for JDR
Holdings, Inc., is based solely on the report of the other auditors. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, 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 and the report of other auditors provide a reasonable
basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
PricewaterhouseCoopers LLP
Philadelphia, PA
February 16, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To JDR Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of JDR Holdings,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1998,
and the related consolidated statements of operations, redeemable preferred and
common stock and stockholders' equity (deficit), and cash flows for the period
from May 29, 1997 to December 31, 1997 and for the year ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of JDR Holdings, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the period from May 29, 1997 to December 31,
1997 and for the year ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
-----------------------
Philadelphia, Pa.,
January 29, 1999
F-3
<PAGE>
Part 1 - Financial Information
Item 1 - Financial Statements
NCO GROUP, INC.
Consolidated Balance Sheets
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------------
ASSETS 1998 1999
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,560 $ 52,380
Accounts receivable, trade, net of allowance for
doubtful accounts of $3,998 and $6,425, respectively 54,443 82,207
Purchased accounts receivable 1,597 6,719
Deferred taxes 1,348 2,965
Other current assets 2,930 5,890
--------- ---------
Total current assets 83,878 150,161
Funds held on behalf of clients
Property and equipment, net 27,062 56,823
Other assets:
Intangibles, net of accumulated amortization 297,347 584,702
Other assets 6,522 6,254
--------- ---------
Total other assets 303,869 590,956
--------- ---------
Total assets $ 414,809 $ 797,940
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 8,288 $ 1,672
Corporate taxes payable 7,737 11,490
Accounts payable 8,485 9,284
Accrued expenses 13,346 34,447
Accrued compensation and related expenses 10,507 15,643
--------- ---------
Total current liabilities 48,363 72,536
Funds held on behalf of clients
Long-term liabilities:
Long-term debt, net of current portion 143,910 323,949
Deferred taxes 6,832 25,747
Other long-term liabilities 4,357 10,820
Redeemable preferred stock 11,882 -
Commitments and contingencies
Shareholders' equity:
Preferred stock 1,853 -
Common stock, no par value, 37,500 shares authorized,
20,100 and 25,533 shares issued, respectively, and
19,744 and 25,533 shares outstanding, respectively 177,835 313,558
Unexercised warrants 5,450 1,043
Treasury stock, at cost (4,108) -
Foreign currency translation adjustment (2,169) 694
Retained earnings 20,604 49,593
--------- ---------
Total shareholders' equity 199,465 364,888
--------- ---------
Total liabilities and shareholders' equity $ 414,809 $ 797,940
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
NCO GROUP, INC.
Consolidated Statements of Income
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenue $ 108,073 $ 229,952 $ 492,354
Operating costs and expenses:
Payroll and related expenses 56,949 119,314 257,877
Selling, general and administrative
expenses 36,372 66,588 135,508
Depreciation and amortization expense 4,564 9,851 23,311
Non-recurring acquisition costs - - 4,601
--------- --------- ---------
Total operating costs and expenses 97,885 195,753 421,297
--------- --------- ---------
Income from operations 10,188 34,199 71,057
Other income (expense):
Interest and investment income 1,025 1,135 1,365
Interest expense (1,781) (3,858) (19,362)
Other income (expense) (41) - -
--------- --------- ---------
Total other income (expense) (797) (2,723) (17,997)
--------- --------- ---------
Income before provision for income taxes 9,391 31,476 53,060
Income tax expense 4,800 13,131 23,694
--------- --------- ---------
Net income 4,591 18,345 29,366
Accretion of preferred stock to redemption value (1,617) (1,604) (377)
--------- --------- ---------
Net income applicable to common shareholders $ 2,974 $ 16,741 $ 28,989
========= ========== ==========
Net income per share:
Basic $ 0.22 $ 0.91 $ 1.27
Diluted $ 0.20 $ 0.85 $ 1.22
Weighted average shares outstanding:
Basic 13,736 18,324 22,873
Diluted 14,808 19,758 23,799
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
NCO GROUP, INC.
Consolidated Statements of Redeemable Preferred Stock
and Shareholders' Equity
For the Years Ended December 31, 1997, 1998 and 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
Shareholders' Equity
-------------------------------------------------
Redeemable Preferred Stock Preferred Stock Common Stock
-------------------------- --------------------- ----------------------
Number of Number of Number of
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 - $ - - $ - 10,070 $ 29,363
Capital contribution 13 157 - - 590 (3,137)
Issuance of common stock - - - - 3,146 50,886
Issuance of series C preferred, voting common
and nonvoting common in connection with
acquisitions - - 146 1,686 1,455 16,799
Reclass of carryover basis adjustment - - - - - (11,065)
Conversion of loan into and sale of
preferred stock 434 8,934 - - - -
Issuance of warrants in conjunction with
the issuances of common stock and debt - (4,126) - - - -
Issuance of warrants in conjunction with
acquisitions - - - - - -
Exercise of nonvoting common options - - - - 36 418
Redemption of nonvoting common - - - - (36) -
Redemption of nonvoting common and
issuance of nonvoting common in private
placement - - - - 16 -
Accretion of preferred to redemption value 4 1,557 3 60 - -
Net income - - - - - -
--------- -------- --------- ------- --------- ---------
Balance, December 31, 1997 451 6,522 149 1,746 15,277 83,264
Issuance of common stock - - - - 4,802 93,884
Exercise of voting and nonvoting
common conversion options 334 3,863 - - (334) -
Accretion of preferred to redemption value - 1,497 - 107 - -
Common stock options granted to consultant - - - - - 687
Redemption of nonvoting common - - - - (1) -
Comprehensive income:
Net income - - - - - -
Other comprehensive income:
Foreign currency translation adjustment - - - - - -
Total comprehensive income
--------- -------- --------- ------- --------- ---------
Balance, December 31, 1998 785 11,882 149 1,853 19,744 177,835
Issuance of common stock - - - - 4,747 125,719
Issuance of warrants in conjunction with
acquisitions - - - - - -
Accretion of preferred to redemption value 93 349 15 28 - -
Exchange of redeemable preferred stock
for common stock (878) (12,231) - - 878 12,231
Exchange of convertible preferred stock
for common stock - - (164) (1,881) 164 1,881
Retirement of treasury stock - - - - - (4,108)
Comprehensive income:
Net income - - - - - -
Other comprehensive income:
Foreign currency translation adjustment - - - - - -
Total comprehensive income
--------- -------- --------- ------- --------- ---------
Balance, December 31, 1999 - $ - - $ - 25,533 $ 313,558
========= ======== ========= ======= ========= =========
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Shareholders' Equity
---------------------------------------------------------------
Treasury Stock
Carryover ------------------------
Unexercised Basis Number of
Warrants Adjustment Shares Amount
-------- ---------- ------ ------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ 396 $ - - $ -
Capital contribution - - - -
Issuance of common stock (149) - - -
Issuance of series C preferred, voting common
and nonvoting common in connection with
acquisitions - (11,065) - -
Reclass of carryover basis adjustment - 11,065 - -
Conversion of loan into and sale of
preferred stock - - - -
Issuance of warrants in conjunction with
the issuances of common stock and debt 4,575 - - -
Issuance of warrants in conjunction with
acquisitions 875 - - -
Exercise of nonvoting common options - - - -
Redemption of nonvoting common - - 36 (418)
Redemption of nonvoting common and
issuance of nonvoting common in private
placement - - (16) 184
Accretion of preferred to redemption value - - - -
Net income - - - -
------- -------- --------- -------
Balance, December 31, 1997 5,697 - 20 (234)
Issuance of common stock (247) - - -
Exercise of voting and nonvoting
common conversion options - - 335 (3,863)
Accretion of preferred to redemption value - - - -
Common stock options granted to consultant - - - -
Redemption of nonvoting common - - 1 (11)
Comprehensive income:
Net income - - - -
Other comprehensive income:
Foreign currency translation adjustment - - - -
Total comprehensive income
------- -------- --------- -------
Balance, December 31, 1998 5,450 - 356 (4,108)
Issuance of common stock (6,332) - - -
Issuance of warrants in conjunction with
acquisitions 1,925 - - -
Accretion of preferred to redemption value - - - -
Exchange of redeemable preferred stock
for common stock - - - -
Exchange of convertible preferred stock
for common stock - - - -
Retirement of treasury stock - - (356) 4,108
Comprehensive income:
Net income - - - -
Other comprehensive income:
Foreign currency translation adjustment - - - -
Total comprehensive income
------- -------- --------- -------
Balance, December 31, 1999 $ 1,043 $ - - $ -
======= ======== ========= =======
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Shareholders' Equity
--------------------------------------------------------------
Accumulated
Other
Comprehensive Retained Comprehensive
Income Earnings Income Total
------ -------- ------ -----
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ - $ 889 $ 30,648
Capital contribution - - (3,137)
Issuance of common stock - - 50,737
Issuance of series C preferred, voting common
and nonvoting common in connection with
acquisitions - - 7,420
Reclass of carryover basis adjustment - - -
Conversion of loan into and sale of
preferred stock - - -
Issuance of warrants in conjunction with
the issuances of common stock and debt - - 4,575
Issuance of warrants in conjunction with
acquisitions - - 875
Exercise of nonvoting common options - - 418
Redemption of nonvoting common - - (418)
Redemption of nonvoting common and
issuance of nonvoting common in private
placement - - 184
Accretion of preferred to redemption value - (1,617) (1,557)
Net income - 4,591 4,591
------- ------- ---------
Balance, December 31, 1997 - 3,863 94,336
Issuance of common stock - - 93,637
Exercise of voting and nonvoting
common conversion options - - (3,863)
Accretion of preferred to redemption value - (1,604) (1,497)
Common stock options granted to consultant - - 687
Redemption of nonvoting common - - (11)
Comprehensive income:
Net income - 18,345 $ 18,345 18,345
Other comprehensive income:
Foreign currency translation adjustment (2,169) - (2,169) (2,169)
---------
Total comprehensive income $ 16,176
------- ------- ========= ---------
Balance, December 31, 1998 (2,169) 20,604 199,465
Issuance of common stock - - 119,387
Issuance of warrants in conjunction with
acquisitions - - 1,925
Accretion of preferred to redemption value - (377) (349)
Exchange of redeemable preferred stock
for common stock - - 12,231
Exchange of convertible preferred stock
for common stock - - -
Retirement of treasury stock - - -
Comprehensive income:
Net income - 29,366 $ 29,366 29,366
Other comprehensive income:
Foreign currency translation adjustment 2,863 - 2,863 2,863
---------
Total comprehensive income $ 32,229
------- ------- ========= ---------
Balance, December 31, 1999 $ 694 $49,593 $ 364,888
======= ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
NCO GROUP, INC
Consolidated Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,591 $ 18,345 $ 29,366
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 2,140 3,945 8,808
Amortization of intangibles 2,424 5,906 14,503
Write-off of defered financing costs - - 353
Loss on disposal of fixed assets 41 - -
Provision for doubtful accounts 356 1,187 2,629
Compensation expense on stock options granted 418 686 34
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, trade (4,565) (10,767) (17,536)
Purchased accounts receivable - 115 (5,122)
Deferred taxes 1,781 3,090 16,980
Other assets (1,728) (698) (1,279)
Accounts payable and accrued expenses (140) 1,483 (5,348)
Corporate taxes payable 68 59 (1,644)
Other long-term liabilities - - 1,711
-------- -------- --------
Net cash provided by operating activities 5,386 23,351 43,455
Cash flows from investing activities:
Purchase of property and equipment (4,849) (10,292) (29,631)
Net cash paid for acquisitions (25,399) (222,843) (135,237)
-------- -------- --------
Net cash used in investing activities (30,248) (233,135) (164,868)
Cash flows from financing activities:
Repayment of notes payable (7,012) (1,256) (1,574)
Repayment of acquired notes payable - (21,919) (42,000)
Borrowings under revolving credit agreement 32,686 94,789 190,715
Repayment of borrowings under revolving credit agreement (18,165) (84,193) (4,000)
Borrowings under term loan - 125,000 -
Payment of fees to acquire new debt (401) (3,015) (3,565)
Issuance of common stock, net 40,428 93,637 10,079
Proceeds from issuance of preferred and common stock
and exercise of common stock options 1,068 - -
Redemption of common stock (5,931) (11) -
Payment of dividends (188) - -
Capital contributions 697 - -
-------- -------- --------
Net cash provided by financing activities 43,182 203,032 149,655
Effect of exchange rate on cash - (67) 578
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 18,320 (6,819) 28,820
Cash and cash equivalents at beginning of period 12,059 30,379 23,560
-------- -------- --------
Cash and cash equivalents at end of period $ 30,379 $ 23,560 $ 52,380
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements
1. Nature of operations:
NCO Group, Inc. (the "Company") is a leading provider of accounts receivable
management and other outsourced revenue cycle management services. The Company's
client base is comprised of companies located throughout North America and in
the United Kingdom and Puerto Rico in the financial services, healthcare,
retail, commercial, education, utilities, government, and telecommunications
sectors.
2. Summary of significant accounting policies:
Principles of Consolidation:
The consolidated financial statements include the accounts of NCO Group, Inc.
and its wholly-owned subsidiaries after elimination of significant intercompany
accounts and transactions.
Revenue Recognition:
The Company generates revenues from contingent fees and contractual services.
Contingent fee revenue is recognized upon collection of funds on behalf of
clients. Contractual services revenue is recognized as services are performed.
Credit Policy:
The Company has two types of arrangements under which it collects its contingent
fee revenue. For certain clients, the Company remits funds collected on behalf
of the client net of the related contingent fees while, for other clients, the
Company remits gross funds collected on behalf of clients and bills the client
separately for its contingent fees. Management carefully monitors its client
relationships in order to minimize its credit risk and generally does not
require collateral. In many cases, in the event of collection delays from
clients, management may, at its discretion, change from the gross remittance
method to the net remittance method.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with an initial
maturity of three months or less to be cash equivalents. These financial
instruments potentially subject the Company to concentrations of credit risk.
Property and Equipment:
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful life of each class of assets
using the straight-line method. Expenditures for maintenance and repairs are
charged to expense as incurred. Renewals and betterments are capitalized. When
property is sold or retired, the cost and related accumulated depreciation are
removed from the balance sheet and any gain or loss on the transaction is
included in the statement of income.
Effective January 1, 1999, the Company adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 identified the characteristics of internal
use software and established guidelines for identifying which costs must be
expensed as incurred and which costs must be capitalized.
F-8
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (continued):
Property and Equipment (continued:
The Company reviews long-lived assets and certain identifiable intangibles for
impairment, based on the estimated future cash flows, whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable.
Intangibles:
Intangibles consists primarily of goodwill and deferred financing costs.
Goodwill represents the excess of purchase price over the fair market value of
the net assets of the acquired businesses based on their respective fair values
at the date of acquisition. Goodwill is amortized on a straight-line basis over
15 to 40 years. For certain acquisitions, such allocations have been based on
estimates that may be revised at a later date. The Company reviews the
recoverability of its goodwill whenever events or changes in circumstances
indicate that the carrying amount of the goodwill may not be recoverable. In
making such a determination with respect to goodwill, the Company evaluates the
operating results of the underlying business that gave rise to such amount.
Deferred financing costs relate to debt issuance costs incurred, which are
capitalized and amortized over the term of the debt.
Accumulated amortization at December 31, 1998 and 1999 totaled $9.1 million and
$24.1 million, respectively.
Income Taxes:
The Company accounts for income taxes using an asset and liability approach. The
asset and liability approach requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the financial reporting basis and the tax basis of assets and
liabilities.
Income taxes were computed after giving effect to the non-deductible portion of
goodwill expenses attributable to certain acquisitions and non-recurring
acquisition costs attributable to the acquisition of JDR Holdings, Inc. ("JDR")
on March 31, 1999.
Foreign Currency Translation:
The Company has foreign subsidiaries whose local currency has been determined to
be the functional currency. For these foreign subsidiaries, the assets and
liabilities have been translated using the current exchange rates, and the
income and expenses have been translated using historical exchange rates. The
adjustments resulting from translation have been recorded as a separate
component of shareholders' equity and are not included in determining
consolidated net income.
Estimates Utilized in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Comprehensive Income:
Comprehensive income consists of net income from operations plus certain changes
in assets and liabilities that are not included in net income but are reported
as a separate component of shareholders' equity under generally accepted
accounting principles.
F-9
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (continued):
Reclassifications:
Certain amounts for December 31, 1997 and 1998, and for the years then ended
have been reclassified for comparative purposes.
3. Acquisitions:
Pooling-of-Interests Transaction:
On March 31, 1999, the Company acquired all of the outstanding shares of JDR
Holdings, Inc. ("JDR") for approximately 3.4 million shares of NCO common stock.
The transaction was accounted for as a pooling-of-interests and a tax-free
reorganization. Accordingly, the historical financial information of the Company
has been restated to include the historical information of JDR. The following
reconciles the amounts originally reported for revenue, net income applicable to
common shareholders, and diluted net income per common share for the years ended
December 31, 1997 and 1998 to the restated amounts and discloses the amount of
revenue and net income applicable to common shareholders separately for each
company for the period prior to the acquisition for the year ended December 31,
1999 (amounts in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenue:
NCO (as originally reported for 1997
and 1998) $ 85,284 $ 178,976 $ 477,877
JDR (for the period prior to the
acquisition for 1999) (1) 22,789 50,976 14,477
--------- --------- ---------
Combined $ 108,073 $ 229,952 $ 492,354
========= ========= =========
Net income applicable to common shareholders:
NCO (as originally reported for 1997
and 1998) $ 7,074 $ 14,716 $ 32,105
JDR (for the period prior to the
acquisition for 1999) (1) (4,100) 2,025 578
Non-recurring acquisition costs, net
of taxes - - (3,694)
--------- --------- ---------
Combined $ 2,974 $ 16,741 $ 28,989
========= ========= =========
Diluted net income per share:
NCO (as originally reported) $ 0.57 $ 0.89
JDR (1) (0.37) (0.04)
--------- ---------
Combined $ 0.20 $ 0.85
========= =========
</TABLE>
(1) On May 29, 1997, JDR completed a recapitalization, which
established a new basis of accounting (see Note 9). As a result, the
results of JDR for the year ended December 31, 1997 represent the
period from May 29, 1997 to December 31, 1997.
For the year ended December 31, 1999, the Company incurred $4.6 million of
non-recurring acquisition costs in connection with the JDR acquisition. These
costs consisted primarily of investment banking fees, legal and accounting fees,
and printing costs.
F-10
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
3. Acquisitions (continued):
Purchase Transactions:
All of the following acquisitions have been accounted for under the purchase
method of accounting. As part of the purchase accounting, the Company recorded
accruals for acquisition related expenses. These accruals included professional
fees related to the acquisition, termination costs related to certain redundant
personnel immediately eliminated at the time of the acquisitions, and certain
future rental obligations attributable to facilities which were closed at the
time of the acquisitions.
On January 1, 1998, the Company purchased the net assets of the Collections
Division of American Financial Enterprises, Inc. for $1.7 million in cash. The
Company recognized goodwill of $2.2 million and is amortizing the goodwill on a
straight-line basis over 25 years.
On February 6, 1998, the Company purchased the net assets of The Response
Center, which was an operating division of TeleSpectrum Worldwide, Inc., for
$15.0 million in cash. The Company recognized goodwill of $14.3 million and is
amortizing the goodwill on a straight-line basis over 25 years.
On May 5, 1998, the Company purchased all of the outstanding common shares of
FCA International Ltd. ("FCA") for $69.9 million in cash. The Company recognized
goodwill of $93.2 million and is amortizing the goodwill on a straight-line
basis over 40 years. Included in this goodwill is an accrual of $15.2 million
for acquisition related expenses. As of December 31, 1999, there was $3.6
million remaining from this accrual for acquisition related expenses.
On July 1, 1998, the Company purchased all of the outstanding stock of
MedSource, Inc. for $18.4 million in cash. In connection with the acquisition,
the Company repaid debt of $17.3 million. The Company recognized goodwill of
$37.2 million and is amortizing the goodwill on a straight-line basis over 25
years. Included in this goodwill is an accrual of $5.8 million for acquisition
related expenses. As of December 31, 1999, there was $551,000 remaining from
this accrual for acquisition related expenses.
On November 30, 1998, the Company acquired all of the outstanding stock of
Medaphis Services Corporation ("MSC"), a wholly owned subsidiary of Medaphis
Corporation, for $107.5 million in cash, plus an earn-out of up to $10.0 million
based on MSC achieving certain operational targets during 1999. The Company
recognized goodwill of $115.7 million and is amortizing the goodwill on a
straight-line basis over 40 years. Included in this goodwill is an accrual of
$3.3 million for acquisition related expenses. As of December 31, 1999, there
was $2.5 million remaining from this accrual for acquisition related expenses.
F-11
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
3. Acquisitions (continued):
Purchase Transactions (continued):
On May 21, 1999, the Company acquired all of the outstanding stock of Co-Source
Corporation ("Co-Source") for approximately $122.7 million in cash plus a
warrant to purchase 250,000 shares of NCO common stock. The purchase price was
valued at approximately $124.6 million. The Company recognized goodwill of
$128.6 million and is amortizing the goodwill on a straight-line basis over 40
years. Included in this goodwill is an accrual of $2.2 million for acquisition
related expenses. As of December 31, 1999, there was $800,000 remaining from
this accrual for acquisition related expenses. The allocation of the fair market
value to the acquired assets and liabilities of Co-Source was based on
preliminary estimates and may be subject to change.
On August 20, 1999, the Company acquired all of the outstanding shares of
Compass International Services Corporation ("Compass") for approximately 3.3
million shares of NCO common stock. In connection with the acquisition, the
Company assumed outstanding stock options to purchase approximately 200,000
shares of NCO common stock. The purchase price was valued at approximately
$104.1 million. The Company recognized goodwill of $139.1 million and is
amortizing the goodwill on a straight-line basis over 40 years. Included in this
goodwill is an accrual of $12.5 million for acquisition related expenses. As of
December 31, 1999, there was $3.6 million remaining from this accrual for
acquisition related expenses. The allocation of the fair market value to the
acquired assets and liabilities of Compass was based on preliminary estimates
and may be subject to change.
The following summarizes the unaudited pro forma results of operations for the
years ended December 31, 1998 and 1999, assuming the above acquisitions had
occurred as of the beginning of the respective periods. 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:
1998 1999
--------- ---------
(Unaudited)
Revenue $ 519,874 $ 581,987
Net income $ 13,253 $ 27,387
Earnings per share - basic $ 0.48 $ 1.10
Earnings per share - diluted $ 0.45 $ 1.06
4. Funds held on behalf of clients:
In the course of the Company's regular business activities as an accounts
receivable management company, the Company receives clients' funds arising from
the collection of accounts placed with the Company. These funds are placed in
segregated cash accounts and are generally remitted to clients within 30 days.
Funds held on behalf of clients of $32.2 million and $47.7 million at December
31, 1998 and 1999, respectively, have been shown net of their offsetting
liability for financial statement presentation.
F-12
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
5. Property and equipment:
At December 31, 1998 and 1999, property and equipment, at cost, consisted of the
following:
<TABLE>
<CAPTION>
Estimated
Useful Life 1998 1999
-------------- ------------ ------------
<S> <C> <C> <C>
Computer equipment 5 years $ 23,794,000 $ 47,423,000
Furniture and fixtures 5 to 10 years 6,250,000 9,325,000
Computer software developed
for internal use 5 years - 8,750,000
Leasehold improvements 5 to 12 years 1,908,000 4,471,000
Leased assets 2 to 5 years 1,983,000 2,465,000
------------ ------------
33,935,000 72,434,000
Less accumulated depreciation 6,873,000 15,611,000
------------ ------------
$ 27,062,000 $ 56,823,000
============ ============
</TABLE>
Depreciation charged to operations amounted to $2.1 million, $3.9 million and
$8.8 million for the years ended 1997, 1998, and 1999, respectively.
6. Long-term debt:
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C> <C>
Revolving credit loan $ 11,035,000 $ 322,750,000
Term loan; 7.37%, payable in quarterly
installments, ranging from $3.0 to $5.3 million,
through November 2003 when the remaining
balance becomes payable 125,000,000 -
JDR revolving credit agreement 12,500,000 -
Subordinated seller notes payable; interest rates
ranging from 7.16% to 8.00%, $750,000 due May
2000 through August 2000 and $130,000 due May
2001
- 880,000
Subordinated seller note payable; 8.00%, due
February 2002, converted to common stock at
$14.12 per share on February 15, 1999 900,000 -
Subordinated seller notes payable; 8.00%, due
January 1999 500,000 -
Other 36,000 -
Capital leases 2,227,000 1,991,000
Less current portion (8,288,000) (1,672,000)
------------- -------------
$ 143,910,000 $ 323,949,000
============= =============
</TABLE>
F-13
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
6. Long-term debt (continued):
The following summarizes the Company's required debt payments for the next
five years:
2000 $ 1,672,000
2001 680,000
2002 261,000
2003 97,000
2004 322,911,000
In May 1999, the Company's credit agreement with Mellon Bank, N.A. ("Mellon
Bank"), for itself and as administrative agent for other participating lenders,
was amended to, among other things, increase the Company's credit facility to
provide for borrowings up to $350.0 million, structured as a $350.0 million
revolving credit facility. Prior to this amendment, the credit facility was
structured as a $125.0 million term loan and a $75.0 million revolving credit
facility. At the option of NCO, the borrowings bear interest at a rate equal to
either Mellon Bank's prime rate plus a margin ranging from 0.25% to 0.50% that
is determined quarterly based upon the Company's consolidated funded debt to
EBITDA ratio (Mellon Bank's prime rate was 8.50% at December 31, 1999), or LIBOR
plus a margin ranging from 1.25% to 2.25% depending on the Company's
consolidated funded debt to EBITDA ratio (LIBOR was 5.83% at December 31, 1999).
Borrowings are collateralized by substantially all the assets of the Company.
The balance under the revolving credit facility will be due upon the expiration
of the five-year term. The credit agreement contains certain financial covenants
such as maintaining net worth and funded debt to EBITDA requirements and
includes restrictions on, among other things, acquisitions, capital
expenditures, and distributions to shareholders.
Mellon Bank received warrants to purchase an aggregate of 361,000 shares of the
Company's common stock for establishing the credit facility initially in 1995
and for subsequent amendments to increase the Company's borrowing capacity under
the credit facility. In July 1997, the bank exercised and sold 225,000 warrants
for common stock. The remainder of the warrants were exercised in January 1998.
As of December 31, 1998, JDR had $12.5 million of borrowings outstanding against
its revolving credit facility (the "JDR Credit Facility"). On March 31, 1999,
the Company repaid the outstanding balance on the JDR Credit Facility with
borrowings from its revolving credit agreement with Mellon Bank and cancelled
the JDR Credit Facility. Deferred financing costs of $353,000 were written-off
on March 31, 1999 as a result of the cancellation of the JDR Credit Facility.
Under the terms of the JDR Credit Facility, JDR could borrow up to $20.0
million. Advances under the JDR Credit Facility bore interest at optional
borrowing rates of either the then current prime rate plus a margin that ranged
from 0.50% to 1.50 % or LIBOR, plus a margin that ranged from 2.00% to 3.00%,
depending on certain conditions specified in the JDR Credit Facility agreement.
JDR also paid a commitment fee of 0.375% on the unused borrowing capacity.
Borrowings under the JDR Credit Facility were collateralized by substantially
all of the assets of JDR.
On May 29, 1997, JDR entered into a credit agreement (the "JDR Bridge Loan")
whereby JDR borrowed $11.0 million to redeem common stock owned by two
stockholders and repay all outstanding indebtedness of JDR. Borrowings under the
JDR Bridge Loan bore interest at 10%. On May 30, 1997, $8.3 million of
borrowings under the JDR Bridge Loan were converted into redeemable preferred
stock (see Notes 9 and 10) and $2.7 million was repaid with borrowings under the
JDR Credit Facility. In connection with the JDR Bridge Loan, JDR recorded debt
issuance costs of $185,000, which were fully amortized upon conversion and
repayment of the JDR Bridge Loan.
In connection with the JDR Credit Facility, the lender purchased 18,000 shares
of JDR Redeemable Series A and 11,000 shares of JDR Series B Preferred for
$603,000 (see Notes 9 and 10).
At December 31, 1999, the Company had unused letters of credit of $1.7 million.
F-14
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
6. Long-term debt (continued):
On February 15, 1999, the $900,000 convertible note issued in connection with
the 1997 acquisition of Goodyear & Associates, Inc. ("Goodyear") was converted
into 64,000 shares of NCO common stock.
The Company leases certain equipment under agreements which are classified as
capital leases. The equipment leases have original terms ranging from 24 to 120
months and have purchase options at the end of the original lease term.
7. Operating leases:
The Company leases certain equipment and real estate facilities under
non-cancelable operating leases. Future minimum payments, by year and in the
aggregate, under non-cancelable operating leases with initial or remaining terms
of one year or more consisted of the following at December 31, 1999:
2000 $ 17,928,000
2001 14,491,000
2002 9,709,000
2003 7,084,000
2004 5,517,000
Thereafter 10,853,000
------------
$ 65,582,000
============
Rent expense was $3.7 million, $7.8 million and $15.0 million for the years
ended December 31, 1997, 1998, and 1999, respectively. The total amount of base
rent payments is being charged to expense on the straight-line method over the
term of the lease.
8. Income taxes:
A summary of the components of the tax provision at December 31, 1997, 1998, and
1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Currently payable:
Federal $ 2,233,000 $ 7,699,000 $ 9,574,000
State 484,000 1,355,000 576,000
Foreign - 331,000 500,000
Deferred:
Federal 1,752,000 3,035,000 10,699,000
State 29,000 711,000 2,345,000
Valuation allowance 302,000 - -
----------- ------------ ------------
Provision for income taxes $ 4,800,000 $ 13,131,000 $ 23,694,000
=========== ============ ============
</TABLE>
Deferred tax assets (liabilities) at December 31, 1998 and 1999 consisted of the
following:
<TABLE>
<CAPTION>
1998 1999
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 569,000 $ -
Contractual revenue recognition - -
Accrued expenses 1,056,000 2,965,000
------------ -------------
1,625,000 2,965,000
Deferred tax liabilities:
Amortization 4,999,000 21,310,000
Depreciation 1,735,000 4,437,000
Cash basis of accounting 375,000 -
------------ -------------
7,109,000 25,747,000
------------ -------------
Net deferred tax liability $ (5,484,000) $ (22,782,000)
============ =============
</TABLE>
F-15
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
8. Income taxes (continued):
A reconciliation of the U.S. statutory income tax rate to the effective rate
(excluding the effect of the change in tax status) is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
U.S. statutory income tax rate 34% 35% 35%
Non-deductible goodwill and other
expenses 3% 2% 6%
State taxes, net of federal 5% 6% 4%
Utilization of net operating loss
carryforwards - (1%) -
JDR operating losses not tax deductible 9% - -
-------- --------- ---------
Effective tax rate 51% 42% 45%
======== ========= =========
</TABLE>
9. JDR Recapitalization:
On May 29 and 30, 1997, JDR completed a series of transactions that
substantially changed its size and capital structure. These transactions, which
are described further below, included the repayment of outstanding debt, the
repurchase of all capital stock held by two former institutional investors,
certain executive officers of JDR and an individual investor, the issuance of
new preferred shares, the purchase of several companies that were previously
partially-owned by JDR's majority stockholder and President, and a
recapitalization of JDR. After the repurchase of capital stock, JDR's President
became the only holder of Voting Common ("JDR's Sole Stockholder"). At that
point, the Sole Stockholder's basis in his investment was "pushed down" to the
JDR's books, as required by Staff Accounting Bulletin No. 54. This established a
new basis of accounting for JDR on May 29, 1997 and NCO's financial statements,
therefore, include the period from that date to the Company's fiscal year end,
December 31, 1997.
On May 29, 1997, JDR amended and restated its certificate of incorporation to
authorize the issuance of 17,955,000 shares of stock, consisting of: (i)
9,794,000 shares of common stock ("JDR Common") consisting of 4,897,000 shares
of voting common stock ("Voting Common") and 4,897,000 shares of nonvoting
common stock ("Nonvoting Common"); and (ii) 8,161,000 shares of preferred stock
("Preferred"), of which 417,000 shares were designated as Redeemable Series A
Preferred stock, no par value ("Redeemable Series A"), 555,000 shares were
designated as Convertible Series A Preferred stock, no par value ("Series A
Preferred"), 204,000 were designated as Convertible Series B Preferred stock, no
par value ("Series B Preferred") and 237,000 were designated as Convertible
Series C Preferred stock, no par value ("Series C Preferred") (see Notes 10 and
11).
Also on May 29, 1997, JDR received a bridge loan of $11.0 million (see Note 6),
the proceeds of which were used to repay $5.4 million of outstanding long-term
debt, to pay debt issuance costs of $185,000 (see Note 6) and to repurchase for
$5.4 million all of the Voting Common held by shareholders other than JDR's Sole
Stockholder and certain shares of Redeemable Series A and Series B Preferred
stock. This transaction resulted in the push down of JDR's Sole Stockholder's
basis in his investment in JDR's stock onto JDR's books. The establishment of
this new basis of accounting resulted in JDR recording an increase in equity of
$6.7 million, which represented the difference between JDR's net book value at
May 29, 1997 and JDR's Sole Stockholder's accounting basis. The entire amount of
the increase in equity was allocated to goodwill, which is being amortized over
40 years on a straight-line basis.
F-16
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
9. JDR Recapitalization (continued):
<TABLE>
<CAPTION>
The repurchase and exchange of stock included the following:
<S> <C>
Repurchase of 401,000 shares of Voting Common $ 4,624,000
Repurchase of 92,000 shares of Redeemable Series A
and Series B Preferred stock plus accrued dividends of $165,000 802,000
Exchange of 40,000 shares of Redeemable Series A and Series B Preferred
stock, plus accrued dividends of $23,000 for 13,000 shares of Series
A Preferred 146,000
Exchange of 129,000 shares of Voting Common for 129,000 shares
of Nonvoting Common 1,493,000
Exchange of 1,000 shares of Voting Common for 1,000 shares of Series B
Preferred 11,000
-----------
Total value of shares repurchased and exchanged $ 7,076,000
===========
</TABLE>
On May 30, 1997, JDR issued preferred stock to two new institutional
investors (see Note 10) as follows:
<TABLE>
<CAPTION>
<S> <C>
Issued 271,000 shares of Redeemable Series A $ 7,050,000
Issued 38,000 shares of Series A Preferred 439,000
Issued 125,000 shares of Series B Preferred 1,445,000
-----------
$ 8,934,000
===========
</TABLE>
10. Redeemable preferred stock:
All of the Redeemable Series A Preferred stock, the Convertible Series A
Preferred stock and the Convertible Series B Preferred stock was exchanged for
NCO common stock on March 31, 1999.
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
Redeemable Series A Preferred stock, no par value,
417,000 shares authorized, 271,000 shares issued and
outstanding $ 5,394,000
Convertible Series A Preferred stock, no par value,
555,000 shares authorized, 365,000 shares issued and
outstanding 4,601,000
Convertible Series B Preferred stock, no par value,
204,000 shares authorized, 149,000 shares issued and
outstanding 1,887,000
------------
$ 11,882,000
============
</TABLE>
JDR issued 271,000 shares of Redeemable Series A stock to repay $6.6 million of
borrowings under the JDR Bridge Loan (see Notes 6 and 9) and for cash proceeds
of $476,000. The Redeemable Series A stock required a dividend (payable in kind)
of 7.0% per year. The holders of the Redeemable Series A stock could have
redeemed these shares for their liquidation value beginning on May 30, 2003. JDR
would have been obligated to redeem these shares on May 30, 2004. The Redeemable
Series A stock had limited voting rights, was senior to the Series C Preferred
stock and common stock.
JDR issued 38,000 shares of Series A Preferred stock to repay $439,000 of
borrowings under the JDR Bridge Loan (see Notes 6 and 9). In addition, JDR
issued 13,000 shares of Series A Preferred stock in exchange for certain
Redeemable Series A and Series B Preferred stock. The Series A Preferred
required a dividend (payable in kind) of 6.0% per year. The holders of the
Series A Preferred stock could have converted their shares at any time into
voting common stock. In addition, the holders of the Series A Preferred stock
could have redeemed their shares for their liquidation value beginning on May
30, 2002. The Series A Preferred stock had limited voting rights, was senior to
the Series C Preferred stock and common stock.
F-17
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
10. Redeemable preferred stock (continued):
JDR issued 125,000 shares of Series B Preferred stock to repay $1.3 million of
borrowings under the JDR Bridge Loan (see Notes 6 and 9) and for cash proceeds
of $127,000. The Series B Preferred stock required a dividend (payable in kind)
of 6.0% per year. The holders of the Series B Preferred stock could have
converted their shares at any time into nonvoting common stock. In addition, the
holders of the Series B Preferred stock could have redeemed these shares for
their liquidation value beginning on May 30, 2002. The Series B Preferred stock
had limited voting rights, was senior to the Series C Preferred stock and common
stock.
11. Shareholders' equity:
Preferred Stock
At December 31, 1998, JDR had 237,000 shares designated as Series C Preferred
stock, of which 149,000 shares were issued and outstanding. The Series C
Preferred stock required a dividend (payable in kind) of 6.0% per year. JDR
could have redeemed the Series C Preferred, at any time, for its liquidation
value. The holders of the Series C Preferred stock could have converted their
shares at any time after May 30, 2000, or at the time any shares of Series A
Preferred stock or Series B Preferred stock were converted into common stock,
into nonvoting common stock. The Series C Preferred stock had a liquidation
value of $1.9 million, including dividends of $167,000, at December 31, 1998.
All of the Series C Preferred stock was converted into NCO common stock on March
31, 1999.
Common Stock
In December 1997, the Company effected a three-for-two stock split and increased
the authorized shares of common stock to 37,500,000. All per share and related
amounts have been adjusted to reflect the stock exchange and stock splits.
In July 1997, the Company completed a public offering, selling 2,166,000 shares
of common stock at a price to the public of $19.67 per share. The Company
received net proceeds, after underwriting discounts and expenses, of
approximately $40.4 million.
In June 1998, the Company completed a public offering, selling 4,469,000 shares
of common stock (469,000 of which were over-allotment shares exercised in July
1998) at a price to the public of $21.50 per share. The Company received net
proceeds, after underwriting discounts and expenses, of approximately $91.3
million.
Nonvoting Common Stock
At December 31, 1998, JDR had 4,897,000 shares of nonvoting common stock
authorized, of which 1,088,000 shares were issued and 1,044,000 shares were
outstanding. All of the nonvoting common stock was exchanged for NCO common
stock on March 31, 1999.
Common Stock Warrants
On May 30, 1997, JDR issued warrants to purchase 621,000 shares of nonvoting
common stock at a nominal value in connection with the sale of capital stock and
the JDR Credit Facility (see Note 8). All of the warrants were exercised and
exchanged for NCO common stock on March 31, 1999.
On May 21, 1999, NCO issued warrants to purchase 250,000 shares of NCO common
stock in connection with the acquisition of Co-Source. During 1999, warrants to
issue 228,000 shares of NCO common stock were exercised. The holders of the
warrants elected to use the option of forfeiting a portion of their warrants to
cover the exercise price. These exercises resulted in the net issuance of 67,000
shares of NCO common stock. Warrants to purchase 22,000 shares of NCO common
stock were still were outstanding as of December 31, 1999.
F-18
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
11. Shareholders' equity (continued):
Treasury Stock
JDR had 44,000 shares of nonvoting common stock and 312,000 shares of voting
common stock in Treasury at December 31, 1998. All of the treasury shares were
retired on March 31, 1999.
12. Earnings per share:
Basic earnings per share were computed by dividing the net income for the years
ended December 31, 1997, 1998, and 1999 by the weighted average number of shares
outstanding. Diluted earnings per share were computed by dividing the net
income, adjusted for the effects of interest expense attributable to convertible
debt, for the years ended December 31, 1997, 1998, and 1999, by the weighted
average number of shares outstanding, including common equivalent shares. All
outstanding options, warrants and convertible securities have been utilized in
calculating diluted net income per share only when their effect would be
dilutive.
The reconciliation of basic to diluted earnings per share ("EPS") consists of
the following (amounts in thousands, except EPS amounts):
<TABLE>
<CAPTION>
1997 1998 1999
-------------------- ------------------ --------------------
Shares EPS Shares EPS Shares EPS
--------- --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic 13,736 $ 0.22 18,324 $ 0.91 22,873 $ 1.27
Dilutive effect of warrants 459 (0.01) 725 (0.03) 206 (0.01)
Dilutive effect of options 491 (0.01) 615 (0.03) 712 (0.04)
Other 122 - 94 - 8 -
------ ------ ------ ------ ------ ------
Diluted 14,808 $ 0.20 19,758 $ 0.85 23,799 $ 1.22
====== ====== ====== ====== ====== ======
</TABLE>
13. Stock options:
In June 1995, the Company adopted the 1995 Stock Option Plan (the "1995 Plan").
In September 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan") and the 1996 Non-Employee Director Stock Option Plan (the "Director
Plan"). The 1995 Plan and 1996 Plan, as amended, authorized 333,000 and
2,717,000 shares, respectively, of incentive or non-qualified stock options. The
Director Plan, as amended, authorized 150,000 shares. The vesting periods for
the outstanding options under the 1995 Plan, the 1996 Plan, and the Director
Plan are three years, three years and one year, respectively. The maximum
exercise period is ten years after the date of grant.
F-19
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
13. Stock options (continued):
In June 1997, JDR established the JDR Holdings, Inc. 1997 Stock Option Plan (the
"JDR Plan") and reserved 69,000 shares of common stock. All options that were
issued and outstanding under the JDR Plan as of March 31, 1999 became fully
vested as a result of the acquisition of JDR by NCO. The options expire no later
than ten years from the date of grant.
On August 20, 1999, as part of the acquisition of Compass, NCO assumed the
Compass Employee Incentive Compensation Plan (the "Compass Plan"). The Compass
Plan authorized up to 475,000 shares of non-qualified stock options. The vesting
periods for the outstanding options under the Compass Plan are one to three
years. The maximum exercise period is ten years after the date of grant.
A summary of stock option activity of the 1995 Plan, the 1996 Plan, the Director
Plan, the JDR Plan and the Compass Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise Price
Options Per Share
------------- ---------------
<S> <C> <C>
Outstanding at January 1, 1997 658,000 $ 6.80
Granted 493,000 21.21
Exercised (50,000) 4.20
Forfeited (36,000) 10.72
----------- -------
Outstanding at December 31, 1997 1,065,000 13.95
Granted 776,000 27.32
Exercised (230,000) 5.98
Forfeited (32,000) 19.78
----------- -------
Outstanding at December 31, 1998 1,579,000 21.44
Granted 1,497,000 32.58
Exercised (441,000) 16.89
Forfeited (24,000) 26.76
----------- -------
Outstanding at December 31, 1999 2,611,000 $ 28.27
=========== =======
Stock options exercisable at December 31, 1999 695,000 $ 25.55
=========== =======
</TABLE>
F-20
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
13. Stock options (continued):
The following table summarizes information about fixed stock options
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
------------------------------------------------- -----------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Prices Shares Remaining Life Exercise Price Shares Exercise Price
--------------------- ------------ ----------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$ 1.82 to $19.42 311,000 7.08 years $ 13.55 246,000 $ 12.72
$21.00 to $24.75 497,000 8.33 years 22.51 194,000 23.14
$28.44 to $29.94 1,170,000 9.84 years 29.83 27,000 29.14
$30.75 to $37.00 449,000 9.11 years 33.70 89,000 33.70
$43.81 to $61.09 184,000 8.36 years 45.47 139,000 45.80
--------- ---------- ------- ------- -------
2,611,000 9.00 years $ 28.27 695,000 $ 25.55
========= ========== ======= ======= =======
</TABLE>
The Company applies APB Opinion 25 and related interpretations in accounting for
its stock option plans and, accordingly, does not recognize compensation cost
based on the fair value of the options granted at grant date. If the Company had
elected to recognize compensation cost based on the fair value of the options
granted at grant date, net income and earnings per share for 1997, 1998, and
1999 would have been reduced to the unaudited, pro forma amounts indicated in
the following table:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net income - as reported $ 4,591,000 $ 18,345,000 $ 29,366,000
Net income - pro forma $ 4,115,000 $ 17,264,000 $ 27,050,000
Net income per share:
Basic - as reported $ 0.22 $ 0.91 $ 1.27
Basic - pro forma $ 0.18 $ 0.85 $ 1.17
Diluted - as reported $ 0.20 $ 0.85 $ 1.22
Diluted - pro forma $ 0.17 $ 0.79 $ 1.12
</TABLE>
The estimated weighted average, grant-date fair values of the options granted
during the years ended December 31, 1997, 1998, and 1999 were $6.53, $9.86, and
$12.43, respectively. All options granted were at the market price of the stock
on the grant date. For valuation purposes, the Company utilized the
Black-Scholes option pricing model using the following assumptions on a weighted
average basis:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate 6.19% 4.98% 5.73%
Expected life in years 3.25 3.25 3.25
Volatility factor 40.42% 43.38% 44.04%
Dividend yield None None None
Forfeiture rate 5.00% 5.00% 5.00%
</TABLE>
F-21
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
13. Stock options (continued):
For valuation purposes, JDR utilized the Black-Scholes option pricing model
using the following assumptions on a weighted average basis for the options
granted under the JDR Plan: dividend yield of 0%, expected volatility of 0%,
risk-free interest rate of 6.6%, and an expected life of ten years.
At December 31, 1998, the Company had 36,000 options outstanding to purchase JDR
Nonvoting Common stock at $0.02 per share. On March 31, 1999, the 36,000
outstanding options to purchase JDR Nonvoting Common stock at $0.02 per share
were converted into 36,000 options to purchase NCO common stock at $0.02 per
share. During 1999, 22,000 of these options were exercised to purchase NCO
common stock. At December 31, 1999, the Company had 14,000 options outstanding
to purchase NCO common stock at $0.02 per share.
On July 1997, a consultant, who also served as a director of JDR, received
options to purchase 228,000 shares of JDR Nonvoting Common stock at $11.54 per
share. The original vesting schedule of these options was 58% on January 1, 1998
and 14% on January 1, 1999, 2000 and 2001. The Company recorded the $961,000
value as expense as the options vested. For the year ended December 31, 1998 and
the first quarter of 1999, the Company recorded $686,000 and $34,000,
respectively, as consulting expense for these options. The remaining value of
the options was recorded when the they became fully vested upon the completion
of the acquisition of JDR on March 31, 1999.
14. Derivative financial instruments:
The Company selectively uses derivative financial instruments to manage interest
costs and minimize currency exchange risk. The Company does not hold derivatives
for trading purposes. While these derivative financial instruments are subject
to fluctuations in value, these fluctuations are generally offset by the value
of the underlying exposures being hedged. The Company minimizes the risk of
credit loss by entering into these agreements with major financial institutions
that have high credit ratings.
Interest Rate Collar and Interest Rate Swap Agreements:
During 1998 and 1999, the Company entered into interest rate collar agreements
and an interest rate swap agreement to reduce the impact of changes in interest
rates on portions of the debt borrowed from its revolving credit facility.
As of December 31, 1999, the Company was party to three interest rate collar
agreements that consisted of a rate ceiling and floor that is based on different
notional amounts. The first interest rate collar agreement consisted of a
ceiling portion with a rate of 7.75%, covering a notional amount of $30.0
million, and a floor portion with a rate of 4.75%, covering a notional amount of
$15.0 million. This interest rate collar agreement expires in September of 2001.
The other two interest rate collar agreements consisted of a ceiling portion
with a rate of 7.50%, covering a total notional amount of $120.0 million, and a
floor portion with a rate of 5.50%, covering a total notional amount of $120.0
million. These interest rate collar agreements expire in October of 2001. The
notional amounts of these interest rate collar agreements are used to measure
the interest to be paid or received and do not represent the amount of exposure
due to credit loss. The net cash amounts paid or received on the interest rate
collar agreements are accrued and recognized as an adjustment to interest
expense.
The interest rate swap agreement, which expired in June 1999, exchanged the
floating rate on the Company's outstanding debt from its revolving credit
facility for a fixed interest rate of 5.12%. This agreement covered a notional
amount of approximately $136.0 million.
Foreign Exchange Contracts:
As part of the acquisition of FCA International Ltd. ("FCA"), the Company
obtained forward exchange contracts which where entered into by FCA. These
forward exchange contracts were used by the Company to minimize the impact of
currency fluctuations on transactions, cash flows and firm commitments. The
Company had approximately $3.4 million of contracts outstanding at December 31,
1998. These contracts were for the purchase of Canadian dollars and matured
within one to 30 months. In April 1999, the Company elected to finalize its
forward position under these contracts at a cost of approximately $148,000.
F-22
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
15. Fair value of financial instruments:
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
Cash and Cash Equivalents:
The carrying amount reported in the balance sheet approximates fair value
because of the short maturity of these instruments.
Debt:
The Company's non-seller-financed debt is primarily variable in nature and based
on the prime rate, and, accordingly, the carrying amount of debt instruments
approximates fair value. The stated interest rates of the Company's
non-convertible seller-financed notes approximate market rates for debt with
similar terms and maturities, and, accordingly, the carrying amounts
approximates fair value. The Company's seller-financed debt from the Goodyear
acquisition consisted of a note payable, which contained a conversion option,
which allowed the holder to convert the debt into 64,000 shares of common stock
at a price of $14.12 per share on February 15, 1999. Accordingly, the fair value
of the debt as of December 31, 1998 was calculated using the closing market
price of NCO's common stock on February 15, 1999.
Interest Rate Instruments:
While it is not the Company's intention to terminate any of the interest rate
instruments, the fair value of the instruments was estimated by obtaining quotes
from brokers that represented amounts the Company would have received or paid if
the agreements were terminated at December 31, 1998 and 1999. These fair values
indicated that the gains or losses that would have resulted from the termination
of the interest rate swap agreement and the interest rate collar agreement at
December 31, 1998 and 1999 would have not been material.
Foreign Exchange Contracts:
The fair value of foreign exchange contracts at December 31, 1998 was not
material.
F-23
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
15. Fair value of financial instruments (continued):
The estimated fair value of the Company's financial instruments are as follows
at December 31:
<TABLE>
<CAPTION>
1998 1999
-------------------------------- --------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 23,560,000 $ 23,560,000 $ 52,380,000 $ 52,380,000
Financial liabilities:
Non-seller financed debt 148,535,000 148,535,000 322,750,000 322,750,000
Subordinated seller notes
payable 500,000 500,000
880,000 880,000
Subordinated seller notes
payable, convertible 900,000 2,176,000 - -
Non-interest bearing note
payable 36,000 36,000 - -
</TABLE>
16. Supplemental cash flow information:
The following are supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
1997 1998 1999
-------------- --------------- ----------------
<S> <C> <C> <C>
Cash paid for interest $ 1,570,000 $ 2,905,000 $ 19,999,000
Cash paid for income taxes 4,181,000 5,726,000 7,923,000
Non-cash investing and financing
activities:
Fair value of assets acquired 12,320,000 47,872,000 28,368,000
Liabilities assumed from
acquisitions 7,019,000 46,730,000 53,713,000
Fair value of contributed capital - 3,834,000 -
Property acquired under
capital leases 967,000 138,000 -
Value of fixed assets traded for
new fixed assets 238,000 - -
Convertible note payable,
issued for acquisition 900,000 - -
Notes payable, issued for acquisitions 1,000,000 - -
Convertible note payable,
converted to common stock 1,000,000 - 900,000
Common stock issued for
acquisitions 9,310,000 - 101,526,000
Common stock options issued
for acquisitions - - 2,562,000
Redemption of redeemable
preferred stock for common stock - - 12,231,000
Warrant issued 5,450,000 - 1,925,000
Warrants exercised 149,000 247,000 6,332,000
</TABLE>
F-24
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
17. Employee benefit plans:
The Company has a savings plan under Section 401(k) of the Internal Revenue Code
(the "Plan"). The Plan allows all eligible employees to defer up to 15% of their
income on a pretax basis through contributions to the Plan. The Company will
provide a matching contribution of 25% of an employee's contribution, subject to
a maximum of 1.5% of an employee's base salary. The charges to operations for
the matching contributions were $220,000, $755,000 and $1,407,000, for 1997,
1998, and 1999, respectively.
18. Commitments and contingencies:
The Company is party, from time to time, to various legal proceedings incidental
to its business. In the opinion of management none of these items individually
or in the aggregate would have a significant effect on the financial position,
result of operations, cash flows, or liquidity of the Company.
19. Segment reporting:
The Company is organized into market specific operating divisions that are
responsible for all aspects of client sales, client service, and operational
delivery of services. The accounting policies of the segments are the same as
those described in Note 2, "Summary of significant accounting policies." Segment
data includes a charge allocating corporate overhead costs to each of the
operating segments based on revenue and employee headcount. During 1999, the
operating divisions, which were each headed by a divisional chief executive
officer, included Accounts Receivable Management Services, Healthcare Services,
Technology-Based Outsourcing, Commercial Services, Market Strategy and
International Operations.
The Accounts Receivable Management Services division provides accounts
receivable management services to consumer and commercial accounts for all
market segments, serving clients of all sizes in local, regional and national
markets.
The Healthcare Services division primarily focuses on providing comprehensive
outsourcing services for the hospital market. In addition, the Healthcare
Services division provides accounts receivable management programs for physician
groups and allied health service providers. During the first quarter of 2000,
the accounts receivable management services portion of the Healthcare Services
division was merged into the Accounts Receivable Management Services division,
and the pre-delinquency services portion of the Healthcare Services division was
merged into the Technology-Based Outsourcing division.
With the March 1999 acquisition of JDR, the Technology-Based Outsourcing
division was created. This division continues the growth of the client
relationship beyond bad debt recovery and delinquency management, delivering
cost-effective receivables and customer relationship management solutions to all
market segments, serving clients of all sizes in local, regional and national
markets.
With the May 1999 acquisition of Co-Source, the Commercial Services division was
created. The Commercial Services division focuses on providing accounts
receivable management and collection services to the commercial market. During
the first quarter of 2000, the Commercial Services division was merged into the
Accounts Receivable Management Services division.
The Market Strategy division provides full-service, custom market research
services to the telecommunications, financial services, utilities, healthcare,
pharmaceutical, and consumer products sectors. In addition, the Market Strategy
division provides telemarketing services for clients, including lead generation
and qualification, and the booking of appointments for a client's sales
representatives.
F-25
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
19. Segment reporting (continued):
With the May 1998 acquisition of FCA, the International Operations division was
created. The International Operations division provides accounts receivable
management services across Canada and the United Kingdom.
The following tables represent the revenue, payroll and related expenses,
selling, general and administrative expenses, and earnings before interest,
taxes, depreciation, and amortization ("EBITDA") for each segment for the years
ended December 31, 1997, 1998 and 1999. EBITDA is used by the Company's
management to measure the segments' operating performance and is not intended to
report the segments' operating results in conformity with generally accepted
accounting principles.
<TABLE>
<CAPTION>
For the year ended December 31, 1997
(Amounts in thousands)
------------------------------------------------------------------------
Payroll and Selling General
Related and Admin.
Revenue Expenses Expenses EBITDA
---------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
A/R Management $ 81,942 $ 40,550 $ 28,318 $ 13,074
Tech-Based Outsourcing 17,778 10,945 6,165 668
Market Strategy 8,353 5,454 1,889 1,010
--------- -------- -------- --------
Total $ 108,073 $ 56,949 $ 36,372 $ 14,752
========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1998
(Amounts in thousands)
------------------------------------------------------------------------
Payroll and Selling General
Related and Admin.
Revenue Expenses Expenses EBITDA
---------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
A/R Management $ 127,419 $ 63,023 $ 38,649 $ 25,747
Healthcare Services 20,442 9,930 5,978 4,534
Tech-Based Outsourcing 43,530 22,932 11,893 8,705
Market Strategy 20,005 12,527 5,210 2,268
International Operations 18,556 10,902 4,858 2,796
--------- --------- -------- --------
Total $ 229,952 $ 119,314 $ 66,588 $ 44,050
========= ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1999
(Amounts in thousands)
---------------------------------------------------------------------------
Selling Non-
Payroll and General and Recurring
Related Admin. Acquisition
Revenue Expenses Expenses Costs EBITDA
-------------- ------------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
A/R Management $ 175,225 $ 85,563 $ 50,401 $ - $ 39,261
Healthcare Services 136,375 72,037 39,410 - 24,928
Tech-Based Outsourcing 63,118 32,994 16,964 - 13,160
Commercial Services 54,553 29,673 12,705 - 12,175
Market Strategy 32,043 20,011 7,397 - 4,635
International Operations 31,040 17,599 8,631 - 4,810
Other - - - 4,601 (4,601)
---------- --------- --------- ------- --------
Total $ 492,354 $ 257,877 $ 135,508 $ 4,601 $ 94,368
========= ========= ========= ======= ========
</TABLE>
F-26
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
20. Recent accounting pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
subsequently amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
(collectively "SFAS No. 133"). SFAS No. 133 is effective for the fiscal years
beginning after June 15, 2000 and requires that an entity recognize all
derivative instruments as either assets or liabilities on its balance sheet at
their fair values. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction, and, if it is, the type
of hedge transaction. The Company will adopt SFAS No. 133 by the first quarter
of 2001. Due to the Company's limited use of derivative instruments, SFAS No.
133 is not expected to have a material impact on the consolidated results of
operations, financial condition, or cash flows of the Company.
F-27
<PAGE>
Consent of Independent Accountants
----------------------------------
We hereby consent to the incorporation by reference in the registration
statements of NCO Group, Inc. on Form S-8 (File No's. 333-42743, 333-62131,
333-73087, 333-83229 and 333-87493) and Form S-3 (File No. 333-86473) of our
report dated February 16, 2000, on our audits of the consolidated financial
statements and the financial statement schedule of NCO Group, Inc. as of
December 31, 1998 and 1999, and for each of the three years in the period ended
December 31, 1999, which report is included in this Annual Report on Form
10-K/A.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
April 11, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated January 29, 1999 on the financial statements of JDR Holdings, Inc.
and Subsidiaries for the period from May 29, 1997 to December 31, 1997 and for
the year ended December 31, 1998 included in this Form 10-K/A, into NCO Group,
Inc.'s previously filed Registration Statements on Form S-8 (File No.
333-42743), (File 333-62131), (File No. 333-73087), (File No. 333-83229) and
(File No. 333-87493) and on Form S-3 (File No. 333-86473).
/s/ Arthur Andersen LLP
-----------------------
Philadelphia, Pa.,
April 11, 2000
