UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(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, 2010
or
o | 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. 333-165975; 333-158745; 333-150885
NCO GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 02-0786880 |
(State or other jurisdiction of |
| (IRS Employer Identification No.) |
incorporation or organization) |
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507 Prudential Road, Horsham, Pennsylvania |
| 19044 |
(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code (215) 441-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
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 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. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
| Accelerated filer o |
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Non-accelerated filer x |
| Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the registrant’s voting stock held by non-affiliates is zero. The registrant is a privately held corporation.
The number of shares of each of the registrant’s classes of common stock outstanding as of March 31, 2011 was: 2,960,847 shares of Class A common stock, $0.01 par value, and 399,814 shares of Class L common stock, $0.01 par value.
As used in this Annual Report on Form 10-K, unless the context otherwise requires, “we,” “us,” “our,” “Company” or “NCO” refers to NCO Group, Inc. and its subsidiaries.
Forward-Looking Statements
Certain statements included in this Annual Report on Form 10-K, other than historical facts, are forward-looking statements (as such term is defined in the Securities Exchange Act of 1934, as amended, and the regulations thereunder), which are intended to be covered by the safe harbors created thereby. Forward-looking statements include, without limitation, statements as to:
· the Company’s expected future results of operations;
· economic conditions;
· the Company’s business and growth strategy;
· fluctuations in quarterly operating results;
· the integration of acquisitions;
· the final outcome of the Company’s litigation with its former landlord;
· statements as to liquidity and compliance with debt covenants;
· the effects of terrorist attacks, war and the economy on the Company’s business;
· expected increases in operating efficiencies;
· anticipated trends in the business process outsourcing industry;
· estimates of future cash flows and allowances for impairments of purchased accounts receivable;
· estimates of intangible asset impairments and amortization expense of customer relationships and other intangible assets;
· the effects of legal proceedings, regulatory investigations and tax examinations;
· the effects of changes in accounting guidance; and
· statements as to trends or the Company’s or management’s beliefs, expectations and opinions.
The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” “would,” “should,” “guidance,” “potential,” “continue,” “project,” “forecast,” “confident,” and similar expressions are typically used to identify forward-looking statements. These statements are based on assumptions and assessments made by the Company’s management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Forward-looking statements are not guarantees of the Company’s future performance and are subject to risks and uncertainties and may be affected by various factors that may cause actual results, developments and business decisions to differ materially from those in the forward-looking statements. Some of the factors that may cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements include:
· risks related to the instability in the financial markets;
· risks related to adverse capital and credit market conditions;
· the ability of governmental and regulatory bodies to stabilize the financial markets;
· risks related to the domestic and international economies;
· risks related to derivative transactions;
· risks related to the Company’s ability to grow internally;
· risks related to the Company’s ability to compete;
· risks related to the Company’s substantial indebtedness, its ability to service such debt and its ability to comply with debt covenants;
· risks related to the Company’s ability to meet liquidity needs;
· the risk that the Company will not be able to implement its growth strategy as and when planned;
· risks associated with growth and acquisitions;
· the risk that the Company will not be able to realize operating efficiencies in the integration of its acquisitions;
· fluctuations in quarterly operating results;
· risks related to the timing of contracts;
· risks related to purchased accounts receivable;
· risks related to possible impairment of goodwill and other intangible assets;
· the Company’s dependence on senior management;
· risks related to security and privacy breaches;
· risks related to union organizing efforts at the Company’s facilities;
· risks associated with technology;
· risks related to the final outcome of the Company’s litigation with its former landlord;
· risks related to litigation, regulatory investigations and tax examinations;
· risks related to past or possible future terrorist attacks;
· risks related to natural disasters or the threat or outbreak of war or hostilities;
· the risk that the Company will not be able to improve margins;
· risks related to the Company’s international operations;
· risks related to the availability of qualified employees, particularly in new or more cost-effective locations;
· risks related to currency fluctuations;
· risks related to reliance on independent telecommunications service providers;
· risks related to concentration of the Company’s clients in the financial services, telecommunications and healthcare sectors;
· risks related to the possible loss of key clients or loss of significant volumes from key clients; and
· risks related to changes in government regulations.
The Company can give no assurance that any of the events anticipated by the forward-looking statements will occur or, if any of them does, what impact they will have on our results of operations and financial condition. The Company disclaims any intent or obligation to publicly update or revise any forward-looking statements, regardless of whether new information becomes available, future developments occur or otherwise. For additional information concerning the risks that affect us, see “Part I. — Item 1A. Risk Factors” of this Report on Form 10-K.
General
NCO Group, Inc. is a holding company and conducts substantially all of its business operations through its subsidiaries. NCO is an international provider of business process outsourcing services, referred to as BPO, primarily focused on accounts receivable management, referred to as ARM, and customer relationship management, referred to as CRM. We provide a wide range of ARM services to our clients by utilizing an extensive technological infrastructure. Although traditional ARM services have focused on the recovery of delinquent accounts, we also engage in the recovery of current accounts receivable and early stage delinquencies (generally, accounts that are 180 days or less past due). Our CRM services allow our clients to strengthen their customer relationships by providing a high level of support to their customers and generate incremental sales by acquiring new customers. We support essential business functions across key portions of the customer lifecycle including acquisition, growth, care, resolution and retention. The primary market sectors we support in our BPO business are financial services, telecommunications, healthcare, retail and commercial, utilities, education, technology, transportation/logistics and government. Historically we have also purchased and collected past due consumer accounts receivable from consumer creditors. Beginning in 2009, we significantly reduced our purchases of accounts receivable and made a decision to minimize further investments in the future, as further discussed below (see “Business Strategy — Portfolio Management”). We operate our business in three segments: ARM, CRM and Portfolio Management.
Our extensive industry knowledge, technological expertise, management depth, international scale, broad service offerings and long-standing client relationships enable us to deliver customized solutions that help our clients reduce their operating costs, increase cash flow, and improve their customers’ experience. We provide our services through our customer-driven model that provides optimal performance, leading-edge technology, proven efficiency and quality, to a wide range of clients in North America and abroad. We currently have approximately 28,600 full and part-time employees (including approximately 1,700 non-employee personnel utilized through subcontractors) who provide our services through our network of over 100 offices in 11 countries, or through in-home “virtual” offices.
Our website is www.ncogroup.com. We make available on our website, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
In addition, we will provide to our investors, at no cost, paper or electronic copies of our reports and other filings (excluding exhibits) made with the SEC. Requests should be directed to:
NCO Group, Inc.
507 Prudential Road
Horsham, PA 19044
Attention: Investor Relations
The information on the website listed above, is not and should not be considered part of this Annual Report on Form 10-K and is not incorporated by reference in this document. This website is, and is only intended to be, an inactive textual reference.
Industry Background
Companies are outsourcing many essential, non-core business functions in order to focus on revenue-generating activities and core competencies, reduce costs and improve productivity and service levels. In particular, many large corporations are recognizing the advantages of outsourcing accounts receivable management and customer service and support. This trend is being driven by a number of industry-specific factors, including:
· an increase in the complexity of collection and other customer service processes, which requires sophisticated call management and database systems for efficient operations;
· the lack of expertise, resources and infrastructure necessary to provide optimal customer support due to the growing scope and complexity of such activities;
· significant economies of scale achievable by third parties with focused capabilities; and
· a trend in certain industries to outsource essential, non-core functions due to competitive pressures, regulatory considerations and/or required capital expenditures.
The BPO industry is highly fragmented in the U.S. The leading providers of BPO services are large multinational companies. We believe that many smaller competitors have insufficient capital to expand and invest in technology and are unable to meet the geographic coverage, and regulatory requirements and quality standards demanded by businesses seeking to outsource their essential, non-core business functions.
Business Strategy
Our primary business strategy is to strengthen our global position in the ARM and CRM markets, and to opportunistically expand our service offerings to other complementary BPO services. We believe we build quality partnerships and use our operational expertise to create value for our customers, employees and shareholders.
Expand our relationships with clients — An integral component of our growth strategy is focused on the expansion of existing client relationships. We plan to continue to grow these relationships and the resulting opportunities in both scale and depth. We believe these relationships will continue to transition from vendor relationships, focusing on the operational delivery of services, to strategic partnerships focused on long-term, goal-oriented delivery of services. A key focus of this strategy is leveraging existing client relationships in one market to cross-sell our services in other markets.
Enhance our operating margins — We intend to continue pursuing the following initiatives to increase profitability:
· standardization of systems and practices;
· consolidation of facilities;
· automation of clerical functions;
· utilization of near shore and offshore labor;
· use of statistical analysis to improve performance and reduce operating expenses;
· use of segmentation strategy to improve profitability; and
· leveraging our international size and presence.
Continuously improve business processes — We intend to continue developing and enhancing our technology and infrastructure with initiatives that improve the efficiency of our operations and enhance client service. Examples of our recent initiatives include:
· Decision support system: We developed and implemented an innovative, proprietary, web-based suite of call center management tools called InsiteSM, which provides decision support for call center performance optimization. Insite provides us with a consistent view of performance and opportunity across the enterprise to ensure that NCO provides top tier performance on behalf of its clients.
· Enhanced data management and analytics: We have both client-specific and pooled segmentation models to focus better our collections efforts. These models, coupled with iterative segment-based treatment testing, provide benefits by reducing operating expense and increasing collection revenues. Segmentation allows us to focus resources on accounts with the highest likelihood of recovery, and devote less costly resources to lower probability accounts. Additionally, we began applying the use of segmentation models to make more strategic portfolio purchase decisions.
· Online access for our clients’ customers: We implemented a self-service website to allow our clients’ customers to access their accounts with us. Our clients’ customers can use the website to update their account information, request statements and make payments. Additionally, we launched a separate consumer help website designed to allow our clients’ customers to easily communicate with us anytime, via email, telephone, or request one of our representatives to call them.
· Pattern recognition system: Our pattern recognition system is designed to determine the patterns and profiles that precede customer decisions such as purchase or defection. Leveraging predictive analytic technologies increases the ability to predict customers’ behaviors, thus improving the results of the outsourced solutions we provide to our clients, as well as improving our purchased portfolio analytics, while reducing our costs.
· Technology upgrades: We are continuously upgrading and fine-tuning our technology to meet current and future client needs, while maximizing our investment through aggressive re-use philosophy wherever possible.
· Enhanced data security: We continue to deploy both physical and system security enhancements to help ensure ongoing protection and privacy of NCO’s and clients’ data as well as network and systems hardening. We incorporate sophisticated password, access and authentication controls, and emphasize security awareness training programs.
Expand internationally — We believe that the BPO industry continues to gain widespread acceptance throughout Canada, Europe, the Asia-Pacific region and Latin America. Our international expansion strategy is designed to continue to capitalize on each of these markets in the near term, as well as continue to develop access to lower-cost foreign labor. We believe we are a leading provider of BPO services in Canada, Europe, Australia and Mexico. We expect to further penetrate all of these markets through increased sales of ARM and CRM services. Additionally, we expect to pursue direct investments, strategic alliances and partnerships as well as further explore acquisitions in these markets and other markets.
Portfolio Management — Historically, the Portfolio Management segment had participated in the purchased accounts receivable business on an opportunistic basis. Beginning in 2009, we significantly reduced our purchases of accounts receivable and made a decision to minimize further investments in the future. This decision resulted from declines in liquidation rates, competition for purchased accounts receivable and the continued uncertainty of collectibility. We do not expect the Portfolio Management segment to make any future purchases. However, certain international subsidiaries in our ARM segment may purchase small portfolios through forward flow commitments and may opportunistically purchase accounts receivable that allow us to leverage meaningful third-party servicing contracts. Our amended senior credit facility (see note 12 in our Notes to Consolidated Financial Statements) limits purchases in 2011 and beyond to $10 million per year.
Pursue strategic acquisition opportunities — We have developed a disciplined approach to acquisitions. We believe our approach enables us to efficiently integrate acquired businesses, personnel and facilities into our existing technology platform, personnel matrix and facilities. By leveraging our shared services and infrastructure, we facilitate the realization of cost synergies and growth of sales and earnings. We intend to evaluate and pursue strategic acquisitions on an opportunistic basis as they become available.
We acquired the following companies during the past two years:
Date |
| Acquired Company |
| Description |
September 2010 |
| Health Blueprints, Inc. |
| Healthcare Consulting |
August 2009 |
| TSYS Total Debt Management |
| Attorney network receivables management |
May 2009 |
| Complete Credit Management, Ltd. |
| Receivables management in the U.K. |
Our Services
We provide the following BPO services:
Accounts Receivable Management
We provide a wide range of ARM services to our clients by utilizing an extensive technological infrastructure. Although traditional ARM services have focused on the recovery of delinquent accounts (third-party), we also engage in the recovery of current accounts receivable and early stage delinquencies (generally, accounts that are 180 days or less past due) (first-party). We generate ARM revenue from the recovery of delinquent accounts receivable on a contingency fee basis and from contractual collection services and other related services.
ARM services typically include the following activities:
Engagement Planning. We customize solutions for our clients based on a number of factors, including account size and demographics, the client’s specific requirements and our management’s estimate of the collectibility of the account. We integrate our standard processes for accounts receivable management, developed from decades of accumulated experience, to create a customized recovery solution. In many instances, the approach will evolve and change as the relationship with the client develops, and both parties evaluate the most effective means of recovering accounts receivable. Our systematic approach to accounts receivable management removes most decision making from the recovery staff and is designed to ensure uniform, cost-effective performance.
Once the approach has been defined, we electronically or manually transfer pertinent client data into our information system. When the client’s records have been established in our system, we begin the recovery process.
Account Notification. We initiate the recovery process by forwarding a preliminary letter that is designed to seek payment of the amount due or open a dialogue with the client’s customers. This letter also serves as an official notification to each client’s customer of his or her rights as required by the Federal Fair Debt Collection Practices Act. We continue the recovery process with a series of mail and telephone notifications. Telephone representatives remind the client’s customer of their obligation, inform them that their account has been placed for collection with us and begin a dialogue to develop a payment program.
Skip Tracing. In cases where the client’s customer’s contact information is unknown, we systematically search the U.S. Post Office National Change of Address service, consumer databases, electronic telephone directories, credit agency reports, tax assessor and voter registration records, motor vehicle registrations, military records, and other sources. The geographic expansion of banks, credit card companies, national and regional telecommunications companies, and national and regional hospital chains, along with the mobility of consumers, has increased the demand for locating the client’s customers. Once we have located the client’s customer, the notification process can begin.
First Party/Early Stage Delinquency Calls. Although companies understand the importance of contacting customers early in the delinquency cycle, some do not possess the resources necessary to sustain consistent and cost-effective outbound telephone campaigns. We provide a customized, service approach to contact our clients’ customers and remind them of their obligation to pay their accounts.
We typically conduct reminder calls to recently past due customers and courtesy collection calls to more seriously delinquent customers. Our representatives leave courteous messages if telephone contact attempts are unsuccessful after the second day.
Third Party Collection Services. The most common challenges encountered by companies are how to prompt seriously delinquent customers to make payment before they are charged off as uncollectible or to collect the full balance after charge-off. Our third party collection services communicate a sense of urgency to seriously delinquent customers during these periods, reducing net charge-offs and the cost of collection.
Credit Reporting. Credit bureau reporting is used as a collection tool in accordance with NCO’s policy, applicable laws, and client guidelines. At a client’s request, we will electronically report delinquent accounts to one or more of the national credit bureaus where it will remain for a period of up to seven years. The possible denial of future credit often motivates the resolution of past due accounts.
Payment Processing. After we receive payment from the client’s customer, depending on the terms of our contract with the client, we can either remit the amount received minus our fee to the client or remit the entire amount received to the client and subsequently bill the client for our collection services.
Attorney Network Services. We coordinate and implement legal collection solutions undertaken on behalf of our clients through the management of nationwide legal resources specializing in collection litigation. Our collection support staff manages the attorney relationships and facilitates the transfer of necessary documentation.
Agency Management. We help our clients manage their accounts receivable management vendors. We establish consistent performance reporting and hold agencies to rigorous performance standards. We monitor and audit all of the agencies in our clients’ network for quality to ensure they are meeting all performance standards.
NCOePayments. We provide our clients’ customers with multiple secure payment options, accessible via the telephone and the Internet, 24 hours a day, 365 days a year. We also provide contact center solutions utilizing our extranet technology, allowing representatives to take payments directly from the customer.
Consumer Loan Servicing. We provide consumer loan servicing for a variety of consumer assets through an end-to-end servicing model, from asset generation to deficiency collections.
Transworld Systems. Our subsidiary, Transworld Systems Inc., provides first- and third-party early stage and past due account recovery services for small, medium and large businesses through a demand letter series, reminder calls, or a customized program to fit individual business needs.
University Accounting Services. Our subsidiary, University Accounting Service, LLC, provides student loan billing and related services for institutions of higher education.
Healthcare Services. We provide revenue cycle management and several specialty services for healthcare providers such as:
· Consulting and Management Services — includes assistance in designing and managing a broad spectrum of revenue cycle management and back office services targeted to our clients’ specific needs.
· Patient Access Services— includes scheduling, insurance verification, pre-registration, eligibility screening, financial counseling, etc.
· Health Information Management — includes clinical documentation integrity, coding, transcription, etc.
· Accounts Receivable Management — includes claims management and electronic billing, denial and remittance management, collection services, etc.
· Customer Care — includes patient satisfaction and physician satisfaction.
Customer Relationship Management
Our CRM services allow our clients to strengthen their customer relationships by providing a high level of support to their customers and generate incremental sales by acquiring new customers. We design and implement customized outsourced customer care solutions including the following:
Customer Care and Retention. Our representatives specialize in developing and maintaining the relationships that our clients value. Customer care programs vary depending upon each client’s specific goals, but often include services such as customer development and outbound and inbound calling campaigns. Our representatives handle customer care inquiries such as billing questions, product and service inquiries, and complaint resolution. We also place calls on behalf of clients in welcoming new customers, retaining current customers, delivering notifications and conducting market research or satisfaction surveys. Our programs include specialized training in order to ensure that each representative is a seamless extension of our clients’ businesses.
Customer Acquisition and Sales. We support inbound and outbound sales efforts by conducting customized programs designed to acquire new customers, renew current customers, and win back or win over targeted customers. We execute multiple phases of the sales order process, pre- and post-sale, from answering product related questions and making sales presentations to up selling, cross selling and order processing.
Product and Technical Support. In support of the increasing dependence of customers and businesses on technology, prompt and accurate responses to technology inquires, product-related support issues, and service related concerns has become a cornerstone to maintaining high customer satisfaction and achieving retention goals. Our product support services include help desk, troubleshooting, warranty, recall, and upgrade support. We strive for first call resolution and are committed to meeting client service level requirements. We believe that our highly trained customer contact staff is knowledgeable in all components of technical support and help desk related service requirements, and is adept at troubleshooting, evaluation and escalation procedures and resolving complaints quickly and effectively to increase our clients’ customer retention and loyalty.
Interactive Voice Response. We use interactive voice response (IVR) technology to cost-effectively facilitate customer care for our clients. Customers can efficiently obtain account balance information, transfer funds, place an order, check status of an order, pay a bill, or answer a survey. Incoming calls are routed to representatives through systematic call transfer protocols or as a result of a toll-free number being included on customer correspondence. The process is completely automated, and if the caller wants to speak to a representative they can choose to be connected to a live NCO customer service professional. This combination of live and recorded telephone interaction benefits the customer through efficient, 24-hour service, and decreased operating costs.
Email Management. An important component to attracting and retaining customers is easy accessibility. Our email management services allow our clients’ customers to communicate with them day or night, 24 hours a day, seven days a week. Our response generation and intelligent routing provide an efficient means to respond to customer needs while increasing our clients’ operational effectiveness and decreasing their costs.
Web Chat. We have the ability to communicate with clients’ customers through our live Web chat service. Faster than email, our Web chat solution allows customers to interact with agents in real time. We can leverage our Web chat technology to provide customer care, answer product questions, or offer technical support.
Text Messaging Services. Using text messaging, we can relay a wide variety of information, including information about new services, promotions, or important information like confirmation numbers.
In-Language Contact. Our global network of call centers support all major languages, including English, Spanish, French, Arabic, Korean, Hindi, Polish, Russian, Tagalog, and numerous Asian dialects. We have a wealth of experience supporting multilingual programs and can work with clients to meet any language requirement.
Order Processing. We support multiple phases of order processing, including answering product-related questions and making sale presentations, up selling and cross selling, order entry, and providing post-sale support.
Technology and Infrastructure
We have implemented a scalable technical infrastructure that can flexibly support growing client volume while delivering a high level of reliability and service. Our customer contact centers feature advanced technologies, including predictive dialers, automated call distribution systems, digital switching, Voice over Internet Protocol (“VoIP”) technologies, digital recording, workforce management systems and customized computer software, including the NCO ACCESS Interface Manager. This is a graphical user interface we developed for use in large-scale outsourcing engagements that enables better data integration, enhanced reporting, representative productivity, implementation speed, and security. As a result, we believe we are able to address outsourced business process activities more reliably and more efficiently than our competitors. Our IT staff is comprised of over 400 professionals. We provide our services through the operation of over 100 centers that are linked through an international wide area network.
We maintain disaster recovery contingency plans and have implemented procedures to protect against the loss of data resulting from power outages, fire and other casualties. We believe fast recovery and continuous operation are ensured with multiple redundancies, uninterruptible power supplies and contracted backup and recovery services. We have implemented security systems to protect the integrity and confidentiality of our computer systems and data, and we maintain comprehensive business interruption and critical systems insurance on our telecommunications and computer systems. Our systems also permit secure network access to enable clients to establish real time communications with us
and monitor operational activity. We employ a variety of industry leading measures including advanced firewalls, data encryption, role specific access permissions, and site security to ensure data remains safe and secure.
We continue to be an early adopter of the Credit Card Industry best practices and compliance for data protection. A Level I, audit/assessment is conducted annually by an outside third-party firm, resulting in the satisfactory compliance with the Payment Card Industry (“PCI”), VISA Cardholder Information Security Program (“CISP”), MasterCard Site Data Protection (“SDP”) Program and American Express Data Security System (“DSS”) requirements. VISA and MasterCard have validated NCO as a Level I provider, which is the most stringent level in the PCI schema.
In 2009, the FSA changed its requirements to establish a continuous monitoring program to ensure that controls are reviewed on a consistent basis and that documentation is up to date. To that end, the U.S. Department of Education required that its third party collections agencies comply with the Federal Information Security Management Act (FISMA) and to ensure that the system maintains its accreditation and “Authorization to Process” by the end of October 2009. On October 22, 2009, NCO received the formal “Security Authorization to Operate Decision” from the Department of Education. This process will continue on an annual basis.
Our ARM call centers utilize both virtual and onsite predictive dialers with a total of over 5,400 stations to address our low-balance, high-volume accounts, and our CRM centers utilize approximately 500 predictive dialer stations to conduct our clients’ outbound calling campaigns. These systems scan our databases, simultaneously initiate calls on all available telephone lines, and determine if a live connection is made. Upon determining that a live connection has been made, the computer immediately switches the call to an available representative and instantaneously displays the associated account record on the representative’s workstation. Calls that reach other signals, such as a busy signal, telephone company intercept or no answer, are tagged for statistical analysis and placed in priority recall queues or multiple-pass calling cycles. NCO systems also automate almost all record keeping and workflow activities including letter and report generation. We believe that our automated method of operations dramatically improves the productivity of our staff.
Quality Assurance and Client Service
We believe a reputation for quality service is critical to acquiring and retaining clients. Therefore, our representatives are supervised, by both NCO and our clients, for strict compliance with client specifications, our policies, and applicable laws and regulations. We regularly measure the quality of our services by capturing and reviewing such information as the amount of time spent talking with clients’ customers, level of customer complaints and operating performance. In order to provide ongoing improvement to our telephone representatives’ performance and to ensure compliance with our policies and standards, as well as federal, state and local guidelines, quality assurance personnel supervise each telephone representative on a frequent basis and provide ongoing training to the representative based on this review. Our information systems enable us to provide clients with reports on a real-time basis as to the status of their accounts and clients can choose to network with our computer system to access such information directly.
We maintain a client service department to promptly address client issues and questions and alert senior executives of potential problems that require their attention. In addition to addressing specific issues, a team of client service representatives contact clients on a regular basis in order to establish a close relationship, determine clients’ overall level of satisfaction, and identify practical methods of improving their satisfaction.
Additionally, we provide a consumer help website designed to allow our clients’ customers to communicate with us 24 hours a day, seven days a week, 365 days a year. Consumers can choose to contact us via email or telephone, or they can choose to have one of our representatives call them. We have a dedicated team of representatives to support this website.
Client Relationships
Our active client base currently includes over 14,000 companies in the financial services, telecommunications, healthcare, retail and commercial, education and government, utilities, technology and transportation/logistics sectors. Our 10 largest clients in 2010 accounted for approximately 36.8 percent of our consolidated revenue excluding reimbursable costs and fees. Our largest client during the year ended December 31, 2010, was in the telecommunications sector and represented 7.1 percent of our consolidated revenue, excluding reimbursable costs and fees, for the year ended December 31, 2010. In 2010, we derived 43.4 percent of our revenue from financial services (which includes the banking and insurance sectors), 17.4 percent from telecommunications companies, 9.8 percent from healthcare organizations, 9.0 percent from retail and commercial entities, 8.2 percent from education and government
organizations, 7.2 percent from utilities, 2.8 percent from transportation/logistics companies and 2.2 percent from technology companies, in each case excluding purchased accounts receivable.
Our ARM contracts generally define, among other things, fee arrangements, scope of services and termination provisions. Clients may usually terminate such contracts on 30 or 60 days notice. In the event of termination, however, clients typically do not withdraw accounts referred to us prior to the date of termination, thus providing us with an ongoing stream of revenue from such accounts, which diminishes over time. Under the terms of our contracts, clients are not required to place accounts with us but do so on a discretionary basis.
Our CRM contracts are generally for terms of up to three years. Contracts are typically terminable by either party upon 60 days notice; however, in some cases, particularly in our longer term inbound contracts which often require substantial capital expenditures on our part, a client may be required to pay us a termination fee in connection with an early termination of the contract.
In addition, certain inbound CRM contracts may contain minimum volume commitments requiring our clients to provide us with agreed-upon levels of calls during the terms of the contracts. Our fees for services rendered under these contracts are based on pre-determined contracted chargeable rates that may include a base rate per minute or per hour plus a higher rate or “bonus” rate if we meet pre-determined objective performance criteria, such as sales generated during a defined period, and may be reduced by any contractual monthly performance penalties to which the client may be entitled. Additionally, we may receive additional discretionary client determined bonuses based upon criteria established by our clients.
Some of our customer contracts provide for limited currency rate protection below certain pre-determined exchange rate levels and limited gain sharing above certain pre-determined exchange rate levels. Such contracts may mitigate certain currency risks, however, there can be no assurance that new contracts will be successfully negotiated with such provisions or that existing contract provisions will result in the reduction of currency risk for such contracts.
Personnel and Training
Our success in recruiting, hiring and training a large number of employees is critical to our ability to provide high quality BPO services to our clients. We seek to hire personnel with previous experience in the industry or with experience as telephone representatives. We generally offer internal promotion opportunities and competitive compensation and benefits.
All of our call center personnel receive comprehensive training that consists of three stages: introduction training, behavioral training and functional training. These programs are conducted through a combination of classroom and role-playing sessions. Prior to customer contact, new employees receive one week of training in our operating systems, procedures and telephone techniques and instruction in applicable federal and state regulatory requirements. Our personnel also receive a wide variety of continuing professional education and on-going refresher training, as well as additional product training on an as-needed basis.
As of December 31, 2010, we had a total of approximately 25,200 full-time employees and 1,700 part-time employees, of which approximately 20,500 were telephone representatives. In addition, as of December 31, 2010, we utilized approximately 1,100 telephone representatives and 600 sales professionals through subcontractors. We believe that our relations with our employees are good.
Typically, our employees are not represented by a labor union. However, from time to time, our facilities are targeted by union organizers. We are not aware of any current union organizing efforts at any of our facilities.
Sales and Marketing
Our sales force is organized to best match our sales professionals’ experience and expertise with the appropriate target market. Our core sales force, composed of approximately 50 sales professionals, is organized by industry and geographical location to ensure the highest level of focus and service to potential and existing business partners. This group is focused on forming and cultivating strategic, long-term partnerships with large, multinational firms in order to maximize outsourcing opportunities via our full suite of BPO services. Additionally, we have a sales force of approximately 600 people, working on a contract basis, focused on selling account recovery services for small, medium and large businesses.
Our in-house marketing department provides innovative customer contact solutions and sales support by performing
a wide range of personalized services such as customer database administration, advertising, marketing campaigns and direct mailings, collateral development, trade show and site visit management, market and competitive research, and more. These functions are all integrated with our client relationship management system to provide a seamless interface between our sales team and our marketing department. We also maintain a dedicated team of skilled writers who prepare detailed, professional responses to formal requests for proposals and requests for information.
Competition
The BPO industry is highly competitive. We compete with a large number of ARM providers, including large national corporations such as Alliance One, GC Services LP and iQor, Inc., as well as many regional and local firms. We also compete with large CRM providers such as Convergys Corporation, Sitel Worldwide Corporation, Sykes Enterprises, Inc., TeleTech Holdings, Inc., and West Corporation. Some of our competitors may offer more diversified services and/or operate in broader geographic areas than we do. In addition, many companies perform the BPO services offered by us in-house. Moreover, many larger clients retain multiple outsourcing providers, which exposes us to continuous competition in order to remain a preferred vendor. We believe that the primary competitive factors in obtaining and retaining clients are the ability to provide customized solutions to a client’s requirements, personalized quality service, sophisticated call and information systems, and a competitive price.
Regulation
We devote significant and continuous efforts, through training of personnel and monitoring of compliance, to ensure that we comply with all applicable foreign, federal and state regulatory requirements. We believe that we are in material compliance with all such regulatory requirements.
Accounts Receivable Management
The ARM industry in the United States is regulated both at the federal and state level. The Federal Fair Debt Collection Practices Act, referred to as the FDCPA, regulates any person who regularly collects or attempts to collect, directly or indirectly, consumer debts owed or asserted to be owed to another person. The FDCPA establishes specific guidelines and procedures that debt collectors must follow in communicating with consumer debtors, including the time, place and manner of such communications. Further, it prohibits harassment or abuse by debt collectors, including the threat of violence or criminal prosecution, obscene language or repeated telephone calls made with the intent to abuse or harass. The FDCPA also places restrictions on communications with individuals other than consumer debtors in connection with the collection of any consumer debt and sets forth specific procedures to be followed when communicating with such third parties for purposes of obtaining location information about the consumer. Additionally, the FDCPA contains various notice and disclosure requirements and prohibits unfair or misleading representations by debt collectors. We are also subject to the Fair Credit Reporting Act, which regulates the consumer credit reporting industry and which may impose liability on us to the extent that the adverse credit information reported on a consumer to a credit bureau is false or inaccurate. The Federal Trade Commission, referred to as the FTC, has the authority to investigate consumer complaints against debt collection companies and to recommend enforcement actions and seek monetary penalties.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) became law. The Dodd-Frank Act restructures the regulation and supervision of the financial services industry. Many of the provisions of the Dodd-Frank Act have extended implementation periods and delayed effective dates and will require extensive rulemaking by regulatory authorities. As a result, the ultimate impact of the Dodd-Frank Act on our business cannot be determined at this time.
The new Consumer Financial Protection Bureau (“CFPB”) was formed as part of the Dodd-Frank Act. The CFPB has authority to regulate and bring enforcement action against various types of financial service businesses including collection agencies. Despite the creation of this new agency, none of the enforcement authority was taken from the FTC, meaning that these two government agencies will have dual enforcement authority over the debt collection industry.
The ARM business is also subject to state regulation. Some states require that we be licensed as a debt collection company. We believe that we currently hold applicable state licenses from all states where required.
We provide services to healthcare clients that are considered “covered entities” under the Health Insurance Portability and Accountability Act of 1996, referred to as HIPAA. As covered entities, our clients must comply with the standards for privacy, transaction and code sets, and data security. Under HIPAA, we are considered a “business associate,” which requires that we protect the security and privacy of “protected health information” provided to us by
our clients for the collection of payments for healthcare services. We believe that we operate in compliance with all applicable standards under HIPAA in all material respects.
The collection of accounts receivable by collection agencies in Canada is regulated at the provincial and territorial level in substantially the same fashion as is accomplished by federal and state laws in the United States. The manner in which we conduct the business of collecting accounts is subject, in all provinces and territories, to established rules of common law or civil law and statute. Such laws establish rules and procedures governing the tracing, contacting and dealing with debtors in relation to the collection of outstanding accounts. These rules and procedures prohibit debt collectors from engaging in intimidating, misleading and fraudulent behavior when attempting to recover outstanding debts. In Canada, our collection operations are subject to licensing requirements and periodic audits by government agencies and other regulatory bodies. Generally, such licenses are subject to annual renewal. We believe that we hold all necessary licenses in those provinces and territories that require them.
In Australia, debt collection and debt purchasing activities are regulated by legislation and regulation at a state and federal level, with licenses required for corporations and individuals with varying effect at a state Level. The Trade Practices Act, The Privacy Act and the Anti Money Laundering legislation are the primary federal laws, and the Commercial Agents legislation is the state level legislation. NCO’s Australian operations are licensed across all required jurisdictions. We believe that we hold all necessary licenses in those jurisdictions that require them.
In addition, the ARM industry is regulated in the United Kingdom and Europe, including licensing requirements. We believe we hold all necessary licenses required in the United Kingdom and Europe. If we expand our international operations, we may become subject to additional government control and regulation in other countries, which may be more onerous than those in the United States.
Several of the industries served by us are also subject to varying degrees of government regulation. Although compliance with these regulations is generally the responsibility of our clients, we could be subject to various enforcement or private actions for our failure or the failure of our clients to comply with such regulations.
Customer Relationship Management
In the United States, there are two major federal laws that specifically address telemarketing, the Telephone Consumer Protection Act, referred to as TCPA, which authorized the Federal Communications Commission, referred to as the FCC, to regulate the telemarketing industry, and the Telemarketing and Consumer Fraud and Abuse Prevention Act, referred to as the Fraud Prevention Act, which authorized the FTC, to adopt the Telemarketing Sales Rule, referred to as the TSR, which includes restrictions on telemarketing activities. These laws have been amended several times since their inception. In addition, the states have various regulatory restrictions and requirements for telemarketing companies.
The TCPA places restrictions on unsolicited automated telephone calls to residential telephone subscribers by means of automatic telephone dialing systems, prerecorded or artificial voice messages and telephone fax machines. It provides requirements for caller identification and call abandonment. In addition, the regulations require CRM firms to develop and maintain an internal “Do Not Call” list, to comply with the rules regarding the national “Do-Not-Call” registry, as discussed below, and to train their CRM personnel to comply with these restrictions. We train our service representatives to comply with all of these regulations of the TCPA.
The FTC regulates both general sales practices and telemarketing specifically and has broad authority to prohibit a variety of advertising or marketing practices that may constitute “unfair or deceptive acts or practices.” The FTC administers the Fraud Prevention Act under which the FTC has issued the TSR prohibiting a variety of deceptive, unfair or abusive practices in direct telephone sales. Generally, these rules prohibit misrepresentations of the cost, quantity, terms, restrictions, performance or characteristics of products or services offered by telephone solicitation or of refund, cancellation or exchange policies. The rules also require that a telemarketer identify promptly and clearly the seller on whose behalf the CRM representative is calling, the purpose of the call, the nature of the goods or services offered and that no purchase or payment is necessary to win a prize. Service providers are required to maintain records on various aspects of their businesses. The TSR also established the national “Do Not Call” registry, where consumers could register once to stop all unwanted telemarketing calls. A consumer who receives a telemarketing call despite being on the registry can file a complaint with the FTC. In addition, the TSR restricts call abandonment (with certain safe harbors) and unauthorized billing, and it requires telemarketers to transmit their telephone numbers and, if possible, their names to consumers’ caller identification services.
Most states have also enacted consumer protection statutes prohibiting unfair or deceptive acts or practices as they relate to telemarketing sales. For example, telephone sales in certain states are not final until a written contract is delivered to and signed by the buyer, and such a contract often may be canceled within three business days. At least one state also prohibits parties conducting direct telephone sales from requesting credit card numbers in certain situations, and several other states require certain providers of such services to register annually, post bonds or submit sales scripts to the state’s attorney general. Some states have established their own statewide “Do Not Call” lists while other states have opted to use the FTC’s “Do Not Call” list as their official state list.
Additionally, some states have enacted laws and others are considering enacting laws targeted at direct telephone sales practices. Some examples include laws regulating electronic monitoring of telephone calls and laws prohibiting any interference by direct telephone sales with caller identification services.
In Canada, the Canadian Radio-Television and Telecommunications Commission, referred to as CRTC, enforces rules regarding unsolicited communications using automatic dialing and announcing devices, live voice and fax. Canada also instituted the Canadian National Do Not Call list, referred to as the NDNCL, under which a telemarketer shall not initiate a telemarketing communication on behalf of a client unless that client is a registered subscriber of the NDNCL and the applicable fees have been paid. We are registered as a telemarketer with the NDNCL. Additionally, we ensure that our clients have properly registered and paid for the NDNCL by requesting the client’s registration number.
Canada’s Personal Information Protection and Electronic Documents Act, referred to as the Federal Act requires all commercial enterprises to obtain consent for the collection, use, and disclosure of an individual’s personal information. The Federal Act permits any Province of Canada to enact substantially similar legislation governing the subject matter of the Federal Act, in which case the legislation of the Province will override the provisions of the Federal Act. Our Canadian operations are located primarily in the Provinces of Ontario, British Columbia and New Brunswick. British Columbia has enacted legislation, referred to as the B.C. Act, governing the subject matter of the Federal Act. The federal government of Canada has not yet declared the B.C. Act substantially similar to the Federal Act. Until such time as the federal government of Canada makes such declaration, both the B.C. Act and the Federal Act will apply concurrently to our operations in British Columbia. Though neither has yet enacted legislation that is substantially similar to the Federal Act, both Ontario and New Brunswick have indicated that they may enact legislation governing the subject matter of the Federal Act.
Canada’s Competition Act contains a number of provisions that regulate the conduct of telemarketers in Canada, in particular the manner in which outbound calls are to be conducted.
The industries we serve are also subject to government regulation, and, from time to time, bills are introduced in Congress, which, if enacted, could affect our operations. We, and our employees who sell insurance products, are required to be licensed by various state and Canadian provincial insurance commissions for the particular type of insurance product to be sold and are required to participate in regular continuing education programs.
We provide service to the telecommunications industry, which is subject to government regulation. For example, “slamming” is the illegal practice of changing a consumer’s telephone service without permission. The FCC has promulgated regulations regarding slamming rules that apply solely to the telecommunications carrier and not the telemarketer or the independent party verifying the service change. However, some state slamming rules may extend liability for violations to agents and other representatives of telecommunications carriers, such as telemarketers.
Our representatives undergo an extensive training program, part of which is aimed to ensure their compliance with all such laws and regulations affecting the telemarketing industry. We also program our call management system to avoid initiating telephone calls during restricted hours or to individuals maintained on our “Do Not Call” list.
Segment and Geographical Financial Information
See Note 20 in our Notes to Consolidated Financial Statements for the year ended December 31, 2010 for disclosure of financial information regarding our segments. The following table presents revenues and total assets, net of any intercompany balances, by geographic location (amounts in millions):
|
| For the Years Ended December 31, |
| |||||||
|
| 2010 |
| 2009 |
| 2008 |
| |||
Revenues: |
|
|
|
|
|
|
| |||
U.S. |
| $ | 1,481.2 |
| $ | 1,447.9 |
| $ | 1,381.8 |
|
Canada |
| 47.2 |
| 44.5 |
| 46.8 |
| |||
Australia |
| 27.3 |
| 23.1 |
| 19.2 |
| |||
Panama |
| 20.6 |
| 28.7 |
| 28.7 |
| |||
U.K. |
| 15.8 |
| 22.4 |
| 25.7 |
| |||
Mexico |
| 10.1 |
| 12.7 |
| 10.9 |
| |||
|
|
|
|
|
|
|
| |||
Total assets: |
|
|
|
|
|
|
| |||
U.S. |
| $ | 1,089.8 |
| $ | 1,284.7 |
| $ | 1,411.5 |
|
Canada |
| 40.8 |
| 29.2 |
| 121.4 |
| |||
Australia |
| 36.3 |
| 33.3 |
| 47.0 |
| |||
U.K. |
| 19.8 |
| 27.5 |
| 18.7 |
| |||
Philippines |
| 17.9 |
| 18.4 |
| 25.1 |
| |||
Panama |
| 12.3 |
| 46.9 |
| 55.9 |
| |||
Mexico |
| 10.9 |
| 11.5 |
| 5.9 |
| |||
Other |
| 9.9 |
| 8.5 |
| 16.1 |
| |||
You should carefully consider the following risk factors. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us.
Risks Related to the Current Environment and Recent Developments
Recent instability in the financial markets and global economy may affect our access to capital and the success of our collection efforts which could have a material adverse effect on our results of operations and revenue.
The stress experienced by global capital markets that began in the second half of 2007, and which substantially increased during the second half of 2008, continued into 2009 and 2010. Concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining real estate market in the U.S. have contributed to increased volatility and diminished expectations for the economy and the markets going forward. These factors, combined with low business and consumer confidence and high unemployment, created a challenging economic environment. This challenging economic environment has adversely affected the ability and willingness of consumers to pay their debts and resulted in a weaker collection environment in 2009 and 2010. The ability and willingness of consumers to pay their debts could continue to be adversely affected, which could have a material adverse effect on our results of operations, collections and revenue.
Further deterioration in economic conditions in the United States may also lead to higher rates of personal bankruptcy filings. Defaulted consumer loans that we service or purchase are generally unsecured, and we may be unable to collect these loans in the case of personal bankruptcy of a consumer. Increases in bankruptcy filings could have a material adverse effect on our results of operations, collections and revenue.
Continued or further credit market dislocations or sustained market downturns may also reduce the ability of lenders to originate new credit, limiting our ability to service defaulted consumer loans in the future. We were not in compliance with our leverage ratio and interest coverage ratio debt covenants at December 31, 2010, however we received a waiver from our lenders. The future impact on our operations and financial projections from the challenging economic and business environment may further impact our ability to meet our debt covenants in the future. Further, increased financial pressure on the distressed consumer may result in additional regulatory restrictions on our operations
and increased litigation filed against us. We are unable to predict the likely duration or severity of the current disruption in financial markets and adverse economic conditions and the effects they may have on our business, financial condition and results of operations.
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs and access capital.
The current status of global financial and credit markets exposes us to a variety of risks. The capital and credit markets have been experiencing volatility and disruption for a couple of years. Disruptions in the credit markets make it harder and more expensive to obtain funding. In some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for certain issuers.
We need liquidity to pay our operating expenses and debt service obligations. Without sufficient liquidity, we could be forced to limit our investment in growth opportunities or curtail operations. The principal sources of our liquidity are cash flows from operations, including collections on purchased accounts receivable, bank borrowings, and equity and debt offerings. As a result of the global financial crisis, there is a risk that one or more lenders in our senior credit facility syndicate could be unable to meet contractually obligated borrowing requests in the future. In the event current resources do not satisfy our needs, we may have to seek additional financing. The availability of additional financing will depend on a variety of factors such as market conditions and the general availability of credit. If current levels of market disruption and volatility continue or worsen, we may not be able to successfully obtain additional financing on favorable terms, or at all.
There can be no assurance that actions of the U.S. Government, Federal Reserve and other governmental and regulatory bodies for the purpose of stabilizing the financial markets will achieve the intended effect.
In response to the financial crisis affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, the Federal Government, Federal Reserve and other governmental and regulatory bodies have taken actions and may take further actions to address the financial crisis. There can be no assurance as to what impact such actions will have on the financial markets.
Derivative transactions may expose us to unexpected risk and potential losses.
From time to time, we may be party to certain derivative transactions, such as interest rate swap contracts and foreign exchange contracts, with financial institutions to hedge against certain financial risks. Changes in the fair value of these derivative financial instruments that are not cash flow hedges are reported in income, and accordingly could materially affect our reported income in any period. Moreover, in the light of current economic uncertainty and potential for financial institution failures, we may be exposed to the risk that our counterparty in a derivative transaction may be unable to perform its obligations as a result of being placed in receivership or otherwise. In the event that a counterparty to a material derivative transaction is unable to perform its obligations thereunder, we may experience material losses that could materially adversely affect our results of operations and financial condition.
Risks Related to our Business
Our business is dependent on our ability to grow internally.
Our business is dependent on our ability to grow internally, which is dependent upon:
· our ability to retain existing clients and expand our existing client relationships; and
· our ability to attract new clients.
Our ability to retain existing clients and expand those relationships is subject to a number of risks, including the risk that:
· we fail to maintain the quality of services we provide to our clients;
· we fail to maintain the level of attention expected by our clients;
· we fail to successfully leverage our existing client relationships to sell additional services; and
· we fail to provide competitively priced services.
Our ability to attract new clients is subject to a number of risks, including:
· the market acceptance of our service offerings;
· the quality and effectiveness of our sales force; and
· the competitive factors within the BPO industry.
If our efforts to retain and expand our client relationships and to attract new clients do not prove effective, it could have a materially adverse effect on our business, results of operations and financial condition.
We compete with a large number of providers in the ARM and CRM industries. This competition could have a materially adverse effect on our future financial results.
We compete with a large number of companies in the industries in which we provide services. In the ARM industry, we compete with other sizable corporations in the U.S. and abroad such as Alliance One, GC Services LP and iQor, Inc., as well as many regional and local firms. In the CRM industry, we compete with large customer care outsourcing providers such as Convergys Corporation, Sitel Worldwide Corporation, Sykes Enterprises, Inc., TeleTech Holdings, Inc., and West Corporation. We may lose business to competitors that offer more diversified services, have greater financial and other resources and/or operate in broader geographic areas than we do. We may also lose business to regional or local firms who are able to use their proximity to or contacts at local clients as a marketing advantage. In addition, many companies perform the BPO services offered by us in-house. Many larger clients retain multiple BPO providers, which exposes us to continuous competition in order to remain a preferred provider. Because of this competition, in the future we may have to reduce our fees to remain competitive and this competition could have a materially adverse effect on our future financial results.
Many of our clients are concentrated in the financial services, telecommunications, and healthcare sectors. If any of these sectors performs poorly or if there are any adverse trends in these sectors it could materially adversely affect us.
For the year ended December 31, 2010, we derived 43.4 percent of our revenue from clients in the financial services sector, 17.4 percent of our revenue from clients in the telecommunications industry, 9.8 percent of our revenue from clients in the healthcare sector, and 9.0 percent from clients in the retail and commercial sector, in each case excluding purchased accounts receivable. If any of these sectors performs poorly, clients in these sectors may do less business with us, or they may elect to perform the services provided by us in-house. If there are any trends in any of these sectors to reduce or eliminate the use of third-party BPO service providers, it could harm our business and results of operations.
We have international operations and utilize foreign sources of labor, and various factors relating to our international operations, including fluctuations in currency exchange rates, could adversely affect our results of operations.
Approximately 5.7% of our 2010 revenues were derived from clients in Canada, the United Kingdom and Australia. Political or economic instability in Canada, the United Kingdom or Australia could have an adverse impact on our results of operations due to diminished revenues in these countries. Our future revenue, costs of operations and profitability could also be affected by a number of other factors related to our international operations, including changes in economic conditions from country to country, changes in a country’s political condition, trade protection measures, licensing and other legal requirements, and local tax or foreign exchange issues. Unanticipated currency fluctuations in the Canadian Dollar, British Pound, Euro or the Australian Dollar could lead to lower reported consolidated results of operations due to the translation of these currencies into U.S. dollars when we consolidate our financial results.
We provide ARM and CRM services to our U.S. clients utilizing foreign sources of labor through call centers in Canada, India, the Philippines, Barbados, Antigua, Australia, Panama, Mexico and Guatemala. Any political or economic instability in these countries could result in our having to replace or reduce these labor sources, which may increase our labor costs and have an adverse impact on our results of operations. A decrease in the value of the U.S. dollar in relation to the currencies of the countries in which we operate could increase our cost of doing business in those countries. In addition, we expect to expand our operations into other countries and, accordingly, will face similar risks with respect to the costs of doing business in such countries including as a result of any decreases in the value of the U.S. dollar in relation to the currencies of such countries. There is no guarantee that we will be able to successfully hedge our foreign currency exposure in the future.
We seek growth opportunities for our business in parts of the world where we have had little or no prior experience. International expansion into new markets with different cultures and laws poses additional risks and costs, including the risk that we will not be able to obtain the required permits, comply with local laws and regulations, hire, train and maintain a workforce, and obtain and maintain physical facilities in a culture and under laws that we are not familiar with. In addition, we may have to customize certain of our collection techniques to work with a different consumer base in a different regulatory environment. Also, we may have to revise certain of our analytical portfolio techniques as we apply them in different countries.
We are dependent on our employees and a higher turnover rate would have a material adverse effect on us.
We are dependent on our ability to attract, hire and retain qualified employees. The BPO industry, by its nature, is labor intensive and experiences a high employee turnover rate. Many of our employees receive modest hourly wages and some of these employees are employed on a part-time basis. A higher turnover rate among our employees would increase our recruiting and training costs and could materially adversely impact the quality of services we provide to our clients. If we were unable to recruit and retain a sufficient number of employees, we would be forced to limit our growth or possibly curtail our operations. Growth in our business will require us to recruit and train qualified personnel at an accelerated rate from time to time. We cannot assure that we will be able to continue to hire, train and retain a sufficient number of qualified employees to meet the needs of our business or to support our growth. If we are unable to do so, our results of operations could be harmed. Any increase in hourly wages, costs of employee benefits or employment taxes could also have a materially adverse affect on our results of operations.
If the employees at any of our offices voted to join a labor union, it could increase our costs and possibly result in a loss of customers.
Although there have been efforts in the past, we are currently not aware of any union organizing efforts at any of our facilities. However, if our employees are successful in organizing a labor union at any of our locations, it could further increase labor costs, decrease operating efficiency and productivity in the future, result in office closures, and result in a loss of customers.
If we are not able to respond to technological changes in telecommunications and computer systems in a timely manner, we may not be able to remain competitive.
Our success depends in large part on our sophisticated telecommunications and computer systems. We use these systems to identify and contact large numbers of debtors and record the results of our collection efforts, as well as to provide customer service to our clients’ customers. If we are not able to respond to technological changes in telecommunications and computer systems in a timely manner, we may not be able to remain competitive. We have made a significant investment in technology to remain competitive and we anticipate that it will be necessary to continue to do so in the future. Telecommunications and computer technologies are changing rapidly and are characterized by short product life cycles, so we must anticipate technological developments. If we are not successful in anticipating, managing, or adopting technological changes on a timely basis or if we do not have the capital resources available to invest in new technologies, our business could be materially adversely affected.
We are highly dependent on our telecommunications and computer systems.
As noted above, our business is highly dependent on our telecommunications and computer systems. These systems could be interrupted by terrorist acts, natural disasters, power losses, computer viruses, or similar events. Our business is also materially dependent on services provided by various local and long distance telephone companies. If our equipment or systems cease to work or become unavailable, or if there is any significant interruption in telephone services, we may be prevented from providing services and collecting on accounts receivable portfolios we have purchased. Because we generally recognize revenue and generate operating cash flow primarily through ARM collections and providing CRM services, any failure or interruption of services and collections would mean that we would continue to incur payroll and other expenses without any corresponding income.
An increase in communication rates or a significant interruption in communication service could harm our business.
Our ability to offer services at competitive rates is highly dependent upon the cost of communication services provided by various local and long distance telephone companies. Any change in the telecommunications market that would affect our ability to obtain favorable rates on communication services could harm our business. Moreover, any significant interruption in communication service or developments that could limit the ability of telephone companies
to provide us with increased capacity in the future could harm existing operations and prospects for future growth.
We may seek to make strategic acquisitions of companies. Acquisitions involve additional risks that may adversely affect us.
From time to time, we may seek to make acquisitions of businesses that provide BPO services. We may be unable to make acquisitions if suitable businesses that provide BPO services are not available at favorable prices due to increased competition for these businesses.
We may have to borrow money, incur liabilities, or sell or issue stock to pay for future acquisitions and we may not be able to do so on terms favorable to us, or at all. Additional borrowings and liabilities may have a materially adverse effect on our liquidity and capital resources. If we issue stock for all or a portion of the purchase price for future acquisitions, our stockholders’ ownership interest may be diluted. Our common stock is not publicly traded and potential sellers may be unwilling to accept equity in a privately held company as payment for the sale of their business. If potential sellers are not willing to accept our common stock as payment for the sale of their business, we may be required to use more of our cash resources, if available, in order to continue our acquisition strategy.
Completing acquisitions involves a number of risks, including diverting management’s attention from our daily operations, other additional management, operational and financial resources, system conversions and the inability to maintain key pre-acquisition relationships with customers, suppliers and employees. We might not be able to successfully integrate future acquisitions into our business or operate the acquired businesses profitably, and we may be subject to unanticipated problems and liabilities of acquired companies.
Our success depends on our senior management team and if we are not able to retain them, it could have a materially adverse effect on us.
We are highly dependent upon the continued services and experience of our senior management team. We depend on the services of the members of our senior management team to, among other things, continue the development and implementation of our growth strategies, and maintain and develop our client relationships.
Goodwill and other intangible assets represented 61.4 percent of our total assets at December 31, 2010. If the goodwill or the other intangible assets, primarily our customer relationships and trade name, are deemed to be impaired, we may need to take a charge to earnings to write-down the goodwill or other intangibles to its fair value.
Our balance sheet includes goodwill, which represents the excess of the purchase price over the fair market value of the net assets of acquired businesses based on their respective fair values at the date of acquisition. Trade name represents the fair value of the NCO name and is an indefinite-lived intangible asset. Other intangibles are composed of customer relationships, which represent the information and regular contact we have with our clients and non-compete agreements.
Goodwill is tested at least annually for impairment. The test for impairment uses a fair value based approach, whereby if the implied fair value of a reporting unit’s goodwill is less than its carrying amount, goodwill would be considered impaired. The trade name intangible asset is also reviewed for impairment on an annual basis.
As a result of the annual impairment testing, we recorded goodwill impairment charges of $57.0 million in the CRM segment in 2010. In 2009, we recorded goodwill impairment charges of $24.7 million in the CRM segment, and in 2008 we recorded goodwill impairment charges of $275.5 million and trade name impairment charges of $14.0 million across all segments. If our goodwill or trade name are deemed to be further impaired, we will need to take an additional charge to earnings in the future to write-down the asset to its fair value.
We make significant assumptions to estimate the future revenue and cash flows used to determine the fair value of our reporting units. These assumptions include future growth rates, profitability, discount factors, market comparables, future tax rates, and other factors. Variations in any of these assumptions could result in materially different calculations of impairment amounts. If the expected revenue and cash flows are not realized, additional impairment losses may be recorded in the future.
Our other intangible assets, consisting of customer relationships and non-compete agreements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. For example, the loss of a larger client could require a review of the customer relationship for impairment. We made
significant assumptions to estimate the future cash flows used to determine the fair value of the customer relationship. If we lost a significant customer relationship, the future cash flows expected to be generated by the customer relationship would be less than the carrying amount, and an impairment loss may be recorded.
As of December 31, 2010, our balance sheet included goodwill, trade name and other intangibles that represented 38.8 percent, 6.7 percent and 15.8 percent of total assets, respectively, and 597.9 percent, 103.9 percent and 242.6 percent of stockholders’ equity, respectively.
Security and privacy breaches of the systems we use to protect personal data could adversely affect our business, results of operations and financial condition.
Our databases contain personal data of our clients’ customers, including credit card and healthcare information. Any security or privacy breach of these databases could expose us to liability, increase our expenses relating to the resolution of these breaches and deter our clients from selecting our services. Our data security procedures may not effectively counter evolving security risks, address the security and privacy concerns of existing or potential clients or be compliant with federal, state, and local laws and regulations in all respects. Any failures in our security and privacy measures could adversely affect our business, financial condition and results of operations.
If we fail to maintain an effective system of internal control over financial reporting and disclosure controls and procedures, we may be unable to accurately report our financial results and comply with the reporting requirements under the Securities Exchange Act of 1934. As a result, investors may lose confidence in our financial reporting and disclosure required under the Securities Exchange Act of 1934, which could adversely affect our business and could subject us to regulatory scrutiny.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, referred to as Section 404, we are required to include in our Annual Reports on Form 10-K, our management’s report on internal control over financial reporting. Currently, we are not required to include a report of our independent registered public accounting firm on our internal controls because we are a “non-accelerated filer” under SEC rules; therefore, you do not have the benefit of an independent review of our internal controls. While we have reported no “material weaknesses” in the Form 10-K for the fiscal year ended December 31, 2010, we cannot guarantee that we will not have any “material weaknesses” in the future. Compliance with the requirements of Section 404 is expensive and time-consuming. If in the future we fail to complete this evaluation in a timely manner, we could be subject to regulatory scrutiny and a loss of public confidence in our internal control over financial reporting. In addition, any failure to establish an effective system of disclosure controls and procedures could cause our current and potential investors and customers to lose confidence in our financial reporting and disclosure required under the Securities Exchange Act of 1934, which could adversely affect our business.
Terrorist attacks, war and threats of attacks and war may adversely impact our results of operations, revenue and profitability.
Terrorist attacks in the United States and abroad, as well as war and threats of war or actual conflicts involving the United States or other countries in which we operate, may adversely impact our operations, including affecting our ability to collect our clients’ accounts receivable. More generally, any of these events could cause consumer confidence and spending to decrease. They could also result in an adverse effect on the economies of the United States and other countries in which we operate. Any of these occurrences could have a material adverse effect on our results of operations, collections and revenue.
Risks Related to our ARM Business
We are subject to business-related risks specific to the ARM business. Some of those risks are:
Most of our ARM contracts do not require clients to place accounts with us, may be terminated on 30 or 60 days notice, and are on a contingent fee basis. We cannot guarantee that existing clients will continue to use our services at historical levels, if at all.
Under the terms of most of our ARM contracts, clients are not required to give accounts to us for collection and usually have the right to terminate our services on 30 or 60 days notice. Accordingly, we cannot guarantee that existing clients will continue to use our services at historical levels, if at all. In addition, most of these contracts provide that we are entitled to be paid only when we collect accounts. Therefore, for these contracts, we can only recognize revenues upon the collection of funds on behalf of clients.
If we fail to comply with government regulation of the collections industry, it could result in the suspension or termination of our ability to conduct business.
The collections industry is regulated under various U.S. federal and state, Canadian, United Kingdom and Australian laws and regulations. Many states, as well as Canada, the United Kingdom and Australia, require that we be licensed as a debt collection company. The Federal Trade Commission, referred to as the FTC, has the authority to investigate consumer complaints against debt collection companies and to recommend enforcement actions and seek monetary penalties. If we fail to comply with applicable laws and regulations, it could result in fines as well as the suspension or termination of our ability to conduct collections, which would materially adversely affect us. State regulatory authorities have similar powers. If such matters resulted in further investigations and subsequent enforcement actions, we could be subject to fines as well as the suspension or termination of our ability to conduct collections, which would materially adversely affect our financial position and results of operations. In addition, new federal, state or foreign laws or regulations, or changes in the ways these rules or laws are interpreted or enforced, could limit our activities in the future or significantly increase the cost of regulatory compliance. If we expand our international operations, we may become subject to additional government controls and regulations in other countries, which may be stricter or more burdensome than those government controls and regulations to which we are currently subject.
Several of the industries we serve are also subject to varying degrees of government regulation. Although our clients are generally responsible for complying with these regulations, we could be subject to various enforcement or private actions for our failure, or the failure of our clients, to comply with these regulations.
Recently enacted regulatory reform may have a material impact on our operations.
On July 21, 2010, the Dodd-Frank Act became law. The Dodd-Frank Act restructures the regulation and supervision of the financial services industry, including the formation of the new Consumer Financial Protection Bureau. Many of the provisions of the Dodd-Frank Act have extended implementation periods and delayed effective dates and will require extensive rulemaking by regulatory authorities. As a result, the ultimate impact of the Dodd-Frank Act on our business cannot be determined at this time. The Dodd-Frank Act may have a material impact on our operations, particularly through increased regulatory burden and compliance costs.
Risks Related to our CRM Business
We are subject to business-related risks specific to the CRM business. Some of those risks are:
The CRM division relies on a few key clients for a significant portion of its revenues. The loss of any of these clients or their failure to pay us could reduce revenues and adversely affect results of operations.
The CRM division is characterized by substantial revenues from a few key clients. While no individual CRM client represented more than 10 percent of our consolidated revenue, we are exposed to customer concentration within this division. Most of these clients are not contractually obligated to continue to use our services at historic levels or at all. If any of these clients were to significantly reduce the amount of service, for example due to business volume fluctuations, mergers and acquisitions and/or performance issues, fail to pay, or terminate the relationship altogether, our CRM business could be harmed.
Government regulation of the CRM industry and the industries we serve may increase our costs and restrict the operation and growth of our CRM business.
The CRM services industry is subject to an increasing amount of regulation in the United States and Canada. In the United States, the FCC places restrictions on unsolicited automated telephone calls to residential telephone subscribers by means of automatic telephone dialing systems, prerecorded or artificial voice messages and telephone fax machines, and requires CRM firms to develop a “do not call” list and to train their CRM personnel to comply with these restrictions. The FTC regulates both general sales practices and telemarketing specifically and has broad authority to prohibit a variety of advertising or marketing practices that may constitute “unfair or deceptive acts or practices.” Most of the statutes and regulations in the United States allow a private right of action for the recovery of damages or provide for enforcement by the FTC, state attorneys general or state agencies permitting the recovery of significant civil or criminal penalties, costs and attorneys’ fees in the event that regulations are violated. The Canadian Radio-Television and Telecommunications Commission enforces rules regarding unsolicited communications using automatic dialing and announcing devices, live voice and fax. We cannot assure you that we will be in compliance with all applicable
regulations at all times. We also cannot assure you that new laws, if enacted, will not adversely affect or limit our current or future operations.
Several of the industries we serve, particularly the insurance, financial services and telecommunications industries, are subject to government regulation. We could be subject to a variety of private actions or regulatory enforcement for our failure or the failure of our clients to comply with these regulations. Our results of operations could be adversely impacted if the effect of government regulation of the industries we serve is to reduce the demand for our CRM services or expose us to potential liability. We, and our employees who sell insurance products, are required to be licensed by various state insurance commissions for the particular type of insurance product sold and to participate in regular continuing education programs. Our participation in these insurance programs requires us to comply with certain state regulations, changes in which could materially increase our operating costs associated with complying with these regulations.
Risks Related to our Purchased Accounts Receivable Business
We are subject to business-related risks specific to the Purchased Accounts Receivable business. Some of those risks are:
Collections may not be sufficient to recover the cost of investments in purchased accounts receivable and support operations.
We purchase past due accounts receivable generated primarily by consumer credit transactions. These are obligations that the individual consumer has failed to pay when due. The accounts receivable are purchased from consumer creditors such as banks, finance companies, retail merchants, hospitals, utilities, and other consumer-oriented companies. Substantially all of the accounts receivable consist of account balances that the credit grantor has made numerous attempts to collect, has subsequently deemed uncollectible, and charged off. After purchase, collections on accounts receivable could be reduced by consumer bankruptcy filings. The accounts receivable are purchased at a significant discount, typically less than 10 percent of face value, and, although we estimate that the recoveries on the accounts receivable will be in excess of the amount paid for the accounts receivable, actual recoveries on the accounts receivable will vary and may be less than the amount expected, and may even be less than the purchase price paid for such accounts. In addition, the timing or amounts to be collected on those accounts receivable cannot be assured. If cash flows from operations are less than anticipated as a result of our inability to collect accounts receivable, we may have difficulty servicing our debt obligations and may not be able to purchase new accounts receivable, and our future growth and profitability will be materially adversely affected.
Additionally, if all or a large portion of the purchased accounts receivable were sold at a discount to the expected future cash flows, we may realize a loss on the sale.
We use estimates to report results. For the year ended December 31, 2010, we recorded an impairment charge of $14.3 million relating to our purchased receivables portfolio. If the amount and/or timing of collections on portfolios are materially different than expected, we may be required to record further impairment charges that could have a materially adverse effect on us.
Our revenue is recognized based on estimates of future collections on portfolios of accounts receivable purchased. Although these estimates are based on analytics, the actual amount collected on portfolios and the timing of those collections will differ from our estimates. If collections on portfolios are less than estimated, we may be required to record an allowance for impairment of our purchased receivables portfolio, which could materially adversely affect our earnings, financial condition and creditworthiness. For the year ended December 31, 2010, we recorded an impairment charge of $14.3 million relating to our purchased receivables portfolio. If we continue to experience adverse effects of the challenging economic and business environment, including changes in financial projections, we may have to recognize further impairment charges on our purchased receivables portfolio.
Risks Related to our Structure
We are controlled by an investor group led by One Equity Partners, a private equity firm, and its affiliates, whose interests may not be aligned with those of our noteholders.
Our equity investors control the election of our directors and thereby have the power to control our affairs and policies, including the appointment of management, the issuance of additional stock, stock repurchase programs and the declaration and payment of dividends. In addition, our equity investors must consent to the entering into of mergers,
sales of substantially all our assets and certain other transactions.
Circumstances may occur in which the interests of our equity investors could be in conflict with those of our noteholders. For example if we encounter financial difficulties or are unable to pay our debts as they mature, our equity investors might pursue strategies that favor equity investors over our debt investors. One Equity Partners may also have an interest in pursuing acquisitions, divestitures, financing or other transactions that, in their judgment, could enhance their equity investments, even though such transaction might involve risk to our noteholders. Additionally, One Equity Partners is not prohibited from making investments in any of our competitors.
Risks Related to our $165.0 million of Floating Rate Senior Notes due 2013 (“senior notes”), our $200.0 million of 11.875 percent Senior Subordinated Notes due 2014 (“senior subordinated notes”) (collectively, the “notes”) and our Other Indebtedness
Our substantial leverage and significant debt service obligations could adversely affect our financial condition and our ability to fulfill our obligations and operate our business.
We are highly leveraged and have significant debt service obligations. Our financial performance could be affected by our substantial leverage. At December 31, 2010, our total indebtedness was $889.4 million, and we had $85.0 million of borrowing capacity under the revolving portion of our senior credit facility. Subsequent to the amendment of our senior credit facility on March 25, 2011, we have maximum borrowing capacity under the revolving credit facility of $75.0 million through November 15, 2011 and $67.5 million thereafter until its maturity on December 31, 2012. We may also incur additional indebtedness in the future.
This high level of indebtedness could have important negative consequences to us and our noteholders, including:
· we may have difficulty satisfying our obligations with respect to our senior notes and our senior subordinated notes, collectively referred to as the notes;
· we may have difficulty obtaining financing in the future for working capital, capital expenditures, acquisitions or other purposes;
· we will need to use all, or a substantial portion, of our available cash flow to pay interest and principal on our debt, which will reduce the amount of money available to finance our operations and other business activities;
· some of our debt, including our borrowings under our senior credit facilities, has variable rates of interest, which exposes us to the risk of increased interest rates;
· our debt level increases our vulnerability to general economic downturns and adverse industry conditions;
· our debt level could limit our flexibility in planning for, or reacting to, changes in our business and in our industry in general;
· our substantial amount of debt and the amount we must pay to service our debt obligations could place us at a competitive disadvantage compared to our competitors that have less debt;
· our customers may react adversely to our significant debt level and seek or develop alternative suppliers;
· we may have insufficient funds, and our debt level may also restrict us from raising the funds necessary, to repurchase all of the notes tendered to us upon the occurrence of a change of control, which would constitute an event of default under the notes; and
· our failure to comply with the financial and other restrictive covenants in our debt instruments which, among other things, require us to maintain specified financial ratios and limit our ability to incur debt and sell assets, could result in an event of default that, if not cured or waived, could have a material adverse effect on our business or prospects.
Our high level of indebtedness requires that we use a substantial portion of our cash flow from operations to pay principal of, and interest on, our indebtedness, which will reduce the availability of cash to fund working capital requirements, capital expenditures or other general corporate or business activities, including future acquisitions.
In addition, a substantial portion of our indebtedness bears interest at variable rates, including indebtedness under our senior notes and our senior credit facility. If market interest rates increase, debt service on our variable-rate debt will rise, which would adversely affect our cash flow. We may employ hedging strategies to help reduce the impact of fluctuations in interest rates. The portion of our variable rate debt that is not hedged will be subject to changes in interest rates.
We may be unable to generate sufficient cash to service all of our indebtedness, including the notes, and meet our other ongoing liquidity needs and may be forced to take other actions to satisfy our obligations under our indebtedness, which may be unsuccessful.
Our ability to make scheduled payments or to refinance our debt obligations, including the notes, and to fund our planned capital expenditures and other ongoing liquidity needs, depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. Our business may not generate sufficient cash flow from operations or future borrowings may not be available to us under our senior credit facility or otherwise in an amount sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our debt on or before maturity. We may be unable to refinance any of our debt on commercially reasonable terms.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, seek additional capital or seek to restructure or refinance our indebtedness, including the notes. These alternative measures may be unsuccessful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. Our senior credit facility and the indentures governing the notes restrict our ability to use the proceeds from certain asset sales. We may be unable to consummate those asset sales to raise capital or sell assets at prices that we believe are fair and proceeds that we do receive may be inadequate to meet any debt service obligations then due.
Despite our current leverage, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks that we and our subsidiaries face.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the indentures do not fully prohibit us or our subsidiaries from doing so. The revolving credit portion of our senior credit facility provides commitments of up to $100.0 million, $85.0 million of which was available for future borrowings, subject to certain conditions, as of December 31, 2010. Subsequent to the amendment of our senior credit facility on March 25, 2011, we have maximum borrowing capacity under the revolving credit facility of $75.0 million through November 15, 2011 and $67.5 million thereafter until its maturity on December 31, 2012.) All of those borrowings are secured, and as a result, are effectively senior to the notes and the guarantees of the notes by our subsidiary guarantors. If we incur any additional indebtedness that ranks equally with the notes, the holders of that debt will be entitled to share ratably with the holders of the notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us. This may have the effect of reducing the amount of proceeds paid to our noteholders. If new debt is added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.
Our senior credit facility contains, and the indentures governing the notes contain, a number of restrictive covenants which will limit our ability to finance future operations or capital needs or engage in other business activities that may be in our interest.
Our senior credit facility and the indentures governing the notes impose, and the terms of any future indebtedness may impose, operating and other restrictions on us and our subsidiaries. Such restrictions affect or will affect, and in many respects limit or prohibit, among other things, our ability and the ability of our restricted subsidiaries to:
· incur additional indebtedness;
· create liens;
· pay dividends and make other distributions in respect of our capital stock;
· redeem our capital stock;
· purchase accounts receivable;
· make certain investments or certain other restricted payments;
· sell certain kinds of assets;
· enter into certain types of transactions with affiliates; and
· effect mergers or consolidations.
In addition, our senior credit facility includes other more restrictive covenants. Our senior credit facility also requires us to achieve certain financial and operating results and maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control.
The restrictions contained in our senior credit facility and the indentures could:
· limit our ability to plan for or react to market or economic conditions or meet capital needs or otherwise restrict our activities or business plans; and
· adversely affect our ability to finance our operations, acquisitions, investments or strategic alliances or other capital needs or to engage in other business activities that would be in our interest.
A breach of any of these covenants or our inability to comply with the required financial ratios could result in a default under our senior credit facility and/or the indentures. If an event of default occurs under our senior credit facility, which includes an event of default under the indentures governing the notes, the lenders could elect to:
· declare all borrowings outstanding, together with accrued and unpaid interest, to be immediately due and payable;
· require us to apply all of our available cash to repay the borrowings; or
· prevent us from making debt service payments on the notes;
any of which could result in an event of default under the notes. The lenders will also have the right in these circumstances to terminate any commitments they have to provide further financing.
If we were unable to repay or otherwise refinance these borrowings when due, our lenders could sell the collateral securing our senior credit facility, which constitutes substantially all of our and our domestic wholly-owned subsidiaries’ assets (other than certain assets relating to portfolio transactions). Although holders of the notes could accelerate the notes upon the acceleration of the obligations under our senior credit facility, we cannot assure you that sufficient assets will remain to repay the notes after we have paid all the borrowings under our senior credit facility and any other senior debt.
We are a holding company and we depend upon cash from our subsidiaries to service our debt. If we do not receive cash distributions, dividends or other payments from our subsidiaries, we may be unable to make payments on the notes.
We are a holding company and all of our operations are conducted through our subsidiaries. Accordingly, we are dependent upon the earnings and cash flows of, and cash distributions, dividends and other payments from, our subsidiaries to provide the funds necessary to meet our debt service obligations, including the required payments on the notes. If we do not receive such cash distributions, dividends or other payments from our subsidiaries, we may be unable to pay the principal or interest on the notes. In addition, certain of our subsidiaries who are guarantors of the notes are holding companies that will rely on subsidiaries of their own as a source of funds to meet any obligations that might arise under their guarantees.
Generally, the ability of a subsidiary to make cash available to its parent is affected by its own operating results and is subject to applicable laws and contractual restrictions contained in its debt instruments and other agreements. Although the indentures governing the notes will limit the extent to which our subsidiaries may restrict their ability to make dividend and other payments to us, these limitations will be subject to significant qualifications and exceptions. The indentures governing the notes also allow us to include the operating results of our subsidiaries in our consolidated Adjusted EBITDA, as defined in the indentures, for the purpose of determining whether we can incur additional indebtedness under the indentures, even though some of those subsidiaries are subject to contractual restrictions on making dividends or distributions of cash to us for the purposes of servicing such indebtedness. In addition, the indentures allow us to create limitations on distributions and dividends under the terms of our and any of our subsidiaries’ future credit facilities. Moreover, there may be restrictions on payments by our subsidiaries to us under applicable laws, including laws that require companies to maintain minimum amounts of capital and to make payments to stockholders only from profits. As a result, although our subsidiaries may have cash, we or our subsidiary guarantors may be unable to obtain that cash to satisfy our obligations under the notes or the guarantees, as applicable.
Each noteholder’s right to receive payments on the notes is effectively junior to those lenders who have a security interest in our assets.
Our obligations under the notes and our guarantors’ obligations under their guarantees of the notes are unsecured, but our obligations under our senior credit facility and each guarantor’s obligations under their respective guarantees of the senior credit facility are secured by a security interest in substantially all of our domestic tangible and intangible assets (other than certain assets relating to portfolio transactions) and the assets and a portion of the stock of certain of our non-U.S. subsidiaries. If we are declared bankrupt or insolvent, or if we default under our senior credit facility, the
lenders could declare all of the funds borrowed thereunder, together with accrued interest, immediately due and payable. If we were unable to repay such indebtedness, the lenders could foreclose on the pledged assets to the exclusion of holders of the notes, even if an event of default exists under the indentures governing the notes at such time. Furthermore, if the lenders foreclose and sell the pledged equity interests in any subsidiary guarantor under the notes, then that guarantor will be released from its guarantee of the notes automatically and immediately upon such sale. In any such event, because the notes are not secured by any of our assets or the equity interests in subsidiary guarantors, it is possible that there would be no assets remaining from which noteholders’ claims could be satisfied or, if any assets remained, they might be insufficient to satisfy noteholders’ claims fully.
As of December 31, 2010, the notes and the guarantees were subordinated or effectively subordinated to $517.2 million of indebtedness (representing borrowings under our senior credit facility which did not include availability of approximately $85.0 million under the revolving portion of our senior credit facility after giving effect to letters of credit outstanding as of December 31, 2010). The indentures will permit the incurrence of substantial additional indebtedness by us and our restricted subsidiaries in the future, including secured indebtedness.
Claims of noteholders will be structurally subordinate to claims of creditors of all of our non-U.S. subsidiaries and some of our U.S. subsidiaries because they have not guaranteed the notes.
The notes are not guaranteed by any of our non-U.S. subsidiaries, and certain other domestic subsidiaries. Accordingly, claims of holders of the notes will be structurally subordinate to the claims of creditors of these non-guarantor subsidiaries, including trade creditors. All obligations of our non-guarantor subsidiaries will have to be satisfied before any of the assets of such subsidiaries would be available for distribution, upon a liquidation or otherwise, to us or a guarantor of the notes.
As of December 31, 2010, our non-guarantor subsidiaries had total liabilities (excluding intercompany liabilities) of $74.8 million, representing 6.5 percent of our total consolidated liabilities. Our non-guarantor subsidiaries accounted for $312.3 million, or 19.5 percent of our consolidated revenue, and had $39.1 million of net loss, compared to our consolidated net loss of $155.0 million, for the year ended December 31, 2010. In addition, our non-guarantor subsidiaries accounted for $183.5 million, or 14.8 percent, of our consolidated assets at December 31, 2010.
Because a portion of our operations are conducted by subsidiaries that have not guaranteed the notes, our cash flow and our ability to service debt, including our and the guarantors’ ability to pay the interest on and principal of the notes when due, are dependent to a significant extent on interest payments, cash dividends and distributions and other transfers of cash from subsidiaries that have not guaranteed the notes. In addition, any payment of interest, dividends, distributions, loans or advances by subsidiaries that have not guaranteed the notes to us and the guarantors, as applicable, could be subject to taxation or other restrictions on dividends or repatriation of earnings under applicable local law, monetary transfer restrictions and foreign currency regulations in the jurisdiction in which these subsidiaries operate. Moreover, payments to us and the guarantors by subsidiaries that have not guaranteed the notes will be contingent upon these subsidiaries’ earnings.
Our subsidiaries that have not guaranteed the notes are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the notes, or to make any funds available therefore, whether by dividends, loans, distributions or other payments. Any right that we or the guarantors have to receive any assets of any subsidiaries that have not guaranteed the notes upon the liquidation or reorganization of those subsidiaries, and the consequent rights of holders of notes to realize proceeds from the sale of any of those subsidiaries’ assets, will be effectively subordinated to the claims of that subsidiary’s creditors, including trade creditors and holders of debt of that subsidiary.
We also have joint ventures and subsidiaries in which we own less than 100 percent of the equity so that, in addition to the structurally senior claims of creditors of those entities, the equity interests of our joint venture partners or other stockholders in any dividend or other distribution made by these entities would need to be satisfied on a proportionate basis with us. These joint ventures and less than wholly-owned subsidiaries may also be subject to restrictions on their ability to distribute cash to us in their financing or other agreements and, as a result, we may not be able to access their cash flow to service our debt obligations, including in respect of the notes.
Each noteholder’s right to receive payments on the notes is junior to all of our existing and future senior indebtedness and the guarantees of the notes is junior to all the guarantors’ existing and future senior indebtedness.
The notes are general unsecured obligations that are junior in right of payment to all our existing and future senior
indebtedness, including our senior credit facility. The guarantees are general unsecured obligations of the guarantors that are junior in right of payment to all of the applicable guarantor’s existing and future senior indebtedness, including our senior credit facility.
We and the guarantors may not pay principal, premium, if any, interest or other amounts on account of the notes or the guarantees in the event of a payment default or certain other defaults in respect of certain of our senior indebtedness, including debt under our senior credit facility, unless the senior indebtedness has been paid in full or the default has been cured or waived. In addition, in the event of certain other defaults with respect to the senior indebtedness, we or the guarantors may not be permitted to pay any amount on account of the notes or the guarantees for a designated period of time.
The subordination provisions in the notes and the guarantees provide that, in the event of a bankruptcy, liquidation or dissolution of us or any guarantor, our or the guarantor’s assets will not be available to pay obligations under the notes or the applicable guarantee until we or the guarantor has made all payments on its respective senior indebtedness. We and the guarantors may not have sufficient assets after all these payments have been made to make any payments on the notes or the applicable guarantee, including payments of principal or interest when due.
As of December 31, 2010, the notes and the guarantees were subordinated or effectively subordinated to $517.2 million of indebtedness (representing borrowings under our senior credit facility which did not include availability of approximately $85.0 million under the revolving portion of our senior credit facility after giving effect to letters of credit outstanding as of December 31, 2010). The indentures will permit the incurrence of substantial additional indebtedness, including senior debt, by us and our restricted subsidiaries in the future.
If we default on our obligations to pay our other indebtedness, we may be unable to make payments on the notes.
Any default under the agreements governing our indebtedness, including a default under our senior credit facility that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including our senior credit facility), we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the revolving portion of our senior credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to seek and obtain waivers from the required lenders under our senior credit facility to avoid being in default. If we breach our covenants under our senior credit facility and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our senior credit facility, the lenders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation.
Federal and state fraudulent transfer laws may permit a court to void the notes and the guarantees and if that occurs, noteholders may not receive any payments on the notes.
The issuance of the notes and the guarantees may be subject to review under federal bankruptcy law or relevant state fraudulent transfer and conveyance statutes. While the relevant laws may vary from state to state, under such laws, generally, the payment of consideration will be a fraudulent conveyance if (1) we paid the consideration with the intent of hindering, delaying or defrauding creditors or (2) we or any of the guarantors, as applicable, received less than reasonably equivalent value or fair consideration in return for issuing either the notes or a guarantee, and, in the case of (2) only, one of the following is also true:
· we or any of the guarantors was insolvent or rendered insolvent by reason of the incurrence of the indebtedness; or
· payment of the consideration left us or any of the guarantors with an unreasonably small amount of capital to carry on the business; or
· we or any of the guarantors intended to, or believed that it would, incur debts beyond its ability to pay as they mature.
If a court were to find that the issuance of the notes or a guarantee was a fraudulent conveyance, the court could void the payment obligations under the notes or such guarantee or further subordinate the notes or such guarantee to presently existing and future indebtedness of ours or such guarantor, or require the holders of the notes to repay any amounts received with respect to the notes or such guarantee. In the event of a finding that a fraudulent conveyance occurred, noteholders may not receive any repayment on the notes. Further, the voidance of the notes could result in an event of default with respect to our and our subsidiaries’ other debt that could result in the acceleration of such debt.
Generally, an entity would be considered insolvent if, at the time it incurred indebtedness:
· the sum of its debts, including contingent liabilities, was greater than the fair salable value of all its assets; or
· the present fair salable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts and liabilities, including contingent liabilities, as they become absolute and mature; or
· it could not pay its debts as they become due.
We cannot be certain as to the standards a court would use to determine whether or not we or the guarantors were solvent at the relevant time, or regardless of the standard that a court uses, that the issuance of the notes and the guarantees would not be further subordinated to our or any of our guarantors’ other debt.
If the guarantees were legally challenged, any guarantee could also be subject to the claim that, since the guarantee was incurred for our benefit, and only indirectly for the benefit of the applicable guarantor and none of the proceeds of the notes were paid to any guarantor, the obligations of the applicable guarantor were incurred for less than fair consideration. A court could thus void the obligations under the guarantees, subordinate them to the applicable guarantor’s other debt or take other action detrimental to the holders of the notes.
Noteholders’ ability to transfer the notes may be limited by the absence of an active trading market, and there is no assurance that any active trading market will develop for the notes.
The notes are securities for which there is no existing public market. Accordingly, the development or liquidity of any market for the notes is uncertain. We cannot assure noteholders as to the liquidity of markets that may develop for the notes, noteholders’ ability to sell the notes or the price at which noteholders would be able to sell the notes. We do not intend to apply for a listing of the notes on a securities exchange or on any automated dealer quotation system.
In connection with the private offering of the notes, the placement agents in such offering have advised us that they intend to make a market in the notes, as permitted by applicable laws and regulations. However, the placement agents are not obligated to make a market in the notes, and they may discontinue their market-making activities at any time without notice. Additionally, we are controlled by One Equity Partners, an affiliate of J.P. Morgan Securities Inc., one of the placement agents of the notes. As a result of this affiliate relationship, if J.P. Morgan Securities Inc. conducts any market making activities with respect to the notes, J.P. Morgan Securities Inc. will be required to deliver a market making prospectus when effecting offers and sales of the notes. For as long as a market making prospectus is required to be delivered, the ability of J.P. Morgan Securities Inc. to make a market in the notes may, in part, be dependent on our ability to maintain a current market making prospectus for its use. If we are unable to maintain a current market making prospectus, J.P. Morgan Securities Inc. may be required to discontinue its market making activities without notice. Therefore, we cannot assure you that an active market for the notes will develop or, if developed, that it will continue. Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the notes. The market, if any, for the notes may experience similar disruptions and any such disruptions may adversely affect the prices at which noteholders may sell the notes. In addition, the notes may trade at discounts from their initial offering prices, depending upon prevailing interest rates, the market for similar notes, our financial and operating performance and other factors.
Item 1B. Unresolved Staff Comments
Not Applicable
The following table summarizes the locations of our facilities by segment. Certain of our facilities are used for both ARM and CRM operations. Portfolio Management operates in one of the “ARM Only” U.S. facilities. We lease all but one of these facilities. The leases expire between 2011 and 2021, and most contain renewal options.
|
| ARM Only |
| CRM Only |
| ARM and CRM |
| Total |
|
U.S. |
| 61 |
| 4 |
| 4 |
| 69 |
|
Canada |
| 6 |
| 1 |
| 1 |
| 8 |
|
Australia |
| 5 |
| — |
| — |
| 5 |
|
Panama |
| — |
| 2 |
| 2 |
| 4 |
|
United Kingdom |
| 2 |
| — |
| — |
| 2 |
|
Philippines |
| — |
| 2 |
| 4 |
| 6 |
|
Barbados |
| — |
| — |
| 1 |
| 1 |
|
Antigua |
| — |
| — |
| 1 |
| 1 |
|
Puerto Rico |
| 1 |
| — |
| — |
| 1 |
|
Mexico |
| 5 |
| — |
| — |
| 5 |
|
Guatemala |
| — |
| 1 |
| — |
| 1 |
|
Total |
| 80 |
| 10 |
| 13 |
| 103 |
|
We believe that our facilities are adequate for our current operations, but additional facilities may be required to support growth. We believe that suitable additional or alternative space will be available as needed on commercially reasonable terms.
Fort Washington Flood:
In June 2001, the first floor of our Fort Washington, Pennsylvania, headquarters was severely damaged by a flood caused by remnants of Tropical Storm Allison. We subsequently decided to relocate our corporate headquarters to Horsham, Pennsylvania. We filed a lawsuit on August 14, 2001 in the Court of Common Pleas, Montgomery County, Pennsylvania (Civil Action No. 01-15576) against the current landlord and the former landlord of the Fort Washington facilities to terminate the leases and to obtain other relief. The landlord and former landlord filed counter-claims against us. We maintain a reserve that we believe is adequate to address our exposure to this matter and we plan to continue to contest this matter.
Attorneys General:
From time to time, we receive subpoenas or other similar information requests from various states’ Attorneys General, requesting information relating to NCO’s debt collection practices in such states. We respond to such inquires or investigations and provide certain information to the respective Attorneys General offices. We believe we are in compliance with the laws of the states in which we do business relating to debt collection practices in all material respects. However, no assurance can be given that any such inquiries or investigations will not result in a formal investigation or an enforcement action. Any such enforcement actions could result in fines as well as the suspension or termination of our ability to conduct business in such states.
Other:
We are involved in other legal proceedings, regulatory investigations, client audits and tax examinations from time to time in the ordinary course of business. Management believes that none of these other legal proceedings, regulatory investigations, client audits or tax examinations will have a materially adverse effect on our financial condition or results of operations.
Item 4. [Removed and Reserved]
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
There is no established public trading market for each of our Class A common stock and our Class L common stock, and all of our outstanding common equity is privately held. As of March 31, 2011, there were 57 holders of record of our Class A common stock (including holders of our restricted stock) and 24 holders of record of our Class L common stock.
Our ability to pay cash dividends on our capital stock is limited by the terms of our senior credit facility and the indentures governing the terms of our notes. There were no cash dividends declared or paid during 2009 and 2010. We do not anticipate paying a cash dividend on our capital stock in the near future. See Note 15 in our Notes to Consolidated Financial Statements included elsewhere in this Report on Form 10-K for disclosure of information regarding the payment of dividends.
See Part III, Item 12 of this Form 10-K for information regarding equity compensation plan information.
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA (1)
(Amounts in thousands)
|
| Successor(2) |
|
|
| Successor(2) |
| Predecessor(2) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| Period from |
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
| Combined |
| July 13, 2006 |
| Period from |
| ||||||||
|
|
|
|
|
|
|
|
|
| For the |
| (date of inception) |
| January 1 |
| ||||||||
|
|
|
|
|
|
|
|
|
| year ended |
| through |
| through |
| ||||||||
|
| For the years ended December 31, |
| December 31, |
| December 31, |
| November 15, |
| ||||||||||||||
|
| 2010(3) |
| 2009(4) |
| 2008(5) |
| 2007 |
| 2006(6)(7) |
| 2006(8) |
| 2006(9) |
| ||||||||
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Services |
| $ | 1,223,501 |
| $ | 1,400,610 |
| $ | 1,466,318 |
| $ | 1,102,343 |
| $ | 998,493 |
| $ | 130,877 |
| $ | 867,616 |
| |
Portfolio |
| 35,561 |
| 51,759 |
| 21,031 |
| 153,506 |
| 188,020 |
| 13,557 |
| 174,463 |
| ||||||||
Reimbursable costs and fees |
| 343,101 |
| 126,992 |
| 25,792 |
| 29,581 |
| 9,653 |
| 1,931 |
| 7,722 |
| ||||||||
Total revenues |
| 1,602,163 |
| 1,579,361 |
| 1,513,141 |
| 1,285,430 |
| 1,196,166 |
| 146,365 |
| 1,049,801 |
| ||||||||
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Payroll and related expenses |
| 702,032 |
| 781,888 |
| 845,481 |
| 679,951 |
| 633,048 |
| 79,165 |
| 553,883 |
| ||||||||
Selling, general and administrative expenses |
| 434,413 |
| 508,378 |
| 536,547 |
| 429,589 |
| 415,619 |
| 48,191 |
| 367,428 |
| ||||||||
Reimbursable costs and fees |
| 343,101 |
| 126,992 |
| 25,792 |
| 29,581 |
| 9,653 |
| 1,931 |
| 7,722 |
| ||||||||
Depreciation and amortization expense |
| 108,822 |
| 119,570 |
| 121,324 |
| 102,349 |
| 58,923 |
| 12,228 |
| 46,695 |
| ||||||||
Impairment of intangible assets |
| 57,015 |
| 30,032 |
| 289,492 |
| — |
| 69,898 |
| 69,898 |
| — |
| ||||||||
Restructuring charges |
| 18,272 |
| 10,868 |
| 11,600 |
| — |
| 12,765 |
| — |
| 12,765 |
| ||||||||
(Loss) income from operations |
| (61,492 | ) | 1,633 |
| (317,095 | ) | 43,960 |
| (3,740 | ) | (65,048 | ) | 61,308 |
| ||||||||
Other expense |
| 87,349 |
| 90,941 |
| 110,208 |
| 89,051 |
| 36,064 |
| 14,422 |
| 21,642 |
| ||||||||
(Loss) income before income taxes |
| (148,841 | ) | (89,308 | ) | (427,303 | ) | (45,091 | ) | (39,804 | ) | (79,470 | ) | 39,666 |
| ||||||||
Income tax expense (benefit) |
| 6,872 |
| (1,166 | ) | (71,947 | ) | (16,104 | ) | 11,220 |
| (3,522 | ) | 14,742 |
| ||||||||
Net (loss) income |
| (155,713 | ) | (88,142 | ) | (355,356 | ) | (28,987 | ) | (51,024 | ) | (75,948 | ) | 24,924 |
| ||||||||
Less: Net (loss) income attributable to noncontrolling interests |
| (713 | ) | (3,921 | ) | (18,250 | ) | 2,735 |
| 4,047 |
| 157 |
| 3,890 |
| ||||||||
Net (loss) income attributable to NCO Group, Inc. |
| $ | (155,000 | ) | $ | (84,221 | ) | $ | (337,106 | ) | $ | (31,722 | ) | $ | (55,071 | ) | $ | (76,105 | ) | $ | 21,034 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Statement of Cash Flows Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net cash provided by (used in) operating activities |
| $ | 43,124 |
| $ | 98,474 |
| $ | 93,733 |
| $ | 43,995 |
| $ | 104,715 |
| $ | (4,957 | ) | $ | 109,672 |
| |
Net cash provided by (used in) investing activities |
| 22,344 |
| 16,714 |
| (424,159 | ) | (32,719 | ) | (1,006,275 | ) | (990,329 | ) | (15,946 | ) | ||||||||
Net cash (used in) provided by financing activities |
| (71,389 | ) | (107,153 | ) | 332,204 |
| (2,869 | ) | 914,898 |
| 1,010,775 |
| (95,877 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
| Successor |
|
|
|
|
| ||||||||||||||||
|
| December 31, |
|
|
|
|
| ||||||||||||||||
|
| 2010 |
| 2009 |
| 2008 |
| 2007 |
| 2006 |
|
|
|
|
| ||||||||
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Cash and cash equivalents |
| $ | 33,077 |
| $ | 39,221 |
| $ | 29,880 |
| $ | 31,283 |
| $ | 20,703 |
|
|
|
|
|
| ||
Working capital |
| 87,844 |
| 86,708 |
| 151,547 |
| 162,471 |
| 200,398 |
|
|
|
|
|
| |||||||
Total assets |
| 1,237,713 |
| 1,460,035 |
| 1,701,639 |
| 1,677,999 |
| 1,692,673 |
|
|
|
|
|
| |||||||
Long-term debt, net of current portion |
| 867,229 |
| 909,831 |
| 1,048,517 |
| 903,052 |
| 892,271 |
|
|
|
|
|
| |||||||
Noncontrolling interests |
| 6,520 |
| 11,450 |
| 22,803 |
| 48,948 |
| 55,628 |
|
|
|
|
|
| |||||||
Stockholders’ equity |
| 86,926 |
| 240,550 |
| 283,789 |
| 408,045 |
| 420,434 |
|
|
|
|
|
| |||||||
(1) | This data should be read in conjunction with the consolidated financial statements, including the accompanying notes, included elsewhere in this Report on Form 10-K. |
(2) | On November 15, 2006, NCO Group, Inc. was acquired by and became a wholly owned subsidiary of Collect Holdings, Inc., an entity controlled by One Equity Partners and its affiliates, with participation by certain members of executive management and other co-investors, referred to as the Transaction. Subsequent to the Transaction, NCO Group, Inc. was merged with and into Collect Holdings, Inc. and the surviving corporation was renamed NCO Group, Inc. The selected financial data are presented for two periods, Predecessor and Successor which relate to the period of operations preceding the Transaction and the period of operations succeeding the Transaction, respectively. Collect Holdings was formed on July 13, 2006 (there were no operations from the date of inception until the Transaction on November 15, 2006). |
(3) | Includes $57.0 million of impairment charges to goodwill, and $18.3 million of restructuring charges. |
(4) | Includes $30.0 million of impairment charges to goodwill and customer relationships and $11.6 million of restructuring, integration and acquisition costs. |
(5) | The Company acquired Outsourcing Solutions, Inc. on February 29, 2008 (see note 4 in the Company’s Notes to Consolidated Financial Statements, included elsewhere in this Report on Form 10-K). Also includes $289.5 million of impairment charges to goodwill and trade name, and $15.2 million of merger, restructuring and integration costs. |
(6) | The combined results for the year ended December 31, 2006 represent the addition of the Predecessor period from January 1, 2006 through November 15, 2006 and the Successor period from July 13, 2006 through December 31, 2006. This combination does not comply with GAAP or with the rules of pro forma presentation, however we believe it provides investors the most meaningful comparison of our results. The combined operating results do not reflect the actual results we would have achieved if the Transaction did not occur and may not be predictive of future results of operations. |
(7) | Includes $33.9 million, net of taxes, of charges and costs related to the Transaction and restructuring and integration plans, and a $69.9 million SST goodwill impairment charge (see note 2 in the Company’s Notes to Consolidated Financial Statements, included elsewhere in this Report on Form 10-K). |
(8) | Includes $22.8 million, net of taxes, of charges and costs related to the Transaction, and a $69.9 million SST goodwill impairment charge (see note 2 in the Company’s Notes to Consolidated Financial Statements, included elsewhere in this Report on Form 10-K). |
(9) | Includes $11.1 million, net of taxes, of charges and costs related to the Transaction and restructuring and integration plans. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a holding company and conduct substantially all of our business operations through our subsidiaries. We are an international provider of business process outsourcing services, referred to as BPO, primarily focused on accounts receivable management, referred to as ARM, and customer relationship management, referred to as CRM, serving a wide range of clients in North America and abroad through our global network of over 100 offices.
Historically, our Portfolio Management business participated in the purchased accounts receivable business on an opportunistic basis. Beginning in 2009, we significantly reduced our purchases of accounts receivable. This decision resulted from declines in liquidation rates, competition for purchased accounts receivable and the continued uncertainty of collectibility.
We operate our business in three segments: ARM, CRM and Portfolio Management.
During 2010, we generated approximately 60 percent of our ARM revenue from the recovery of delinquent accounts receivable on a contingency fee basis. Our ARM contingency fees range from approximately five percent for the management of accounts placed early in the accounts receivable cycle to approximately 50 percent for accounts that have been serviced extensively by the client or by third-party providers. Our average fee for ARM contingency-based revenue across all industries was approximately 10 percent during 2010, 18 percent during 2009 and 17 percent during 2008. In addition, we generate revenue from certain contractual ARM services. Generally, revenue is earned and recognized upon collection of accounts receivable for contingency fee services and as work is performed for contractual services. We enter into contracts with most of our clients that define, among other things, fee arrangements, scope of services, and termination provisions. Clients typically have the right to terminate their contracts on 30 or 60 days’ notice. Approximately 40 percent of our ARM revenue is generated from contractual collection services, where fees are based on a monthly rate or a per service charge, and other ARM services.
During 2010, approximately 95 percent of our CRM revenue was generated from inbound services, which consist primarily of customer service and technical support programs, and to a lesser extent acquisition and retention services. Inbound services involve the processing of incoming calls, often placed by our clients’ customers using toll-free numbers, to a customer service representative for service, order fulfillment or information. During 2010, outbound services, which consist of customer acquisition and customer retention services, represented approximately five percent of our CRM revenue.
Our operating costs consist principally of payroll and related costs; selling, general and administrative costs; and depreciation and amortization. Payroll and related expenses consist of wages and salaries, commissions, bonuses, and benefits for all of our employees, including management and administrative personnel. Selling, general and administrative expenses include telephone, postage and mailing costs, outside collection attorneys and other third-party collection services providers, and other collection costs, as well as expenses that directly support operations, including facility costs, equipment maintenance, sales and marketing, data processing, professional fees, and other management costs. Our payroll and related expenses may increase or decrease due to changes in the value of the U.S. dollar against the Canadian dollar and the Philippine peso.
Due to the expected prolonged impact of the economic environment on the Company’s clients’ business in 2011 and beyond, in the fourth quarter of 2010 we reduced our budgeted volumes from certain of our clients in the CRM reporting unit. As a result, our 2010 annual impairment test for goodwill indicated that the carrying value of the CRM reporting unit exceeded its fair value and we recorded goodwill impairment charges of $57.0 million in the CRM segment in 2010. We recorded goodwill impairment charges of $24.7 million in the CRM segment in 2009, and in 2008 we recorded goodwill impairment charges of $275.5 million and trade name impairment charges of $14.0 million across all segments.
Additionally, revenue for 2010, 2009 and 2008 was reduced by impairment charges of $14.3 million, $21.5 million and $98.9 million, respectively, recorded to increase the valuation allowance against the carrying value of the portfolios of purchased accounts receivable.
During the fourth quarter of 2010, we identified $15.4 million of reimbursable costs and fees received from clients associated with certain contractual arrangements acquired in connection with the acquisition of TSYS Total Debt Management that were incorrectly recorded on a net basis, as an offset to selling, general and administrative expenses in the statement of operations for the year ended December 31, 2009. Revenue for the year ended December
31, 2009 should have included these reimbursable costs and fees, with an equal and offsetting amount charged to operating expenses, due to the fact that we acted as principal and assumed overall risk in the transactions under these contractual arrangements. Although we concluded that the impact was not material to the 2009 financial statements, revenue and operating expenses have been revised to reflect the $15.4 million reimbursable costs and fees in both revenue and operating expenses in the statement of operations for the year ended December 31, 2009.
The challenging economic environment in the U.S. has impacted our business over the course of 2009 and 2010. Factors such as reduced availability of credit for consumers, a depressed real estate market, high unemployment and other factors have had a negative impact on the ability and willingness of consumers to pay their debts and a negative impact on our clients’ businesses, which has adversely affected our results of operations, collections and revenue.
Further changes to the economic conditions in the U.S., either positive or negative, could have a significant impact on our business, including, but not limited to:
· further impairment charges to our goodwill, trade name and purchased accounts receivable;
· fluctuations in the volume of placements of accounts and the collectability of those accounts for our ARM contingency fee based services;
· volume fluctuations in our ARM fixed fee based services;
· volume fluctuations in our CRM services; and,
· variability in the collectibility of existing portfolios.
We have grown through both acquisitions as well as internal growth. The following table lists the companies we have acquired in the past three years (purchase price in millions):
Date |
| Acquired Company |
| Description |
| Purchase |
| |
September 2010 |
| Health Blueprints, Inc. |
| Healthcare Consulting |
| $ | 1.6 |
|
August 2009 |
| TSYS Total Debt Management (“TDM”) |
| Attorney network receivables management |
| $ | 4.5 |
|
May 2009 |
| Complete Credit Management, Ltd. |
| Receivables management in the U.K. |
| $ | 0.7 |
|
February 2008 |
| Outsourcing Solutions, Inc. (“OSI”) |
| Receivables management |
| $ | 334.0 |
|
January 2008 |
| Systems & Services Technologies, Inc. (“SST”) |
| Active account servicing |
| $ | 18.4 |
|
2008 |
| Various international companies |
| Receivables management |
| $ | 9.3 |
|
In October 2009, we sold our print and mail business for approximately $18.7 million in cash.
Prior to the acquisition of SST on January 2, 2008, SST was a wholly owned subsidiary of JPMorgan Chase & Co., referred to as JPM. JPM also wholly owns One Equity Partners, which has had a controlling interest in us since our “going-private” transaction on November 15, 2006, referred to as the Transaction. Transfers of net assets or exchanges of equity interests between entities under common control are accounted for similar to the pooling-of-interests method (“as-if pooling-of-interests”) in that the entity that receives the net assets or the equity interests initially recognizes the assets and liabilities transferred at their carrying amounts in the accounts of the transferring entity at the date of transfer. Because NCO and SST were under common control at the time of the SST acquisition, the transfer of assets and liabilities of SST were accounted for at historical cost in a manner similar to a pooling of interests. For financial accounting purposes, the acquisition was viewed as a change in reporting entity and, as a result, required restatement of our financial statements for all periods subsequent to November 15, 2006, the date of the Transaction and the date at which common control of NCO and SST by JPM commenced.
Critical Accounting Policies and Estimates
General
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. We believe the following accounting policies and estimates are the most critical and could have the most impact on our results of operations. For a discussion of these and other accounting policies, see note 2 in our Notes to Consolidated Financial Statements.
As a result of the Transaction, the majority of our assets and liabilities, including our portfolio of accounts
receivable, were adjusted to their fair value as of the date of the Transaction. We made significant assumptions in determining the fair value of intangible assets and other assets and liabilities in connection with purchase accounting. Additionally, a portion of the equity related to our management stockholders was recorded at the stockholder’s predecessor basis and a corresponding portion of the acquired assets was reduced accordingly.
Goodwill, Other Intangible Assets and Purchase Accounting
Assets acquired and liabilities assumed must be recorded at their fair value at the date of acquisition. Our balance sheet includes amounts designated as “Goodwill”, “Trade name” and “Customer relationships and other intangible assets.” Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired businesses. Trade name represents the fair value of the NCO name. Other intangible assets consist primarily of customer relationships, which represent the information and regular contact we have with our clients, and non-compete agreements.
As of December 31, 2010, our balance sheet included goodwill, trade name and other intangibles that represented 38.8 percent, 6.7 percent and 15.8 percent of total assets, respectively, and 597.9 percent, 103.9 percent and 242.6 percent of stockholders’ equity, respectively.
Goodwill and trade name are tested for impairment at least annually and as triggering events occur. The test for impairment is performed at the reporting unit level and involves a two-step approach, the first step identifies any potential impairment and the second step measures the amount of the impairment, if applicable. The first test for potential impairment compares the fair value of a reporting unit’s goodwill to its carrying amount. If the fair value is less than the carrying amount, the reporting unit’s goodwill would be considered impaired and we could be required to take a charge to earnings, which could be material.
Fair values are determined by using a combination of the market approach and income approach. Our fair value calculations are based on projected financial results that are prepared in connection with our annual budget and forecasting process. The fair value calculations are also based on other assumptions including long-term growth rates and weighted average cost of capital. For 2010, 2009 and 2008, the fair value calculations assumed long-term growth rates of 3 percent, 3 percent and 4 percent, respectively, and weighted average cost of capital ranging from approximately 14 percent to 18 percent, 13 percent to 14 percent, and 13 percent to 14 percent, respectively.
Due to the expected impact of the economic environment on our clients’ business in 2011 and beyond, in the fourth quarter of 2010 we reduced the budgeted volumes from certain of our clients in the CRM reporting unit. As a result, our 2010 annual impairment test for goodwill indicated that the carrying value of our CRM reporting unit exceeded its fair value. Due to similar circumstances, our 2009 annual impairment test for goodwill indicated that the carrying value of our CRM reporting unit exceeded its fair value. Late in 2008, our ARM and Portfolio Management reporting units experienced a significant reduction in the collectability of both customer-placed and purchased accounts receivable resulting from deteriorating economic conditions. Due to the expected impact of the economic environment, we reduced our 2009 budgeted expectations for each of our reporting units. As a result, our 2008 annual impairment test for goodwill and trade name indicated that the carrying values of all of our reporting units exceeded their fair values.
As a result of the annual impairment testing, we recorded goodwill impairment charges of $57.0 million and $24.7 million in the CRM reporting unit in 2010 and 2009, respectively. We were not required to record any trade name impairment charges in 2010 or 2009. We recorded total goodwill impairment charges of $275.5 million and total trade name impairment charges of $14.0 million across all reporting units in 2008.
We make significant assumptions to estimate the future revenue and cash flows used to determine the fair value of our reporting units. These assumptions include future growth rates, profitability, discount factors, market comparables, future tax rates, and other factors. Variations in any of these assumptions could result in materially different calculations of impairment amounts. If the expected revenue and cash flows are not realized, additional impairment losses may be recorded in the future.
We periodically evaluate the net realizable value of identifiable definite-lived intangible assets for impairment, based on the estimated undiscounted future cash flows, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
During 2009, we began to reduce our purchases of portfolios of accounts receivable and made a decision to minimize further investments in purchased accounts receivable in the future. This decision resulted primarily from the continuation of the difficult collection environment, the competitive market for portfolio investments, as well as
potential regulatory changes affecting the purchased accounts receivable business. As a result of this decision, in 2009 we recorded an impairment charge of $5.3 million for the Portfolio Management reporting unit’s customer relationship intangible assets.
Revenue Recognition for Purchased Accounts Receivable
In the ordinary course of accounting for purchased accounts receivable, estimates have been made by management as to the amount of future cash flows expected from each portfolio. We have historical collection records for all of our purchased accounts receivable which provide us a reasonable basis for our judgment that it is probable that we will ultimately collect the recorded amount of our purchased accounts receivable plus a premium or yield. The historical collection amounts also provide a reasonable basis for determining the timing of the collections. We use all available information to forecast the cash flows of our purchased accounts receivable including, but not limited to, historical collections, payment patterns on similar purchases, credit scores of the underlying debtors, seller’s credit policies, and location of the debtor. The estimated future cash flow of each portfolio is used to compute the internal rate of return, referred to as the IRR, for each portfolio. The IRR is used to allocate collections between revenue and amortization of the carrying values of the purchased accounts receivable.
If the original collection estimates are lowered, an allowance is established in the amount required to maintain the original IRR. If collection estimates are raised, increases are first used to recover any previously recorded allowances and then recognized prospectively through an increase in the IRR over a portfolio’s remaining life. Any increase in the IRR must be used for subsequent revenue recognition and allowance testing.
If management came to a different conclusion as to the future estimated collections, it could have had a significant impact on the amount of revenue that was recorded from the purchased accounts receivable. A five percent increase in the amount of future expected collections would have resulted in additional net income of $1.7 million for the year ended December 31, 2010, largely as a result of lower allowances since increases in future expected collections are recognized to the extent sufficient to recover any allowances or to increase the expected IRR. A five percent decrease in the amount of future expected collections would have resulted in additional net loss of $1.7 million for the year ended December 31, 2010, largely as a result of higher allowances.
Income Taxes
Deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance, if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Deferred taxes have not been provided on the cumulative undistributed earnings of foreign subsidiaries because such amounts are expected to be reinvested indefinitely.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible or the net operating losses can be utilized. As a result of incurring cumulative losses over the past several years, we have provided for a full valuation allowance of $86.5 million on the total federal and certain state and foreign net deferred tax assets as of December 31, 2010. In addition, a valuation allowance of $24.2 million has been provided on a portion of deferred tax assets relating to certain foreign and state net operating losses and state tax credit carryforwards based on management’s assessment that it is more likely than not that such amounts will not be realized. This represents a total increase in the valuation allowance of $42.3 million over the prior year, due primarily to an increase in federal and certain state net deferred tax assets and additional state and foreign net operating losses in 2010. The utilization of net operating loss carryforwards and tax credits is an estimate based on a number of factors beyond our control, including the level of taxable income available from successful operations in the future.
Our annual provision for income taxes and the determination of the resulting deferred tax assets and liabilities involve a significant amount of judgment and are based on the latest information available at the time. We are subject to audit within the federal, state and international taxing jurisdictions, and these audits can involve complex issues that may require an extended period of time to resolve. We maintain reserves for estimated tax exposures, which are ultimately settled primarily through the settlement of audits within these tax jurisdictions, changes in applicable tax law, or other factors. We believe that an appropriate liability has been established for financial statement purposes; however, actual results may differ from these estimates.
As of December 31, 2010 and 2009, we had $11.1 million and $12.7 million, respectively, in reserves for uncertain
tax positions, including penalties, that, if recognized, would affect the effective tax rate. We recognize interest related to uncertain tax positions in interest expense. As of December 31, 2010 and 2009, we had approximately $4.0 million and $4.5 million, respectively, of accrued interest related to uncertain tax positions. We recognize penalties related to uncertain tax positions in the provision for income taxes. As of December 31, 2010 and 2009, we had accrued penalties related to uncertain tax positions of $1.1 million and $1.0 million, respectively.
We are subject to federal, state and foreign income tax audits from time to time that could result in proposed assessments. We cannot predict with certainty how these audits will be resolved and whether we will be required to make additional tax payments, which may or may not include penalties and interest. As of December 31, 2010, we are no longer subject to federal income tax examinations for years prior to 2006. For most states and foreign countries where we conduct business, we are subject to examination for the preceding three to six years. In certain states and foreign countries, the period could be longer.
Allowance for Doubtful Accounts
Allowances for doubtful accounts are determined based on estimates of losses related to customer receivable balances. In establishing the appropriate provision for customer receivables balances, we make assumptions with respect to their future collectibility. Our assumptions are based on an individual assessment of a customer’s credit quality as well as subjective factors and trends, including the aging of receivable balances. Generally, these individual credit assessments occur at regular reviews during the life of the exposure and consider factors such as a customer’s ability to meet and sustain their financial commitments, a customer’s current financial condition and historical payment patterns. Our level of reserves for our customer accounts receivable fluctuates depending upon all of the factors mentioned above, in addition to any contractual rights that allow us to reduce outstanding receivable balances through the application of future collections. If our estimate is not sufficient to cover actual losses, we would be required to take additional charges to our earnings.
Results of Operations
The following table sets forth selected historical statement of operations data (amounts in thousands):
|
| For the Years Ended December 31, |
| |||||||||||||
|
| 2010 |
| 2009 |
| 2008 |
| |||||||||
|
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Services |
| $ | 1,223,501 |
| 76.4 | % | $ | 1,400,610 |
| 88.7 | % | $ | 1,466,318 |
| 96.9 | % |
Portfolio |
| 35,561 |
| 2.2 |
| 51,759 |
| 3.3 |
| 21,031 |
| 1.4 |
| |||
Reimbursable costs and fees |
| 343,101 |
| 21.4 |
| 126,992 |
| 8.0 |
| 25,792 |
| 1.7 |
| |||
Total revenues |
| 1,602,163 |
| 100.0 |
| 1,579,361 |
| 100.0 |
| 1,513,141 |
| 100.0 |
| |||
Payroll and related expenses |
| 702,032 |
| 43.8 |
| 781,888 |
| 49.5 |
| 845,481 |
| 55.9 |
| |||
Selling, general and admin. expenses |
| 434,413 |
| 27.1 |
| 508,378 |
| 32.2 |
| 536,547 |
| 35.5 |
| |||
Reimbursable costs and fees |
| 343,101 |
| 21.4 |
| 126,992 |
| 8.0 |
| 25,792 |
| 1.7 |
| |||
Depreciation and amortization |
| 108,822 |
| 6.8 |
| 119,570 |
| 7.6 |
| 121,324 |
| 8.0 |
| |||
Impairment of intangible assets |
| 57,015 |
| 3.6 |
| 30,032 |
| 1.9 |
| 289,492 |
| 19.1 |
| |||
Restructuring charges |
| 18,272 |
| 1.1 |
| 10,868 |
| 0.7 |
| 11,600 |
| 0.8 |
| |||
(Loss) income from operations |
| (61,492 | ) | 3.8 |
| 1,633 |
| 0.1 |
| (317,095 | ) | 21.0 |
| |||
Other expense |
| 87,349 |
| 5.5 |
| 90,941 |
| 5.8 |
| 110,208 |
| 7.3 |
| |||
Income tax expense (benefit) |
| 6,872 |
| 0.4 |
| (1,166 | ) | 0.1 |
| (71,947 | ) | 4.8 |
| |||
Less: Net loss attributable to noncontrolling interests |
| (713 | ) | — |
| (3,921 | ) | 0.2 |
| (18,250 | ) | 1.2 |
| |||
Net loss attributable to NCO |
| $ | (155,000 | ) | 9.7 | % | $ | (84,221 | ) | 5.4 | % | $ | (337,106 | ) | 22.3 | % |
Year ended December 31, 2010 Compared to Year ended December 31, 2009
Revenue. Revenue increased $22.8 million, or 1.4 percent, to $1,602.2 million for 2010, from $1,579.4 million in 2009. Revenue for the year ended December 31, 2010 was reduced by a $14.3 million impairment charge recorded to increase the valuation allowance against the carrying value of the portfolios of purchased accounts receivable, compared to an impairment charge of $21.5 million in 2009.
Revenue by segment (amounts in thousands):
|
| For the Year Ended December 31, |
|
|
|
|
| |||||||||
|
|
|
| % of |
|
|
| % of |
|
|
|
|
| |||
|
| 2010 |
| Revenue |
| 2009 |
| Revenue |
| $ Change |
| % Change |
| |||
ARM |
| $ | 1,332,067 |
| 83.1 | % | $ | 1,261,998 |
| 79.9 | % | $ | 70,069 |
| 5.6 | % |
CRM |
| 280,352 |
| 17.5 | % | 334,492 |
| 21.2 | % | (54,140 | ) | (16.2 | )% | |||
Portfolio Management |
| 31,835 |
| 2.0 | % | 48,482 |
| 3.1 | % | (16,647 | ) | (34.3 | )% | |||
Eliminations |
| (42,091 | ) | (2.6 | )% | (65,611 | ) | (4.2 | )% | 23,520 |
| (35.8 | )% | |||
Total |
| $ | 1,602,163 |
| 100.0 | % | $ | 1,579,361 |
| 100.0 | % | $ | 22,802 |
| 1.4 | % |
ARM’s revenue for 2010 and 2009 included $42.1 million and $60.5 million, respectively, of intercompany revenue earned on services performed for Portfolio Management and CRM’s revenue for 2009 included $5.1 million of intercompany revenue earned on services performed for ARM, which was eliminated upon consolidation. CRM did not perform services for ARM in 2010.
ARM’s revenue for 2010 and 2009 included $344.5 million and $130.2 million of reimbursable costs and fees (discussed in more detail below), which resulted in a $214.3 million increase in ARM’s revenue in 2010. This increase was partially offset by decreases primarily attributable to lower volumes and the weaker third-party collection environment during 2010, a $43.9 million decrease resulting from the sale of our print and mail business in October 2009, and an $18.4 million decrease in fees from collection services performed for Portfolio Management.
The decrease in CRM’s revenue was primarily due to lower volumes from certain existing clients attributable to the impact of the economy on the clients’ business, partially offset by increased client volumes related to the implementation of new contracts during 2010.
Portfolio Management’s collections decreased $50.9 million, or 34.3 percent, to $97.5 million in 2010, from $148.4 million in 2009. Revenue for 2010 was reduced by a $14.3 million impairment charge recorded to increase the valuation allowance against the carrying value of the portfolios of purchased accounts receivable, compared to an impairment charge of $21.5 million in the prior year. Excluding the effect of the impairment charges, Portfolio Management’s revenue represented 45.5 percent of collections in 2010, as compared to 46.0 percent of collections in 2009. The decrease in revenue and collections was attributable to lower portfolio purchases and the effect of the weaker collection environment during 2010. Portfolio sales revenue for 2010 and 2009 was $1.1 million and $361,000, respectively.
Payroll and related expenses. Payroll and related expenses decreased $79.9 million to $702.0 million in 2010, from $781.9 million in 2009, and decreased as a percentage of revenue to 43.8 percent from 49.5 percent.
Payroll and related expenses by segment (amounts in thousands):
|
| For the Year Ended December 31, |
|
|
|
|
| |||||||||
|
|
|
| % of |
|
|
| % of |
|
|
|
|
| |||
|
| 2010 |
| Revenue |
| 2009 |
| Revenue |
| $ Change |
| % Change |
| |||
ARM |
| $ | 486,036 |
| 36.5 | % | $ | 542,919 |
| 43.0 | % | $ | (56,883 | ) | (10.5 | )% |
CRM |
| 212,828 |
| 75.9 | % | 238,836 |
| 71.4 | % | (26,008 | ) | (10.9 | )% | |||
Portfolio Management |
| 3,168 |
| 10.0 | % | 5,244 |
| 10.8 | % | (2,076 | ) | (39.6 | )% | |||
Eliminations |
| — |
| — |
| (5,111 | ) | 7.8 | % | 5,111 |
| (100.0 | )% | |||
Total |
| $ | 702,032 |
| 43.8 | % | $ | 781,888 |
| 49.5 | % | $ | (79,856 | ) | (10.2 | )% |
The decrease in ARM’s payroll and related expenses as a percentage of revenue was primarily due to the higher revenue base, which was attributable to the increase in reimbursable costs and fees. Included in ARM’s payroll and related expenses for 2009 was $5.1 million of intercompany expense to CRM, for services provided to ARM.
The increase in CRM’s payroll and related expenses as a percentage of revenue was primarily a result of leveraging its infrastructure over the lower revenue base.
Portfolio Management outsources all of its collection services to ARM and, therefore, has a relatively small fixed payroll cost structure. The decrease in Portfolio Management’s payroll and related expenses was attributable to the restructuring activities following the Company’s decision to limit purchases in this business.
Selling, general and administrative expenses. Selling, general and administrative expenses decreased $74.0 million to $434.4 million in 2010, from $508.4 million in 2009, and decreased as a percentage of revenue to 27.1 percent from 32.2 percent.
Selling, general and administrative expenses by segment (amounts in thousands):
|
| For the Year Ended December 31, |
|
|
|
|
| |||||||||
|
|
|
| % of |
|
|
| % of |
|
|
|
|
| |||
|
| 2010 |
| Revenue |
| 2009 |
| Revenue |
| $ Change |
| % Change |
| |||
ARM |
| $ | 374,378 |
| 28.1 | % | $ | 443,040 |
| 35.1 | % | $ | (68,662 | ) | (15.5 | )% |
CRM |
| 57,019 |
| 20.3 | % | 59,892 |
| 17.9 | % | (2,873 | ) | (4.8 | )% | |||
Portfolio Management |
| 43,746 |
| 137.4 | % | 62,779 |
| 129.5 | % | (19,033 | ) | (30.3 | )% | |||
Eliminations |
| (40,730 | ) | 96.8 | % | (57,333 | ) | 87.4 | % | 16,603 |
| (29.0 | )% | |||
Total |
| $ | 434,413 |
| 27.1 | % | $ | 508,378 |
| 32.2 | % | $ | (73,965 | ) | (14.5 | )% |
The decrease in ARM’s selling, general and administrative expenses as a percentage of revenue was primarily due to the higher revenue base, which was attributable to the increase in reimbursable costs and fees, as well as cost saving initiatives and the sale of the print and mail business, which had a higher selling, general and administrative expense cost structure.
The increase in CRM’s selling, general and administrative expenses as a percentage of revenue was primarily attributable to leveraging its infrastructure over the lower revenue base.
The decrease in Portfolio Management’s selling, general and administrative expenses resulted from an $18.4 million decrease in fees for collection services provided by ARM. Included in Portfolio Management’s selling, general and administrative expenses for 2010 and 2009 was $42.1 million and $60.5 million, respectively, of intercompany expense to ARM, for services provided to Portfolio Management.
Reimbursable costs and fees. Reimbursable costs and fees consist of court costs, legal fees and repossession fees, representing out-of-pocket expenses that are reimbursed by the Company’s clients. Reimbursable costs and fees are recorded as both revenue and operating expenses on the statement of operations. The increase in reimbursable costs and fees was due to the acquisition of TDM in August 2009.
Depreciation and amortization. Depreciation and amortization decreased to $108.8 million in 2010, from $119.6 million in 2009. This decrease was primarily attributable to lower depreciation expense resulting from more assets becoming fully depreciated, as well as lower amortization of customer relationships and other intangible assets due to certain intangible assets becoming fully amortized during 2010.
Impairment of intangible assets. During the fourth quarter of 2010, the Company recorded goodwill impairment charges of $57.0 million in the CRM segment. During the fourth quarter of 2009, the Company recorded goodwill impairment charges of $24.7 million in the CRM segment, and customer relationship impairment charges of $5.3 million in the Portfolio Management segment.
Restructuring charges. We incurred restructuring charges of $18.3 million in 2010, which related to streamlining the cost structure of our operations and our decision to limit purchases in the Portfolio Management business. The charges consisted primarily of costs associated with the closing of redundant facilities and severance costs. This compares to $10.9 million of restructuring charges in 2009, which also related to the streamlining of our cost structure.
Other income (expense). Interest expense decreased to $90.3 million for 2010, from $99.2 million for 2009. Interest expense for 2010 included $8.3 million of losses, compared to $14.1 of losses in 2009, from interest rate swap agreements and embedded derivatives. The remaining decrease in interest expense was primarily due to lower debt balances during 2010. Other income (expense), net for 2010 and 2009 included approximately $1.2 million and $7.0 million, respectively, of net gains resulting from the settlement of certain foreign exchange contracts. Other income
(expense) for 2009 also included a $5.0 million loss from writing down one of our notes receivable and a $4.4 million gain on sale of our print and mail business.
Income tax expense (benefit). For 2010, we recorded income tax expense of $6.9 million on a pre-tax loss of $148.8 million, or an effective income tax rate of (4.6) percent. For 2009, we recorded an income tax benefit of $1.2 million on a pre-tax loss of $89.3 million, or an effective income tax rate of 1.3 percent. The change in the effective income tax rate was due primarily to the recognition of a valuation allowance on certain domestic net deferred tax assets, and income tax expense to be paid in state and foreign jurisdictions.
Year ended December 31, 2009 Compared to Year ended December 31, 2008
Revenue. Revenue increased $66.2 million, or 4.4 percent, to $1,579.4 million for 2009, from $1,513.1 million in 2008. Revenue for the year ended December 31, 2009 was reduced by a $21.5 million impairment charge recorded to increase the valuation allowance against the carrying value of the portfolios of purchased accounts receivable, compared to an impairment charge of $98.9 million in 2008.
Revenue by segment (amounts in thousands):
|
| For the Year Ended December 31, |
|
|
|
|
| |||||||||
|
|
|
| % of |
|
|
| % of |
|
|
|
|
| |||
|
| 2009 |
| Revenue |
| 2008 |
| Revenue |
| $ Change |
| % Change |
| |||
ARM |
| $ | 1,261,998 |
| 79.9 | % | $ | 1,219,348 |
| 80.6 | % | $ | 42,650 |
| 3.5 | % |
CRM |
| 334,492 |
| 21.2 | % | 361,096 |
| 23.9 | % | (26,604 | ) | (7.4 | )% | |||
Portfolio Management |
| 48,482 |
| 3.1 | % | 18,389 |
| 1.2 | % | 30,093 |
| 163.6 | % | |||
Eliminations |
| (65,611 | ) | (4.2 | )% | (85,692 | ) | (5.7 | )% | 20,081 |
| (23.4 | )% | |||
Total |
| $ | 1,579,361 |
| 100.0 | % | $ | 1,513,141 |
| 100.0 | % | $ | 66,220 |
| 4.4 | % |
ARM’s revenue for 2009 included $60.5 million of intercompany revenue earned on services performed for Portfolio Management and CRM’s revenue for 2009 included $5.1 million of intercompany revenue earned on services performed for ARM, which were eliminated upon consolidation. ARM’s revenue for 2008 included $82.8 million of intercompany revenue earned on services performed for Portfolio Management and CRM’s revenue for 2008 included $2.9 million of intercompany revenue earned on services performed for ARM, which were eliminated upon consolidation.
The increase in ARM’s revenue was primarily attributable to increased volume from new and existing clients in both first-party (early stage) and contingent collections as well as a full year of revenue from the OSI acquisition completed on February 29, 2008. This increase was offset in part by the weaker collection environment during 2009 and a $22.3 million decrease in fees from collection services performed for Portfolio Management.
The decrease in CRM’s revenue was primarily due to lower volumes from certain existing clients attributable to the impact of the economy on the clients’ business, partially offset by increased client volumes related to the implementation of new contracts during 2008 and 2009.
Portfolio Management’s collections, excluding all portfolio sales, decreased $48.4 million, or 24.6 percent, to $148.4 million in 2009, from $196.8 million in 2008. Revenue for 2009 was reduced by a $21.5 million impairment charge recorded to increase the valuation allowance against the carrying value of the portfolios of purchased accounts receivable, due to the impact of the deteriorating economic conditions on cash collected and lower estimates of future collections, compared to an impairment charge of $98.2 million in the prior year. Excluding the effect of the impairment charges as well as portfolio sales, Portfolio Management’s revenue represented 46.0 percent of collections in 2009, as compared to 57.1 percent of collections in 2008. The remaining decrease in revenue and collections was attributable to lower portfolio purchases and the affect of the weaker collection environment during 2009. Portfolio sales revenue for 2009 was $361,000 compared to $3.0 million for 2008.
Payroll and related expenses. Payroll and related expenses decreased $63.6 million to $781.9 million in 2009, from $845.5 million in 2008, and decreased as a percentage of revenue to 49.5 percent from 55.9 percent.
Payroll and related expenses by segment (amounts in thousands):
|
| For the Year Ended December 31, |
|
|
|
|
| |||||||||
|
|
|
| % of |
|
|
| % of |
|
|
|
|
| |||
|
| 2009 |
| Revenue |
| 2008 |
| Revenue |
| $ Change |
| % Change |
| |||
ARM |
| $ | 542,919 |
| 43.0 | % | $ | 583,658 |
| 47.9 | % | $ | (40,739 | ) | (7.0 | )% |
CRM |
| 238,836 |
| 71.4 | % | 256,895 |
| 71.1 | % | (18,059 | ) | (7.0 | )% | |||
Portfolio Management |
| 5,244 |
| 10.8 | % | 7,822 |
| 42.5 | % | (2,578 | ) | (33.0 | )% | |||
Eliminations |
| (5,111 | ) | 7.8 | % | (2,894 | ) | 3.4 | % | (2,217 | ) | 76.6 | % | |||
Total |
| $ | 781,888 |
| 49.5 | % | $ | 845,481 |
| 55.9 | % | $ | (63,593 | ) | (7.5 | )% |
The decrease in ARM’s payroll and related expenses as a percentage of revenue was primarily due to the integration efforts following the acquisition of OSI on February 29, 2008, as well as the deployment of additional staff in off-shore locations where labor costs are lower. Included in ARM’s payroll and related expenses was $5.1 million of intercompany expense to CRM, for services provided to ARM.
CRM’s payroll and related expenses decreased as a percentage of revenue primarily as a result of our continuing deployment of additional staff in off-shore locations where labor costs are lower.
Portfolio Management outsources all of its collection services to ARM and, therefore, has a relatively small fixed payroll cost structure. The decrease in payroll and related expenses as a percentage of revenue was primarily attributable to the $98.9 impairment charge recorded on purchased accounts receivables in 2008, which is recorded in revenue, compared to a $21.5 million impairment charge in 2009.
Selling, general and administrative expenses. Selling, general and administrative expenses decreased $28.1 million to $508.4 million in 2009, from $536.5 million in 2008, and decreased as a percentage of revenue to 32.2 percent from 35.5 percent.
Selling, general and administrative expenses by segment (amounts in thousands):
|
| For the Year Ended December 31, |
|
|
|
|
| |||||||||
|
|
|
| % of |
|
|
| % of |
|
|
|
|
| |||
|
| 2009 |
| Revenue |
| 2008 |
| Revenue |
| $ Change |
| % Change |
| |||
ARM |
| $ | 443,040 |
| 35.1 | % | $ | 463,083 |
| 38.0 | % | $ | (20,043 | ) | (4.3 | )% |
CRM |
| 59,892 |
| 17.9 | % | 61,723 |
| 17.1 | % | (1,831 | ) | (3.0 | )% | |||
Portfolio Management |
| 62,779 |
| 129.5 | % | 86,533 |
| 470.6 | % | (23,754 | ) | (27.5 | )% | |||
Eliminations |
| (57,333 | ) | 87.4 | % | (74,792 | ) | 87.3 | % | 17,459 |
| (23.3 | )% | |||
Total |
| $ | 508,378 |
| 32.2 | % | $ | 536,547 |
| 35.5 | % | $ | (28,169 | ) | (5.3 | )% |
The decrease in ARM’s selling, general and administrative expenses as a percentage of revenue was primarily attributable to the effective management of expenses and integration efforts following the OSI acquisition.
The increase in CRM’s selling, general and administrative expenses as a percentage of revenue was primarily attributable to increasing capacity due to anticipated higher client volumes, in advance of the offsetting revenue generation.
The decrease in Portfolio Management’s selling, general and administrative expenses resulted from a $22.3 million decrease in fees for collection services provided by ARM. The decrease as a percentage of revenue was primarily due to the decrease in revenue resulting from lower collections. Included in Portfolio Management’s selling, general and administrative expenses for 2009 and 2008 was $60.5 million and $82.8 million, respectively, of intercompany expense to ARM, for services provided to Portfolio Management.
Reimbursable costs and fees. Reimbursable costs and fees consist of court costs, legal fees and repossession fees, representing out-of-pocket expenses that are reimbursed by the Company’s clients. Reimbursable costs and fees are recorded as both revenue and operating expenses on the statement of operations. The increase in reimbursable costs and fees was due to the acquisition of TDM in August 2009.
Depreciation and amortization. Depreciation and amortization decreased to $119.6 million in 2009, from $121.3 million in 2008. This decrease was primarily attributable to lower depreciation expense resulting from a lower level of property and equipment, offset partially by higher amortization of customer relationships and other intangible assets following the OSI acquisition in February 2008.
Impairment of intangible assets. During the fourth quarter of 2009, the Company recorded goodwill impairment charges of $24.7 million in the CRM segment, and customer relationship impairment charges of $5.3 million in the Portfolio Management segment.
Restructuring charges. We incurred restructuring charges of $10.9 million in 2009, which related to restructuring of our legacy operations to streamline our cost structure. The charges consisted primarily of severance costs. This compares to $11.6 million of restructuring charges in 2008, which primarily related to the OSI acquisition.
Other income (expense). Interest expense increased to $99.2 million for 2009, from $94.8 million for 2008. Interest expense for 2009 included $14.1 million of losses, compared to $717,000 of gains in 2008, from interest rate swap agreements and embedded derivatives. This was offset partially by lower interest expense under our amended senior credit facility in 2009, due to a lower level of debt resulting from debt repayments during 2009. Other income (expense), net for 2009 and 2008 included approximately $7.0 million of net gains and $16.8 million of net losses, respectively, resulting from the settlement of certain foreign exchange contracts. Other income (expense) for 2009 also included a $5.0 million loss from writing down one of our notes receivable and a $4.4 million gain on sale of our print and mail business.
Income tax benefit. For 2009, the effective income tax rate decreased to 1.3 percent from 16.8 percent for 2008, due primarily to the recognition of a valuation allowance on certain domestic net deferred tax assets.
Liquidity and Capital Resources
Our primary sources of cash are cash flows from operations, including collections on purchased accounts receivable, bank borrowings, and equity and debt offerings. Cash has been used for acquisitions, repayments of bank borrowings, purchases of equipment, purchases of accounts receivable, and working capital to support our growth.
The cash flow from our contingency collection business and our purchased portfolio business is dependent upon our ability to collect from consumers and businesses. Many factors, including the economy and our ability to hire and retain qualified collectors and managers, are essential to our ability to generate cash flows. The cash flows from our first-party collections and our CRM businesses are dependent upon the volume of business that our clients place with us. Fluctuations in these factors that cause a negative impact on our business could have a material impact on our expected future cash flows.
The capital and credit markets have experienced significant volatility in the recent past and if this continues, it is possible that our ability to access the capital and credit markets may be limited. Our senior notes and senior subordinated notes are assigned ratings by certain rating agencies. Changes in our business environment, operating results, cash flows, or financial position could impact the ratings assigned by these rating agencies. Significant changes in assigned ratings could also significantly affect the costs of borrowing, which could have a material impact on our financial condition and results of operations.
We have a senior credit facility, referred to as the Credit Facility, that consists of a term loan ($507.2 million outstanding as of December 31, 2010) and a revolving credit facility ($10.0 million outstanding as of December 31, 2010). Additionally, we have $165.0 million of floating rate senior notes and $200.0 million 11.875 percent senior subordinated notes. As a result, we are significantly leveraged.
Borrowings under the Credit Facility are collateralized by substantially all of our assets. The Credit Facility contains certain financial and other covenants such as maintaining a maximum leverage ratio and a minimum interest coverage ratio, and includes restrictions on, among other things, acquisitions, the incurrence of additional debt, investments, investments in purchased accounts receivable, disposition of assets, liens and dividends and other distributions. At December 31, 2010, we were not in compliance with our leverage ratio maximum of 5.75 and our interest coverage ratio minimum of 1.80; however, we received a waiver from our lenders for this breach of financial covenants.
Due to the expected impact of the economic environment on our clients’ business, and the resulting expected impact of that on our 2011 results, as well as financial covenant ratio adjustments required under the Credit Facility in
2011, we became uncertain of our ability to remain in compliance with the financial covenants through 2011. Therefore, on March 25, 2011, we amended the Credit Facility to, among other things, adjust certain financial covenants, including increasing certain maximum leverage ratios and decreasing certain minimum interest coverage ratios, extend the maturity date of the revolving credit facility from November 15, 2011 to December 31, 2012 and reduce the maximum borrowing capacity to $75.0 million through November 15, 2011 and $67.5 million thereafter, and permit us to sell all or a portion of our portfolios of accounts receivable. We believe we will be able to maintain compliance with such covenants in 2011. Our ability to maintain compliance with our covenants will be highly dependent on our results of operations and, to the extent necessary, our ability to implement remedial measures such as further reductions in operating costs. If we were to enter into an agreement with our lenders for future covenant compliance relief, such relief could result in additional fees and higher interest expense.
The economic and business climate in 2010 continued to be very difficult and there is uncertainty as to whether the economic and business climate in 2011 will improve. In addition, other factors, such as the loss of a significant client or reduced client volumes, may impact our ability to meet our debt covenants in the future. Therefore, no assurance can be given that we will be able to maintain compliance with our financial covenants in future periods.
If an event of default, such as failure to comply with covenants, were to occur under the Credit Facility and we were not able to obtain an amendment or waiver from the lenders, we would not be able to borrow under the revolving credit facility and the lenders would be entitled to declare all amounts outstanding under the Credit Facility immediately due and payable and foreclose on the pledged assets. In addition, the acceleration of the amounts due under the Credit Facility could be an event of default under our Senior Notes and Senior Subordinated Notes and entitle the holders to accelerate the payment of these obligations. Under these circumstances, the acceleration of the payment of our debt would have a material adverse effect on our business.
Our Credit Facility, as amended, does not give us the ability to use available excess cash flow to repurchase our senior notes and senior subordinated notes. However, our Credit Facility, as amended, permits us to repurchase our senior notes and senior subordinated notes out of the net cash proceeds of new equity issuances. We are aware that our senior notes and senior subordinated notes from time to time may trade at substantial discounts to their face amounts. We or our stockholders may from time to time seek to retire or purchase our outstanding notes through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Our stockholders who acquire such notes may seek to contribute them to us, for retirement, in exchange for the issuance of additional equity. The amounts involved may be material.
Beginning in 2009, we significantly reduced our purchases of accounts receivable and made a decision to minimize further investments in the future. This decision resulted from declines in liquidation rates, competition for purchased accounts receivable and the continued uncertainty of collectability. We limited our purchases in 2010 to certain of our non-cancelable forward flow commitments.
Cash Flows from Operating Activities. Cash provided by operating activities was $43.1 million in 2010, compared to $98.5 million in 2009. The decrease in cash provided by operating activities was primarily attributable to lower operating results for 2010, as well as a decrease in accounts receivable, trade of $5.6 million for 2010 compared to $43.9 million for 2009, resulting from the collection of a large outstanding receivable balance during 2009.
Cash provided by operating activities was $98.5 million in 2009, compared to $93.7 million in 2008. The increase in cash provided by operating activities was primarily attributable to a decrease in accounts receivable, trade of $43.9 million for 2009, compared to a decrease of $11.8 million in the prior year, resulting from the collection of a large outstanding receivable balance during 2009, offset partially by decreases in accounts payable and accrued expenses and income taxes payable.
Cash Flows from Investing Activities. Cash provided by investing activities was $22.3 million in 2010 compared to $16.7 million in 2009. The increase in cash provided by investing activities was primarily attributable to lower purchases of accounts receivable and lower purchases of property and equipment, partially offset by lower collections of purchased accounts receivable.
Cash provided by investing activities was $16.7 million in 2009 compared to cash used in investing activities of $424.2 million in 2008. The change in investing activities was primarily attributable to cash paid for acquisitions and acquisition-related costs of $349.4 million in 2008 primarily incurred in connection with the acquisition of OSI on February 29, 2008, as well as lower purchases of accounts receivable in 2009 and $20.0 million of cash received from the sale of our print and mail business in 2009.
Cash Flows from Financing Activities. Cash used in financing activities was $71.4 million in 2010, compared to $107.2 million in 2009. The decrease in cash used in financing activities resulted primarily from lower repayments of borrowings under the Credit Facility and lower repayments of notes payable under our nonrecourse credit facility.
Cash used in financing activities was $107.2 million in 2009, compared to cash provided by financing activities of $332.2 million in 2008. The change in financing activities resulted from the additional borrowings of $139.0 million under our Credit Facility and the issuance of $210.0 million of stock, both of which were used primarily to fund the OSI acquisition in 2008. Also contributing to the change was a total of $103.8 million of net repayments of borrowings under the Credit Facility in 2009, compared to total net borrowings of $23.8 million in 2008. During 2008, we paid $17.5 million to JPM in connection with the acquisition of SST, which was deemed to be a cash dividend for accounting purposes.
Senior Credit Facility. Our Credit Facility, as amended on March 25, 2011, is with a syndicate of financial institutions and consists of a term loan and a revolving credit facility. We are required to make quarterly principal repayments of $1.5 million on the term loan until its maturity in May 2013, at which time its remaining balance outstanding is due. We are also required to make quarterly prepayments of 75 percent of the excess cash flow from our purchased accounts receivable, and annual prepayments of 75 percent or 50 percent of our excess annual cash flow, based on our leverage ratio, less the amounts paid during the year from the purchased accounts receivable excess cash flow prepayments. The revolving credit facility requires no minimum principal payments until its maturity in December 2012. At December 31, 2010, the balance outstanding on the term loan was $507.2 million and the balance outstanding on the revolving credit facility was $10.0 million. The availability of the revolving credit facility is reduced by any unused letters of credit ($5.0 million at December 31, 2010). As of December 31, 2010, we had $85.0 million of remaining availability under the revolving credit facility. Subsequent to the amendment on March 25, 2011, we have maximum borrowing capacity under the revolving credit facility of $75.0 million through November 15, 2011 and $67.5 million thereafter until its maturity on December 31, 2012.
All borrowings bear interest at an annual variable rate, based on either the prime rate (3.25 percent at December 31, 2010), the federal funds rate (0.13 percent at December 31, 2010), or LIBOR (0.26 percent 30-day LIBOR at December 31, 2010) plus an applicable margin, which is based on the type of rate and our funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio, as defined in the loan agreement, subject to certain interest rate minimum requirements. We are charged a quarterly commitment fee on the unused portion of the revolving credit facility at an annual rate of 0.75 percent. For the years ended December 31, 2010 and 2009, the effective interest rate on the Credit Facility was approximately 9.23 percent and 8.61 percent, respectively.
Senior Notes and Senior Subordinated Notes. We have $165.0 million of floating rate senior notes due 2013 (“Senior Notes”) and $200.0 million of 11.875 percent senior subordinated notes due 2014 (“Senior Subordinated Notes”) (collectively, “the Notes”). The Notes are guaranteed, jointly and severally, on a senior basis with respect to the Senior Notes and on a senior subordinated basis with respect to the Senior Subordinated Notes, in each case by all of our existing and future domestic restricted subsidiaries (other than certain subsidiaries and joint ventures engaged in financing the purchase of delinquent accounts receivable portfolios and certain immaterial subsidiaries).
The Senior Notes are unsecured senior obligations and are senior in right of payment to all existing and future senior subordinated indebtedness, including the Senior Subordinated Notes, and all future subordinated indebtedness. The Senior Notes bear interest at an annual rate equal to the London Interbank Offered Rate, referred to as LIBOR, plus 4.875 percent, reset quarterly. We may redeem the Senior Notes, in whole or in part, at varying redemption prices depending on the redemption date, plus accrued and unpaid interest.
The Senior Subordinated Notes are unsecured senior subordinated obligations and are subordinated in right of payment to all existing and future senior indebtedness, including the Senior Notes and borrowings under the Credit Facility. We may redeem the Senior Subordinated Notes, in whole or in part, at any time on or after November 15, 2010 at varying redemption prices depending on the redemption date, plus accrued and unpaid interest.
The indentures governing the Notes contain a number of covenants that limit our and our restricted subsidiaries’ ability, among other things, to: incur additional indebtedness and issue certain preferred stock, pay certain dividends, acquire shares of capital stock, make payments on subordinated debt or make investments, place limitations on distributions from restricted subsidiaries, issue or sell stock of restricted subsidiaries, guarantee indebtedness, sell or exchange assets, enter into transactions with affiliates, create certain liens, engage in unrelated businesses, and consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis. In addition, upon a change of control, we are required to offer to repurchase all of the Notes then outstanding, at a purchase price equal to 101 percent of their principal amount, plus any accrued interest to the date of repurchase.
Upon certain events of default, the trustee or the holders of at least 25 percent in the aggregate principal amount of the notes, then outstanding, may, and the trustee at the request of the holders will, declare the principal of, premium, if any, and accrued interest on the notes to be immediately due and payable. In the event a court enters a decree or order for relief against us in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, the court appoints a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official or for all or substantially all of our property and assets or the winding up or liquidation of our affairs and, in each case, such decree or order remains unstayed and in effect for a period of 60 consecutive days, the principal of, premium, if any, and accrued interest on the notes then outstanding will automatically become and be immediately due and payable. Additionally, if we or any subsidiary guarantor commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, consent to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official or for all or substantially all of our property and assets or substantially all of the property and assets of a significant subsidiary (as defined in the indentures) or effect any general assignment for the benefit of creditors, the principal of, premium, if any, and accrued interest on the notes then outstanding will automatically become and be immediately due and payable.
Nonrecourse Credit Facility. We have a nonrecourse credit facility that funded certain purchases of accounts receivable prior to 2009. We do not have the ability to make any additional borrowings under the nonrecourse credit facility. The financing was structured, depending on the size and nature of the portfolio to be purchased, either as a borrowing arrangement or under various equity sharing arrangements. The lender financed non-equity borrowings with floating interest at an annual rate equal to LIBOR (0.26 percent 30-day LIBOR at December 31, 2010) plus 2.50 percent, or as negotiated. These borrowings are due two years from the date of each respective loan, unless otherwise negotiated. As additional return on the debt financed portfolios, the lender receives residual cash flows, as negotiated, which is defined as all cash collections after servicing fees, floating rate interest, repayment of the borrowing, and the initial investment by us, including interest. Residual cash flow payments are accrued for as embedded derivatives.
Borrowings under this credit facility are nonrecourse to us, except for the assets within the entities established in connection with the financing agreement. The nonrecourse debt agreements contain a collections performance requirement, among other covenants, that, if not met, provides for cross-collateralization with any other portfolios financed by the nonrecourse lender, in addition to other remedies.
The total nonrecourse debt outstanding was $1.8 million and $14.3 million as of December 31, 2010 and 2009, respectively, which included $1.8 million and $2.1 million, respectively, of accrued residual interest. The effective interest rate on these loans, including the residual interest component, was approximately 10.8 percent and 12.8 percent for the years ended December 31, 2010 and 2009, respectively. The nonrecourse debt agreements contain certain covenants such as meeting minimum cumulative collection targets. As of December 31, 2010, we were in compliance with all required covenants.
Contractual Obligations. The following summarizes our contractual obligations as of December 31, 2010 (amounts in thousands). For a detailed discussion of these contractual obligations, see notes 12, 13 and 19 in our Notes to Consolidated Financial Statements.
|
| Payments Due by Period(1) |
| |||||||||||||
|
| Total |
| Less than |
| 1 to 3 |
| 3 to 5 |
| More than |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Credit Facility |
| $ | 517,220 |
| $ | 20,014 |
| $ | 497,206 |
| $ | — |
| $ | — |
|
Notes |
| 365,000 |
| — |
| 165,000 |
| 200,000 |
| — |
| |||||
Nonrecourse credit facility |
| 1,778 |
| 652 |
| 777 |
| 349 |
| — |
| |||||
Capital leases |
| 4,709 |
| 922 |
| 857 |
| 1,135 |
| 1,795 |
| |||||
Other long-term debt |
| 646 |
| 536 |
| 110 |
| — |
| — |
| |||||
Estimated interest payments(2) |
| 207,619 |
| 71,222 |
| 115,215 |
| 21,182 |
| — |
| |||||
Operating leases(3) |
| 167,322 |
| 44,826 |
| 70,306 |
| 35,523 |
| 16,667 |
| |||||
Purchase commitments |
| 17,117 |
| 9,725 |
| 7,392 |
| — |
| — |
| |||||
Other |
| 600 |
| 600 |
| — |
| — |
| — |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total contractual obligations |
| $ | 1,282,011 |
| $ | 148,497 |
| $ | 856,863 |
| $ | 258,189 |
| $ | 18,462 |
|
(1) | Does not include deferred income taxes since the timing of payment is not certain (see note 14 in our Notes to Consolidated Financial Statements). Payments of debt assume no prepayments. |
(2) | Represents estimated future interest expense based on applicable rates, including minimum rates as defined in our amended senior credit facility. |
(3) | Does not include the leases from our former Fort Washington locations (see note 19 in our Notes to Consolidated Financial Statements). |
Because their future cash outflows are uncertain, noncurrent liabilities for income tax contingencies are excluded from the table above. At December 31, 2010, we had approximately $11.1 million in reserves for uncertain tax positions and an accrual for related interest expense of $4.0 million. Currently, we do not estimate a cash settlement with the applicable taxing authority will occur within 12 months for the majority of these unrecognized tax benefits.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined by Regulation S-K 303(a)(4) of the Securities Exchange Act of 1934.
Market Risk
We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes, foreign currency exchange rate fluctuations, changes in corporate tax rates, and inflation. We employ risk management strategies that may include the use of derivatives, such as interest rate swap agreements, interest rate cap agreements, and foreign currency forwards and options to manage these exposures. We do not enter into derivatives for trading purposes.
Foreign Currency Risk. Foreign currency exposures arise from transactions denominated in a currency other than the functional currency and from foreign denominated revenue and profit translated into U.S. dollars. The primary currencies to which we are exposed include the Canadian dollar, the Philippine peso, the British pound and the Australian dollar. Due to the size of the Philippine operations, we currently use forward exchange contracts to limit potential losses in earnings or cash flows from adverse foreign currency exchange rate movements. These contracts are entered into to protect against the risk that the eventual cash flows resulting from such contracts will be adversely affected by changes in exchange rates. Our objective is to maintain economically balanced currency risk management strategies that provide adequate downside protection.
Interest Rate Risk. At December 31, 2010, we had $684.0 million in outstanding variable rate borrowings. A material change in interest rates could adversely affect our operating results and cash flows. A 25 basis-point increase in interest rates could increase our annual interest expense by $125,000 for each $50 million of variable debt outstanding for the entire year. From time to time, we use interest rate swap agreements to limit potential losses from adverse interest rate changes. Our interest rate swap agreements minimize the impact of LIBOR fluctuations on the interest payments on our floating rate debt. We are required to pay the counterparties quarterly interest payments at a weighted average fixed rate, and we receive from the counterparties variable quarterly interest payments based on LIBOR.
Impact of Recently Issued and Proposed Accounting Guidance
In June 2009, the FASB issued authoritative guidance for transfers of financial assets. This guidance removes the concept of qualifying special-purpose entities and eliminates the exception from applying guidance related to consolidating of variable interest entities to qualifying special-purpose entities. This guidance requires additional disclosures in order to provide greater transparency about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. This guidance was effective for us on January 1, 2010, and it did not have a material impact on our financial condition or results of operations.
In June 2009, the FASB issued amended guidance for consolidation of variable interest entities. This guidance amends previous guidance to require companies to perform an analysis to determine if their variable interest gives them a controlling financial interest in the variable interest entity, and requires ongoing reassessments of who is the primary beneficiary of a variable interest entity. This guidance also requires enhanced disclosures of information about involvement in a variable interest entity. This guidance was effective for us on January 1, 2010, and it did not have a material impact on our financial condition or results of operations.
In October 2009, the FASB issued amended guidance for revenue recognition related to multiple-deliverable revenue arrangements. This guidance, among other things, creates a hierarchy for determining the selling price of a deliverable, which will now include an estimated selling price if neither vendor-specific objective evidence nor third-party evidence exist. This may result in more instances of separating consideration in multiple-deliverable arrangements. Disclosures related to multiple-deliverable revenue arrangements have also been expanded. This guidance was effective for us for revenue arrangements entered into or materially modified on or after January 1, 2011, and it will not have a material impact on our financial condition or results of operations.
In January 2010, the FASB issued amended guidance for disclosures about fair value measurements, which requires new disclosures regarding transfers in and out of Level 1 and 2 measurements and requires additional disclosures regarding activity in Level 3 measurements. This guidance also clarifies existing fair value disclosures regarding the level of disaggregation and the input and valuation techniques used to measure fair value. We adopted this guidance on January 1, 2010, except for the requirement for additional disclosures of Level 3 activity which is effective on January 1, 2011, and it did not have a material impact on our financial condition or results of operations.
In April 2010, the FASB issued amended guidance for loan modifications when the loan is part of a pool that is accounted for as a single asset. This guidance clarifies that modifications of loans that are accounted for within a pool, which have evidence of credit deterioration upon acquisition, do not result in the removal of those loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amended guidance was effective for us for loan modifications made in or after the third quarter of 2010. We adopted this guidance and it did not have a material impact on our results of operations or financial position.
In July 2010, the FASB issued amended guidance for disclosures about financing receivables and allowances for credit losses. The guidance requires further disaggregated disclosures that improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The new disclosure requirements are effective for us for the annual reporting period ending December 31, 2010. Certain disclosures related to allowance and modification activities will be effective for us for reporting periods beginning January 1, 2011. We do not expect the adoption of this guidance to have a material impact on our financial condition or results of operations.
In December 2010, the FASB issued amended guidance for business combinations, specifically related to disclosures of supplementary pro forma information. The amended guidance specifies that if comparative financial statements are presented, then revenue and earnings of the combined entity should be disclosed as though the business combination, which occurred during the current year, had occurred as of the beginning of the comparable prior annual reporting period only. The amended guidance also expands the supplemental pro forma information disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination. The amended guidance is effective for us for acquisitions occurring on or after January 1, 2011. We do not expect the adoption of this guidance to have a material impact on our financial condition or results of operations.
In December 2010, the FASB issued amended guidance for goodwill and other intangible assets, specifically related to when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. Under the amended guidance, if a reporting unit’s carrying amount is zero or negative, then step 2 of the goodwill impairment test is required to be performed if it is more likely than not that a goodwill impairment exists. The amended guidance is effective for us on January 1, 2011. We are reviewing the guidance to assess the impact of adoption.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Disclosure regarding this item is included in Item 6, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the heading of “Market Risk,” of this Report on Form 10-K and note 16 in our Notes to Consolidated Financial Statements included elsewhere in this Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data
The financial statements, financial statement schedules and related documents that are filed with this Report are listed in Item 15 of this Report on Form 10-K and begin on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of December 31, 2010. Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of the end of the period covered by this Report, our disclosure controls and procedures were effective as of December 31, 2010, in reaching a reasonable level of assurance that (i) information required to be disclosed by the Company in the reports that it files or submits under the Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes to Internal Control over Financial Reporting During the Quarter Ended December 31, 2010
Our management, with the participation of our chief executive officer and chief financial officer, conducted an evaluation of our internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), to determine whether any changes occurred during the quarter ended December 31, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there were no such changes during the quarter ended December 31, 2010.
Management’s Annual Report on Internal Control over Financial Reporting
Management of NCO Group, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 15d-15(f).
Our management, with the participation of our chief executive officer and chief financial officer, conducted an assessment as of December 31, 2010, of the effectiveness of the Company’s internal control over financial reporting, using the framework established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management concluded that, as of December 31, 2010, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of the inherent limitations in all controls systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within our company have been or will be detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
This report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the Dodd-Frank Act, which permits the Company to provide only management’s report in this report on Form 10-K.
Inherent Limitations on Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all controls systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Entry into a Material Definitive Agreement
In September 2010, the Company entered into amendments to the employment agreements with each of its Named Executive Officers (Messrs. Michael J. Barrist, Stephen W. Elliott, Joshua Gindin, Steven Leckerman and John R. Schwab), dated November 15, 2006. The amendments to Messrs. Elliot, Gindin, Leckerman and Schwab’s employment agreements revised provisions related to certain termination benefits and amended the period of time that such officers would be subject to non-compete, non-solicitation and non-interference covenants after termination of employment. The amendments provide that (i) upon a termination of employment on or prior to November 15, 2011 by reason of death, disability, without “cause” or a resignation for “good reason,” the executive will (a) receive his accrued but unpaid base salary and annual bonus, (b) continue to receive his then current base salary and target bonus for a period of two years; and (c) receive reimbursement of certain healthcare costs and expenses for a period of up to two years from such termination; (ii) upon a termination of employment after November 15, 2011 but on or prior to November 15, 2012 by reason of death, disability, without “cause” or a resignation for “good reason,” the executive will (x) receive his accrued but unpaid base salary and annual bonus, (y) be paid two times his then current base salary and two times his target bonus for a one year period; and (z) receive reimbursement of certain healthcare costs and expenses for a period of up to two years from such termination; and (iii) upon a termination of employment after November 15, 2012 by reason of death, disability, without “cause” or a resignation for “good reason,” the executive will (aa) receive his accrued but unpaid base salary and annual bonus, (bb) continue to receive his then current base salary and target bonus for a one year period; and (cc) receive reimbursement of certain healthcare costs and expenses for a period of up to one year from such termination. The amendments also provided for other non-material changes necessary for the employment agreements to comply with or remain exempt from Section 409A of the Internal Revenue Code. Copies of the employment agreement amendments are filed as Exhibits 10.35 through 10.39 and are incorporated herein by reference. For a further description of the amendments to and the current terms of Messrs. Elliot, Gindin, Leckerman and Schwab’s employment agreements, see “Item 11. Executive Compensation - Employment Agreements” and “Item 11. Executive Compensation - Potential Payments Upon Termination of Employment or Change in Control - Termination or Change in Control Provisions in Employment Agreements — Other Named Executive Officers.” For a description of the amendment to and the terms of Mr. Barrist’s employment agreement which was effective during 2010, see our Form 8-K filed on March 24, 2011, “Item 11. Executive Compensation - Employment Agreements,” and “Item 11. Executive Compensation - Potential Payments Upon Termination of Employment or Change in Control - Termination or Change in Control Provisions in Employment Agreements — Michael J. Barrist.”
On March 25, 2011, NCO Group, Inc. (the “Company”) entered into the Fourth Amendment to the Credit Agreement by and among the Company, NCO Financial Systems, Inc., certain guarantors under the Credit Agreement (defined below), Citizens Bank of Pennsylvania as the administrative agent, Citizens Bank of Pennsylvania as sole issuing bank and certain lenders (the “Third Amendment”). The Fourth Amendment amended the Credit Agreement dated as of November 15, 2006 among the Company, NCO Financial Systems, Inc., the subsidiary guarantors party thereto, Morgan Stanley & Co. Incorporated as collateral agent, Morgan Stanley Senior Funding, Inc. as administrative agent, and the other lenders party thereto, as amended pursuant to the First Amendment to Credit Agreement dated as of February 8, 2008, the Second Amendment to Credit Agreement dated as of March 25, 2009 and the Third Amendment to Credit Agreement dated as of March 31, 2010 (as amended, the “Credit Agreement”). The Fourth Amendment
amended the Credit Agreement to, among other things: (i) obtain a waiver for the financial covenants for the period ended December 31, 2010 and adjust certain future financial covenants, including increasing maximum leverage ratios and decreasing minimum interest coverage ratios; (ii) extend the maturity date of the revolving credit facility from November 2011 to December 31, 2012 and reduce the availability to $75.0 million through November 15, 2011 and $67.5 million thereafter; and (iii) permit the Company to sell all, or a portion of, its portfolios of purchased accounts receivable, with any proceeds from such sale to be used to repay term loan borrowings. A copy of the Fourth Amendment is attached as exhibit 10.41 hereto and is incorporated herein by reference.
The lenders or their affiliates have in the past engaged, and may in the future engage, in transactions with and perform services, including commercial banking, financial advisory and investment banking services, for the Company and its affiliates in the ordinary course of business for which they have received or will receive customary fees and expenses. One Equity Partners, a significant stockholder of the Company, manages certain investments and commitments for JP Morgan Chase & Co., an affiliate of JPMorgan Chase Bank, N.A., in direct private equity transactions. JPMorgan Chase Bank, N.A. is a lender under our Credit Agreement. One Equity Partners is managed by OEP Holding Corporation, a wholly-owned indirect subsidiary of JPMorgan Chase & Co.
Item 10. Directors, Executive Officers and Corporate Governance
Set forth below is information concerning our directors and executive officers.
Name |
| Age(1) |
| Position |
Ronald A. Rittenmeyer |
| 63 |
| President and Chief Executive Officer |
Stephen W. Elliott |
| 49 |
| Executive Vice President, Information Technology and Chief Information Officer |
Joshua Gindin, Esq. |
| 54 |
| Executive Vice President and General Counsel |
Steven Leckerman |
| 58 |
| Executive Vice President and Chief Operating Officer |
John R. Schwab |
| 43 |
| Executive Vice President, Finance, Chief Financial Officer and Treasurer |
Albert Zezulinski |
| 64 |
| Executive Vice President |
Michael J. Barrist |
| 50 |
| Chairman of the Board |
Henry H. Briance |
| 26 |
| Director(2) |
Colin M. Farmer |
| 37 |
| Director(2) |
Edward A. Kangas |
| 66 |
| Director(2) |
Thomas J. Kichler |
| 49 |
| Director(2) |
(1) As of March 31, 2011
(2) Each Director serves a term of one year and until his successor is duly elected and qualified
Ronald A. Rittenmeyer — Mr. Rittenmeyer was appointed as our President and Chief Executive Officer effective March 18, 2011. Mr. Rittenmeyer is the founder and Chief Executive Officer of Turnberry Associates, LLC, a consulting firm, and had previously served as a consultant to us starting in December 2010. Mr. Rittenmeyer served as Chairman, President and Chief Executive Officer of Electronic Data Systems (“EDS”), a leading global provider of information technology services, until its sale to Hewlett-Packard in August 2008 and continued as President and CEO of EDS until December 2008. During his tenure at EDS, Mr. Rittenmeyer also served as Chief Operating Officer and Executive Vice President of Global Service Delivery from July 2005 to December 2006 and President and Chief Operating Officer from December 2006 until September 2007. Prior to joining EDS, Mr. Rittenmeyer served as Managing Director of The Cypress Group, a private equity firm, from 2004 to 2005. Mr. Rittenmeyer previously served as Chairman, Chief Executive Officer and President of Safety-Kleen, Inc., a $1.5 billion hazardous and industrial waste management company, from 2001 to 2004. He currently serves on the Board of Directors of American International Group, Inc., Tenet Healthcare Corporation and IMS Health Inc., a privately held company.
Stephen W. Elliott — Mr. Elliott joined us in 1996 as Senior Vice President, Technology and Chief Information Officer and became an Executive Vice President in February 1999. Prior to joining us, Mr. Elliott was employed by Electronic Data Systems, a computer services company, for almost 10 years, most recently as Senior Account Manager.
Joshua Gindin, Esq. — Mr. Gindin joined us in May 1998. Prior to joining us, Mr. Gindin was a partner in the law firm of Kessler & Gindin, which had served as our legal counsel since 1986.
Steven Leckerman — Mr. Leckerman joined us in 1995 as Senior Vice President, Collection Operations and since then has held various positions. In November 2008, Mr. Leckerman became Executive Vice President and Chief Operating Officer. From 1982 to 1995, Mr. Leckerman was a manager of dialer and special projects at Allied Bond Corporation, a collection company that was a division of TransUnion Corporation.
John R. Schwab — Mr. Schwab joined us as Senior Vice President, Finance and Chief Accounting Officer, through the acquisition of RMH Teleservices, Inc. in April 2004, where he was the Chief Financial Officer since 2003. In May 2006, Mr. Schwab became Executive Vice President, Finance, Chief Financial Officer and Treasurer. From 2000 to 2003, Mr. Schwab was employed by Inrange Technologies, Inc., a data storage networking company, most recently as the Chief Financial Officer. Prior to that, Mr. Schwab worked for Arthur Andersen, an accounting firm, for 11 years.
Albert Zezulinski — Mr. Zezulinski joined us in January 2001 as Executive Vice President, Health Services, became Executive Vice President, Corporate and Government Affairs in May 2002, and in September 2005 became Executive Vice President, Global Portfolio Operations. In November 2008, Mr. Zezulinski became Executive Vice President, Marketing and Administrative Operations. Mr. Zezulinski has more than 30 years of consulting and healthcare experience. Prior to joining us, Mr. Zezulinski was the Director of Healthcare Financial Services for BDO Seidman, LLP, an international accounting and consulting firm.
Michael J. Barrist — Effective March 18, 2011, Mr. Barrist is no longer our President and Chief Executive Officer, but remains as our Chairman of the Board. Mr Barrist had been our Chairman, President and Chief Executive Officer since purchasing the Company in 1986. Mr. Barrist was employed by U.S. Healthcare, Inc., a managed healthcare company, from 1984 to 1986, most recently as Vice President of Operations, and was employed by Gross & Company, a certified public accounting firm, from 1980 through 1984. Mr. Barrist is a Certified Public Accountant. Mr. Barrist’s years of leadership and experience running the Company provides the Board with an extensive understanding of the Company’s history, challenges and operations, which adds valuable insight for Board decision making.
Henry H. Briance — Mr. Briance is a Vice President at One Equity Partners, which he joined in September 2006. Mr. Briance was appointed to our Board in March 2009. Mr. Briance received a BA in Classics from the University of Cambridge in 2005. Mr. Briance has experience in investment banking and financial services, and serves as a director of several private companies. He is familiar with highly complex capital structures.
Colin M. Farmer — Mr. Farmer is a Managing Director of One Equity Partners. Prior to joining One Equity Partners in October 2006, Mr. Farmer spent eight years at Harvest Partners, a middle-market private equity firm. Prior to that, Mr. Farmer worked at Robertson Stephens & Company, an investment banking firm. Mr. Farmer was appointed to our Board in March 2007. Mr. Farmer is a Trustee of the Princeton University Rowing Association. Mr. Farmer is also a director of X-Rite, Incorporated. Mr. Farmer has significant experience as an executive of several private equity firms. He is familiar with and has designed highly complex capital structures. His experience with the financial markets has helped guide our capital structure decisions. In addition, Mr. Farmer serves as a director of a number of private companies.
Edward A. Kangas — Mr. Kangas was Chairman and Chief Executive Officer of Deloitte Touche Tohmatsu, an accounting firm, from 1989 until his retirement in 2000. Mr. Kangas served as Managing Partner of Deloitte & Touche (USA) from 1989 to 1994 and Managing Partner and Chief Executive Officer of Touche Ross in from 1985 to 1989. After his retirement, Mr. Kangas served as a consultant to Deloitte until 2004. Mr. Kangas was appointed to our Board in February 2007. Mr. Kangas is also a director of,Allscripts Healthcare Solutions, Inc., United Technologies Corporation, Hovnanian Enterprises, Inc., Intuit Inc. and Tenet Healthcare Corporation. Mr. Kangas was on the board of Electronic Data Systems Corporation from 2004 to 2008. Mr. Kangas was on the board of Eclipsys Corporation from 2004 to 2010. Mr. Kangas has substantial financial and accounting expertise and brings significant experience to the Board having served as chief executive officer of one of the largest public accounting firms and director of many large public corporations.
Thomas J. Kichler — Mr. Kichler is a Managing Director of One Equity Partners. Prior to joining One Equity Partners in 2002, Mr. Kichler was a Managing Director at Salomon Smith Barney (Citigroup), an investment banking firm. He also worked at Wasserstein Perella, an investment banking firm, and at Ernst & Young, an accounting firm. Mr. Kichler graduated from the Wharton School at the University of Pennsylvania and is a CPA. In addition, Mr. Kichler serves as a director of a number of private companies, and has served as a director of public companies in the past. Mr. Kichler has 20 years of investment banking experience.
Effective March 22, 2010, Mr. David M. Cohen resigned from our Board, and effective May 10, 2010, Mr. Kichler was appointed as director by the remaining members of our Board to fill the vacancy. Mr. Cohen was, and Mr. Kichler is, a representative designee of One Equity Partners, referred to as OEP, under the Stockholders’ Agreement described below. Effective January 7, 2011, Mr. Austin A. Adams resigned from our Board and effective March 22, 2011, Mr. Leo J. Pound resigned from our Board. Mr. Adams was an independent designee of
OEP, and Mr. Pound was an independent designee of Mr. Barrist, under the Stockholders’ Agreement described below. Effective March 22, 2011, Mr. Kangas was appointed as chairman of our Audit Committee following the resignation of Mr. Pound. OEP has not yet designated replacement directors.
Stockholders’ Agreement
In connection with the Transaction, on November 15, 2006, we and Michael J. Barrist, certain of Mr. Barrist’s family members and trusts formed for his or their benefit, our other executive officers and the other co-investors entered into stockholders’ agreements, including a stockholders agreement and a registration rights agreement, collectively referred to as the Stockholders’ Agreements. The Stockholders’ Agreements contain agreements among the parties with respect to delivery of our periodic financial reports, confidentiality, restrictions on certain issuances and transfers of shares, including rights of first offer, participation rights, tag-along rights and drag-along rights, registration rights (including customary indemnification provisions) and limited call and put rights.
The Stockholders’ Agreements further provide that our Board will consist of seven members, which subject to certain exceptions, will consist of: Mr. Barrist as Chairman of the Board, three persons designated by OEP, and, following the termination of Mr. Barrist as Chief Executive Officer, three independent directors designated by OEP.
OEP’s representative designees on our Board are Messrs. Briance, Farmer and Kichler and OEP’s independent designee on our Board is Mr. Kangas. OEP has not yet designated independent directors to fill the two vacancies.
Code of Ethics
The Company has adopted a Code of Ethics and Conduct that applies to all of its directors and employees including, the Company’s principal executive officer, principal financial officer, principal accounting officer and all employees performing similar functions. The Company will provide a copy of the Code of Ethics and Conduct without charge upon written request directed to: Joshua Gindin, Esq., Corporate Secretary, NCO Group, Inc., 507 Prudential Road Horsham, Pennsylvania 19044. The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any future amendments to, or a waiver from, a provision of its Code of Ethics and Conduct by posting such information on the Company’s website www.ncogroup.com.
The information on the website listed above, is not and should not be considered part of this Annual Report on Form 10-K and is not incorporated by reference in this document. This website is, and is only intended to be, an inactive textual reference.
Audit Committee Financial Expert
The Board of Directors of the Company has determined that Mr. Kangas qualifies as an “audit committee financial expert” as that term is defined in SEC regulations. Although not formally considered by the Board given that the Company’s securities are not registered or traded on any national securities exchange, based upon the listing standards of The Nasdaq Stock Market, LLC, we believe that Mr. Kangas is independent under such standards.
Item 11. Executive Compensation
Compensation Discussion and Analysis
Objectives of Our Compensation Program
Our overall compensation program with respect to our executive officers is designed to achieve the following objectives:
· to provide compensation that will attract and retain superior executive talent;
· to provide our executive officers with compensation that reflects their overall experience, position with NCO and expected contributions to NCO;
· to support the achievement of the goals contained in our annual budget by linking a portion of the executive officer’s compensation to the achievement of such goals;
· to be competitive with compensation programs offered by companies of a similar size within similar industries based on formal and informal surveys conducted by us; and
· to offer to our executive officers an economically reasonable amount of appropriate benefits and perquisites comparable to those offered by other companies of a similar size within similar industries.
Elements of Executive Compensation
The compensation paid to our executive officers consists of the following elements:
· base salary;
· performance-based cash bonuses;
· equity compensation;
· severance benefits, death benefits and right to participate in a nonqualified deferred compensation plan;
· other benefits, such as the use of an automobile; and
· benefits that are generally available to all full-time employees of our company, such as participation in group medical, disability and life insurance plans and a 401(k) plan.
These elements are discussed in greater detail below.
Base Salary. Base salary is used to reward superior individual performance of each executive officer on a day-to-day basis during the year, and to encourage them to perform at their highest levels. We also use our base salary to attract and retain top quality executives and other management employees from other companies. Moreover, base salary and increases to base salary recognize the overall experience, position and responsibilities within NCO and expected contributions to NCO of each executive officer. Typically, the Compensation Committee will review and adjust base salaries on an annual basis. We have employment agreements, which were negotiated and entered into in connection with the closing of the Transaction, with each of our executive officers. Each employment agreement was amended in September 2010 to, among other things, revise provisions related to certain termination benefits. For a description of the material terms of such employment agreements, see “—Employment Agreements.” Each employment agreement, among other things, sets forth the executive’s minimum base salary (which shall at a minimum be upwardly adjusted each year in accordance with the Consumer Price Index (“CPI”)). In March 2010, the Compensation Committee determined that the annual base salaries of our executive officers would not be increased for 2010, and our executive officers did not receive the annual CPI upward adjustment in 2010 because the change in CPI was negative. Information concerning base salaries paid to executive officers in 2010 is set forth in “—Summary Compensation—Summary Compensation Table.”
Management Incentive Compensation. We believe that a significant portion of the total potential compensation of our executive officers should depend upon the degree of our financial success in a particular year. Management incentive compensation is used to reward our executives upon the achievement of certain goals contained in our annual operating plan. Under the employment agreements that we entered into with each of our executive officers, each executive is entitled to earn cash incentive compensation ranging from 75 percent to 100 percent of his base salary based on the achievement of the Company’s annual operating plan.
Each year the Compensation Committee sets performance-based targets based on our annual operating plan that must be met in order for the executive officers to earn an annual bonus. For 2010, 75 percent of the bonus was based on achieving targets for NCO’s earnings before interest, taxes, depreciation and amortization, referred to as EBITDA, and 25 percent was based on senior debt repayment targets. The targets set by the Compensation Committee included a range of performance levels that gave the executive officers the potential to earn from zero percent to 150 percent of the cash incentive compensation specified in their respective employment agreements. For example, if NCO achieved EBITDA of $190 million for 2010 and repaid $80 million of senior debt during 2010, the executive officers would have received 100 percent of their cash incentive compensation specified in their respective employment agreements. In the view of the Compensation Committee, payout of these performance goals required substantial achievement by each executive officer.
The Compensation Committee may, in determining the annual bonus amount, take into consideration other extenuating circumstances not within the control of the Company that may have occurred during the year that impacted the annual operating plan thus rendering the performance-based targets unattainable.
In March 2011, the Compensation Committee determined that both the EBITDA and debt repayment targets for 2010 were not achieved, and did not award any of the bonus potential to the executive
officers.
See “—Summary Compensation—Summary Compensation Table” for the actual amounts paid out to the Named Executive Officers for 2010, 2009 and 2008. References to our “Named Executive Officers” means all of the executive officers named in the “Summary Compensation Table.” Amounts paid under the management incentive program are reported in the “Non-Equity Incentive Plan Compensation” column.
Equity Compensation. We have a Restricted Share Plan which authorizes grants of restricted shares of our Class A common stock to our officers, key employees and directors. The total number of restricted shares authorized for issuance under the Restricted Share Plan is 336,666.7 shares. Each share of restricted stock issued pursuant to the Restricted Share Plan, regardless of whether the restriction period with regard to such share has lapsed, is subject to the transfer restrictions, repurchase rights and other restrictions pursuant to the terms of a Stockholders’ Agreement. The purpose of the restricted share plan awards is to align managements’ objectives with those of the stockholders. The number of shares awarded to management is approved by the Compensation Committee. There were no restricted share awards granted to our executive officers during 2010. Generally, the Restricted Share Plan states that the Compensation Committee of our Board will determine, in the terms of the applicable award agreement, the time or times when and the manner and condition in which each award will vest. The shares of restricted stock that have been granted under the Restricted Share Plan to our executive officers vest in 25 percent increments upon each anniversary of the date of grant, each, referred to as an annual vesting date, provided that the recipient remains employed by us. In addition, if a recipient’s employment is terminated by us without Cause (as defined in the Restricted Share Plan) or if a recipient terminates his employment with us for Good Reason (as defined in the Restricted Share Plan) within three months immediately preceding an annual vesting date, such award will immediately vest with respect to the 25 percent of the then unvested shares that would have vested had such recipient remained employed through the annual vesting date. In addition, each restricted share award will immediately vest in full in the event a Change in Control or Public Offering (each as defined in the Restricted Share Plan) occurs, subject to certain resale restrictions if vesting occurs as a result of a Public Offering. For a description of additional termination or change in control provisions in the Restricted Share Plan, see “—Potential Payments Upon Termination of Employment or Change in Control.”
In the future, the Compensation Committee, on a discretionary basis, may elect to award our executive officers restricted stock under the Restricted Share Plan, although there is no obligation for us to do so and we do not expect any such awards to be material.
As a condition to the grant of an award under our Restricted Share Plan, the recipient is required to make an election to include in the recipient’s current year income the fair market value, as of the date of grant, of the restricted shares pursuant to Internal Revenue Code Section 83(b). We pay the recipient an amount equal to the income taxes that the recipient incurs as a result of making the 83(b) election, as well as any additional taxes imposed as a result of the payment, referred to as a “gross-up.” These amounts are included in “All Other Compensation” column in the “—Summary Compensation—Summary Compensation Table.”
Severance Benefits. Each Named Executive Officer’s employment agreement contains termination provisions that provide each respective executive officer with severance payments if their respective employment is terminated in specified circumstances. See “—Potential Payments Upon Termination of Employment or Change in Control—Termination or Change in Control Provisions in Employment Agreements.”
Death Benefits. We provide beneficiaries of designated participants with a death benefit in the event of the participant’s death while employed by us. The benefit provides each participant, as long as such participant is employed with the Company, with a fixed dollar term life insurance policy for the beneficiaries of such participant’s choice. Executive participants are selected by the Board, and each of our Named Executive Officers is a participant. Under this benefit, beneficiaries of Messrs. Barrist, Schwab, Elliott, Gindin and Leckerman would be entitled to receive a lump sum payment of $4,500,000, $2,000,000, $2,000,000, $2,000,000 and $4,000,000, respectively. See “—Potential Payments Upon Termination of Employment or Change in Control—Death Benefits.”
401(k) Plan Matching Contributions. We match, in cash, 25 percent of the first 6 percent of the contributions to our 401(k) plan that each employee, including each Named Executive Officer, makes during the year. For each eligible employee, their contributions are limited to 15 percent of such employee’s income on a pre-tax basis, subject to limitations under Section 401(k) of the Internal Revenue Code of 1986, as amended, referred to as the Code. We provide these matching contributions to all of our employees, including Named Executive Officers, who
participate in the 401(k) plan, to encourage them to systematically save for retirement.
Deferred Compensation Plan. We maintain a non-qualified deferred compensation plan that allows eligible employees, including executive officers, to defer compensation in excess of the amounts that the employee can defer under our 401(k) plan because of limits under the Code on the amount of compensation that can be deferred. In addition, in our absolute and sole discretion, we may make a contribution that will be allocated among participants in proportion to their deferrals for such year. For more information, see “—Nonqualified Deferred Compensation.”
Perquisites, Personal Benefits and Other Compensation. Each of our Named Executive Officers receives a limited amount of perquisites and other personal benefits that we pay on their behalf or for which we provide reimbursement. We provide our Named Executive Officers the use of an automobile leased by us at prices ranging from $1,275 to $2,300 per month or a monthly cash allowance for an equivalent amount. Prior to July 1, 2010, Mr. Barrist’s compensation also included the use by Mr. Barrist of an aggregate of 150 hours on an airplane that was partly owned by NCO for both business and personal use, as determined by Mr. Barrist in his discretion. Effective July 1, 2010, Mr. Barrist was entitled to use of the Company’s airplane as necessary for business, but not personal, travel within the Americas. We believe providing our Named Executive Officers with these benefits is justified because our Named Executive Officers contribute substantially to our financial and operating performance and to the growth and development of our business. The perquisites and other personal benefits provided to our Named Executive Officers are disclosed below in the “All Other Compensation” column in “—Summary Compensation—Summary Compensation Table.”
Processes and Procedures for the Determination of Executive Officer Compensation
Meetings of the Compensation Committee. The Compensation Committee meets at least annually and more frequently as circumstances require, and it also considers and takes action by written consent. The Compensation Committee reports on committee actions and recommendations at Board meetings.
Scope of Authority of the Compensation Committee. The scope of the Compensation Committee’s authority and responsibilities is set forth in its charter. The Compensation Committee’s authority includes the authority to:
· Review and approve annually our goals and objectives relevant to the compensation of the executive officers and evaluate annually the performance of the executive officers in light of those goals and objectives, and consistent with the requirements of any employment agreement, determine the compensation of the executive officers based on this evaluation;
· Review annually and make recommendations to our Board concerning the following with respect to our executive officers: employment agreements, severance agreements, change in control agreements/provisions and other compensatory arrangements, in each case as, when and if appropriate, and any special or supplemental benefits, in each case subject to the terms of any existing applicable employment agreement terms;
· Review and approve new hire and promotion compensation arrangements for executive officers; and
· Review and recommend to our Board incentive compensation plans, long-term compensation plans, equity-based plans and deferred compensation plans for executive officers, including any modification to such plans, and oversee the performance objectives and funding for such plans and, to the extent permitted under such plans, implement and administer such plans.
Delegation of Authority. As provided under the Compensation Committee’s charter, the Compensation Committee may delegate its authority to special subcommittees of the Compensation Committee as the Compensation Committee deems appropriate, consistent with applicable law. To date, the Compensation Committee has not delegated its responsibilities.
Role of Management in Determining or Recommending Executive Compensation. The Chief Executive Officer makes recommendations concerning the amount of compensation to be awarded to our executive officers, including himself, but does not participate in the Compensation Committee’s deliberations or decisions.
Role of Compensation Consultants in Determining or Recommending Executive Compensation. Under its charter, the Compensation Committee has authority to retain, at our expense, such counsel, consultants, experts and other professionals as it deems necessary. The Compensation Committee has not used consultants in the past, and there are currently no plans to engage consultants in the future.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis section appearing above with our management. Based on this review and these discussions, the Compensation Committee recommended to our Board of Directors that the Compensation Discussion and Analysis be included in our Annual Report on Form 10-K for 2010.
Members of the Compensation Committee
Colin M. Farmer
Edward A. Kangas
The information contained in this Compensation Committee Report is not “soliciting material” and has not been “filed” with the Securities and Exchange Commission. This Compensation Committee Report will not be incorporated by reference into any of our future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we may specifically incorporate it by reference into a future filing.
Summary Compensation
The following table sets forth the compensation earned during 2010, 2009 and 2008 by our Chief Executive Officer, our Chief Financial Officer, and our three other most highly compensated executive officers who were serving as executive officers at the end of 2010. We refer to these individuals collectively as our “Named Executive Officers.”
Summary Compensation Table
Name and Principal |
| Year |
| Salary |
| Stock |
| Non-Equity |
| All Other |
| Total |
|
Michael J. Barrist President and Chief Executive Officer(4) |
| 2010 |
| 811,750 810,926 784,592 |
| — |
| — |
| 196,294 |
| 1,008,044 1,757,212 1,760,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John R. Schwab |
| 2010 |
| 400,000 390,515 344,933 |
| — |
| — |
| 23,914 |
| 423,914 565,047 558,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen W. Elliott |
| 2010 |
| 397,171 396,768 383,883 |
| — |
| — |
| 41,150 |
| 438,321 578,216 591,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joshua Gindin, Esq. |
| 2010 |
| 397,171 396,768 383,883 |
| — |
| — |
| 32,391 |
| 429,562 578,402 587,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven Leckerman |
| 2010 |
| 700,000 692,627 645,784 |
| — |
| — |
| 90,308 |
| 790,308 1,094,589 897,458 |
|
(1) The amounts in this column represent the aggregate grant date fair value for restricted stock granted under our Restricted Share Plan computed in accordance with FASB ASC Topic 718. In accordance with rules of the SEC, any estimate for forfeitures is excluded from and does not reduce, such amounts. Generally, the full grant date fair value is the amount we would recognize for financial statement reporting purposes over the award’s vesting schedule. Our common stock is not publicly traded and therefore no market value for our shares is readily available. Amounts in this column represent the value of the shares based on their most recent purchase price per share.
(2) Represents amounts earned under our management incentive program for executive officers. See “—Grants of Plan-Based Awards.”
(3) The following table summarizes all other compensation paid during 2010 to our Named Executive Officers:
Executive Officer |
| Car(a) |
| Aircraft |
| Other |
| Total All Other |
|
Michael J. Barrist |
| 25,920 |
| 149,467 |
| 20,907 |
| 196,294 |
|
John R. Schwab |
| 15,278 |
| — |
| 8,636 |
| 23,914 |
|
Stephen W. Elliott |
| 20,940 |
| — |
| 20,210 |
| 41,150 |
|
Joshua Gindin, Esq. |
| 18,388 |
| — |
| 14,003 |
| 32,391 |
|
Steven Leckerman |
| 27,720 |
| 26,807 |
| 35,781 |
| 90,308 |
|
(a) | The amount reported represents the amount we paid to lease the Named Executive Officers’ respective cars. |
(b) | Represents Mr. Barrist’s and Mr. Leckerman’s personal use of the Company’s aircraft, calculated by using our actual variable operating costs of $83,422 and $13,068, respectively, plus the hourly cost equivalent for the monthly management fee, interest and depreciation of $6,928 and $995, respectively, and lost tax benefits to us of $59,117 and $12,744, respectively, attributable to such flights. |
(c) | Represents Company paid or reimbursed health, disability, and life insurance premiums and Company contributions to 401(k) plans. |
(4) Mr. Barrist was terminated on March 18, 2011.
Grants of Plan-Based Awards
The following table shows all plan-based awards granted to the Named Executive Officers during 2010.
|
| Estimated Possible Payouts |
| ||||
Name |
| Threshold |
| Target |
| Maximum |
|
Michael J. Barrist |
| — | (2) | 811,750 | (1) | 1,217,625 | (2) |
John R. Schwab |
| — | (2) | 300,000 | (1) | 450,000 | (2) |
Stephen W. Elliott |
| — | (2) | 297,878 | (1) | 446,817 | (2) |
Joshua Gindin, Esq. |
| — | (2) | 297,878 | (1) | 446,817 | (2) |
Steven Leckerman |
| — | (2) | 700,000 | (1) | 1,050,000 | (2) |
(1) | Under the employment agreements with each of our executive officers, each executive is entitled to earn incentive compensation of from 75 percent to 100 percent of his base salary based on our achievement of our annual operating plan for the year. See “Compensation Discussion and Analysis—Elements of Executive Compensation—Management Incentive Compensation.” Messrs. Barrist’s, Schwab’s, Elliott’s, Gindin’s and Leckerman’s target bonus potential as a percentage of each individual’s base salary is equal to 100 percent, 75 percent, 75 percent, 75 percent and 100 percent, respectively. The Compensation Committee has the discretion to pay at, above or below these targets. |
(2) | The performance targets set by the Compensation Committee included a range of performance levels that gave the executive officers the potential to earn from zero percent to 150 percent of the cash incentive compensation specified in their respective employment agreements. |
Employment Agreements
We have definitive employment agreements with each of our executive officers.
Effective as of March 18, 2011, Mr. Barrist’s employment agreement was terminated. Set forth below is a description of Mr. Barrist’s employment agreement that was in effect during 2010:
· Mr. Barrist will serve as our President and Chief Executive Officer;
· The initial term of Mr. Barrist’s employment agreement is five years commencing November 15, 2006, referred to as the Barrist Initial Term, may be extended thereafter and is subject to early termination;
· Mr. Barrist will receive a base salary as stated in the employment agreement, to be adjusted upward, at a minimum, annually in accordance with the Consumer Price Index in effect for such year;
· Mr. Barrist will receive employee benefits similar with those provided to him prior to the Transaction;
· Mr. Barrist will have the opportunity to earn an annual cash bonus equal to 100 percent of his base salary (such percentage of base salary is referred to as Mr. Barrist’s “target bonus”), based upon the achievement by us of our annual operating plan as presented to the Board by our chief executive officer and approved by the Board;
· Mr. Barrist will receive a car allowance of $2,500 per month, effective through June 30, 2010 an aggregate of 150 hours per year (for both business and personal use) on the Company’s aircraft, effective July 1, 2010 use of the Company’s aircraft as necessary for business, but not personal, travel within the Americas, in addition to other perquisites;
· Upon a termination of employment by reason of death, disability, without “cause” or a resignation for “good reason,” Mr. Barrist will receive certain payments and benefits (see “—Potential Payments Upon Termination of Employment or Change in Control”);
· Upon a termination of employment for “cause” or a resignation without “good reason,” Mr. Barrist will receive his accrued but unpaid base salary and annual bonus (see “—Potential Payments Upon Termination of Employment or Change in Control”);
· Mr. Barrist is subject to non-compete, non-solicitation and non-interference covenants during his employment and ending on the later of (i) the last day of the period equal to the greater of one year and the remainder of the Barrist Initial Term, or (ii) two years after termination of employment;
· During and after Mr. Barrist’s employment with us, Mr. Barrist is subject to a confidentiality covenant; and
· Mr. Barrist will be entitled, under certain circumstances, to receive reimbursement from us for taxes, if any, imposed on Mr. Barrist under Section 4999 of the Code and/or under Section 409A of the Code and any federal, state, local and excise taxes imposed upon the reimbursement.
The terms of the employment agreements of our other Named Executive Officers, Messrs. Schwab, Elliott, Gindin and Leckerman include the following terms:
· Each executive will retain the same position as that held with NCO prior to the Transaction;
· The initial term of each employment agreement is five years commencing November 15, 2006, referred to as the “Initial Term,” each may be extended thereafter and each is subject to early termination;
· Each of Messrs. Schwab, Elliott, Gindin and Leckerman will receive base salaries as stated in their respective employment agreements, to be adjusted upward, at a minimum, annually in accordance with the Consumer Price Index in effect for such year;
· Each executive will receive employee benefits and perquisites similar with those provided prior to the Transaction;
· Each of Messrs. Schwab, Elliott, Gindin and Leckerman will have the opportunity to earn an annual bonus equal to 75 percent, 75 percent, 75 percent and 100 percent, respectively, of his base salary (such percentage of base salary is referred to as such executive’s “target bonus”), based upon the achievement by us of our annual operating plan as presented to the Board by our chief executive officer and approved by the Board;
· Upon a termination of employment by reason of death, disability, without “cause” or a resignation for “good reason,” the executive will receive certain payments and benefits (see “—Potential Payments Upon Termination of Employment or Change in Control”);
· Upon a termination of employment for “cause” or a resignation without “good reason,” the executive will receive his accrued but unpaid base salary and annual bonus (see “—Potential Payments Upon Termination of Employment or Change in Control”);
· The executive is subject to non-compete and non-solicitation covenants during his employment and for (i) two years after termination of employment if his employment is terminated on or prior to November 15, 2012 or (ii) one year after termination of employment if his employment is terminated after November 15, 2012;
· The executive is subject to a non-interference covenant during his employment and for (i) three years after termination of employment if his employment is terminated on or prior to November 15, 2012 or (ii) two years after termination of employment if his employment is terminated after November 15, 2012;
· During and after employment with us, the executive is subject to a confidentiality covenant; and
· The executive will be entitled, under certain circumstances, to receive reimbursement from us for taxes, if any, imposed on the executive under Section 4999 of the Code and/or under Section 409A of the Code and any federal, state, local and excise taxes imposed upon the reimbursement.
On March 18, 2011, the Board appointed Ronald A. Rittenmeyer as our President and Chief Executive Officer. Effective as of March 18, 2011, we entered into an employment agreement with Mr. Rittenmeyer. The terms of Mr. Rittenmeyer’s employment agreement include:
· Mr. Rittenmeyer will serve as our President and Chief Executive Officer;
· The initial term of Mr. Rittenmeyer’s employment agreement is one year, referred to as “term of employment,” may be extended thereafter and is subject to early termination;
· Mr. Rittenmeyer will receive a base salary of $1,000,000 per year;
· Mr. Rittenmeyer will be entitled to participate in all employee benefit plans of the Company
· Mr. Rittenmeyer will have the opportunity to earn an annual performance bonus (with a “target bonus” of 100 percent of base salary), based upon the achievement of performance goals as mutually agreed to by him and the Board;
· Mr. Rittenmeyer will be eligible, no later than May 31, 2011, to receive equity, stock options, or other equity-based awards, as determined in the sole discretion of the Board;
· Mr. Rittenmeyer will receive a car allowance, reimbursement of certain housing expenses, reimbursement for use of his indirectly owned aircraft as necessary for business travel, in addition to other perquisites;
· Upon a termination of employment by Mr. Rittenmeyer, Mr. Rittenmeyer will receive any base salary earned but unpaid as of the termination date in a lump sum within 10 business days following the termination date;
· Upon a termination of employment by reason of death, Mr. Rittenmeyer’s beneficiaries will receive any base salary earned but unpaid as of the termination date and a pro-rated target bonus for that year in a lump sum within 10 business days following the termination date;
· Upon a termination of employment by us, Mr. Rittenmeyer will receive any base salary earned but unpaid as of the termination date in a lump sum within 10 business days following the
termination date and, subject to certain conditions, base salary continuation for the then remaining term of employment and a pro-rated target bonus for that year paid in a lump sum 30 days following the termination date;
· Mr. Rittenmeyer is subject to non-solicitation and non-interference covenants during his term of employment and for one year thereafter;
· During and after Mr. Rittenmeyer’s employment with us, Mr. Rittenmeyer is subject to a confidentiality covenant; and
· Mr. Rittenmeyer will be entitled, under certain circumstances, to receive reimbursement from us for certain taxes imposed on Mr. Rittenmeyer.
Restricted Share Plan
On November 15, 2006, we adopted a restricted share plan, known as the NCO Group, Inc. Restricted Share Plan (the “Restricted Share Plan”) which authorizes grants of restricted shares of our Class A common stock to our officers and key employees. On March 28, 2008, the Board approved the amendment and restatement of the Restricted Share Plan to: (i) permit members of our Board to participate in the Restricted Share Plan and (ii) to increase the number of shares authorized for issuance under the Restricted Share Plan to 336,666.7 shares. No awards were granted under the Restricted Share Plan during 2010. At December 31, 2010, there were 333,010.8 shares issued under the Restricted Share Plan and 3,655.9 shares available for future issuance.
The Restricted Share Plan is administered by the Compensation Committee of our Board. Each share of restricted stock issued pursuant to the Restricted Share Plan, regardless of whether the restriction period with regard to such share has lapsed, is subject to the transfer restrictions, repurchase rights and other restrictions pursuant to the terms of a Stockholders’ Agreement.
Generally, the Restricted Share Plan states that the Compensation Committee of our Board will determine, in the terms of the applicable award agreement, the time or times when and the manner and condition in which each award will vest. The shares of restricted stock that have been granted under the Restricted Share Plan vest in 25 percent increments upon each anniversary of the date of grant, each, referred to as an annual vesting date, provided that the recipient remains employed by us or continues to serve as our director, as applicable. In addition, if a recipient’s employment or service as a director, as applicable, is terminated by us without Cause (as defined in the Restricted Share Plan) or if a recipient terminates his employment, or service as a director, as applicable, with us for Good Reason (as defined in the Restricted Share Plan) within three months immediately preceding an annual vesting date, such award will immediately vest with respect to the 25 percent of the then unvested shares that would have vested had such recipient remained employed, or remained as our director, as applicable, through the annual vesting date. For purposes of awards to the directors, the terms “Cause” and “Good Reason” are as defined in the Restricted Share Plan, except that such terms are interpreted as applicable to apply to the termination of a director’s service as a director rather than termination of employment. In addition, each restricted share award will immediately vest in full in the event a Change in Control or Public Offering (each as defined in the Restricted Share Plan) occurs, subject to certain resale restrictions if vesting occurs as a result of a Public Offering. For a description of additional termination or change in control provisions in the Restricted Share Plan, which are applicable to the awards that have been issued to our executive officers and directors, see “—Potential Payments Upon Termination of Employment or Change in Control.”
In the future, the Compensation Committee, on a discretionary basis, may elect to award our executive officers or directors restricted stock under the Restricted Share Plan, although there is no obligation for us to do so and we do not expect any such awards to be material.
If cash dividends are declared by our Board on our common stock, dividends will be paid on the shares of restricted stock awarded under our Restricted Share Plan regardless of vesting. In addition, unless otherwise determined by the Compensation Committee, holders of restricted shares will have the right to vote such shares during the restriction period.
Outstanding Equity Awards at Fiscal Year End
The following table shows all outstanding equity awards held by the Named Executive Officers as of December 31, 2010.
|
|
|
| Stock Awards |
| ||
Name |
| Date of Grant |
| Number of Shares |
| Market Value of Shares |
|
Michael J. Barrist |
| 3/31/2008 |
| 10,401.5 |
| N/A |
|
John R. Schwab |
| 8/10/2007 |
| 1,110.8 |
| N/A |
|
|
| 3/31/2008 |
| 5,918.9 |
| N/A |
|
Stephen W. Elliott |
| 8/10/2007 |
| 1,110.8 |
| N/A |
|
|
| 3/31/2008 |
| 6,074.9 |
| N/A |
|
Joshua Gindin, Esq. |
| 8/10/2007 |
| 1,110.8 |
| N/A |
|
|
| 3/31/2008 |
| 5,996.9 |
| N/A |
|
Steven Leckerman |
| 8/10/2007 |
| 1,417.2 |
| N/A |
|
|
| 3/31/2008 |
| 7,693.4 |
| N/A |
|
(1) Represents awards of restricted shares under our Restricted Share Plan which are scheduled to vest in 25 percent increments over a period of 4 years beginning on the first anniversary of the date of grant, provided that the recipient remains employed by us. In addition, if a recipient’s employment is terminated by us without Cause (as defined in the Restricted Share Plan) or if a recipient terminates his employment with us for Good Reason (as defined in the Restricted Share Plan) within three months immediately preceding an annual vesting date, such award will immediately vest with respect to the 25 percent of the then unvested shares that would have vested had such recipient remained employed through the annual vesting date. In addition, each restricted share award will immediately vest in full in the event a Change in Control or Public Offering (each as defined in the Restricted Share Plan) occurs. See “—Restricted Share Plan”. For a description of additional termination or change in control provisions, including our right to repurchase the shares issued, in the Restricted Share Plan, see “—Potential Payments Upon Termination of Employment or Change in Control.” In addition, each share of restricted stock issued pursuant to the Restricted Stock Plan, regardless of whether the restriction period with regard to such share has lapsed, is subject to transfer restrictions, repurchase rights and other restrictions set forth in a Stockholders’ Agreement. See “—Restricted Share Plan.”
(2) Our common stock is not publicly traded and therefore no market value for our shares is readily available.
Stock Vested in 2010
The following table provides information concerning restricted share awards held by the Named Executive Officers that vested during 2010.
|
| Stock Awards |
| ||
Name |
| Number of |
| Value |
|
Michael J. Barrist |
| 5,200.8 |
| N/A |
|
John R. Schwab |
| 9,255.3 |
| N/A |
|
Stephen W. Elliott |
| 9,333.3 |
| N/A |
|
Joshua Gindin, Esq. |
| 9,294.3 |
| N/A |
|
Steven Leckerman |
| 11,879.3 |
| N/A |
|
(1) These shares remain subject to transfer restrictions, repurchase rights and other restrictions set forth in a Stockholders’ Agreement and the stock awards issued pursuant to the Restricted Share Plan. See “—Restricted Share Plan” and “—Potential Payments Upon Termination of Employment or Change in Control.”
(2) Our common stock is not publicly traded and therefore no market value for our shares is readily available.
Nonqualified Deferred Compensation
Our Deferred Compensation Plan permits eligible employees to defer receipt and taxation of their compensation each year up to the limit in effect under Section 402(g) of the Code ($16,500 for 2010) (less amounts contributed to our 401(k) Plan). In addition, in our absolute and sole discretion, we may make a
contribution that will be allocated among participants in proportion to their deferrals for such year. All executive officers and other key employees designated by us are eligible to participate in the Deferred Compensation Plan.
Amounts deferred or contributed are placed in a rabbi trust, of which Putnam Fiduciary Trust Company is directed trustee. Participants may designate certain Putnam mutual funds by which the value of their accounts will be measured, but all investments of Deferred Compensation Plan funds are made as directed by us in our sole discretion.
A participant is 100 percent vested as to amounts deferred by the participant. Any company contributions will be 100 percent vested upon a participant’s having three years of service, termination of employment due to death or disability, reaching age 65 or upon a “change of control” (as defined in the Deferred Compensation Plan) of us. A participant’s benefits in the Deferred Compensation Plan are payable as soon as practicable following termination of employment or a “change of control” of the Company.
A participant may make an early withdrawal if such participant demonstrates a special need or hardship due to “severe financial emergency.”
The following table provides information concerning amounts held under the Deferred Compensation Plan for the benefit of our Named Executive Officers.
Name |
| Executive |
| Registrant |
| Aggregate |
| Aggregate |
Michael J. Barrist |
| — |
| — |
| 3,812 |
| 30,569 |
John R. Schwab |
| — |
| — |
| 1, 652 |
| 10,194 |
Stephen W. Elliott |
| — |
| — |
| — |
| — |
Joshua Gindin, Esq. |
| — |
| — |
| — |
| — |
Steven Leckerman |
| — |
| — |
| — |
| — |
(1) The aggregate earnings represent the market value change of this plan during 2010. Earnings received by the Named Executive Officers are not reported as compensation in the Summary Compensation Table because such earnings are not considered to be “above market” earnings under SEC regulations.
(2) Amounts reported in the Aggregate Balance at Last FY which were previously reported as compensation to the Named Executive Officers in the Summary Compensation Table included in prior SEC filings for previous years included $22,416 and $5,894 for Messrs. Barrist and Schwab, respectively. These amounts represent executive contributions and registrant contributions for prior years.
Potential Payments Upon Termination of Employment or Change in Control
Death Benefits
We provide beneficiaries of designated participants with a death benefit in the event of the participant’s death while employed by us. The benefit provides each participant, as long as such participant is employed with the Company, with a fixed dollar term life insurance policy for the beneficiaries of such participant’s choice. Executive participants are selected by the Board, and each of our Named Executive Officers is a participant. Under this benefit, beneficiaries of Messrs. Barrist, Schwab, Elliott, Gindin and Leckerman would be entitled to receive a lump sum payment of $4,500,000, $2,000,000, $2,000,000, $2,000,000 and $4,000,000, respectively.
Termination or Change in Control Provisions in Restricted Share Plan
Generally, the Restricted Share Plan states that the Compensation Committee of our Board will determine, in the terms of the applicable award agreement, the time or times when and the manner and condition in which each award will vest and the extent, if any, to which vesting accelerates upon a Change in Control. “Change of Control” is defined in the Restricted Share Plan as (i) any liquidation, dissolution or winding up of our company, whether voluntary or involuntary, (ii) any transfer by our company of all or substantially all of its assets on a consolidated basis, (iii) any consolidation, merger or reorganization of our company with or into any other entity or entities as a result of which the holders of our company’s outstanding capital stock possessing the voting power (under ordinary circumstances) to elect a majority of our Board immediately prior to such consolidation, merger or reorganization no longer beneficially own, directly or indirectly, the outstanding capital stock of the surviving corporation possessing the voting power (under ordinary circumstances) to elect a majority of the surviving corporation’s board of directors, (iv) any transfer to any third party of shares of our company’s capital stock by
the holders thereof as a result of which the holders of our company’s outstanding capital stock possessing the voting power (under ordinary circumstances) to elect a majority of our company’s Board immediately prior to such transfer no longer beneficially own, directly or indirectly, the outstanding capital stock of our company possessing the voting power (under ordinary circumstances) to elect a majority of our company’s Board, or (v) a change in the constituency of the Board with the result that individuals, who were members of the Board on November 15, 2006 (or individuals designated by OEP in place thereof) cease for any reason to constitute at least a majority of the Board.
The individual award agreements that have been issued to our executives provide the following enhanced vesting provisions related to termination of employment or a Change of Control:
· If a holder’s employment is terminated by us without “Cause” or if the holder terminates his employment for “Good Reason” within three months immediately preceding an annual vesting date, such holder’s award will immediately vest with respect to the 25 percent of the then unvested shares that would have vested had the holder remained employed through that annual vesting date; and
· In the event that during a holder’s service with us, a Change in Control occurs, then 100 percent of the holder’s award will become vested.
“Cause” is defined in the Restricted Share Plan as (i) an indictment of employee in connection with a crime involving moral turpitude or any felony, which materially adversely affects our company or employee’s ability to perform the duties of his employment; (ii) a conviction of, or a plea of guilty or no-contest by, employee to any felony; (iii) the employee’s dishonesty, fraud, unethical or illegal act, misappropriation or embezzlement which does (or would reasonably be likely to) materially damage our company or our company’s reputation; (iv) willful or deliberate material violations of the employee’s obligations to our company; or (v) a material breach of any of the terms or conditions of an employment agreement between the employee and us, subject, in the case of (iv) and (v) above, to a 20 day cure period. “Good Reason” is defined in the Restricted Share Plan as: (i) a material diminution of the employee’s duties or responsibilities under a contract of employment with our company; (ii) a material decrease in the employee’s base salary or bonus opportunity or other material benefits, other than in connection with such a reduction occasioned by our company’s business conditions or prospects and applicable to all similarly situated company employees; and (iii) any material violation by our company of a contract of employment with the employee, subject, in the case of (i) — (iii) above, to a 20 day cure period.
The individual award agreements that have been issued to our executives also provide that in the event that no public offering has occurred and a holder of restricted shares ceases to be employed by us for any reason within five years of the date of grant, all of the holder’s restricted shares, whether or not vested, will remain outstanding following the date of such holder’s termination of employment and, for a 180-day period thereafter, we will have the right to repurchase both the vested and unvested portions of such awards at the prices set forth below, as applicable:
· If a holder ceases to be employed by us for any reason other than a termination for Cause, we will repurchase the portion of such award that is (a) vested shares of common stock for their then Fair Market Value (as defined below); and (b) not vested for the lesser of (i) the Fair Market Value as of the termination date, or (ii) 40 percent of the Fair Market Value as of the date of grant of the restricted shares; and
· If a holder is terminated for Cause, any stock that such holder would have acquired under the award, whether or not vested and otherwise free from restriction, will be subject to repurchase by us for the lesser of (i) the Fair Market Value as of the termination date, or (ii) 40 percent of the Fair Market Value as of the date of grant of the restricted shares.
“Fair Market Value”, in the context of our current repurchase option, is defined in the Restricted Share Plan as the fair market value as determined by the Board, subject in certain cases, to change based upon an appraisal by an independent investment bank or other independent valuation expert.
In the event that we do not exercise our buyback right described above within 180 days following the executive’s termination of employment, the restrictions on the restricted shares that were not vested (and did not vest) as a result of the holder’s termination of employment will at that date lapse in full and the holder will retain all such restricted shares, as well as all of the restricted shares that were vested as of, or vested in connection with, the holder’s termination of employment.
The individual award agreements that have been issued to our executives further provide that in the event a holder’s employment terminates at any time following, the earlier to occur of (a) a public offering and (b) the fifth anniversary of the grant date, the holder will retain all restricted shares that were vested at the time of termination (including any restricted shares that vested in connection with the public offering or termination).
Termination or Change in Control Provisions in Employment Agreements
Michael J. Barrist. Effective March 18, 2011, Mr. Barrist’s employment agreement was terminated without “Cause.” Set forth below is a description of the termination and change in control provisions contained in Mr. Barrist’s employment agreement that was in effect during 2010. The agreement provides that upon a termination of employment by reason of death, disability, without “Cause” or a resignation for “Good Reason,” Mr. Barrist will receive (i) his accrued but unpaid base salary and target bonus, and (ii) two times his base salary and two times his target bonus payable over a period of one year. In addition, Mr. Barrist’s employment agreement provides that we will reimburse Mr. Barrist for his and his eligible dependents’ COBRA premiums, less the amount, referred to as the “Employee Portion,” that a full-time active employee of NCO would be required to pay for such coverage under our healthcare plans, until the earlier of the 18 month anniversary of such termination and the date on which Mr. Barrist becomes eligible for healthcare coverage under the plan of a subsequent employer that provides benefits that are substantially similar (or better) in the aggregate to the benefits provided under our healthcare plans (such period, is referred to as the “Barrist COBRA Period”). In addition, from the expiration of the Barrist COBRA Period until the second anniversary of Mr. Barrist’s termination of employment, Mr. Barrist’s employment agreement provides that we will reimburse Mr. Barrist for the cost of his and his eligible dependents’ healthcare coverage premiums under the healthcare plan of such subsequent employer or under private health insurance (as applicable), in either case, only to the extent that the costs of such premiums to Mr. Barrist exceed the Employee Portion (but not in an amount in excess of the amount that we would be required to reimburse Mr. Barrist if he continued COBRA coverage during such period).
Mr. Barrist’s employment agreement provides that if Mr. Barrist’s employment is terminated by reason of death, his beneficiaries will be paid the amounts owed under a fixed dollar life insurance policy provided by us. See “—Death Benefits” described above. If Mr. Barrist during any period of disability, including after termination of his employment agreement, receives any periodic payments representing lost compensation under any health and accident policy or under any salary continuation insurance policy, the premiums for which have been paid by us, the amount of the base salary that Mr. Barrist would be entitled to receive from us shall be decreased by the amounts of such payments.
Mr. Barrist’s employment agreement provides that upon a termination of employment for “Cause” or a resignation without “Good Reason,” Mr. Barrist will receive his accrued but unpaid base salary and annual bonus.
“Cause” is defined in Mr. Barrist’s employment agreement as his (i) conviction of, or guilty plea with respect to, a felony; (ii) a nolo contender plea with respect to a felony (other than in respect of a claim or allegation by a governmental regulatory authority); (iii) willful illegal conduct or gross misconduct that, in the reasonable good faith judgment of the Board, materially interferes with Mr. Barrist’s ability to perform his duties for our company; or (iv) any willful material breach of any of the covenants in his employment agreement after notice and thirty days from the date Mr. Barrist receives such notice, to cure such event or condition to the extent such event or conditions is reasonably susceptible to cure. No act or failure to act by Mr. Barrist will be considered willful unless it is done, or omitted to be done, by Mr. Barrist in bad faith or without reasonable belief that such action or inaction was in the best interests of our company. Any act, or failure to act by Mr. Barrist, based on authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel of our company will be conclusively presumed to be in good faith and in the best interests of our company.
“Good Reason” is defined in Mr. Barrist’s employment agreement as (i) the assignment to Mr. Barrist of any duties materially inconsistent, in any respect, with Mr. Barrist’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Mr. Barrist’s employment agreement, or any other action by us which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose any action not taken in bad faith and which is remedied by us promptly after receipt of notice thereof given by Mr. Barrist; (ii) a change in Mr. Barrist’s principal work location to a location more than 40 miles from Horsham, Pennsylvania, except for required travel on company business to an extent substantially consistent with Mr. Barrist’s business travel obligations; (iii) any violation of the terms or conditions of Mr. Barrist’s employment agreement, including, without limitation, failure to pay any compensation when due; (iv) any material change to the nature of our business if such change is implemented over Mr. Barrist’s objection, which, for purposes hereof, is agreed to be (a) business process outsourcing focused primarily on
accounts receivable collections, portfolio purchase and customer relationship management and (b) the purchase and management of overdue accounts receivable (the “Business”); or (v) in the event that JPMorgan Chase Bank (either directly or indirectly) requires changes to our management or strategic plans in order to address concerns or issues that are primarily related to JPMorgan Chase Bank and its affiliates (other than our company) (including the ownership by JPMorgan Chase Bank and its affiliates (other than our company) of a company engaged in the Business) as opposed to concerns or issues primarily related to the performance of our company, and such interference would reasonably be expected to have an adverse effect of a material nature on the value of Mr. Barrist’s investment in our company, or may result in the liquidation or sale of our company, subject in the case of (i) — (v) above to a 30 day cure period.
Mr. Barrist’s employment agreement provides that he will be entitled to reimbursement of certain excise taxes imposed upon him in connection with payments to be made to him in connection with a change in control of the Company and any federal, state and local income tax and excise tax imposed on the reimbursed excise tax.
Other Named Executive Officers. The employment agreements of our other Named Executive Officers, Messrs. Schwab, Elliott, Gindin and Leckerman, provide that upon a termination of employment on or prior to the last day of the Initial Term by reason of death, disability, without “Cause” for a resignation for “Good Reason,” the executive will (i) receive his accrued but unpaid base salary and annual bonus and (ii) continue to receive his then current base salary and target bonus for a period of 24 months. In addition, the employment agreements of our other Named Executive Officers provide that we will reimburse the executive for his and his eligible dependents’ COBRA premiums, less the Employee Portion, until the earlier of the 18 month anniversary of such termination and the date on which the executive becomes eligible for healthcare coverage under the plan of a subsequent employer that provides benefits that are substantially similar (or better) in the aggregate to the benefits provided under our healthcare plans,(such period, is referred to as the “Initial COBRA Period”). In addition, from the expiration of the Initial COBRA Period until the second anniversary of the executive’s termination of employment, the employment agreements of our other Named Executive Officers provide that we will reimburse the executive for the cost of his and his eligible dependents’ healthcare coverage premiums under the healthcare plan of such subsequent employer or under private health insurance (as applicable), in either case, only to the extent that the costs of such premiums to the executive exceed the Employee Portion (but not in an amount in excess of the amount that we would be required to reimburse the executive if the executive continued COBRA coverage during such period).
In addition, the employment agreements of Messrs. Schwab, Elliott, Gindin and Leckerman provide that upon a termination of employment after the Initial Term, but on or prior to November 15, 2012, by reason of death, disability, without “Cause” or a resignation for “Good Reason,” the executive will receive (i) his accrued but unpaid base salary and annual bonus and (ii) two times his then current base salary and two times his target bonus for a period of 12 months. In addition, the employment agreements of our other Named Executive Officers provide that we will reimburse the executive for his and his eligible dependents’ COBRA premiums, less the Employee Portion, until the earlier of the 18 month anniversary of such termination and the date on which the executive becomes eligible for healthcare coverage under the plan of a subsequent employer that provides benefits that are substantially similar (or better) in the aggregate to the benefits provided under our healthcare plans, (such period, is referred to as the “Second COBRA Period”). In addition, from the expiration of the Second COBRA Period until the second anniversary of the executive’s termination of employment, the employment agreements of our other Named Executive Officers provide that we will reimburse the executive for the cost of his and his eligible dependents’ healthcare coverage premiums under the healthcare plan of such subsequent employer or under private health insurance (as applicable), in either case, only to the extent that the costs of such premiums to the executive exceed the Employee Portion (but not in an amount in excess of the amount that we would be required to reimburse the executive if the executive continued COBRA coverage during such period.
The employment agreements of Messrs. Schwab, Elliott, Gindin and Leckerman further provide upon a termination of employment after November 15, 2012 by reason of death, disability, without “Cause” or a resignation for “Good Reason,” the executive will (i) receive his accrued but unpaid base salary and annual bonus and (ii) continue to receive his then current base salary and his target bonus for a period of 12 months. In addition, the employment agreements of our other Named Executive Officers provide that we will reimburse the executive for his and his eligible dependents’ COBRA premiums, less the Employee Portion, until the earlier of the 12 month anniversary of such termination and the date on which the executive becomes eligible for healthcare coverage under the plan of a subsequent employer that provides benefits that are substantially similar (or better) in the aggregate to the benefits provided under our healthcare plans, (such period, referred to as the “Benefit Continuation Period”). In addition, from the expiration of the Benefit Continuation Period until the first
anniversary of the executive’s termination of employment, reimburse the executive for the cost of his and his eligible dependents’ healthcare coverage premiums under the healthcare plan of such subsequent employer to the extent that the costs of such premiums to the executive exceed the Employee Portion (but not in an amount in excess of the amount that we would be required to reimburse the executive if the executive COBRA coverage during such period).
In addition, each of the employment agreements provide that if such executive’s employment is terminated by reason of death, his beneficiaries will be paid the amounts owed under a fixed dollar term life insurance policy provided by us. See “—Death Benefits” described above.
The employment agreements also provide that upon a termination of employment for “Cause” or a resignation without “Good Reason,” the executive will receive his accrued but unpaid base salary and annual bonus.
“Cause” is defined in each of the employment agreements as the executive’s (i) indictment in connection with a crime involving moral turpitude or any felony, which materially adversely affects our company or his ability to perform the duties of his employment; (ii) conviction of, or pleading of guilty or no-contest by, to any felony; (iii) dishonesty, fraud, unethical or illegal act, misappropriation or embezzlement which does (or would reasonably be likely to) materially damage our company or our company’s reputation; (iv) willful or deliberate material violations of his obligations to our company; or (v) material breach of any of the terms or conditions of his employment agreement, subject in the case of (iv) and (v) above, to a 20 day cure period. No act or failure to act by the executive will be considered willful unless it is done, or omitted to be done, by the executive in bad faith or without reasonable belief that such action or omission was in the best interests of our company. Any act, or failure to act by an executive, based on authority given by our company’s Chief Executive Officer or pursuant to a resolution duly adopted by the Board or based upon the advice of counsel of our company will be conclusively presumed to be in good faith and in the best interests of our company.
“Good Reason” is defined in each of the employment agreements as: (i) a material diminution of his position, authority, duties or responsibilities (including any material adverse change to his title); (ii) a material decrease in his base salary or annual bonus opportunity or other material benefits, other than in connection with such a reduction occasioned by our company’s business conditions or prospects and applicable to all similarly situated company management; (iii) our company relocates his principal place of employment to a location in excess of 40 miles from the principal place of his employment as of the date of the applicable employment agreement; and (iv) any material violation of the executive’s employment agreement by our company, subject in the case of (i) — (iv) above to a 20 day cure period.
Each executive officer’s employment agreement provides that the executive will be entitled to reimbursement of certain excise taxes imposed upon such executive in connection with payments to be made to such executive in connection with a change in control of the Company and any federal, state and local income tax and excise tax imposed on the reimbursed excise tax.
The following table shows the estimated amount of payments and benefits that would be provided by us to our Named Executive Officers under the plans and agreements described above assuming that (i) their employment was terminated as of December 31, 2010 for various reasons as described below or (ii) there was a change of control of the Company effective as of December 31, 2010:
|
| Reason for Termination of Employment |
| ||||||||||
Named Officer and |
| Termination |
| Termination |
| Cause |
| Death |
| Disability |
| Payments |
|
Michael J. Barrist |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash payment |
| 31,102 | (1) | 4,089,852 | (2) | 31,102 | (1) | 8,589,852 | (2)(3) | 4,089,852 | (2) | — | (4) |
Cost of continuation of benefits |
| — |
| 20,027 | (5) | — |
| 20,027 | (5) | 20,027 | (5) | — | (4) |
Effect on stock awards |
|
| (10) |
| (10) |
| (11) |
| (10) |
| (10) |
| (12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John R. Schwab |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash payment |
| 15,326 | (6) | 1,415,326 | (7) | 15,326 | (6) | 3,415,329 | (7)(8) | 1,415,326 | (7) | — | (4) |
Cost of continuation of benefits |
| — |
| 19,967 | (9) | — |
| 19,967 | (9) | 19,967 | (9) | — | (4) |
Effect on stock awards |
|
| (10) |
| (10) |
| (11) |
| (10) |
| (10) |
| (12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen W. Elliott |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash payment |
| 15,217 | (6) | 1,405,316 | (7) | 15,217 | (6) | 3,405,316 | (7)(13) | 1,405,316 | (7) | — | (4) |
Cost of continuation of benefits |
| — |
| 20,027 | (9) | — |
| 20,027 | (9) | 20,027 | (9) | — | (4) |
Effect on stock awards |
|
| (10) |
| (10) |
| (11) |
| (10) |
| (10) |
| (12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joshua Gindin, Esq. |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash payment |
| 15,217 | (6) | 1,405,316 | (7) | 15,217 | (6) | 3,405,316 | (7)(14) | 1,405,316 | (7) | — | (4) |
Cost of continuation of benefits |
| — |
| 20,123 | (9) | — |
| 20,123 | (9) | 20,123 | (9) | — | (4) |
Effect on stock awards |
|
| (10) |
| (10) |
| (11) |
| (10) |
| (10) |
| (12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven Leckerman |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash payment |
| 26,820 | (6) | 2,826,820 | (7) | 26,820 | (6) | 6,826,820 | (7)(15) | 2,826,820 | (7) | — | (4) |
Cost of continuation of benefits |
| — |
| 15,094 | (9) | — |
| 15,094 | (9) | 15,094 | (9) | — | (4) |
Effect on stock awards |
|
| (10) |
| (10) |
| (11) |
| (10) |
| (10) |
| (12) |
(1) Represents amounts payable under his employment agreement, representing (i) accrued but unpaid base salary at December 31, 2010, payable within 30 days after termination and (ii) accrued but unpaid annual bonus at December 31, 2010, payable in a lump sum the year following the year of termination when annual bonuses are paid generally to executives of NCO, but not later than two and a half months after the end of the year of termination.
(2) Represents amounts payable under his employment agreement. Includes $842,852 representing (i) accrued but unpaid base salary at December 31, 2010, payable within 30 days after termination and (ii) accrued but unpaid target bonus at December 31, 2010, payable in a lump sum the year following the year of termination when annual bonuses are paid generally to executives of NCO, but not later than two and a half months after the end of the year of termination; and $3,247,000 representing (i) two times Mr. Barrist’s base salary payable pro rata bi-weekly over a one year period from the date of termination and (ii) two times Mr. Barrist’s target bonus, payable in the year following the year to which such bonus relates. Assumes no base salary increases. This amount would be reduced to the extent of any disability payments representing lost compensation received by Mr. Barrist from any policy maintained by us.
(3) Includes $4,500,000 payable to Mr. Barrist’s beneficiaries under our death benefit and $4,089,852 payable under Mr. Barrist’s employment agreement (See Footnote 2 regarding the amounts payable under Mr. Barrist’s employment agreement.).
(4) Each executive’s employment agreement provides that the executive is entitled to reimbursement of certain excise taxes imposed upon such executive in connection with payments made to such executive in connection with a change in control of the Company and any federal, state and local income tax and excise tax imposed on the reimbursed excise tax. Assuming that a change in control involving NCO, whether or not the executive was terminated in connection therewith, occurred on December 31, 2010, there would be no tax liability calculated in accordance with Sections 280G and 4999 of the Internal Revenue Code. See termination payments set forth in other columns of this table for determination of severance benefits payable to each executive if termination occurs at the same time as a change of control.
(5) Represents the estimated cost, calculated in accordance with the terms of his employment agreement, to reimburse Mr. Barrist for healthcare coverage for the two years following termination of employment.
(6) Represents amounts payable under such executive’s employment agreement, representing (i) accrued but unpaid base salary at December 31, 2010, payable within 30 days after termination and (ii) accrued but unpaid annual bonus at December 31, 2010, payable in a lump sum the year following the year of termination when annual bonuses are paid generally to executives of NCO, but not later than two and a half months after the end of the year of termination.
(7) Represents amounts payable under such executive’s employment agreement. Includes $15,326, $15,217, $15,217 and $26,820 payable to each of Messrs. Schwab, Elliott, Gindin and Leckerman, respectively, representing (i) accrued but unpaid base salary at December 31, 2010, payable within 30 days after termination and (ii) accrued but unpaid annual bonus at December 31, 2010, payable in a lump sum the year following the year of termination when annual bonuses are paid generally to executives of NCO, but not later than two and a half months after the end of the year of termination; and $1,400,000, $1,390,098, $1,390,098 and $2,800,000 payable to each of Messrs. Schwab, Elliott, Gindin and Leckerman, respectively, representing (i) base salary payable pro rata bi-weekly over a two year period from the date of termination and (ii) target bonus for two years after termination, to be paid in the year following the year to which they relate. Assumes no base salary increases.
(8) Includes $2,000,000 payable to Mr. Schwab’s beneficiaries under our death benefit and $1,415,326 payable under Mr. Schwab’s employment agreement (See Footnote 7 regarding the amounts payable under Mr. Schwab’s employment agreement.).
(9) Represents the estimated cost, calculated in accordance with the terms of the executive’s employment agreement, to reimburse the executive for healthcare coverage for the two years following termination of employment.
(10) For a 180-day period after termination, we would have had the right to repurchase both the vested and unvested portions of all outstanding restricted stock awards at the following prices: the portion of such award that was (a) vested for their then Fair Market Value; and (b) not vested for the lesser of (i) the Fair Market Value as of the termination date, or (ii) 40 percent of the Fair Market Value as of the date of grant of the restricted shares. As of December 31, 2010, in the case of termination (not in connection with a Change in Control), 10,401.5, 29,991.4, 30,147.4, 30,069.4 and 38,406.6 restricted shares held by Messrs. Barrist, Schwab, Elliott, Gindin and Leckerman, respectively, would have been vested, and 10,401.5, 7,029.7, 7,185.7, 7,107.7 and 9,110.5 shares held by Messrs. Barrist, Schwab, Elliott, Gindin and Leckerman, respectively, would have been unvested. In the case of termination in connection with a Change in Control, 100 percent of the holder’s restricted stock would have become vested upon termination. Accordingly, as of December 31, 2010, Messrs. Barrist, Schwab, Elliott, Gindin and Leckerman would have held 20,803.1, 37,021.1, 37,333.1, 37,177.1 and 47,517.1 vested shares of our common stock, respectively. In the event that we did not exercise our buyback right described above, at the end of the 180-day buyback period, all of the restricted shares held by each executive would have become vested and such executive would have had the right to retain all of the shares issued to him under our Restricted Share Plan.
(11) For a 180-day period after termination, we would have had the right to repurchase both the vested and unvested portions of all outstanding restricted stock awards for the lesser of (i) the Fair Market Value as of the termination date, or (ii) 40 percent of the Fair Market Value as of the date of grant of the restricted shares. As of December 31, 2010, in the case of termination (not in connection with a Change in Control), 10,401.5, 29,991.4, 30,147.4, 30,069.4 and 38,406.6 restricted shares held by Messrs. Barrist, Schwab, Elliott, Gindin and Leckerman, respectively, would have been vested, and 10,401.5, 7,029.7, 7,185.7, 7,107.7 and 9,110.5 shares held by Messrs. Barrist, Schwab, Elliott, Gindin and Leckerman, respectively, would have been unvested. In the event that we did not exercise our buyback right described above, at the end of the 180-day buyback period, all of the restricted shares held by each executive would have become vested and such executive would have had the right to retain all of the shares issued to him under our Restricted Share Plan.
(12) In the event a change of control occurs, then 100 percent of the executive’s stock award will become vested. See also footnote 10 if the executive is terminated in connection with a change of control.
(13) Includes $2,000,000 payable to Mr. Elliott’s beneficiaries under our death benefit and $1,405,316 payable under Mr. Elliot’s employment agreement (See Footnote 7 regarding the amounts payable under his employment agreement.).
(14) Includes $2,000,000 payable to Mr. Gindin’s beneficiaries under our death benefit and $1,405,316 payable under Mr. Gindin’s employment agreement (See Footnote 7 regarding the amounts payable under his employment agreement.).
(15) Includes $4,000,000 payable to Mr. Leckerman’s beneficiaries under our death benefit and $2,826,820 payable under Mr. Leckerman’s employment agreement (See Footnote 7 regarding the amounts payable under his employment agreement.).
Termination or Change in Control Provisions in Deferred Compensation Plan
In addition to the amounts set forth in the table above, our Deferred Compensation Plan provides that:
· a participant is 100 percent vested as to amounts deferred by the participant; and
· any company contributions will be 100 percent vested upon a participant’s having three years of service, termination of employment due to death or disability, reaching age 65 or upon a “change of control” (as defined in the Deferred Compensation Plan) of us.
A participant’s benefits in the Deferred Compensation Plan are payable as soon as practicable following termination of employment or a “change of control” of the Company. Messrs. Barrist and Schwab participate in our Deferred Compensation Plan. The following table provides information concerning amounts held (including both participant contributions and company contributions) under our Deferred Compensation Plan for the benefit of our Named Executive Officers as of December 31, 2010:
Name |
| Aggregate Balance at |
| |
Michael J. Barrist |
| $ | 30,569 |
|
John R. Schwab |
| 10,194 |
| |
Stephen W. Elliott |
| — |
| |
Joshua Gindin, Esq. |
| — |
| |
Steven Leckerman |
| — |
| |
Director Compensation
As of January 1, 2010, our Board was comprised of Michael J. Barrist, Austin A. Adams, Edward A. Kangas, Leo J. Pound, David M. Cohen, Colin M. Farmer and Henry H. Briance. Effective March 22, 2010, Mr. Cohen resigned from our Board and, effective May 10, 2010, Mr. Thomas J. Kichler was appointed as director by the remaining members of our Board to fill the vacancy. Effective January 7, 2011, Mr. Adams resigned from our Board and effective March 22, 2011, Mr. Pound resigned from our Board. OEP has not yet designated replacement directors to fill these two vacancies. Effective March 22, 2011, our Board appointed Mr. Farmer as lead director.
As directors not employed by us or affiliated with OEP, sometimes referred to as “non-employee directors”, each of Messrs. Adams, Kangas and Pound received an annual director fee of $100,000 for 2010, payable in quarterly installments, plus reimbursement of expenses incurred in attending Board and committee meetings. In addition, Mr. Kangas received an annual fee of $50,000 for his services as lead director and Mr. Pound received an annual fee of $25,000 for his services as chairman of the Audit Committee, in each case payable in quarterly installments. We offer optional health insurance coverage to non-employee directors and their families under our health insurance plan.
The following table sets forth information concerning the compensation of each of our directors during 2010.
Name (1) |
| Fees Earned |
| Stock |
| All Other |
| Total |
|
Austin A. Adams |
| 100,000 |
| — |
| — |
| 100,000 |
|
Edward A. Kangas |
| 150,000 |
| — |
| — |
| 150,000 |
|
Leo J. Pound |
| 125,000 |
| — |
| 15,754 |
| 140,754 |
|
Henry H. Briance |
| — |
| — |
| — |
| — |
|
David M. Cohen |
| — |
| — |
| — |
| — |
|
Colin M. Farmer |
| — |
| — |
| — |
| — |
|
Thomas J. Kichler |
| — |
| — |
| — |
| — |
|
(1) Mr. Barrist has been omitted from this table because he received no additional compensation for serving as a director.
(2) There were no restricted stock awards granted to directors during 2010. As of December 31, 2010, the number of unvested restricted shares held by each of Messrs. Adams, Kangas and Pound was 1,339.1 shares and the number of vested restricted shares held by each of Messrs. Adams, Kangas and Pound was 2,725.5 shares. All shares issued to directors under the Restricted Share Plan, regardless of whether the restriction period with regard to such shares has lapsed, remain subject to transfer restrictions, repurchase rights and other restrictions set forth in a Stockholders’ Agreement and the stock awards issued pursuant to the Restricted Share Plan. See “-Restricted Share Plan.”
(3) Represents the amount we paid for health insurance on behalf of the director and his family.
Compensation Policies and Practices Related to Risk Management
We believe several features of our employee compensation programs reflect positive risk management practices for our employees and are not likely to have a material adverse affect on the Company. We believe we have allocated our compensation among base salary and short and long-term compensation, and set incentive compensation targets in such a way as to not encourage excessive risk-taking. Our incentive compensation targets are based on Company-wide performance metrics, which we believe encourages decision-making that is in the best long-term interests of the Company.
Compensation Committee Interlocks and Insider Participation
In 2010, the Compensation Committee consisted of Messrs. Adams, Kangas and Farmer. No person who served as a member of the Compensation Committee during 2010 was a current or former officer or employee of the Company or, except as described below with respect to Mr. Farmer, engaged in certain transactions with the Company required to be disclosed by regulations of the SEC. Additionally, there were no Compensation Committee “interlocks” during 2010, which generally means that no executive officer of the Company served as a director or member of the compensation committee of another entity, one of whose executive officers served as a director or member of the Company’s Compensation Committee.
Consulting Agreement. Prior to Mr. Rittenmeyer’s appointment as President and Chief Executive Officer of the Company on March 18, 2011, he had previously served as a consultant to the Company through a consulting agreement dated as of December 1, 2010 between the Company and Turnberry Associates, LLC, referred to as the “Consulting Agreement.” Mr. Rittenmeyer is the Chief Executive Officer of Turnberry Associates, LLC. Pursuant to the terms of the Consulting Agreement, Mr. Rittenmeyer provided consulting services to the Company as
requested from time to time. As compensation for the services provided, the Company paid Mr. Rittenmeyer $60,000 per month and reimbursed him for all expenses incurred in connection with the services provided. On March 18, 2011, in connection with Mr. Rittenmeyer’s appointment as President and Chief Executive Officer of NCO, the Consulting Agreement was terminated.
Management Agreement. On November 15, 2006, we entered into a ten-year management agreement with OEP pursuant to which OEP provides business and organizational strategy and financial advisory services. OEP is our principal shareholder. Messrs. Cohen (our director from March 2007 to March 2010), Farmer and Kichler are Managing Directors of OEP and Mr. Briance is a Vice President of OEP. Pursuant to the management agreement, we pay OEP $3.0 million per annum plus reimbursement of expenses. We do not know and cannot determine the approximate dollar value of the interest of each of Messrs. Cohen, Farmer, Kichler and Briance in the management fees that we paid to OEP. We do not separately compensate OEP or its designated representatives on our Board for their services as directors, but OEP may receive fees in connection with its role in specific transactions in the future.
Registration Rights Agreement. In connection with the Transaction, on November 15, 2006, we also entered into customary registration rights agreements with the placement agents of the original notes, for the benefit of the holders of the original notes. The registration rights agreements provide that so long as J.P. Morgan Securities Inc. proposes to make a market in the notes as part of its business in the ordinary course, we must, within certain time periods, file a market making registration statement and, subject to certain exceptions, keep the related prospectus current in order to enable J.P. Morgan Securities Inc. to continue its market making activities with respect to the notes.
Other Arrangements. OEP is managed by OEP Holding Corporation, a wholly owned indirect subsidiary of JP Morgan Chase & Co., referred to as JPM, and JPM is a client of ours. For the year ended December 31, 2010, we received fees for providing services to JPM of $10.0 million.
JPMorgan Chase Bank, N.A., an affiliate of JPM, is a lender under our Credit Facility. The Credit Facility consists of substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions for unrelated parties, and does not involve more than the normal risk of uncollectibility or present other unfavorable features.
We also have certain corporate banking relationships with affiliates of JPM and we are charged market rates for these services.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
The following table details information regarding the Company’s existing equity compensation plans as of December 31, 2010:
|
|
|
| (b) |
| (c) |
|
Plan Category |
| (a) |
| Weighted- |
| Number of securities |
|
Equity compensation plans approved by security holders |
| — |
| — |
| 3,656 |
|
Equity compensation plans not approved by security holders |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
Total |
| — |
| — |
| 3,656 |
|
(1) As of December 31, 2010, 333,011 restricted shares of Class A common stock were issued and outstanding, subject, in certain circumstances, to vesting and forfeiture. These awards are issuable without the payment of any cash consideration by the holder.
Security Ownership of Certain Beneficial Owners and Management
The following table summarizes the beneficial ownership of our voting common stock, consisting of Class A common stock and Class L common stock, as of March 31, 2011 for:
· each person who we know beneficially owns more than 5 percent of our voting common stock;
· each director
· each of the Named Executive Officers who appears in the Summary Compensation Table; and
· all directors and executive officers as a group.
As of March 31, 2011, there were 2,960,847 shares of Class A common stock and 399,814 shares of Class L common stock outstanding.
|
| Shares Beneficially Owned (1) |
| ||||||||
Name of Beneficial Owner |
| Number of |
| Percent of |
| Number of |
| Percent of |
| Percent of |
|
One Equity Partners II, L.P, OEP II Co-Investors, L.P. OEP II Partners Co-Invest, L.P. OEP General Partners II, L.P. OEP Co-Investors Management II, Ltd. OEP II Partners Co-Invest, G.P., Ltd. OEP Holding Corporation c/o One Equity Partners 320 Park Avenue, 18th Floor New York, NY 10022 (2) |
| 129,294 |
| 32.3 | % | 2,560,206 |
| 86.5 | % | 80.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
2006 Co-Investment Portfolio, L.P. StepStone Capital Partners II Onshore, L.P. StepStone Capital Partners II Cayman Holdings, L.P. c/o StepStone Group LLC 4350 La Jolla Village Dr. Suite 800 La Jolla, CA 92122 (3) |
| 104,968 |
| 26.3 | % | 26,242 |
| * |
| 3.9 | % |
|
|
|
|
|
|
|
|
|
|
|
|
Citigroup Capital Partners II Employee Master Fund, L.P. c/o Citi Private Equity 388 Greenwich Street, 21st Floor New York, NY 10013 (4) |
| 55,032 |
| 13.8 | % | 13,758 |
| * |
| 2.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
Helzberg Angrist Investors I, LLC 4049 Pennsylvania Avenue, #204 Kansas City, MO 64111 (5) |
| 20,000 |
| 5.0 | % | 5,000 |
| * |
| * |
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Barrist (6) |
| 67,262 |
| 16.8 | % | 37,619 |
| 1.3 | % | 3.1 | % |
Henry H. Briance (2) (7) |
| 129,294 |
| 32.3 | % | 2,560,206 |
| 86.5 | % | 80.0 | % |
Colin M. Farmer (2) (8) |
| 129,294 |
| 32.3 | % | 2,560,206 |
| 86.5 | % | 80.0 | % |
Edward A. Kangas |
| — |
| — |
| 4,065 |
| * |
| * |
|
Thomas J. Kichler (2) (9) |
| 129,294 |
| 32.3 | % | 2,560,206 |
| 86.5 | % | 80.0 | % |
Stephen W. Elliott |
| 1,660 |
| * |
| 37,748 |
| 1.3 | % | 1.2 | % |
Joshua Gindin, Esq. (10) |
| 26,220 |
| 6.6 | % | 43,732 |
| 1.5 | % | 2.1 | % |
Steven Leckerman |
| 1,720 |
| * |
| 47,947 |
| 1.6 | % | 1.5 | % |
Ronald A. Rittenmeyer |
| — |
| — |
| — |
| — |
| — |
|
John R. Schwab |
| 460 |
| * |
| 37,136 |
| 1.3 | % | 1.1 | % |
All directors and executive officers as a group (11 persons) (11) |
| 98,162 |
| 24.6 | % | 243,624 |
| 8.2 | % | 10.2 | % |
* Less than one percent.
(1) The securities “beneficially owned” by a person are determined in accordance with the definition of “beneficial ownership” set forth in the regulations of the SEC and, accordingly, include securities as to which the person has or shares voting or investment power. Shares of NCO voting common stock which a person has the right to acquire within 60 days of March 31, 2011 are deemed outstanding for computing the share ownership and percentage ownership of the person having such right, but are not deemed outstanding for computing the percentage of any other person. The same shares may be beneficially owned by more than one person. Beneficial ownership may be disclaimed as to certain of the securities. Fractional shares are rounded to the nearest whole share.
(2) Includes 2,527,882 shares of Class A common stock owned by One Equity Partners II, L.P. (“OEP II”), 44,930 shares of Class L
common stock and 11,233 shares of Class A common stock owned by OEP II Co-Investors, L.P. (“OEP II Co”) and 84,364 shares of Class L common stock and 21,091 shares of Class A common stock owned by OEP II Partners Co-Invest, L.P. (“OEP II Partners” and collectively with OEP II and OEP II Co, “OEP”). The general partner of OEP II is OEP General Partners II, L.P. (“OEP General”). The general partner of OEP General is OEP Holding Corporation (“OEP Holding”). The general partner of OEP II Co is OEP Co-Investors Management II, Ltd. (“OEP Co-Investors”). The general partner of OEP II Partners is OEP II Partners Co-Invest G.P., Ltd. (“OEP II Partners GP”). Messrs. Farmer and Kichler are managing directors of OEP Holding, OEP Co-Investors and OEP II Partners GP. Mr. Briance is a vice president of OEP. Messrs. Briance, Farmer and Kichler may be deemed to beneficially own these shares, but disclaim beneficial ownership of such shares except to the extent of their respective pecuniary interest therein.
(3) Includes 48,992 shares of Class L common stock and 12,248 shares of Class A common stock held by 2006 Co-Investment Portfolio, L.P., 24,845 shares of Class L common stock and 6,211 shares of Class A common stock held by StepStone Capital Partners II Onshore, L.P. and 31,131 shares of Class L common stock and 7,783 shares of Class A common stock held by StepStone Capital Partners II Cayman Holdings, L.P. StepStone Diversified Funds GP, LLC is the general partner of 2006 Co-Investment Portfolio, L.P., StepStone Capital Partners II Onshore, L.P. and StepStone Partners II Cayman Holdings, L.P.
(4) All shares of Class L common stock and Class A common stock are held by Citigroup Capital Partners II Employee Master Fund, L.P. Citigroup Private Equity LP is the general partner of Citigroup Capital Partners II Employee Master Fund, L.P.
(5) All shares of Class L common stock and Class A common stock are held by Helzberg Angrist Investors, I, LLC. Helzberg Angrist Capital, LLC is the manager of Helzberg Angrist Investors I, LLC.
(6) Includes: (i) 306 shares of Class L common stock and 76 shares of Class A common stock owned by Mrs. Cheryl Lazarus which Mr. Barrist has the sole right to vote pursuant to an irrevocable proxy and for which he shares dispositive power with her; (ii) 8,442 shares of Class L common stock and 2,111 shares of Class A common stock held in trust for the benefit of members of Mr. Barrist’s family for which Mr. Barrist is a co-trustee and (iii) 9,108 shares of Class L common stock and 2,277 shares of Class A common stock held by the Barrist Family Foundation, a charitable trust, for which Mr. Barrist is co-trustee. Excludes 16,738 shares of Class L common stock and 4,184 shares of Class A common stock held in trust for the benefit of Mr. Barrist’s children, as to all of which shares Mr. Barrist disclaims beneficial ownership. Mrs. Cheryl Lazarus is the sister of Michael J. Barrist. Mr. Barrist’s address is c/o NCO Group, Inc., 507 Prudential Road, Horsham, Pennsylvania 19044.
(7) Mr. Briance, our director, was designated by OEP. Mr. Briance is a vice president at OEP. Amounts disclosed for Mr. Briance are also included above in footnote 2. Mr. Briance disclaims beneficial ownership of any shares beneficially owned by OEP, except to the extent of his pecuniary interest.
(8) Mr. Farmer, our director, was designated by OEP. Mr. Farmer is a managing director at OEP Holding, the general partner of OEP II General, the general partner of OEP II, and is a managing director of OEP Co-Investors and OEP II Partners GP. Amounts disclosed for Mr. Farmer are also included above in footnote 2. Mr. Farmer disclaims beneficial ownership of any shares beneficially owned by OEP, except to the extent of his pecuniary interest.
(9) Mr. Kichler, our director, was designated by OEP. Mr. Kichler is a managing director at OEP Holding, the general partner of OEP II General, the general partner of OEP II, and is a managing director of OEP Co-Investors and OEP II Partners GP. Amounts disclosed for Mr. Kichler are also included above in footnote 2. Mr. Kichler disclaims beneficial ownership of any shares beneficially owned by OEP, except to the extent of his pecuniary interest.
(10) Includes: (i) 16,738 shares of Class L common stock and 4,184 shares of Class A common stock held in trust for the benefit of Mr. Barrist’s children for which Mr. Gindin is co-trustee and (ii) 8,442 shares of Class L common stock and 2,111 shares of Class A common stock held in trust for the benefit of members of Mr. Barrist’s family for which Mr. Gindin is co-trustee. Mr. Gindin’s address is c/o NCO Group, Inc., 507 Prudential Road, Horsham, Pennsylvania 19044.
(11) Excludes 129,294 shares of Class L common stock and 2,560,206 shares of Class A common stock described in footnote 2.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Policy with Respect to Approval of Related Party Transactions
Under its charter, our Audit Committee is responsible for reviewing and approving the terms and conditions of all transactions between us and any employee, officer, director and certain of their family members and other related persons required to be reported under Item 404 of SEC Regulation S-K. In practice, related party transactions are reviewed and approved by directors that do not have a direct or indirect interest in such transaction. We have not adopted written policies and procedures with respect to the approval of related party transactions. Generally, under the agreements governing our outstanding notes and bank indebtedness, we are prohibited from entering into transactions with affiliates except upon terms that, taken as a whole, are materially not less favorable to us than could be obtained, at the time of such transaction, in a comparable arm’s-length transaction with a person that is not such an affiliate.
The transactions described in “Item 11. Executive Compensation” under the heading “Compensation Committee Interlocks and Insider Participation” are incorporated herein by reference.
Transactions with Certain Clients
An affiliate of Citigroup is an investor in us, and Citigroup is a client of ours. For the year ended December 31, 2010, we received fees for providing services to Citigroup of $47.8 million. At December 31, 2010, we had accounts receivable of $1.5 million due from Citigroup.
Employment of Related Persons
We employ Brett Leckerman as a general manager of one of our collection units. Mr. Leckerman is the son of Steven Leckerman, an executive officer of ours. Mr. Leckerman received salary and bonus totaling $139,795 in 2010. Mr. Brett Leckerman also received an automobile allowance in 2010. We believe that the compensation paid to Mr. Brett Leckerman was comparable with compensation paid to other employees with similar levels of responsibility and years of service.
Independence of the Board of Directors
Because our common stock is not listed on any national securities exchange or inter-dealer quotation system, we are not required to comply with the listing standards of such exchanges or quotation systems that require that a majority of an issuer’s directors be independent.
In evaluating the independence of our directors, we use the definition of independence contained in the listing standards of The NASDAQ Stock Market LLC, referred to as Nasdaq, the national securities exchange upon which our common stock was listed prior to the Transaction. Though not formally considered by our Board given that our securities are not registered or traded on any national securities exchange, based upon the listing standards of Nasdaq, we believe that Mr. Kangas is independent. Austin Adams, our director and member of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee during 2010, resigned from our Board effective January 2011. Leo Pound, our director, chairman of our Audit Committee and member of our Nominating and Corporate Governance Committee, resigned from our Board effective March 2011.Though not formally considered by our Board given that our securities are not registered or traded on any national securities exchange, based upon the listing standards of Nasdaq, we believe that Messrs. Adams and Pound were independent.
Under applicable Nasdaq listing standards, a majority of the members of a company’s board of directors must qualify as “independent,” unless the company is a controlled company. A controlled company is a company in which more than 50 percent of the voting power is held by an individual, group or other company. We would qualify as a controlled company because OEP owns approximately 80.0 percent of our voting common stock, and, as such, would not be required to have a majority of the members of our Board be independent.
Our Board has three standing committees: an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. The current members of the Audit Committee are Messrs. Kangas and Kichler. The current members of the Compensation Committee are Messrs. Kangas and Farmer. The current member of the Nominating and Corporate Governance Committee is Mr. Briance. Though not formally considered by our Board given that our securities are not registered or traded on any national securities exchange, based upon the listing standards of Nasdaq, we believe that Mr. Kangas is independent and Messrs. Briance, Farmer and Kichler are not independent.
Item 14. Principal Accounting Fees and Services
Independent Registered Public Accounting Firm Fees and Services
The aggregate fees for professional services rendered to us by PricewaterhouseCoopers LLP, our current independent registered public accounting firm, as of or for the years ended December 31, 2010 and 2009, were as follows:
Services Rendered (1) |
| 2010 |
| 2009 |
| ||
Audit fees |
| $ | 1,950,000 |
| $ | 2,340,000 |
|
Audit-Related fees |
| $ | 371,000 |
| $ | 450,000 |
|
Tax fees |
| $ | 185,000 |
| $ | 225,000 |
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All other fees |
| $ | 8,500 |
| $ | 8,500 |
|
(1) The aggregate fees included in Audit Fees are fees billed for the fiscal year.
The aggregate fees included in each of the other categories are fees billed in the fiscal year.
Audit Fees. The audit fees for 2010 and 2009 include fees for professional services rendered for the audit of the Company’s consolidated financial statements, review of the interim consolidated financial statements included in quarterly reports, and services that generally only the independent registered public accounting firm can reasonably provide, such as statutory audits, consents and assistance with and review of documents filed with the SEC.
Audit-Related Fees. The audit-related fees for 2010 and 2009 include fees for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported under “Audit Fees.” These services include attest services that are not required by statute or regulation, and consultations concerning financial accounting and reporting standards. Audit-related fees for 2010 and 2009 also include fees for SAS 70 engagements.
Tax Fees. Tax fees for 2010 and 2009 include fees for services related to tax compliance, and tax planning and advice including tax assistance with tax audits. These services include assistance regarding federal and state tax compliance and advice, review of tax returns, and federal and state tax planning.
All Other Fees. All other fees for 2010 and 2009 represent annual fees for a subscription to PricewaterhouseCoopers’ proprietary research tool.
The Audit Committee has considered and determined that the services provided by PricewaterhouseCoopers LLP are compatible with PricewaterhouseCoopers LLP maintaining its independence.
The Audit Committee has adopted a policy that requires advance approval of all audit, audit-related, tax services and other services performed by PricewaterhouseCoopers LLP. The policy provides for pre-approval by the Audit Committee, or the Chairman of the Audit Committee, of specifically defined audit and non-audit services. Unless the specific service has been previously pre-approved with respect to that year, the Audit Committee must approve the permitted service before PricewaterhouseCoopers LLP is engaged to perform it. The Audit Committee pre-approved all of the audit and non-audit services provided to the Company by PricewaterhouseCoopers LLP in 2010 and 2009.
Item 15. Exhibits and Financial Statement Schedules.
1. List of Consolidated Financial Statements. The consolidated financial statements and the accompanying notes of NCO Group, Inc., have been included in this Report on Form 10-K beginning on page F-1:
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Consolidated Balance Sheets as of December 31, 2010 and 2009 |
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Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008 |
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Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2010, 2009 and 2008 |
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Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008 |
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2. All financial statement schedules are omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the respective financial statements or notes thereto contained herein.
3. List of Exhibits filed in accordance with Item 601 of Regulation S-K. The warranties, representations and covenants contained in the agreements, documents and other instruments included or incorporated by reference herein or which appear as exhibits hereto should not be relied upon by buyers, sellers or holders of the company’s securities and are not intended as warranties, representations or covenants to any individual or entity except as specifically set forth in such agreements, documents and other instruments. The following exhibits are incorporated by reference in, or filed with, this Report on Form 10-K. Management contracts and compensatory plans, contracts and arrangements are indicated by “*”:
Exhibit No. |
| Description |
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2.1 |
| Agreement and Plan of Merger, dated as of July 21, 2006, by and among Collect Holdings, Inc., Collect Acquisition Corp. and NCO Group, Inc. (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s Current Report on Form 8-K filed on July 25, 2006 (000-21639)) (NCO Group, Inc. agrees to furnish supplementally to the SEC, upon request, a copy of any omitted schedules or exhibits.) |
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2.2 |
| Agreement and Plan of Merger, dated as of February 27, 2007, by and between NCO Group, Inc. and Collect Holdings, Inc. (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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2.3 |
| Agreement and Plan of Merger by and among Outsourcing Solutions Inc., NCO Group, Inc. and NCO Acquisition Sub, Inc. dated as of December 11, 2007 (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007 (333-144067), filed on March 31, 2008) |
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2.4 |
| Agreement and Plan of Merger by and among NCO Group, Inc., Systems & Services Technologies Merger Corp., System & Services Technologies, Inc. and JPMorgan Chase Bank, National Association dated as of August 27, 2007 (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s Current Report on Form 8-K (333-144067) filed on May 13, 2008) |
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2.5 |
| Amendment No. 1 dated as of December 12, 2007 to the Agreement and Plan of Merger by and among NCO Group, Inc., System & Services Technologies Merger Corp., System & Services Technologies, Inc, and JPMorgan Chase Bank, National Association (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s Current Report on Form 8-K (333-144067) filed on May 13, 2008) |
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3.1 |
| Second Amended and Restated Certificate of Incorporation of NCO Group, Inc., as amended (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008 (333-144067), filed on March 31, 2009. |
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3.2 |
| Amended and Restated Bylaws of NCO Group, Inc. (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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4.1 |
| Indenture, dated as of November 15, 2006, among NCO Group, Inc., the Guarantors signatory thereto and The Bank of New York, as Trustee, with respect to the Floating Rate Senior Notes due 2013 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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4.2 |
| Indenture, dated as of November 15, 2006, among NCO Group, Inc., the Guarantors signatory thereto and The Bank of New York, as Trustee, with respect to the 11.875% Senior Subordinated Notes due 2014 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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4.3 |
| Supplemental Indenture, dated as of November 15, 2006, among NCO Group, Inc. and The Bank of New York, as Trustee, with respect to the Floating Rate Senior Notes due 2013 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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4.4 |
| Supplemental Indenture, dated as of November 15, 2006, among NCO Group, Inc. and The Bank of New York, as Trustee, with respect to the 11.875% Senior Subordinated Notes due 2014 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
Exhibit No. |
| Description |
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4.5 |
| Second Supplemental Indenture, dated as of February 27, 2007, among NCO Group, Inc. and The Bank of New York, as Trustee, with respect to the Floating Rate Senior Notes due 2013 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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4.6 |
| Second Supplemental Indenture, dated as of February 27, 2007, among NCO Group, Inc. and The Bank of New York, as Trustee, with respect to the 11.875% Senior Subordinated Notes due 2014 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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4.7 |
| Third Supplemental Indenture, dated as of February 27, 2007, among Collect Holdings, Inc. and The Bank of New York, as Trustee, with respect to the Floating Rate Senior Notes due 2013 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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4.8 |
| Third Supplemental Indenture, dated as of February 27, 2007, among Collect Holdings, Inc. and The Bank of New York, as Trustee, with respect to the 11.875% Senior Subordinated Notes due 2014 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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4.9 |
| Registration Rights Agreement, dated as of November 15, 2006, among NCO Group, Inc., the Guarantors signatory thereto and Morgan Stanley & Co. Incorporation, J.P. Morgan Securities Inc. and Banc of America Securities LLP with respect to the Floating Rate Senior Notes due 2013 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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4.10 |
| Registration Rights Agreement, dated as of November 15, 2006, among NCO Group, Inc., the Guarantors signatory thereto and Morgan Stanley & Co. Incorporation, J.P. Morgan Securities Inc. and Banc of America Securities LLP with respect to the 11.875% Senior Subordinated Notes due 2013 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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4.11 |
| Form of 144A and Regulation S Floating Rate Senior Notes due 2013 (contained in Exhibit 4.1) (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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4.12 |
| Form of 144A and Regulation S 11.875% Senior Subordinated Notes due 2014 (contained in Exhibit 4.2) (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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4.13 |
| 144A Notation of Senior Guarantee by the Guarantors named therein, with respect to the Floating Rate Senior Notes due 2013 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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4.14 |
| Regulation S Notation of Senior Guarantee by the Guarantors named therein, with respect to the Floating Rate Senior Notes due 2013 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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4.15 |
| 144A Notation of Senior Subordinated Guarantee by the Guarantors named therein, with respect to the 11.875% Senior Subordinated Notes due 2014 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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4.16 |
| Regulation S Notation of Senior Subordinated Guarantee by the Guarantors named therein, with respect to the 11.875% Senior Subordinated Notes due 2014 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
Exhibit No. |
| Description |
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4.17 |
| Registration Rights Agreement, dated as of November 15, 2006, among Collect Holdings, Inc., One Equity Partners II, L.P., OEP II Partners Co-Investors, L.P., OEP II Partners Co-Invest, L.P., Michael Barrist and the other non-OEP Investors named therein (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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4.18 |
| Fourth Supplemental Indenture, dated as of July 11, 2007, among NCO Group, Inc., NCOP IX, LLC and The Bank of New York, as Trustee, with respect to the Floating Rate Senior Notes due 2013 (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4/A (333-144067) filed on July 13, 2007) |
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4.19 |
| Fourth Supplemental Indenture, dated as of July 11, 2007, among NCO Group, Inc., NCOP IX, LLC and The Bank of New York, as Trustee, with respect to the 11.875% Senior Subordinated Notes due 2014 (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4/A (333-144067) filed on July 13, 2007) |
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4.20 |
| Form of Exchange Floating Rate Senior Note due 2013 (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4/A (333-144067) filed on July 13, 2007) |
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4.21 |
| Form of Exchange 11.875% Senior Subordinated Note due 2014 (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4/A (333-144067) filed on July 13, 2007) |
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4.22 |
| Fifth Supplemental Indenture, dated as of February 29, 2008, among NCO Group, Inc., the New Guarantors (as defined therein), and The Bank of New York, as Trustee, with respect to the Floating Rate Senior Notes due 2013 (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-1 (333-150885) filed on May 13, 2008) |
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4.23 |
| Fifth Supplemental Indenture, dated as of February 29, 2008, among NCO Group, Inc., the New Guarantors (as defined therein), and The Bank of New York, as Trustee, with respect to the 11.875% Senior Subordinated Notes due 2014 (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-1 (333-150885) filed on May 13, 2008) |
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4.24 |
| Sixth Supplemental Indenture, dated as of March 25, 2009, among NCO Group, Inc., the New Guarantor (as defined therein), and The Bank of New York Mellon, as successor to The Bank of New York, as Trustee, with respect to the Floating Rate Senior Notes due 2013 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-1 (333-158745) filed on April 24, 2009) |
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4.25 |
| Sixth Supplemental Indenture, dated as of March 25, 2009, among NCO Group, Inc., the New Guarantor (as defined therein), and The Bank of New York Mellon, as successor to The Bank of New York, as Trustee, with respect to the 11.875% Senior Subordinated Notes due 2014 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-1 (333-158745) filed on April 24, 2009) |
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4.26 |
| Seventh Supplemental Indenture, dated as of March 24, 2010, among NCO Group, Inc., the New Guarantors (as defined therein), and The Bank of New York Mellon, as Trustee, with respect to the Floating Rate Senior Notes due 2013 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-1 filed on April 9, 2010 (333-165975)) |
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4.27 |
| Seventh Supplemental Indenture, dated as of March 24, 2010, among NCO Group, Inc., the New Guarantors (as defined therein), and The Bank of New York Mellon, as Trustee, with respect to the 11.875% Senior Subordinated Notes due 2014 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-1 filed on April 9, 2010 (333-165975)) |
Exhibit No. |
| Description |
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10.1 |
| Credit Agreement, dated as of November 15, 2006, among NCO Group, Inc. (as survivor of the merger with Collect Acquisition Corp.), NCO Financial Systems, Inc., the Subsidiary Guarantors, the Lenders and agents named therein and Morgan Stanley Senior Funding, Inc., as administrative agent (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) (NCO Group, Inc. agrees to furnish supplementally to the SEC, upon request, a copy of any omitted schedules or exhibits.) |
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10.2 |
| Security Agreement, dated November 15, 2006, made by Collect Acquisition Corp., NCO Financial Systems, Inc., Collect Holdings, Inc., the Subsidiary Guarantors and the Other Grantors Identified Therein, to Morgan Stanley & Co. Incorporated, as Collateral Agent (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) (NCO Group, Inc. agrees to furnish supplementally to the SEC, upon request, a copy of any omitted schedules or exhibits.) |
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10.3 |
| Intellectual Property Security Agreement, dated November 15, 2006, made by Collect Acquisition Corp., NCO Financial Systems, Inc., Collect Holdings, Inc., NCO Group, Inc. and the Subsidiary Guarantors in favor of Morgan Stanley & Co. Incorporated, as Collateral Agent (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) (NCO Group, Inc. agrees to furnish supplementally to the SEC, upon request, a copy of any omitted schedules or exhibits.) |
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10.4 |
| Stockholders Agreement, dated as of November 15, 2006, among Collect Holdings, Inc., One Equity Partners II, L.P., OEP II Co-Investors, L.P., OEP II Partners Co-Invest, L.P., Michael Barrist, and the Rollover Investors, Management Investors and Institutional Investors named therein (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) (NCO Group, Inc. agrees to furnish supplementally to the SEC, upon request, a copy of any omitted schedules or exhibits.) |
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*10.5 |
| NCO Group, Inc. Amended and Restated Restricted Share Plan (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-1 (333-150885) filed on May 13, 2008) |
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*10.6 |
| Form of Award Agreement pursuant to the NCO Group, Inc. Restricted Share Plan (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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*10.7 |
| Employment Agreement, dated as of November 15, 2006, between NCO Group, Inc. and Michael J. Barrist (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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*10.8 |
| Employment Agreement, dated as of November 15, 2006, between NCO Group, Inc. and Stephen W. Elliott (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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*10.9 |
| Employment Agreement, dated as of November 15, 2006, between NCO Group, Inc. and Joshua Gindin (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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*10.10 |
| Employment Agreement, dated as of November 15, 2006, between NCO Group, Inc. and Steven Leckerman, including the First Amendment to Employment Agreement dated June 14, 2007 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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*10.11 |
| Employment Agreement, dated as of November 15, 2006, between NCO Group, Inc. and John R. Schwab (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
Exhibit No. |
| Description |
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10.12 |
| Management Agreement, dated as of November 15, 2006, between One Equity Partners II, L.P. and Collect Holdings, Inc. (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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10.13 |
| Rollover Agreement, dated as of July 21, 2006, between Collect Holdings, Inc. and Michael Barrist (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) (NCO Group, Inc. agrees to furnish supplementally to the SEC, upon request, a copy of any omitted schedules or exhibits). |
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10.14 |
| Joinder and Amendment to Rollover Agreement, dated November 15, 2006, among Michael Barrist, Michael and Natalie Barrist Trust, Annette H. Barrist and the Annette H. Barrist Trust (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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*10.15 |
| Executive Deferred Compensation Plan Basic Document (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s Current Report on Form 8-K (000-21639) filed on January 6, 2005) |
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*10.16 |
| Executive Deferred Compensation Plan Adoption Agreement (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s Current Report on Form 8-K (000-21639) filed on January 6, 2005) |
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*10.17 |
| Rabbi Trust Agreement with Putnam Fiduciary Trust Company (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s Current Report on Form 8-K (000-21639) filed on January 6, 2005) |
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10.18 |
| Credit Agreement, dated as of November 26, 2002, by and among NCOP Capital, Inc. as Borrower and CFSC Capital Corp. XXXIV as Lender (incorporated by reference to Exhibit 10.48 to NCO Portfolio Management, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2002 (000-32403), filed on March 13, 2003) |
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10. 19 |
| Second Amendment to Credit Agreement, dated as of June 30, 2005, by and among NCOP Capital, Inc. as Borrower and CFSC Capital Corp. XXXIV as Lender (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (000-21639), filed on November 9, 2005) |
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10.20 |
| Fee Letter Agreement, dated November 15, 2006, between One Equity Partners II, L.P., Collect Holdings, Inc. and Collect Acquisition Corp. (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) |
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10.21 |
| Stock Subscription Agreement, dated as of November 14, 2006, by and among Collect Holdings, Inc., One Equity Partners II, L.P., OEP II Co-Investors, L.P. and OEP II Partners Co-Invest, L.P. and several other individuals and entities listed on the signature page (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) (NCO Group, Inc. agrees to furnish supplementally to the SEC, upon request, a copy of any omitted schedules or exhibits) |
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10.22 |
| Stock Subscription Agreement, dated as of November 15, 2006, by and among Collect Holdings, Inc. and the several individuals listed on the signature page (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed on June 26, 2007) (NCO Group, Inc. agrees to furnish supplementally to the SEC, upon request, a copy of any omitted schedules or exhibits) |
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10.23 |
| Credit Agreement between NCOP Capital III, LLC and CVI GVF FINCO, LLC dated as of August 31, 2007 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 (333-144067), filed on November 14, 2007) |
Exhibit No. |
| Description |
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10.24 |
| Credit Agreement between NCOP Capital IV, LLC and CVI GVF FINCO, LLC dated as of August 31, 2007 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 (333-144067), filed on November 14, 2007) |
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10.25 |
| Second Amended and Restated Exclusivity Agreement dated as of August 31, 2007 among NCOP Lakes, Inc., NCO Financial Systems, Inc., NCO Portfolio Management, Inc., NCO Group, Inc., NCOP Capital, Inc., NCOP Capital I, LLC, NCOP-CF II, LLC, NCOP/CF, LLC, NCOP Capital III, LLC, NCOP Capital IV, LLC, CARVAL INVESTORS, LLC and CVI GVF FINCO, LLC (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 (333-144067), filed on November 14, 2007) |
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10.26 |
| Limited Liability Company Agreement of NCOP/CF II, LLC dated as of August 31, 2007 between NCOP Nevada Holdings, Inc. and CVI GVF FINCO, LLC. (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 (333-144067), filed on November 14, 2007) |
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10.27 |
| First Amended Credit Agreement dated as of February 8, 2008 by and among NCO Group, Inc., NCO Financial Systems, Inc., certain guarantors, Citizens Bank of Pennsylvania, and RBS Securities Corporation d/b/a RBS Greenwich Capital, as lead arranger and bookrunner, and the Lenders (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007 (333-144067), filed on March 31, 2008) |
|
|
|
10.28 |
| Security Agreement Supplement dated as of February 29, 2008 made by NCO Group, Inc., NCO Financial Systems, Inc., the Subsidiary Guarantors and the Other Grantors identified therein to Citizens Bank of Pennsylvania, as the Collateral Agent and Administrative Agent (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007 (333-144067), filed on March 31, 2008) ( NCO Group, Inc. agrees to furnish supplementally to the SEC, upon request, a copy of any omitted schedules or exhibits.) |
|
|
|
10.29 |
| Intellectual Property Security Agreement, dated February 29, 2008, made by the persons listed on the signature pages in favor of Citizens Bank of Pennsylvania, as the Collateral Agent (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007 (333-144067), filed on March 31, 2008) (NCO Group, Inc. agrees to furnish supplementally to the SEC, upon request, a copy of any omitted schedules or exhibits.) |
|
|
|
10.30 |
| Subscription Agreement dated as of February 27, 2008 by and among NCO Group, Inc., One Equity Partners II, L.P., OEP II Co-Investors, OEP II Partners Co-Invest L.P. and several other individuals and entities listed on the signature pages thereto (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007 (333-144067), filed on March 31, 2008) |
|
|
|
10.31 |
| Subscription Agreement dated as of December 8, 2008 by and among NCO Group, Inc., One Equity Partners II, L.P., OEP II Co-Investors, L.P., OEP II Partners Co-Invest, L.P. and several other individuals and entities listed on the signature pages thereto (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Current Report on Form 8-K (333-144067) filed on December 12, 2008) |
|
|
|
10.32 |
| Second Amendment to Credit Agreement dated as of March 25, 2009 by and among NCO Group, Inc., NCO Financial Systems, Inc., certain guarantors under the Credit Agreement, Citizens Bank of Pennsylvania as the administrative agent, Citizens Bank of Pennsylvania as sole issuing bank and certain lenders (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Current Report on Form 8-K (333-144067) filed on March 26, 2009) |
|
|
|
10.33 |
| Subscription Agreement dated as of March 25, 2009 by and among NCO Group, Inc., One Equity Partners II, L.P., OEP II Co-Investors, L.P., OEP II Partners Co-Invest, L.P. and several other individuals and entities listed on the signature pages thereto (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Current Report on Form 8-K (333-144067) filed on March 26, 2009) |
Exhibit No. |
| Description |
|
|
|
10.34 |
| Third Amendment to Credit Agreement dated as of March 31, 2010 by and among NCO Group, Inc., NCO Financial Systems, Inc., certain guarantors under the Credit Agreement, Citizens Bank of Pennsylvania as the administrative agent, Citizens Bank of Pennsylvania as sole issuing bank and certain lenders (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009 (333-144067) filed on March 31, 2010) |
|
|
|
*10.35 |
| First Amendment to Employment Agreement, dated as of September 23, 2010, between NCO Group, Inc. and Michael J. Barrist (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Current Report on Form 8-K (333-144067) filed on March 24, 2011) |
|
|
|
*10.36 |
| First Amendment to Employment Agreement, dated as of September 27, 2010, between NCO Group, Inc. and Stephen W. Elliott |
|
|
|
*10.37 |
| First Amendment to Employment Agreement, dated as of September 27, 2010, between NCO Group, Inc. and Joshua Gindin |
|
|
|
*10.38 |
| First Amendment to Employment Agreement, dated as of September 28, 2010, between NCO Group, Inc. and Steven Leckerman |
|
|
|
*10.39 |
| First Amendment to Employment Agreement, dated as of September 27, 2010, between NCO Group, Inc. and John R. Schwab |
|
|
|
*10.40 |
| Employment Agreement, dated as of March 18, 2011, between NCO Group, Inc. and Ronald A. Rittenmeyer (incorporated by reference to Exhibits filed with NCO Group, Inc.’s Current Report on Form 8-K (333-144067) filed on March 24, 2011) |
|
|
|
10.41 |
| Fourth Amendment to Credit Agreement dated as of March 25, 2011 by and among NCO Group, Inc., NCO Financial Systems, Inc., certain guarantors under the Credit Agreement, Citizens Bank of Pennsylvania as the administrative agent, Citizens Bank of Pennsylvania as sole issuing bank and certain lenders |
|
|
|
12 |
| Statement of Computation of Ratio of Earnings to Fixed Charges |
|
|
|
21.1 |
| Subsidiaries of the Registrant |
|
|
|
31.1 |
| Certification of Chief Executive Officer pursuant to Rule 15d-14(a) promulgated under the Exchange Act. |
|
|
|
31.2 |
| Certification of Chief Financial Officer pursuant to Rule 15d-14(a) promulgated under the Exchange Act. |
|
|
|
32.1 |
| Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2 |
| Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| NCO GROUP, INC. | ||
|
|
| ||
Date: March 31, 2011 | By: | /s/ Ronald A. Rittenmeyer | ||
|
| Ronald A. Rittenmeyer, | ||
|
| President and Chief | ||
|
| Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE |
| TITLE(S) |
| DATE |
|
|
|
|
|
/s/ Ronald A. Rittenmeyer |
| President and Chief Executive Officer |
| March 31, 2011 |
Ronald A. Rittenmeyer |
| (Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ John R. Schwab |
| Executive Vice President, Finance, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) |
| March 31, 2011 |
John R. Schwab |
|
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| |
|
|
|
| |
|
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|
| |
|
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|
|
|
/s/ Michael J. Barrist |
| Chairman of the Board |
| March 31, 2011 |
Michael J. Barrist |
|
|
|
|
|
|
|
|
|
/s/ Henry H. Briance |
| Director |
| March 31, 2011 |
Henry H. Briance |
|
|
|
|
|
|
|
|
|
/s/ Colin M. Farmer |
| Director |
| March 31, 2011 |
Colin M. Farmer |
|
|
|
|
|
|
|
|
|
/s/ Edward A. Kangas |
| Director |
| March 31, 2011 |
Edward A. Kangas |
|
|
|
|
|
|
|
|
|
/s/ Thomas J. Kichler |
| Director |
| March 31, 2011 |
Thomas J. Kichler |
|
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|
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To Board of Directors and Stockholders of
NCO Group, Inc:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders’ equity, and cash flows present fairly, in all material respects, the financial position of NCO Group, Inc and its subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 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 our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 31, 2011
NCO GROUP, INC.
(Amounts in thousands, except per share amounts)
|
| December 31, |
| December 31, |
| ||
|
| 2010 |
| 2009 |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents (includes cash and cash equivalents of consolidated variable interest entities: 2010, $357; 2009, $982) |
| $ | 33,077 |
| $ | 39,221 |
|
Accounts receivable, trade, net of allowance for doubtful accounts of $5,796 and $5,824, respectively |
| 171,350 |
| 178,067 |
| ||
Purchased accounts receivable, current portion, net of allowance for impairment of $158,694 and $144,397, respectively (includes purchased accounts receivable of consolidated variable interest entities: 2010, $8,307; 2009, $22,020) |
| 29,683 |
| 50,960 |
| ||
Deferred income taxes |
| 9,084 |
| 1,753 |
| ||
Prepaid expenses and other current assets |
| 51,538 |
| 61,981 |
| ||
Total current assets |
| 294,732 |
| 331,982 |
| ||
|
|
|
|
|
| ||
Funds held on behalf of clients (note 8) |
|
|
|
|
| ||
|
|
|
|
|
| ||
Property and equipment, net |
| 99,089 |
| 122,317 |
| ||
|
|
|
|
|
| ||
Other assets: |
|
|
|
|
| ||
Goodwill |
| 480,757 |
| 535,857 |
| ||
Trade name, net of accumulated amortization |
| 83,508 |
| 83,912 |
| ||
Customer relationships and other intangible assets, net of accumulated amortization |
| 195,071 |
| 258,682 |
| ||
Purchased accounts receivable, net of current portion (includes purchased accounts receivable of consolidated variable interest entities: 2010, $13,973; 2009, $18,586) |
| 48,924 |
| 87,469 |
| ||
Deferred income taxes |
| 4,249 |
| 3,548 |
| ||
Other assets |
| 31,383 |
| 36,268 |
| ||
Total other assets |
| 843,892 |
| 1,005,736 |
| ||
Total assets |
| $ | 1,237,713 |
| $ | 1,460,035 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Long-term debt, current portion (includes debt of consolidated variable interest entities: 2010, $ - ; 2009, $10,027) |
| $ | 22,124 |
| $ | 41,699 |
|
Income taxes payable |
| 4,662 |
| 2,838 |
| ||
Accounts payable |
| 19,787 |
| 15,865 |
| ||
Accrued expenses (includes accrued expenses of consolidated variable interest entities: 2010, $666; 2009, $795) |
| 91,280 |
| 107,250 |
| ||
Accrued compensation and related expenses |
| 36,578 |
| 38,094 |
| ||
Deferred revenue, current portion |
| 31,299 |
| 39,528 |
| ||
Deferred income taxes |
| 1,158 |
| — |
| ||
Total current liabilities |
| 206,888 |
| 245,274 |
| ||
|
|
|
|
|
| ||
Funds held on behalf of clients (note 8) |
|
|
|
|
| ||
|
|
|
|
|
| ||
Long-term liabilities: |
|
|
|
|
| ||
Long-term debt, net of current portion |
| 867,229 |
| 909,831 |
| ||
Deferred income taxes (includes deferred income taxes of consolidated variable interest entities: 2010, $2,135; 2009, $1,475) |
| 45,763 |
| 31,972 |
| ||
Deferred revenue, net of current portion |
| 696 |
| 1,147 |
| ||
Other long-term liabilities |
| 30,211 |
| 31,261 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies (note 19) |
|
|
|
|
| ||
|
|
|
|
|
| ||
Stockholders’ equity: |
|
|
|
|
| ||
Preferred stock, par value $0.01 per share, 7,500 shares authorized, 3,626 and 3,152 shares issued and outstanding, respectively |
| 36 |
| 31 |
| ||
Class L common stock, par value $0.01 per share, 800 shares authorized, 400 shares issued and outstanding |
| 4 |
| 4 |
| ||
Class A common stock, par value $0.01 per share, 4,500 shares authorized, 2,961 shares issued and outstanding |
| 30 |
| 30 |
| ||
Additional paid-in capital |
| 764,535 |
| 763,828 |
| ||
Accumulated other comprehensive income (loss) |
| 5,043 |
| (551 | ) | ||
Accumulated deficit |
| (689,242 | ) | (534,242 | ) | ||
Total NCO Group, Inc. stockholders’ equity |
| 80,406 |
| 229,100 |
| ||
Noncontrolling interests |
| 6,520 |
| 11,450 |
| ||
Total stockholders’ equity |
| 86,926 |
| 240,550 |
| ||
Total liabilities and stockholders’ equity |
| $ | 1,237,713 |
| $ | 1,460,035 |
|
See accompanying notes.
NCO GROUP, INC.
Consolidated Statements of Operations
(Amounts in thousands)
|
| For the Years Ended December 31, |
| |||||||
|
| 2010 |
| 2009 |
| 2008 |
| |||
|
|
|
|
|
|
|
| |||
Revenues: |
|
|
|
|
|
|
| |||
Services |
| $ | 1,223,501 |
| $ | 1,400,610 |
| $ | 1,466,318 |
|
Portfolio |
| 35,561 |
| 51,759 |
| 21,031 |
| |||
Reimbursable costs and fees |
| 343,101 |
| 126,992 |
| 25,792 |
| |||
Total revenues |
| 1,602,163 |
| 1,579,361 |
| 1,513,141 |
| |||
|
|
|
|
|
|
|
| |||
Operating costs and expenses: |
|
|
|
|
|
|
| |||
Payroll and related expenses |
| 702,032 |
| 781,888 |
| 845,481 |
| |||
Selling, general and administrative expenses |
| 434,413 |
| 508,378 |
| 536,547 |
| |||
Reimbursable costs and fees |
| 343,101 |
| 126,992 |
| 25,792 |
| |||
Depreciation and amortization expense |
| 108,822 |
| 119,570 |
| 121,324 |
| |||
Impairment of intangible assets |
| 57,015 |
| 30,032 |
| 289,492 |
| |||
Restructuring charges |
| 18,272 |
| 10,868 |
| 11,600 |
| |||
Total operating costs and expenses |
| 1,663,655 |
| 1,577,728 |
| 1,830,236 |
| |||
|
|
|
|
|
|
|
| |||
(Loss) income from operations |
| (61,492 | ) | 1,633 |
| (317,095 | ) | |||
|
|
|
|
|
|
|
| |||
Other income (expense): |
|
|
|
|
|
|
| |||
Interest and investment income |
| 540 |
| 1,335 |
| 1,091 |
| |||
Interest expense |
| (90,344 | ) | (99,212 | ) | (94,831 | ) | |||
Other income (expense), net |
| 2,455 |
| 6,936 |
| (16,468 | ) | |||
Total other income (expense) |
| (87,349 | ) | (90,941 | ) | (110,208 | ) | |||
Loss before income taxes |
| (148,841 | ) | (89,308 | ) | (427,303 | ) | |||
|
|
|
|
|
|
|
| |||
Income tax expense (benefit) |
| 6,872 |
| (1,166 | ) | (71,947 | ) | |||
|
|
|
|
|
|
|
| |||
Net loss |
| (155,713 | ) | (88,142 | ) | (355,356 | ) | |||
|
|
|
|
|
|
|
| |||
Less: Net loss attributable to noncontrolling interests |
| (713 | ) | (3,921 | ) | (18,250 | ) | |||
|
|
|
|
|
|
|
| |||
Net loss attributable to NCO Group, Inc. |
| $ | (155,000 | ) | $ | (84,221 | ) | $ | (337,106 | ) |
See accompanying notes.
NCO GROUP, INC.
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| Total |
|
|
|
|
|
|
| ||||||||||
|
|
|
| Class L |
| Class A |
| Additional |
| Other |
|
|
| NCO Group, Inc. |
|
|
| Total |
| Total |
| ||||||||||
|
| Preferred |
| Common |
| Common |
| Paid-in |
| Comprehensive |
| Accumulated |
| Stockholders’ |
| Noncontrolling |
| Stockholders’ |
| Comprehensive |
| ||||||||||
|
| Stock |
| Stock |
| Stock |
| Capital |
| Income (Loss) |
| Deficit |
| Equity |
| Interests |
| Equity |
| Income (Loss) |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Balance, January 1, 2008 |
| $ | 14 |
| $ | 4 |
| $ | 18 |
| $ | 518,089 |
| $ | 2,835 |
| $ | (112,915 | ) | $ | 408,045 |
| $ | 48,948 |
| $ | 456,993 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Issuance of stock |
| 9 |
| — |
| 10 |
| 219,702 |
| — |
| — |
| 219,721 |
| — |
| 219,721 |
|
|
| ||||||||||
Deemed dividend to JPM for SST acquisition |
| — |
| — |
| — |
| (17,500 | ) | — |
| — |
| (17,500 | ) | — |
| (17,500 | ) |
|
| ||||||||||
Preferred stock dividends |
| 3 |
| — |
| — |
| (3 | ) | — |
| — |
| — |
| — |
| — |
|
|
| ||||||||||
Stock-based compensation |
| — |
| — |
| 1 |
| 667 |
| — |
| — |
| 668 |
| — |
| 668 |
|
|
| ||||||||||
Distributions to noncontrolling interests |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (12,242 | ) | (12,242 | ) |
|
| ||||||||||
Investment in subsidiary by noncontrolling interests |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 2,436 |
| 2,436 |
|
|
| ||||||||||
Business combinations |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,911 |
| 1,911 |
|
|
| ||||||||||
Comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| (337,106 | ) | (337,106 | ) | (18,250 | ) | (355,356 | ) | $ | (355,356 | ) | |||||||||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Foreign currency translation adjustment |
| — |
| — |
| — |
| — |
| (6,569 | ) | — |
| (6,569 | ) | — |
| (6,569 | ) | (6,569 | ) | ||||||||||
Change in fair value of cash flow hedges, net of taxes of $7,880 |
| — |
| — |
| — |
| — |
| (13,818 | ) | — |
| (13,818 | ) | — |
| (13,818 | ) | (13,818 | ) | ||||||||||
Net losses on cash flow hedges reclassified into earnings, net of taxes of $4,302 |
| — |
| — |
| — |
| — |
| 7,545 |
| — |
| 7,545 |
| — |
| 7,545 |
| 7,545 |
| ||||||||||
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (368,198 | ) | ||||||||||
Less: comprehensive loss attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 18,250 |
| ||||||||||
Comprehensive loss attributable to NCO Group, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (349,948 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Balance, December 31, 2008 |
| 26 |
| 4 |
| 29 |
| 720,955 |
| (10,007 | ) | (450,021 | ) | 260,986 |
| 22,803 |
| 283,789 |
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Issuance of stock, net |
| 1 |
| — |
| — |
| 39,664 |
| — |
| — |
| 39,665 |
| — |
| 39,665 |
|
|
| ||||||||||
Deemed investment by JPM for SST acquisition |
| — |
| — |
| — |
| 2,161 |
| — |
| — |
| 2,161 |
| — |
| 2,161 |
|
|
| ||||||||||
Preferred stock dividends |
| 4 |
| — |
| — |
| (4 | ) | — |
| — |
| — |
| — |
| — |
|
|
| ||||||||||
Stock-based compensation |
| — |
| — |
| 1 |
| 1,052 |
| — |
| — |
| 1,053 |
| — |
| 1,053 |
|
|
| ||||||||||
Distributions to noncontrolling interests |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (7,432 | ) | (7,432 | ) |
|
| ||||||||||
Comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| (84,221 | ) | (84,221 | ) | (3,921 | ) | (88,142 | ) | $ | (88,142 | ) | |||||||||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Foreign currency translation adjustment |
| — |
| — |
| — |
| — |
| 4,656 |
| — |
| 4,656 |
| — |
| 4,656 |
| 4,656 |
| ||||||||||
Change in fair value of cash flow hedges, net of taxes of $410 |
| — |
| — |
| — |
| — |
| (719 | ) | — |
| (719 | ) | — |
| (719 | ) | (719 | ) | ||||||||||
Net losses on cash flow hedges reclassified into earnings, net of taxes of $3,147 |
| — |
| — |
| — |
| — |
| 5,519 |
| — |
| 5,519 |
| — |
| 5,519 |
| 5,519 |
| ||||||||||
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (78,686 | ) | ||||||||||
Less: comprehensive loss attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3,921 |
| ||||||||||
Comprehensive loss attributable to NCO Group, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (74,765 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Balance, December 31, 2009 |
| 31 |
| 4 |
| 30 |
| 763,828 |
| (551 | ) | (534,242 | ) | 229,100 |
| 11,450 |
| 240,550 |
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Preferred stock dividends |
| 5 |
| — |
| — |
| (5 | ) | — |
| — |
| — |
| — |
| — |
|
|
| ||||||||||
Stock-based compensation |
| — |
| — |
| — |
| 712 |
| — |
| — |
| 712 |
| — |
| 712 |
|
|
| ||||||||||
Distributions to noncontrolling interests |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (4,733 | ) | (4,733 | ) |
|
| ||||||||||
Investment in subsidiary by noncontrolling interests |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 516 |
| 516 |
|
|
| ||||||||||
Comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| (155,000 | ) | (155,000 | ) | (713 | ) | (155,713 | ) | $ | (155,713 | ) | |||||||||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Foreign currency translation adjustment |
| — |
| — |
| — |
| — |
| 2,389 |
| — |
| 2,389 |
| — |
| 2,389 |
| 2,389 |
| ||||||||||
Net losses on cash flow hedges reclassified into earnings, net of taxes of $1,828 |
| — |
| — |
| — |
| — |
| 3,205 |
| — |
| 3,205 |
| — |
| 3,205 |
| 3,205 |
| ||||||||||
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (150,119 | ) | ||||||||||
Less: comprehensive loss attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 713 |
| ||||||||||
Comprehensive loss attributable to NCO Group, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (149,406 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Balance, December 31, 2010 |
| $ | 36 |
| $ | 4 |
| $ | 30 |
| $ | 764,535 |
| $ | 5,043 |
| $ | (689,242 | ) | $ | 80,406 |
| $ | 6,520 |
| $ | 86,926 |
|
|
| |
See accompanying notes.
NCO GROUP, INC
Consolidated Statements of Cash Flows
(Amounts in thousands)
|
| For the Years Ended December 31, |
| |||||||
|
| 2010 |
| 2009 |
| 2008 |
| |||
|
|
|
|
|
|
|
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
| |||
Net loss |
| $ | (155,713 | ) | $ | (88,142 | ) | $ | (355,356 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
| |||
Depreciation and amortization |
| 108,822 |
| 119,570 |
| 121,324 |
| |||
Impairment of intangible assets |
| 57,015 |
| 30,032 |
| 289,492 |
| |||
Provision for doubtful accounts |
| 1,813 |
| 2,797 |
| 3,030 |
| |||
Impairment of purchased accounts receivable and other |
| 14,321 |
| 26,514 |
| 98,892 |
| |||
Noncash interest |
| 8,792 |
| 3,674 |
| 1,517 |
| |||
Noncash net (gains) losses on derivative instruments |
| (601 | ) | 43 |
| 6,241 |
| |||
Gain on sale of purchased accounts receivable |
| (1,100 | ) | (361 | ) | (3,002 | ) | |||
Deferred income taxes |
| 2,104 |
| (9,314 | ) | (75,015 | ) | |||
Gain on sale of business |
| — |
| (4,441 | ) | — |
| |||
Other |
| 5,432 |
| 3,707 |
| 3,960 |
| |||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
| |||
Accounts receivable, trade |
| 5,635 |
| 43,863 |
| 11,765 |
| |||
Accounts payable and accrued expenses |
| (15,603 | ) | (29,683 | ) | (23,172 | ) | |||
Income taxes payable |
| 920 |
| (307 | ) | 4,599 |
| |||
Other assets and liabilities |
| 11,287 |
| 522 |
| 9,458 |
| |||
Net cash provided by operating activities |
| 43,124 |
| 98,474 |
| 93,733 |
| |||
|
|
|
|
|
|
|
| |||
Cash flows from investing activities: |
|
|
|
|
|
|
| |||
Purchases of accounts receivable |
| (12,709 | ) | (56,609 | ) | (126,547 | ) | |||
Collections applied to principal of purchased accounts receivable |
| 56,176 |
| 84,100 |
| 89,325 |
| |||
Proceeds from sales of purchased accounts receivable |
| 3,388 |
| 525 |
| 4,757 |
| |||
Purchases of property and equipment |
| (24,313 | ) | (32,142 | ) | (43,396 | ) | |||
Cash received from sale of business |
| — |
| 20,000 |
| — |
| |||
Net cash (paid) received related to acquisitions |
| (1,600 | ) | 704 |
| (349,420 | ) | |||
Other |
| 1,402 |
| 136 |
| 1,122 |
| |||
Net cash provided by (used in) investing activities |
| 22,344 |
| 16,714 |
| (424,159 | ) | |||
|
|
|
|
|
|
|
| |||
Cash flows from financing activities: |
|
|
|
|
|
|
| |||
Repayment of notes payable |
| (14,859 | ) | (24,594 | ) | (35,476 | ) | |||
Borrowings under notes payable |
| — |
| — |
| 21,691 |
| |||
Net (repayments of) borrowings under revolving credit facility |
| (7,000 | ) | (64,500 | ) | 34,500 |
| |||
Repayment of borrowings under senior term loan |
| (42,039 | ) | (39,345 | ) | (10,745 | ) | |||
Borrowings under senior term loan, net of fees |
| — |
| — |
| 134,135 |
| |||
Payment of fees related to debt |
| (2,758 | ) | (2,477 | ) | (4,317 | ) | |||
Investment in subsidiary by noncontrolling interests |
| — |
| — |
| 2,436 |
| |||
Return of investment in subsidiary to noncontrolling interests |
| (4,733 | ) | (7,855 | ) | (12,242 | ) | |||
Issuance of stock, net |
| — |
| 39,667 |
| 219,722 |
| |||
Payment of deemed dividend to JPM |
| — |
| (8,049 | ) | (17,500 | ) | |||
Net cash (used in) provided by financing activities |
| (71,389 | ) | (107,153 | ) | 332,204 |
| |||
|
|
|
|
|
|
|
| |||
Effect of exchange rate on cash |
| (223 | ) | 1,306 |
| (3,181 | ) | |||
|
|
|
|
|
|
|
| |||
Net (decrease) increase in cash and cash equivalents |
| (6,144 | ) | 9,341 |
| (1,403 | ) | |||
|
|
|
|
|
|
|
| |||
Cash and cash equivalents at beginning of the period |
| 39,221 |
| 29,880 |
| 31,283 |
| |||
|
|
|
|
|
|
|
| |||
Cash and cash equivalents at end of the period |
| $ | 33,077 |
| $ | 39,221 |
| $ | 29,880 |
|
See accompanying notes.
NCO GROUP, INC.
Notes to Consolidated Financial Statements
1. Nature of Operations and Basis of Presentation:
NCO Group, Inc. is a holding company and conducts substantially all of its business operations through its subsidiaries (collectively, the “Company” or “NCO”). NCO is an international provider of business process outsourcing solutions, primarily focused on accounts receivable management (“ARM”) and customer relationship management (“CRM”). NCO provides services through over 100 offices throughout North America, Asia, Europe and Australia. The Company provides services to more than 14,000 active clients, including many of the Fortune 500, supporting a broad spectrum of industries, including financial services, telecommunications, healthcare, retail and commercial, utilities, education and government, technology and transportation/logistics services. These clients are primarily located throughout North America, Asia, Europe and Australia. The Company’s largest client during the year ended December 31, 2010, was in the telecommunications sector and represented 7.1 percent of the Company’s consolidated revenue excluding reimbursable costs and fees for the year ended December 31, 2010.
Historically, the Company’s Portfolio Management business has also purchased and collected past due consumer accounts receivable from consumer creditors. Beginning in 2009, the Company significantly reduced its purchases of accounts receivable and made a decision to minimize further investments in the future. This decision resulted from declines in liquidation rates, competition for purchased accounts receivable, the continued uncertainty of collectibility, as well as potential regulatory changes affecting the purchased accounts receivable business.
The Company’s business consists of three operating segments: ARM, CRM and Portfolio Management.
2. Accounting Policies:
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and all subsidiaries and entities controlled by the Company. All intercompany accounts and transactions have been eliminated.
On January 2, 2008, the Company acquired Systems & Services Technologies, Inc. (“SST”), a third-party consumer receivable servicer. Prior to the acquisition, SST was a wholly owned subsidiary of JPMorgan Chase & Co. (“JPM”). JPM also wholly owns One Equity Partners and its affiliates (“OEP”), which is a private equity investment fund that has had a controlling interest in the Company since the Company’s “going-private” transaction on November 15, 2006 (the “Transaction”).
Because the Company and SST were under common control at the time of the SST acquisition, the transfer of assets and liabilities of SST were accounted for at historical cost in a manner similar to a pooling of interests. For financial accounting purposes, the acquisition was viewed as a change in reporting entity and, as a result, required restatement of the Company’s financial statements for all periods subsequent to November 15, 2006, the date of the Transaction and the date at which common control of the Company and SST by JPM commenced.
The Company also considers whether any of its investments represent a variable interest entity (“VIE”) that is required to be consolidated by the primary beneficiary. The primary beneficiary is the entity that has both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. A VIE is an entity for which the primary beneficiary’s interest in the entity can change with changes in factors other than the amount of investment in the entity.
The Company has investments in VIEs that purchase portfolios of purchased accounts receivable. Based on the Company’s significant participation in the VIEs’ profits or losses and its ability to direct the activities of the VIEs, the Company consolidates these VIEs as it is considered the primary beneficiary. The aggregate assets of the VIEs, that can only be used to settle obligations of the VIEs, and liabilities of the VIEs, for which beneficial interest holders do not have recourse to the Company’s general credit, are presented on the balance sheet.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued):
Revenue Recognition:
Services:
ARM contingency fee revenue is recognized upon collection of funds by NCO or its client. Fees for ARM contractual services are recognized as services are performed and earned under service arrangements with clients where fees are fixed or determinable and collectibility is reasonably assured
CRM revenue is recognized based on the billable hours of each representative as defined in the client contract. The rate per billable hour charged is based on a predetermined contractual rate. The contractual rate can fluctuate based on certain pre-determined objective performance criteria related to quality and performance, reduced by any contractual performance penalties the client may be entitled to, both as measured on a monthly basis. The impact of the performance criteria and penalties on the rate per billable hour is continually updated as revenue is recognized.
Under CRM performance-based arrangements, the Company is paid by its customers based on achievement of certain levels of sales or other client-determined criteria. The Company recognizes performance-based revenue by measuring its actual results against the performance criteria specified in the contracts.
Deferred revenue primarily relates to prepaid fees for ARM collection and letter services for which revenue is recognized when the services are provided or the time period for which the Company is obligated to provide the services has expired. The following summarizes the changes in the balance of deferred revenue (amounts in thousands):
|
| For the Year Ended December 31, |
| ||||
|
| 2010 |
| 2009 |
| ||
Balance at beginning of period |
| $ | 40,675 |
| $ | 46,016 |
|
Additions |
| 34,793 |
| 38,231 |
| ||
Revenue recognized |
| (43,528 | ) | (43,585 | ) | ||
Foreign currency translation adjustment |
| 55 |
| 13 |
| ||
Balance at end of period |
| $ | 31,995 |
| $ | 40,675 |
|
Portfolio:
The Company acquires accounts receivable in groups that are initially recorded at cost. All acquired accounts receivable have experienced deterioration of credit quality between origination and the Company’s acquisition of the accounts receivable, and the amount paid for the accounts receivable reflects the Company’s determination that it is probable the Company will be unable to collect all amounts due according to contractual terms of each receivable. The Company determines whether each purchase of accounts receivable is to be accounted for as an individual portfolio or whether multiple purchases will be combined based on common risk characteristics into an aggregated portfolio. Once the Company establishes an individual purchase or aggregated purchases as a portfolio, the receivables in the portfolio are not changed, unless replaced, returned or sold. The Company considers expected collections, and estimates the amount and timing of undiscounted expected principal, interest, and other cash flows (expected at acquisition) for each portfolio of accounts receivable. The Company determines nonaccretable difference, or the excess of the portfolio’s contractual principal over all cash flows expected at acquisition as an amount that should not be accreted. The excess of the portfolio’s cash flows expected to be collected over the amount paid is accretable yield. Accretable yield is recognized into earnings, as Portfolio revenue in the statement of operations, over the useful life of the portfolio, based on an effective interest rate method.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued):
Revenue Recognition (continued):
Portfolio (continued):
At acquisition, the Company derives an internal rate of return (“IRR”) based on the expected monthly collections over the estimated economic life of each portfolio of accounts receivable (typically up to seven years, based on the Company’s collection experience) compared to the original purchase price. Monthly collections on the portfolios are allocated between revenue and carrying value reduction based on applying each portfolio’s effective IRR for the quarter to its carrying value. Over the life of a portfolio, the Company continues to estimate cash flows expected to be collected. The Company evaluates at the balance sheet date whether the present value of its portfolios determined using the effective interest rates for each portfolio has decreased, and if so, records a valuation allowance to maintain the original IRR. Any increase in actual or estimated cash flows expected to be collected is first used to reverse any existing valuation allowance for that portfolio, and any remaining increases in cash flows are recognized prospectively through an increase in the IRR. The updated IRR then becomes the new benchmark for subsequent valuation allowance testing.
Portfolio Sales:
Gains on sales are recognized as revenue and represent the difference between the sales price and the present value of the future cash collections expected from the receivables sold at the portfolio’s IRR at the time of sale.
Reimbursable Costs and Fees:
Reimbursable costs and fees consist of court costs, legal fees and repossession fees, representing out-of-pocket expenses that are reimbursed by the Company’s clients. Reimbursable costs and fees are recorded as both revenue and operating expenses on the statement of operations.
During the fourth quarter of 2010, the Company identified $15.4 million of reimbursable costs and fees received from clients associated with certain contractual arrangements acquired in connection with the acquisition of TSYS Total Debt Management (note 4) that were incorrectly recorded on a net basis, as an offset to selling, general and administrative expenses in the statement of operations for the year ended December 31, 2009. Revenue for the year ended December 31, 2009 should have included these reimbursable costs and fees, with an equal and offsetting amount charged to operating expenses, due to the fact that the Company acted as principal and assumed overall risk in the transactions under these contractual arrangements. Although the Company concluded that the impact was not material to the 2009 financial statements, revenue and operating expenses have been revised to reflect the $15.4 million reimbursable costs and fees in both revenue and operating expenses in the statement of operations for the year ended December 31, 2009. The following summarizes the impact of this revision on the statement of operations for the year ended December 31, 2009 (in thousands):
|
| As |
| Adjustments |
| As Adjusted |
| |||
Total revenue |
| $ | 1,563,918 |
| $ | 15,443 |
| $ | 1,579,361 |
|
Total operating costs and expenses |
| $ | 1,562,285 |
| $ | 15,443 |
| $ | 1,577,728 |
|
Income from operations |
| $ | 1,633 |
| $ | — |
| $ | 1,633 |
|
Loss before income taxes |
| $ | (89,308 | ) | $ | — |
| $ | (89,308 | ) |
Net loss attributable to NCO Group, Inc. |
| $ | (84,221 | ) | $ | — |
| $ | (84,221 | ) |
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued):
Credit Policy:
Management monitors its client relationships in order to minimize the Company’s credit risk and assesses the likelihood of collection based on a number of factors including the client’s collection history and credit-worthiness. The Company maintains a reserve for potential collection losses when such losses are deemed to be probable.
The Company has two types of arrangements under which it collects its ARM contingency fee revenue. For certain clients, the Company remits funds collected on behalf of the client net of the related contingency fees while, for other clients, the Company remits gross funds collected on behalf of clients and bills the client separately for its contingency fees.
The Company generally does not require collateral and it does not charge finance fees on outstanding trade receivables. In many cases, in the event of collection delays from ARM clients, management may, at its discretion, change from the gross remittance method to the net remittance method. The Company also maintains a reserve for deposits on debtor accounts that may ultimately prove to have insufficient funds. Trade accounts receivable are written off to the allowances when collection appears highly unlikely.
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. The Company minimizes this risk by dealing with major financial institutions. The Company maintains deposit accounts with major financial institutions, and, at times, such deposits may exceed FDIC insurance limits.
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 operations. Certain expenditures for software that is purchased or internally developed for use by the Company are capitalized in accordance with authoritative guidance and amortized using the straight-line method over a period of five years.
Long-Lived Assets:
The Company evaluates the net realizable value of long-lived assets, including property and equipment, internal use software, and certain identifiable definite-lived intangible assets, for impairment, based on the estimated undiscounted future cash flows, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
Goodwill and Other Intangible Assets:
Goodwill represents the excess of purchase price over the fair market value of net assets acquired, based on their respective fair values at the date of acquisition. Goodwill is tested for impairment each year, and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The goodwill impairment test is performed at the reporting unit level and involves a two-step approach, the first step identifies any potential impairment and the second step measures the amount of impairment, if applicable. The first test for potential impairment compares the fair value of a reporting unit’s goodwill to its carrying amount; if the fair value is less than the carrying amount, the reporting unit’s goodwill would be considered impaired and the second step would be performed. The second step measures the amount of impairment by comparing the implied fair value of the reporting unit’s goodwill with its carrying value. Fair value estimates are based upon a combination of the market approach and income approach.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued):
Goodwill and Other Intangible Assets (continued):
Trade name includes the NCO trade name, representing the fair value of the NCO name, which is an indefinite-lived intangible asset and therefore not subject to amortization. Similar to goodwill, the NCO trade name is reviewed at least annually for impairment. Trade name also includes certain trade names acquired in connection with the acquisition of Outsourcing Solutions, Inc. (“OSI”) (note 4). The OSI trade names are not considered to have indefinite lives and therefore are subject to amortization. The OSI trade names are amortized using the straight-line method over a period of five years.
Other intangible assets consist primarily of customer relationships and non-compete agreements, which are amortized over a range of five to seven years using the straight-line method (note 10).
Deferred Financing Fees:
Deferred financing fees relate to debt issuance costs incurred, which are capitalized and amortized to interest expense over the term of the related debt using the effective interest method.
Income Taxes:
Deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Deferred taxes have not been provided on the cumulative undistributed earnings of foreign subsidiaries because such amounts are expected to be reinvested indefinitely.
The Company accounts for uncertain tax positions in accordance with authoritative guidance, which requires that the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position, be recognized in the financial statements. The Company applies a more likely than not threshold to the recognition of uncertain tax positions. The Company recognizes the amount of a tax benefit that has a greater than 50 percent likelihood of being ultimately realized upon settlement. Change in judgment related to the expected ultimate resolution of uncertain tax positions are recognized in earnings in the quarter of such change. The difference between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured represents an unrecognized tax benefit. An unrecognized tax benefit is a liability that represents a potential future obligation to the taxing authorities.
Foreign Currency Translation:
The Company has foreign subsidiaries whose local currency has been determined to be the functional currency for that subsidiary. The assets and liabilities of these foreign subsidiaries have been translated using the current exchange rates, and the income and expenses have been translated using rates consistent with average historical exchange rates. The adjustments resulting from translation have been recorded separately in stockholders’ equity as “Other comprehensive income (loss)” and are not included in determining consolidated net (loss) income. As of December 31, 2010 and 2009, “Accumulated other comprehensive income (loss)” included $5.4 million and $3.0 million of cumulative income, respectively, from foreign currency translation.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued):
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. The Company recognizes all of their derivative instruments as either assets or liabilities in the balance sheet at fair value.
The Company is exposed to foreign currency fluctuations relating to its operations in foreign countries. In order to partially hedge cash flow exposure, the Company may periodically enter into forward exchange contracts in order to minimize the impact of currency fluctuations on transactions and cash flows. The forward exchange contracts are recorded at their fair value on the accompanying balance sheets and may be designated as cash flow hedges. If the forward exchange contracts are designated as cash flow hedges, changes in the fair value, to the extent that the hedge was effective, are recorded, net of tax, in “Other comprehensive income (loss),” until earnings are affected by the variability of the hedged cash flows.
Cash flow hedge ineffectiveness, defined as the extent that the changes in fair value of the derivative exceed the variability of cash flows of the forecasted transaction, is recorded in the statement of operations. If the forward exchange contracts are not designated as cash flow hedges, changes in their estimated fair value are recorded in “Other income (expense)” in the statement of operations (note 16).
The Company is also exposed to interest rate fluctuations relating to its floating rate long-term debt. To manage this interest rate risk, from time to time the Company enters into interest rate swap agreements. The interest rate swap agreements may be designated as cash flow hedges and are recorded at their fair value on the accompanying balance sheets. Changes in the fair value of a cash flow hedge, to the extent that the hedge is effective, are recorded, net of tax, in “Other comprehensive income (loss),” until earnings are affected by the variability of the hedged cash flows. Cash flow hedge ineffectiveness, defined as the extent that the changes in fair value of the derivative exceed the variability of cash flows of the forecasted transaction, is recorded in the statement of operations. If the interest rate swap agreements are not designated as cash flow hedges, changes in their estimated fair value are recorded in “Interest expense” in the statement of operations (note 16).
The Company may also enter into interest rate cap contracts to manage interest rate risk relating to its floating rate long-term debt. These contracts are not cash flow hedges and, accordingly, changes in their estimated fair value are recorded in “Other income (expense)” in the statement of operations.
The Company has embedded derivatives relating to the contingent payment provision in its nonrecourse credit facility relating to its purchased accounts receivable operations, and embedded derivatives relating to the sellers’ participation in collections that are in excess of minimum targets for certain portfolios of purchased accounts receivable. The embedded derivatives are not cash flow hedges and, accordingly, changes in their estimated fair value are recorded in “Interest expense” in the statement of operations. The embedded derivatives related to the nonrecourse credit facility are included in “Long-term debt” on the balance sheet because they are not separable from the notes payable and they have the same counterparty (note 12), and the embedded derivatives related to the sellers’ participation are included in “Accrued expenses” on the balance sheet.
Allowance for Doubtful Accounts:
Allowances for doubtful accounts are determined based on estimates of losses related to customer receivable balances. In establishing the appropriate provision for customer receivables balances, the Company makes assumptions with respect to their future collectibility. The Company’s assumptions are based on an individual assessment of a customer’s credit quality as well as subjective factors and trends, including the aging of receivable balances. If the estimate is not sufficient to cover actual losses, the Company would be required to take additional charges to its earnings.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued):
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
The application of the authoritative guidance for business combinations requires the measurement of fair values of purchased assets and liabilities of an acquired entity. In connection with business combinations accounted for as a purchase, management makes additional estimates and assumptions in determining fair value that affect amounts reported in the financial statements and accompanying notes. The more significant financial statement items for which estimates and assumptions may be made include intangible assets, purchased accounts receivable, and nonrecourse debt.
In the ordinary course of accounting for purchased accounts receivable, estimates are made by management as to the amount and timing of future cash flows expected from each portfolio. The estimated future cash flow of each portfolio is used to compute the IRR for the portfolio, both in the case of any increases in expected cash flows, or to compute impairment or allowances in the case of decreases in expected cash flows. The IRR is used to allocate collections between revenue and principal reduction of the carrying values of the purchased accounts receivable.
On an ongoing basis, the Company compares the historical trends of each portfolio, or aggregated portfolios, to projected collections. Future projected collections are then increased or decreased based on the actual cumulative performance of each portfolio. Management reviews each portfolio’s adjusted projected collections to determine if further upward or downward adjustment is warranted. Management regularly reviews the trends in collection patterns and uses its reasonable best efforts to improve the collections of under-performing portfolios. However, actual results will differ from these estimates and a material change in these estimates could occur within one reporting period (note 7).
3. Restructuring Charges:
The Company has several restructuring plans under which it has recorded restructuring charges during 2009 and 2010, primarily in conjunction with streamlining the cost structure of the Company’s operations. These charges primarily related to the elimination of certain redundant facilities and severance costs. The Company currently expects to pay the remaining severance balance through 2013 and the remaining lease balance through 2016. The restructuring charges recorded during 2008 related to streamlining the cost structure of the Company’s legacy operations in conjunction with the acquisitions of OSI and SST (note 4).
The following presents the activity in the accruals recorded for restructuring charges (amounts in thousands):
|
| Leases |
| Severance |
| Total |
| |||
Balance at January 1, 2008 |
| $ | 7,635 |
| $ | 971 |
| $ | 8,606 |
|
Accruals |
| 6,474 |
| 5,126 |
| 11,600 |
| |||
Cash payments |
| (6,812 | ) | (3,477 | ) | (10,289 | ) | |||
Property and equipment write-offs |
| (615 | ) | — |
| (615 | ) | |||
Balance at December 31, 2008 |
| 6,682 |
| 2,620 |
| 9,302 |
| |||
Accruals |
| 5,566 |
| 5,302 |
| 10,868 |
| |||
Cash payments |
| (3,686 | ) | (4,925 | ) | (8,611 | ) | |||
Balance at December 31, 2009 |
| 8,562 |
| 2,997 |
| 11,559 |
| |||
Accruals |
| 14,992 |
| 3,280 |
| 18,272 |
| |||
Cash payments |
| (8,042 | ) | (4,722 | ) | (12,764 | ) | |||
Property and equipment write-offs |
| (3,084 | ) | — |
| (3,084 | ) | |||
Balance at December 31, 2010 |
| $ | 12,428 |
| $ | 1,555 |
| $ | 13,983 |
|
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
4. Business Combinations:
In September 2010, the Company acquired Health Blueprints, Inc., a healthcare consulting business, for approximately $1.6 million in cash.
On August 31, 2009, the Company acquired TSYS Total Debt Management, Inc. (“TDM”), a provider of accounts receivable management legal network solutions, for $4.5 million in cash which included $1.3 million of acquired cash. The Company allocated $983,000 of the purchase price to the customer relationships and recorded goodwill of $1.1 million. During the year ended December 31, 2009, the Company incurred acquisition costs of $154,000, which were recorded in selling, general and administrative expenses on the statement of operations. The TDM acquisition was included in the ARM segment.
On February 29, 2008, the Company acquired OSI, a leading provider of business process outsourcing services, specializing primarily in accounts receivable management services, for $334.0 million, which includes a $5.0 million purchase price reduction due to the settlement, in the fourth quarter of 2009, of amounts held in escrow. The purchase price was financed in part by the issuance of 802,262 shares of the Company’s Series A 14% PIK Preferred Stock, 37,738 shares of Class L common stock and 1,012,262 shares of Class A common stock. The remainder of the purchase price was financed by borrowings of $139.0 million under the Company’s amended senior credit facility (note 12).
The Company allocated $117.0 million of the purchase price to customer relationships, $3.4 million to trade names, $634,000 to non-compete agreements, and recorded goodwill of $210.4 million, which is non-deductible for tax purposes, in the ARM segment.
The following summarizes the unaudited pro forma results of operations, assuming the OSI acquisition described above occurred as of January 1, 2008. The unaudited pro forma information does not include the TDM acquisition because it was not considered a significant business combination. The unaudited pro forma information is provided for information 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 (amounts in thousands):
|
| For the Year Ended |
| |
|
| December 31, 2008 |
| |
Revenue |
| $ | 1,584,526 |
|
Net loss attributable to NCO |
| (342,445 | ) | |
On January 2, 2008, the Company acquired SST, a third-party consumer receivable servicer, from JPM for $18.4 million, including certain post-closing adjustments. The purchase price consisted of cash consideration of $11.3 million and the issuance of 29,884 shares of the Company’s Series A 14% PIK Preferred Stock valued at $7.1 million. As described in note 2, since the Company and SST were under common control by JPM at the time of the SST acquisition, the transfer of assets and liabilities of SST were accounted for at historical cost in a manner similar to a pooling of interests. The cash consideration paid to JPM for SST and the return of $4.0 million of cash that was not acquired were treated as dividends to JPM.
During the year ended December 31, 2008, the Company acquired several smaller companies, all of which were providers of ARM services, for an aggregate purchase price of $9.3 million, including an accrual for $886,000 for estimated earnout payments which were subsequently paid during 2009, resulting in customer relationships of $1.2 million and goodwill of approximately $8.1 million. In addition, during the year ended December 31, 2008, the Company paid $6.2 million for earnout payments related to prior acquisitions.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
5. Disposals of Business:
In October 2009, the Company sold its print and mail business, from the ARM segment, for approximately $18.7 million in cash. The net proceeds from the sale were used to pay down the Company’s senior term loan. In connection with the sale, during the year ended December 31, 2009, the Company recorded a gain of approximately $4.4 million, which is included in “Other income (expense)” on the statement of operations, and a $2.2 million deferred gain, which is amortized into earnings over the life of the ten-year servicing arrangement entered into with the buyer in connection with the disposal.
6. Fair Value:
Recurring Measurement:
The Company uses various valuation techniques and assumptions when measuring fair value of its assets and liabilities. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable (“Level 1”), market corroborated (“Level 2”), or generally unobservable (“Level 3”). The significant majority of the fair value amounts included in the Company’s current period earnings resulted from Level 2 fair value methodologies; that is, the Company is able to value the assets and liabilities based on observable market data for similar instruments (the “market approach”). The Company applied an income approach to amounts included in its current period earnings resulting from Level 3 fair value methodologies.
The financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were measured at fair value on a recurring basis (amounts in thousands):
|
| At Fair Value as of |
| ||||||||||||||||||||||
|
| December 31, 2010 |
| December 31, 2009 |
| ||||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Forward exchange contracts |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 2 |
| $ | — |
| $ | 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Interest rate swaps |
| — |
| 1,489 |
| — |
| 1,489 |
| — |
| 9,104 |
| — |
| 9,104 |
| ||||||||
Forward exchange contracts |
| — |
| — |
| — |
| — |
| — |
| 60 |
| — |
| 60 |
| ||||||||
Embedded derivatives |
| — |
| — |
| 2,486 |
| 2,486 |
| — |
| — |
| 3,306 |
| 3,306 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net liabilities |
| $ | — |
| $ | 1,489 |
| $ | 2,486 |
| $ | 3,975 |
| $ | — |
| $ | 9,162 |
| $ | 3,306 |
| $ | 12,468 |
|
During the year ended December 31, 2010, there were no transfers in or out of the Company’s Level 1, Level 2 or Level 3 fair value measurements.
To value the interest rate swaps and foreign currency forward exchange contracts, the Company obtains quotes from its counterparties. The Company considers such quotes to be Level 2 measurements. To gain assurance that such quotes reflect market participant views, the Company independently values its interest rate swaps, and independently validates the relevant exchange rates of its forward exchange contracts.
For purposes of valuation adjustments to its interest rate swap derivative positions, the Company has evaluated liquidity premiums that may be demanded by market participants, as well as the credit risk of its counterparties and its own credit. The Company has considered factors such as the likelihood of default by itself and counterparties, its net exposures and remaining maturities in determining the appropriate fair value adjustment to record.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
6. Fair Value (continued):
Recurring Measurement (continued):
Embedded derivatives represent the contingent payment provision embedded in the Company’s nonrecourse credit facility related to purchased accounts receivable and the sellers’ participation in collections that are in excess of minimum targets for certain portfolios of purchased accounts receivable. The Company values these embedded derivatives based on the present value of expected cash flows. Inputs used to value these embedded derivatives are considered Level 3 measurements since they are unobservable. Changes in the fair market value of the embedded derivatives are recorded in interest expense on the statement of operations.
The following summarizes the change in the fair value of the embedded derivatives (amounts in thousands):
|
| For the Year Ended December 31, |
| ||||
|
| 2010 |
| 2009 |
| ||
Balance at beginning of period |
| $ | 3,306 |
| $ | 4,457 |
|
Accrued interest additions |
| 681 |
| 1,486 |
| ||
Payments |
| (2,736 | ) | (2,509 | ) | ||
Changes in fair value |
| 1,235 |
| (128 | ) | ||
Balance at end of period |
| $ | 2,486 |
| $ | 3,306 |
|
For further information on the Company’s derivative financial instruments, refer to note 16.
Non-Recurring Measurement:
For the year ended December 31, 2010, the Company performed its annual impairment test during the fourth quarter. Due to the expected impact of the economic environment on the Company’s clients’ business in 2011 and beyond, in the fourth quarter of 2010 the Company reduced the budgeted volumes from certain of its clients in the CRM reporting unit. As a result, the Company’s 2010 annual impairment test for goodwill indicated that the carrying value of its CRM reporting unit exceeded its fair value. As a result of the annual impairment testing, the Company recorded goodwill impairment charges of $57.0 million in the CRM segment in 2010. Refer to note 10 for the assumptions used to determine fair values. The following table summarizes the non-financial assets measured at fair value on a nonrecurring basis in the balance sheet, by level within the fair value hierarchy (amounts in thousands):
|
| At Fair Value as of |
| ||||||||||||||||||||||
|
| December 31, 2010 |
| December 31, 2009 |
| ||||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||||||
CRM: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Goodwill |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 57,015 |
| $ | 57,015 |
|
Other intangible assets |
| $ | — |
| $ | — |
| $ | 35,900 |
| $ | 35,900 |
| $ | — |
| $ | — |
| $ | 47,100 |
| $ | 47,100 |
|
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, Trade Accounts Receivable, and Accounts Payable:
The carrying amount reported in the balance sheets approximates fair value because of the short maturity of these instruments.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
6. Fair Value (continued):
Fair Value of Financial Instruments (continued):
Purchased Accounts Receivable:
The Company records purchased accounts receivable at cost, which is discounted from the contractual receivable balance. The carrying value of purchased accounts receivable, which is estimated based upon future cash flows, approximates fair value at December 31, 2010 and 2009. However, if all or a portion of the purchased accounts receivable were sold at a discount to the expected future cash flows, the Company may realize a loss on the sale.
Notes Receivable:
The Company had notes receivable of $4.9 million and $5.1 million as of December 31, 2010 and 2009, respectively. The carrying amounts reported in the balance sheets, included in current and long-term other assets, approximated market rates for notes with similar terms and maturities, and, accordingly, the carrying amounts approximate fair value. The Company continually evaluates the collectability of these notes.
Long-Term Debt:
The following presents the carrying values and the estimated fair values of the Company’s long-term debt at December 31, 2010 (amounts in thousands):
|
| Carrying Value |
| Fair Value |
| ||
Senior term loan |
| $ | 507,220 |
| $ | 515,618 |
|
Senior revolving credit facility |
| 10,000 |
| 9,961 |
| ||
Senior subordinated notes |
| 200,000 |
| 152,500 |
| ||
Senior notes |
| 165,000 |
| 141,990 |
| ||
Nonrecourse credit facility |
| 1,778 |
| 1,778 |
| ||
The fair values of the Company’s senior term loan and senior revolving credit facility are based on market interest rates for debt with similar terms and maturities. The fair values of the Company’s Senior Notes and Senior Subordinated Notes are based on their trading prices at December 31, 2010. The stated interest rates of the Company’s nonrecourse credit facility approximate market rates for debt with similar terms and maturities, and, accordingly, the carrying amounts approximate fair value.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
7. Purchased Accounts Receivable:
As of December 31, 2010, the carrying value of Portfolio Management’s and ARM’s purchased accounts receivable were $75.5 million and $3.1 million, respectively. The total outstanding balance due, representing the original undiscounted contractual amount less collections since acquisition, was $55.8 billion and $55.2 billion at December 31, 2010 and 2009, respectively.
The following summarizes the changes in purchased accounts receivable (amounts in thousands):
|
| For the Year Ended December 31, |
| |||||||
|
| 2010 |
| 2009 |
| 2008 |
| |||
|
|
|
|
|
|
|
| |||
Balance at beginning of period |
| $ | 138,429 |
| $ | 185,659 |
| $ | 245,585 |
|
Purchases: |
|
|
|
|
|
|
| |||
Cash purchases |
| 12,709 |
| 56,609 |
| 126,547 |
| |||
Portfolios acquired in business combinations |
| — |
| — |
| 3,630 |
| |||
Collections |
| (103,991 | ) | (155,342 | ) | (205,024 | ) | |||
Revenue recognized |
| 47,815 |
| 71,242 |
| 115,699 |
| |||
Proceeds from portfolio sales applied to carrying value |
| (2,288 | ) | (164 | ) | (1,755 | ) | |||
Allowance for impairment |
| (14,321 | ) | (21,467 | ) | (98,892 | ) | |||
Other |
| 254 |
| 1,892 |
| (131 | ) | |||
Balance at end of period |
| $ | 78,607 |
| $ | 138,429 |
| $ | 185,659 |
|
Portfolio Management sells portfolios of accounts receivable based on a low probability of payment under the Company’s collection platform and other criteria. Proceeds from sales above the remaining carrying value are recorded as revenue. The following summarizes sales proceeds, carrying value and revenue recorded (amounts in thousands):
|
| For the Year Ended December 31, |
| |||||||
|
| 2010 |
| 2009 |
| 2008 |
| |||
Proceeds from sales |
| $ | 3,388 |
| $ | 525 |
| $ | 4,757 |
|
Less carrying value |
| 2,288 |
| 164 |
| 1,755 |
| |||
Portfolio sales revenue |
| $ | 1,100 |
| $ | 361 |
| $ | 3,002 |
|
The following presents the change in the allowance for impairment of purchased accounts receivable (amounts in thousands):
|
| For the Year Ended December 31, |
| |||||||
|
| 2010 |
| 2009 |
| 2008 |
| |||
Balance at beginning of period |
| $ | 144,397 |
| $ | 123,804 |
| $ | 24,962 |
|
Additions |
| 20,503 |
| 26,347 |
| 99,593 |
| |||
Recoveries |
| (6,182 | ) | (4,880 | ) | (701 | ) | |||
Other |
| (24 | ) | (874 | ) | (50 | ) | |||
Balance at end of period |
| $ | 158,694 |
| $ | 144,397 |
| $ | 123,804 |
|
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
7. Purchased Accounts Receivable (continued):
Accretable yield represents the excess of the cash flows expected to be collected during the life of the portfolio over the initial investment in the portfolio. The following presents the change in accretable yield (amounts in thousands):
|
| For the Year Ended December 31, |
| |||||||
|
| 2010 |
| 2009 |
| 2008 |
| |||
Balance at beginning of period |
| $ | 112,108 |
| $ | 167,411 |
| $ | 366,584 |
|
Additions |
| 8,477 |
| 57,088 |
| 125,750 |
| |||
Revenue recognition |
| (47,815 | ) | (71,242 | ) | (115,699 | ) | |||
Reclassifications to nonaccretable difference |
| (16,787 | ) | (40,729 | ) | (210,824 | ) | |||
Foreign currency translation adjustment |
| (230 | ) | (420 | ) | 1,600 |
| |||
Balance at end of period |
| $ | 55,753 |
| $ | 112,108 |
| $ | 167,411 |
|
During the years ended December 31, 2010, 2009 and 2008, the Company purchased accounts receivable for a cost of $12.7 million, $56.6 million and $126.5 million, respectively, that had contractually required payments receivable at the date of acquisition of $718.3 million, $2.9 billion and $4.3 billion, respectively, and expected cash flows at the date of acquisition of $21.2 million, $113.7 million and $248.7 million, respectively.
8. Funds Held on Behalf of Clients:
In the course of the Company’s regular business activities as a provider of accounts receivable management services, 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 $70.5 million and $75.1 million at December 31, 2010 and 2009, respectively, have been shown net of their offsetting liability for financial statement presentation.
9. Property and Equipment:
Property and equipment, at cost, consisted of the following (amounts in thousands):
|
| Estimated |
| December 31, |
| December 31, |
| ||
Land |
|
|
| $ | 70 |
| $ | 70 |
|
Buildings |
| 15 to 30 years |
| 6,726 |
| 6,701 |
| ||
Computer equipment |
| 5 years |
| 127,438 |
| 130,085 |
| ||
Computer software |
| 5 years |
| 97,900 |
| 86,779 |
| ||
Leasehold improvements |
| 5 to 15 years |
| 45,307 |
| 52,621 |
| ||
Furniture and fixtures |
| 5 to 10 years |
| 21,164 |
| 25,287 |
| ||
Capital leases |
|
|
| 5,420 |
| 5,420 |
| ||
|
|
|
| 304,025 |
| 306,963 |
| ||
Less accumulated depreciation |
|
|
| (204,936 | ) | (184,646 | ) | ||
|
|
|
| $ | 99,089 |
| $ | 122,317 |
|
Accumulated depreciation at December 31, 2010 and 2009, includes $1.7 million and $682,000, respectively, of accumulated amortization related to capital leases. During the years ended December 31, 2010, 2009 and 2008, the Company recorded depreciation expense of $44.2 million, $51.5 million and $56.2 million, respectively.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
9. Property and Equipment (continued):
The Company leases two real estate facilities under capital leases. These leases have ten year terms, expiring in 2018. The following represents the future minimum lease payments, by year and in the aggregate, under capital leases and the present value of net minimum lease payments as of December 31, 2010 (amounts in thousands):
2011 |
| $ | 724 |
|
2012 |
| 745 |
| |
2013 |
| 768 |
| |
2014 |
| 790 |
| |
2015 |
| 814 |
| |
Thereafter |
| 2,030 |
| |
Total minimum payments |
| 5,871 |
| |
Less interest |
| (1,743 | ) | |
Present value of net minimum lease payments |
| $ | 4,128 |
|
10. Goodwill and Other Intangible Assets:
Goodwill is allocated and tested at the reporting unit level. Goodwill is tested for impairment each year during the fourth quarter, and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company’s reporting units are ARM, CRM and Portfolio Management.
NCO trade name is an indefinite-lived intangible asset and therefore not subject to amortization. Similar to goodwill, the trade name is reviewed at least annually for impairment.
Fair values are determined by using a combination of the market approach and income approach. The Company’s fair value calculations are based on projected financial results that are prepared in connection with the Company’s annual budget and forecasting process. The fair value calculations are also based on other assumptions including long-term growth rates and weighted average cost of capital.
2010 fair value calculations assumed long-term growth rates of 3 percent and weighted average cost of capital ranging from approximately 14 percent to 18 percent. Due to the expected impact of the economic environment on the Company’s clients’ business in 2011 and beyond, in the fourth quarter of 2010 the Company reduced the budgeted volumes from certain of its clients in the CRM reporting unit. As a result, the Company’s 2010 annual impairment test for goodwill indicated that the carrying value of its CRM reporting unit exceeded its fair value.
2009 fair value calculations assumed long-term growth rates of 3 percent and weighted average cost of capital ranging from approximately 13 percent to 14 percent. Due to the expected impact of the economic environment on the Company’s clients’ business in 2010, in the fourth quarter of 2009 the Company reduced the expected volumes from certain of its clients in the CRM reporting unit. As a result, the Company’s 2009 annual impairment test for goodwill indicated that the carrying value of its CRM reporting unit exceeded its fair value.
2008 fair value calculations assumed long-term growth rates of 4 percent and weighted average cost of capital ranging from approximately 13 percent to 14 percent. Late in 2008, the Company’s ARM and Portfolio Management reporting units experienced a significant reduction in the collectability of both customer-placed and purchased accounts receivable resulting from deteriorating economic conditions. Due to the expected impact of the economic environment, the Company reduced its 2009 budgeted expectations for each of its reporting units. As a result, the Company’s 2008 annual impairment test for goodwill and trade name indicated that the carrying values of all of its reporting units exceeded their fair values.
As a result of the annual impairment testing, the Company recorded goodwill impairment charges of $57.0 million in the CRM segment in 2010. In 2009, the Company recorded goodwill impairment charges of $24.7 million, and in 2008 the Company recorded goodwill impairment charges of $275.5 million and trade name impairment charges of $14.0 million.
The Company did not record an impairment charge for the NCO trade name as a result of the annual testing since its fair value was greater than its carrying value. However, if the projected revenue associated with the NCO trade name decreases by more than five percent, the Company may have to record an impairment of the NCO trade name.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
10. Goodwill and Other Intangible Assets (continued):
The following summarizes the changes in the Company’s reporting units’ goodwill (amounts in thousands):
|
| ARM |
| CRM |
| Portfolio |
| Total |
| ||||
Balance at January 1, 2009: |
|
|
|
|
|
|
|
|
| ||||
Goodwill |
| $ | 556,054 |
| $ | 128,365 |
| $ | 155,693 |
| $ | 840,112 |
|
Accumulated impairment |
| (73,205 | ) | (46,597 | ) | (155,693 | ) | (275,495 | ) | ||||
|
| 482,849 |
| 81,768 |
| — |
| 564,617 |
| ||||
Goodwill impairment |
| — |
| (24,753 | ) | — |
| (24,753 | ) | ||||
OSI acquisition |
| (3,369 | ) | — |
| — |
| (3,369 | ) | ||||
TDM acquisition |
| 1,428 |
| — |
| — |
| 1,428 |
| ||||
Foreign currency translation and other |
| (2,066 | ) | — |
| — |
| (2,066 | ) | ||||
Balance at December 31, 2009: |
|
|
|
|
|
|
|
|
| ||||
Goodwill |
| 552,047 |
| 128,365 |
| 155,693 |
| 836,105 |
| ||||
Accumulated impairment |
| (73,205 | ) | (71,350 | ) | (155,693 | ) | (300,248 | ) | ||||
|
| 478,842 |
| 57,015 |
| — |
| 535,857 |
| ||||
Goodwill impairment |
| — |
| (57,015 | ) | — |
| (57,015 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Acquisitions |
| 1,170 |
| — |
| — |
| 1,170 |
| ||||
Foreign currency translation and other |
| 745 |
| — |
| — |
| 745 |
| ||||
Balance at December 31, 2010: |
|
|
|
|
|
|
|
|
| ||||
Goodwill |
| 553,962 |
| 128,365 |
| 155,693 |
| 838,020 |
| ||||
Accumulated impairment |
| (73,205 | ) | (128,365 | ) | (155,693 | ) | (357,263 | ) | ||||
|
| $ | 480,757 |
| $ | — |
| $ | — |
| $ | 480,757 |
|
Trade name includes the NCO trade name, which is an indefinite-lived intangible asset and therefore is not subject to amortization. Similar to goodwill, the NCO trade name is reviewed at least annually for impairment. At December 31, 2010, the balance of the NCO trade name was $82.6 million.
Trade name also includes certain trade names which are not considered to have indefinite lives and are therefore subject to amortization. At December 31, 2010 and 2009, the gross carrying amount of these trade names was $2.0 million, and the accumulated amortization was $1.1 million and $741,000, respectively.
Other intangible assets subject to amortization consist of customer relationships and non-compete agreements. During 2009, the Company began to reduce its purchases of portfolios of accounts receivable and has made a decision to minimize further investments in purchased accounts receivable in the future. This decision resulted primarily from the continuation of the difficult collection environment, the competitive market for portfolio investments, as well as potential regulatory changes affecting the purchased accounts receivable business. As a result of this decision, the Company recorded an impairment charge of $5.3 million in 2009, for the Portfolio Management reporting unit’s customer relationship intangible assets.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
10. Goodwill and Other Intangible Assets (continued):
The following represents the other intangible assets subject to amortization (amounts in thousands):
|
| December 31, 2010 |
| December 31, 2009 |
| ||||||||
|
| Gross |
| Accumulated |
| Gross |
| Accumulated |
| ||||
Customer relationships |
| $ | 438,332 |
| $ | 244,288 |
| $ | 437,412 |
| $ | 180,379 |
|
Non-compete agreements |
| 3,372 |
| 2,345 |
| 3,955 |
| 2,306 |
| ||||
Total |
| $ | 441,704 |
| $ | 246,633 |
| $ | 441,367 |
| $ | 182,685 |
|
During the years ended December 31, 2010, 2009 and 2008, the Company recorded amortization expense for these other intangible assets of $64.6 million, $67.3 million and $64.5 million, respectively. The following represents the Company’s expected amortization expense for each of the next five years from these other intangible assets (amounts in thousands):
For the Years Ended |
| Estimated |
| |
2011 |
| $ | 63,729 |
|
2012 |
| 59,442 |
| |
2013 |
| 53,533 |
| |
2014 |
| 15,762 |
| |
2015 |
| 2,605 |
| |
11. Accrued Expenses:
Accrued expenses consisted of the following (amounts in thousands):
|
| December 31, |
| December 31, |
| ||
Accrued taxes |
| $ | 13,670 |
| $ | 11,284 |
|
Accrued rent and other related expense associated with an abandoned location |
| 11,100 |
| 11,100 |
| ||
Accrued interest |
| 8,976 |
| 9,293 |
| ||
Restructuring costs |
| 7,364 |
| 6,334 |
| ||
Accrued contract labor expenses |
| 4,124 |
| 3,872 |
| ||
Customer refundable fees |
| 1,375 |
| 5,766 |
| ||
Derivative instruments |
| 1,489 |
| 9,164 |
| ||
Book overdrafts |
| 717 |
| 8,363 |
| ||
Other accrued expenses |
| 42,465 |
| 42,074 |
| ||
|
| $ | 91,280 |
| $ | 107,250 |
|
12. Long-Term Debt:
Long-term debt consisted of the following (amounts in thousands):
|
| December 31, |
| December 31, |
| ||
Senior term loan |
| $ | 507,220 |
| $ | 549,260 |
|
Senior revolving credit facility |
| 10,000 |
| 17,000 |
| ||
Senior subordinated notes |
| 200,000 |
| 200,000 |
| ||
Senior notes |
| 165,000 |
| 165,000 |
| ||
Nonrecourse credit facility |
| 1,778 |
| 14,322 |
| ||
Capital leases |
| 4,709 |
| 4,789 |
| ||
Other |
| 646 |
| 1,159 |
| ||
Less current portion |
| (22,124 | ) | (41,699 | ) | ||
|
| $ | 867,229 |
| $ | 909,831 |
|
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
12. Long-Term Debt (continued):
The following summarizes the Company’s required debt payments (amounts in thousands):
2011 |
| $ | 22,124 |
|
2012 |
| 17,003 |
| |
2013 |
| 646,947 |
| |
2014 |
| 200,735 |
| |
2015 |
| 749 |
| |
Thereafter |
| 1,795 |
| |
|
| $ | 889,353 |
|
Senior Credit Facility:
The Company has a senior credit facility (“Credit Facility”) with a syndicate of financial institutions that, as of December 31, 2010, consisted of a term loan and a $100.0 million revolving credit facility. The Company is required to make quarterly principal repayments of $1.5 million on the term loan until its maturity in May 2013, at which time its remaining balance outstanding is due. The Company is also required to make quarterly prepayments of 75 percent of the excess cash flow from the Company’s purchased accounts receivable, and annual prepayments of 75 percent or 50 percent of its excess annual cash flow, based on its leverage ratio, less the amounts paid during the year from the purchased accounts receivable excess cash flow prepayments. The revolving credit facility requires no minimum principal payments until its maturity. The availability of the revolving credit facility is reduced by any unused letters of credit ($5.0 million at December 31, 2010). As of December 31, 2010, the Company had $85.0 million of remaining availability under the revolving credit facility.
All borrowings bear interest at an annual variable rate, based on either the prime rate (3.25 percent at December 31, 2010), the federal funds rate (0.13 percent at December 31, 2010), or LIBOR (0.26 percent 30-day LIBOR at December 31, 2010) plus an applicable margin, which is based on the type of rate and the Company’s funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio, as defined in the loan agreement, subject to certain interest rate minimum requirements. The Company is charged a quarterly commitment fee on the unused portion of the revolving credit facility at an annual rate of 0.50 percent. For the years ended December 31, 2010 and 2009, the effective interest rate on the Credit Facility was approximately 9.23 percent and 8.61 percent, respectively. The Credit Facility also requires that the Company obtain certain levels of interest rate protection.
Borrowings under the Credit Facility are collateralized by substantially all of the Company’s assets. The Credit Facility contains certain financial and other covenants such as maintaining a maximum leverage ratio and a minimum interest coverage ratio, and includes restrictions on, among other things, acquisitions, the incurrence of additional debt, investments, investments in purchased accounts receivable, disposition of assets, liens and dividends and other distributions. At December 31, 2010, the Company was not in compliance with its leverage ratio maximum of 5.75, and its interest coverage ratio minimum of 1.80; however, the Company received a waiver from its lenders for this breech of financial covenants.
Due to the expected impact of the economic environment on the Company’s clients’ business, and the resulting expected impact of that on the Company’s 2011 results, as well as financial covenant ratio adjustments required under the Credit Facility in 2011, the Company became uncertain of its ability to remain in compliance with the financial covenants through 2011. Therefore, on March 25, 2011, the Company amended the Credit Facility to, among other things, adjust certain financial covenants, including increasing certain maximum leverage ratios and decreasing certain minimum interest coverage ratios, extend the maturity date of the revolving credit facility from November 15, 2011 to December 31, 2012 and reduce the maximum borrowing capacity to $75.0 million through November 15, 2011 and $67.5 million thereafter, and permit the Company to sell all or a portion of its portfolios of purchased accounts receivable. Management believes that the Company will be able to maintain compliance with these covenants in 2011. The Company’s ability to maintain compliance with the covenants will be highly dependent on the Company’s results of operations and, to the extent necessary, the Company’s ability to implement remedial measures such as further reductions in operating costs. If the Company were to enter into an agreement with its lenders for future covenant compliance relief, such relief could result in additional fees and higher interest expense.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
12. Long-Term Debt (continued):
Senior Credit Facility (continued):
If an event of default, such as failure to comply with covenants or change of control, and the failure to negotiate and obtain any required relief from the lenders, were to occur under the Credit Facility, the Company would not be able to borrow under the revolving credit facility and the lenders would be entitled to declare all amounts outstanding under it immediately due and payable and foreclose on the pledged assets. Under these circumstances, the acceleration of the Company’s debt could have a material adverse effect on its business.
Senior Notes and Senior Subordinated Notes:
The Company has $165.0 million of floating rate senior notes due 2013 (“Senior Notes”) and $200.0 million of 11.875 percent senior subordinated notes due 2014 (“Senior Subordinated Notes”) (collectively, “the Notes”). The Notes are guaranteed, jointly and severally, on a senior basis with respect to the Senior Notes and on a senior subordinated basis with respect to the Senior Subordinated Notes, in each case by all of the Company’s existing and future domestic restricted subsidiaries (other than certain subsidiaries and joint ventures engaged in financing the purchase of delinquent accounts receivable portfolios and certain immaterial subsidiaries).
The Senior Notes are senior unsecured obligations and are senior in right of payment to all existing and future senior subordinated indebtedness, including the Senior Subordinated Notes, and all future subordinated indebtedness. The Senior Notes bear interest at an annual rate equal to LIBOR plus 4.875 percent, reset quarterly. For the years ended December 31, 2010 and 2009, the effective interest rate of the Senior Notes was approximately 5.21 percent and 5.82 percent, respectively. The Company may redeem the Senior Notes, in whole or in part, at any time at varying redemption prices depending on the redemption date, plus accrued and unpaid interest.
The Senior Subordinated Notes are unsecured senior subordinated obligations and are subordinated in right of payment to all existing and future senior indebtedness, including the Senior Notes and borrowings under the Credit Facility. The Company may redeem the Senior Subordinated Notes, in whole or in part, at any time on or after November 15, 2010 at varying redemption prices depending on the redemption date, plus accrued and unpaid interest.
The indentures governing the Notes contain a number of covenants that limit the Company’s and its restricted subsidiaries’ ability, among other things, to: incur additional indebtedness and issue certain preferred stock, pay certain dividends, acquire shares of capital stock, make payments on subordinated debt or make investments, place limitations on distributions from restricted subsidiaries, issue or sell capital stock of restricted subsidiaries, guarantee indebtedness, sell or exchange assets, enter into transactions with affiliates, create certain liens, engage in unrelated businesses, and consolidate, merge or transfer all or substantially all of the Company’s assets and the assets of its subsidiaries on a consolidated basis. As of December 31, 2010, the Company was in compliance with all required covenants. In addition, upon a change of control, the Company is required to offer to repurchase all of the Notes then outstanding, at a purchase price equal to 101 percent of their principal amount, plus any accrued interest to the date of repurchase.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
12. Long-Term Debt (continued):
Nonrecourse Credit Facility:
The Company has a nonrecourse credit facility that funded certain purchases of accounts receivable prior to 2009. The Company does not have the ability to make any additional borrowings under the nonrecourse credit facility. The financing was structured, depending on the size and nature of the portfolio to be purchased, either as a borrowing arrangement or under various equity sharing arrangements. The lender financed non-equity borrowings with floating interest at an annual rate equal to LIBOR (0.26 percent 30-day LIBOR at December 31, 2010) plus 2.50 percent, or as negotiated. These borrowings are due two years from the date of each respective loan, unless otherwise negotiated. As additional return on the debt financed portfolios the lender receives residual cash flows, as negotiated, which is defined as all cash collections after servicing fees, floating rate interest, repayment of the borrowing, and the initial investment by the Company, including interest. Residual cash flow payments are accrued for as embedded derivatives.
Borrowings under this credit facility are nonrecourse to the Company, except for the assets within the entities established in connection with the financing agreement. The nonrecourse debt agreements contain a collections performance requirement, among other covenants, that, if not met, provides for cross-collateralization with any other portfolios financed by the nonrecourse lender, in addition to other remedies.
The debt outstanding under this facility was $1.8 million and $14.3 million as of December 31, 2010 and 2009, respectively, which included $1.8 million and $2.1 million, respectively, of accrued residual interest. The effective interest rate on these loans, including the residual interest component, was approximately 10.8 percent and 12.8 percent for the years ended December 31, 2010 and 2009, respectively. The nonrecourse debt agreements contain certain covenants such as meeting minimum cumulative collection targets. As of December 31, 2010, the Company was in compliance with all required covenants.
Capital leases:
The Company leases two real estate facilities under capital leases. These leases have ten year terms, expiring in 2018.
13. Operating Leases:
The Company leases certain equipment and real estate facilities under noncancelable operating leases. These leases expire between 2011 and 2021, and most contain renewal options. The following represents the future minimum payments, by year and in the aggregate, under noncancelable operating leases with initial or remaining terms of one year or more. The following future minimum payments have been reduced by minimum sublease rentals of $350,000, due in the future under noncancelable subleases, and do not include the leases from the Company’s former Fort Washington locations (note 19) (amounts in thousands):
2011 |
| $ | 44,826 |
|
2012 |
| 38,531 |
| |
2013 |
| 31,775 |
| |
2014 |
| 20,798 |
| |
2015 |
| 14,725 |
| |
Thereafter |
| 16,667 |
| |
|
| $ | 167,322 |
|
For the years ended December 31, 2010, 2009 and 2008, rent expense was $48.5 million, $55.4 million and $51.0 million, respectively. The total amount of base rent payments is being charged to expense on the straight-line method over the term of the lease.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
14. Income Taxes:
Consolidated income before income taxes consists of the following components (amounts in thousands):
|
| For the Year Ended December 31, |
| |||||||
|
| 2010 |
| 2009 |
| 2008 |
| |||
Domestic |
| $ | (123,678 | ) | $ | (90,630 | ) | $ | (434,016 | ) |
Foreign |
| (25,163 | ) | 1,322 |
| 6,713 |
| |||
|
| $ | (148,841 | ) | $ | (89,308 | ) | $ | (427,303 | ) |
Income tax expense (benefit) consisted of the following components (amounts in thousands):
|
| For the Year Ended December 31, |
| |||||||
|
| 2010 |
| 2009 |
| 2008 |
| |||
Currently payable: |
|
|
|
|
|
|
| |||
Federal |
| $ | 37 |
| $ | — |
| $ | — |
|
State |
| 1,197 |
| 1,397 |
| 1,921 |
| |||
Foreign |
| (999 | ) | 2,260 |
| 2,976 |
| |||
|
|
|
|
|
|
|
| |||
Deferred: |
|
|
|
|
|
|
| |||
Federal |
| 3,906 |
| (1,815 | ) | (73,596 | ) | |||
State |
| 191 |
| (770 | ) | (3,333 | ) | |||
Foreign |
| 2,540 |
| (2,238 | ) | 85 |
| |||
Income tax expense (benefit) |
| $ | 6,872 |
| $ | (1,166 | ) | $ | (71,947 | ) |
The components of the deferred tax assets and liabilities consisted of the following (amounts in thousands):
|
| December 31, |
| December 31, |
| ||
|
| 2010 |
| 2009 |
| ||
Deferred tax assets: |
|
|
|
|
| ||
Net operating loss carryforwards |
| $ | 140,787 |
| $ | 129,441 |
|
Deferred contractual revenue |
| 7,744 |
| 12,714 |
| ||
Accrued acquisition costs |
| 500 |
| 1,416 |
| ||
Tax credit carryforwards |
| 14,808 |
| 12,648 |
| ||
Accrued expenses |
| 18,290 |
| 20,544 |
| ||
Total deferred tax assets |
| 182,129 |
| 176,763 |
| ||
Valuation allowance |
| (110,741 | ) | (68,416 | ) | ||
Net deferred tax assets |
| 71,388 |
| 108,347 |
| ||
|
|
|
|
|
| ||
Deferred tax liabilities: |
|
|
|
|
| ||
Intangible assets |
| 93,189 |
| 111,330 |
| ||
Prepaid expenses |
| 4,668 |
| 5,236 |
| ||
Property and equipment |
| 220 |
| 2,835 |
| ||
Purchased accounts receivable |
| 6,900 |
| 15,617 |
| ||
Total deferred tax liabilities |
| 104,977 |
| 135,018 |
| ||
Net deferred tax liabilities |
| $ | (33,589 | ) | $ | (26,671 | ) |
The Company had a $104.0 million deferred tax asset for federal net operating loss carryforwards of $297.2 million at December 31, 2010, which expire between 2019 and 2030. The Company had a $93.7 million deferred tax asset for federal net operating loss carryforwards of $267.7 million at December 31, 2009.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
14. Income Taxes (continued):
At December 31, 2010, approximately $122.1 million of the Company’s federal net operating loss carryforwards are subject to limitations as defined by Section 382 of the Internal Revenue Code. Section 382 imposes limitations on a corporation’s ability to utilize its NOL carryforwards if it experiences an “ownership change.” In general terms, an ownership change results from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percent over a three-year period.
The Company had a $6.6 million deferred tax asset for foreign net operating loss carryforwards of $24.5 million at December 31, 2010, which will begin to expire in 2013 and in some countries are indefinite. The Company had $18.1 million of foreign net operating loss carryforwards at December 31, 2009.
The Company had a deferred tax asset of $30.2 million for state net operating loss carryforwards at December 31, 2010, which expire between 2011 and 2030. At December 31, 2009, the Company had a deferred tax asset of $30.7 million for state net operating loss carryforwards.
The deferred tax liability related to intangible assets arose primarily from the Transaction on November 15, 2006, as well as other subsequent acquisitions.
Valuation Allowance:
In assessing the realization of deferred tax assets, the Company’s management considers whether it is more likely than not that some portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible or the net operating losses can be utilized.
As a result of incurring cumulative losses over the past several years, the Company has provided for a full valuation allowance of $86.5 million on the total federal and certain state and foreign net deferred tax assets as of December 31, 2010. In addition, a valuation allowance of $24.2 million has been provided on a portion of deferred tax assets relating to certain foreign and state net operating losses and state tax credit carryforwards based on management’s assessment that it is more likely than not that such amounts will not be realized. This represents a total increase in the valuation allowance of $42.3 million due primarily to an increase in federal and certain state net deferred tax assets and additional state and foreign net operating losses in 2010. Of the total increase in 2010, $3.1 million relates to adjustments to the beginning of the year balance of the valuation allowance for certain federal, state and foreign deferred tax assets due to changes in judgment in the realizabilty of the related deferred tax asset in future years.
The following table presents the changes in the valuation allowance for deferred tax assets (amounts in thousands):
|
|
|
| Additions |
|
|
|
|
| |||||||
|
| Balance at |
| Charged to |
| Charged |
|
|
| Balance at |
| |||||
|
| beginning |
| costs and |
| to other |
|
|
| end of |
| |||||
|
| of year |
| expenses |
| accounts(1) |
| Deductions |
| year |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Year ended December 31, 2010 |
| $ | 68,416 |
| $ | 45,818 |
| $ | — |
| $ | (3,493 | )(2) | $ | 110,741 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Year ended December 31, 2009 |
| $ | 31,351 |
| $ | 35,088 |
| $ | 1,977 |
| $ | — |
| $ | 68,416 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Year ended December 31, 2008 |
| $ | 24,037 |
| — |
| $ | 8,260 |
| $ | (946 | )(3) | $ | 31,351 |
| |
(1) The increases in the valuation allowance not charged to the provision for income taxes relate to amounts recorded as an adjustment to goodwill.
(2) Relates primarily to a credit to the provision for income taxes due to the expiration of federal and certain state net operating losses in the year.
(3) Relates to a credit to the provision for income taxes for state net operating losses.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
14. Income Taxes (continued):
Effective Tax Rate:
A reconciliation of the U.S. statutory income tax rate to the effective rate was as follows:
|
| For the Year Ended December 31, |
| ||||
|
| 2010 |
| 2009 |
| 2008 |
|
U.S. statutory income tax rate |
| 35.0 | % | 35.0 | % | 35.0 | % |
State taxes, net of federal |
| (0.6 | ) | (0.2 | ) | 0.5 |
|
Goodwill impairment |
| (6.2 | ) | (7.8 | ) | (17.4 | ) |
Valuation allowance |
| (24.1 | ) | (30.1 | ) | — |
|
Permanent items |
| 0.7 |
| 3.0 |
| (0.1 | ) |
Noncontrolling interest |
| — |
| (0.5 | ) | (2.1 | ) |
Foreign |
| (7.6 | ) | (1.0 | ) | (0.2 | ) |
Other, net |
| (1.8 | ) | 2.9 |
| 1.1 |
|
Effective tax rate |
| (4.6 | )% | 1.3 | % | 16.8 | % |
The effective tax rate for the year ended December 31, 2010 is primarily impacted by the goodwill impairment and increase to the valuation allowance in 2010. The majority of our goodwill is not deductible for income tax purposes.
Taxes have not been provided on the cumulative undistributed earnings of foreign subsidiaries, which are deemed permanently reinvested, of $45.1 million and $41.9 million at December 31, 2010 and 2009, respectively. Quantification of the deferred tax liability associated with permanently reinvested earnings is not practicable.
Uncertain Tax Positions:
As of December 31, 2010 and 2009, the Company had $11.1 million and $12.7 million in reserves for uncertain tax positions, including penalties that, if recognized, would affect the effective tax rate.
The Company recognizes interest related to uncertain tax positions in “Interest expense.” Interest expense (benefit) on unrecognized tax benefits was $(519,000), $(2.7) million, and $681,000 for the years ended December 31, 2010, 2009 and 2008, respectively. As of December 31, 2010 and 2009, the Company had $4.0 million and $4.5 million, respectively, of accrued interest related to uncertain tax positions.
The Company recognizes penalties related to uncertain tax positions in the provision for income taxes. Penalties included in income taxes on unrecognized tax benefits were $78,000, $(192,000), and $203,000 for the years ended December 31, 2010, 2009 and 2008, respectively. As of December 31, 2010 and 2009, the Company had accrued penalties related to uncertain tax positions of $1.1 million and $1.0 million, respectively.
The Company believes that it is reasonably possible that a decrease of $1.2 million in unrecognized tax benefits may be necessary within the next twelve months due to a lapse in the statute of limitations. The Company’s estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months is classified as a current liability.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
14. Income Taxes (continued):
The following is a roll-forward of the Company’s gross unrecognized tax benefits (amounts in thousands):
Balance at January 1, 2008 |
| $ | 9,617 |
|
Prior year positions: |
|
|
| |
Additions |
| 1,407 |
| |
Change in exchange rates |
| (1,349 | ) | |
Reductions due to statute lapse |
| (852 | ) | |
|
|
|
| |
Balance at January 1, 2009 |
| 8,823 |
| |
Prior year positions: |
|
|
| |
Additions |
| 6,510 |
| |
Reductions |
| (340 | ) | |
Current year positions: |
|
|
| |
Additions |
| 521 |
| |
Settlements with tax authorities |
| (4,394 | ) | |
Change in exchange rates |
| 734 |
| |
Reductions due to statute lapse |
| (148 | ) | |
|
|
|
| |
Balance at December 31, 2009 |
| 11,706 |
| |
Prior year positions: |
|
|
| |
Additions |
| 10 |
| |
Reductions |
| (5 | ) | |
Current year positions: |
|
|
| |
Additions |
| 785 |
| |
Change in exchange rates |
| (85 | ) | |
Reductions due to statute lapse |
| (2,360 | ) | |
|
|
|
| |
Balance at December 31, 2010 |
| $ | 10,051 |
|
The Company is subject to federal, state and foreign income tax audits from time to time that could result in proposed assessments. The Company cannot predict with certainty how these audits will be resolved and whether the Company will be required to make additional tax payments, which may or may not include penalties and interest. As of December 31, 2010, the Company is no longer subject to federal income tax examinations for years prior to 2006. For most states and foreign countries where the Company conducts business, the Company is subject to examination for the preceding three to six years. In certain states and foreign countries, the period could be longer.
Management believes that the Company has provided sufficient tax provisions for tax periods within the statutory period of limitations not previously audited and that are potentially open for examination by the taxing authorities. Potential liabilities associated with these years will be resolved when an event occurs to warrant closure, primarily through the completion of audits by taxing jurisdictions. To the extent audits or other events result in a material adjustment to the accrued estimates, the effect would be recognized during the period of the event. There can be no assurance, however, that the ultimate outcome of audits will not have a material adverse impact on the Company’s financial position, results of operations or cash flows.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
15. Stockholders’ Equity:
The following summarizes the Company’s share activity (shares in thousands):
|
|
|
| Class L |
| Class A |
|
|
| Preferred |
| Common |
| Common |
|
Balance, January 1, 2008 |
| 1,408 |
| 364 |
| 1,822 |
|
Issuance of preferred stock |
| 867 |
| — |
| — |
|
Issuance of preferred stock dividends |
| 298 |
| — |
| — |
|
Issuance of common stock, net of cancelations |
| — |
| 37 |
| 1,012 |
|
Issuance of restricted stock, net of cancelations |
| — |
| — |
| 103 |
|
Balance, December 31, 2008 |
| 2,573 |
| 401 |
| 2,937 |
|
Issuance of preferred stock |
| 176 |
| — |
| — |
|
Issuance of preferred stock dividends |
| 403 |
| — |
| — |
|
Issuance of common stock, net of cancelations |
| — |
| (1 | ) | 24 |
|
Balance, December 31, 2009 |
| 3,152 |
| 400 |
| 2,961 |
|
Issuance of preferred stock dividends |
| 474 |
| — |
| — |
|
Balance, December 31, 2010 |
| 3,626 |
| 400 |
| 2,961 |
|
Capital Stock:
The Company is authorized to issue three classes of capital stock: Preferred Stock, par value $0.01 per share, Class L Common Stock, par value $0.01 per share (“Class L”) and Class A common stock, par value $0.01 per share (“Class A”). Shares of Class L, Class A and three series of Preferred Stock, Series A 14 percent PIK Preferred Stock (“Series A”), Series B-1 19 percent PIK Preferred Stock (“Series B-1”), and Series B-2 19 percent Preferred Stock (“Series B-2”), are issued and outstanding.
Series A is entitled to a quarterly “paid-in-kind” dividend at an annual rate of 14 percent and Series B-1 is entitled to a quarterly “paid-in-kind” dividend at an annual rate of 19 percent. Series B-2 is entitled to a yield at an annual rate of 19 percent and Class L is entitled to a yield at an annual rate of 14 percent. The dividends and yields are calculated on February 28, May 31, August 31, and November 30 of each year. The yields for Series B-2 and Class L are compounding and accumulate on the unreturned initial investment but are not declared until payment. As of December 31, 2010, the accumulated yield for shares of Series B-2 and Class L was $1.9 million and $68.1 million, respectively.
The following presents the Series A and Series B-1 shares issued for the “paid-in-kind” dividends (shares in thousands):
|
| For the Year Ended |
| ||
|
| 2010 |
| 2009 |
|
Series A |
| 430 |
| 374 |
|
Series B-1 |
| 44 |
| 28 |
|
On January 2, 2008, the Company issued 22,484 shares of Series A to JPM and in February 2009, the Company issued 7,400 shares of Series A to JPM, as partial consideration for the acquisition of SST. Due to the related party nature of the acquisition (note 4), the remaining consideration of $8.1 million and the return of $4.0 million of cash that was not acquired were deemed cash dividend payments in 2008, and the remaining consideration of $3.2 million in addition to other post-closing adjustments resulted in a deemed investment of $2.2 million in 2009.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
15. Stockholders’ Equity (continued):
Capital Stock (continued):
In March 2008, in connection with the OSI acquisition, the Company privately placed 802,262 shares of Series A, 37,738 shares of Class L and 1,012,261 shares of Class A for aggregate proceeds of $210.0 million. The entire amount of the proceeds was used to acquire OSI.
On December 8, 2008, the Company increased its authorized capital to the following amounts: 7,500,000 shares of Preferred Stock; 800,000 shares of Class L; and 4,500,000 shares of Class A. On December 9, 2008, the Company privately placed 41,026.6 shares of Series B-1 and 1,088.6 shares of Series B-2, for aggregate proceeds of $10.0 million.
On March 25, 2009, the Company sold 148,463.6 shares of its Series B-1 Preferred Stock and 19,957.4 shares of its Series B-2 Preferred Stock to One Equity Partners, Michael J. Barrist and certain members of executive management, and other co-investors for an aggregate purchase price of $40.0 million. The proceeds were used to pay down $15.0 million of term loan borrowings, and the remainder, net of expenses, of $22.5 million was used to repay borrowings under the revolving credit facility.
Preferred Stock and Class L, in the aggregate, have a preference on distributions (excluding paid-in-kind dividends) allocated as follows: first to unpaid yield accruing on Class L or Series A and the unreturned value of Series A issued in a paid-in-kind dividend, and second to the unreturned initial investment in Class L, excluding the portion of such investment that is attributable to the right of Class L to share generally in distributions, and the unreturned initial investments in Series A. Once this preference has been paid in full, all remaining distributions are payable to Class L and Class A on a pro-rata basis.
Preferred Stock is not entitled to vote, and Class L and Class A vote together as a single class, with each share entitled to one vote. In addition, the Company may not enter into an agreement or consummate a transaction that would result in a change of control or an initial public offering without the consent of the holders of a majority of the then outstanding shares of Series A and Class L voting as a single class.
Stock-based Compensation:
The Company has a Restricted Share Plan, as amended and restated that is administered by the Compensation Committee of the Board of Directors, which approves the grants to employees recommended by the Company’s chief executive officer and to the Company’s independent directors. Shares of restricted stock granted under the Restricted Share Plan vest in 25 percent increments over a period of four years, provided that the recipient remains employed by the Company. At December 31, 2010, an aggregate of 333,011 restricted shares of Class A common stock had been awarded and 3,656 shares of Class A common stock were available for future awards under the Restricted Share Plan. Compensation expense recognized related to the awards for the years ended December 31, 2010, 2009 and 2008 was $712,000, $1.1 million and $667,000, respectively. At December 31, 2010, there was $456,000 of unrecognized pre-tax compensation cost related to the non-vested restricted shares. The Company measures compensation expense based on the grant date fair value, and has elected to recognize this compensation expense on a straight-line basis over the weighted-average service period, which is expected to be four years.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
16. Derivative Financial Instruments:
The Company may enter into forward exchange contracts to minimize the impact of currency fluctuations on transactions and cash flows. These contracts may be designated as cash flow hedges. At December 31, 2010, the Company had no forward exchange contracts outstanding.
The Company has interest rate swap agreements to minimize the impact of LIBOR fluctuations on interest payments on the Company’s floating rate debt. The interest rate swaps may be designated as cash flow hedges. The interest rate swaps cover an aggregate notional amount of $293.7 million. The Company is required to pay the counterparties quarterly interest payments at a weighted average fixed rate ranging from 3.41 percent to 3.44 percent, and receives from the counterparties variable quarterly interest payments based on LIBOR. The net interest paid or received is included in interest expense. On March 25, 2009, the Company amended its senior credit facility, which amendment included a minimum LIBOR of 2.50 percent. This amendment caused the existing interest rate swaps to become ineffective and, as of March 25, 2009, these interest rate swaps were not accounted for as cash flow hedges. Accordingly, the fair value of the interest rate swaps at March 25, 2009 is being amortized to interest expense, using the effective interest rate method, over the remaining lives of the interest rate swap agreements, and future changes in the fair value of these interest rate swaps after March 25, 2009 are recorded in interest expense. The Company’s interest rate swaps expire during the first quarter of 2011.
The Company has embedded derivatives relating to the contingent payment provision in its nonrecourse credit facility relating to purchased accounts receivable, and relating to the sellers’ participation in collections that are in excess of minimum targets for certain portfolios of purchased accounts receivable.
The following summarizes the fair value of the Company’s derivatives (amounts in thousands):
|
| December 31, 2010 |
| December 31, 2009 |
| ||||||
|
| Balance Sheet |
| Fair |
| Balance Sheet |
| Fair |
| ||
Derivatives not designated as hedges: |
|
|
|
|
|
|
|
|
| ||
Asset derivatives |
|
|
|
|
|
|
|
|
| ||
Forward exchange contracts |
|
|
|
|
| Other current assets |
| $ | 2 |
| |
Total asset derivatives not designated as hedges |
|
|
|
|
|
|
| $ | 2 |
| |
|
|
|
|
|
|
|
|
|
| ||
Liability derivatives |
|
|
|
|
|
|
|
|
| ||
Interest rate swaps |
| Accrued expenses |
| $ | 1,489 |
| Accrued expenses |
| $ | 9,104 |
|
Embedded derivatives |
| Long-term debt and accrued expenses |
| 2,486 |
| Long-term debt and accrued expenses |
| 3,306 |
| ||
Forward exchange contracts |
| Accrued expenses |
| — |
| Accrued expenses |
| 60 |
| ||
Total liability derivatives not designated as hedges |
|
|
| $ | 3,975 |
|
|
| $ | 12,470 |
|
The following table summarizes the effect of derivatives designated as hedges on the Company for the year ended December 31, 2009 (there were no derivatives designated as hedges for the year ended December 31, 2010) (amounts in thousands):
|
| Location of |
| Amount of |
| Amount of |
| ||
|
| Gain (Loss) |
| Gain (Loss) |
| Gain (Loss) |
| ||
|
| Reclassified |
| Recognized in |
| Reclassified |
| ||
|
| into Earnings |
| OCI (net of taxes) |
| Into Earnings |
| ||
Derivatives designated as hedges: |
|
|
|
|
|
|
| ||
Interest rate swaps (prior to March 25, 2009) |
| Interest expense |
| $ | (719 | ) | $ | (8,666 | ) |
|
|
|
|
|
|
|
| ||
Total derivatives designated as hedges |
|
|
| $ | (719 | ) | $ | (8,666 | ) |
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
16. Derivative Financial Instruments (continued):
The following table summarizes the effect of derivatives not designated as hedges on the Company (amounts in thousands):
|
|
|
| For the Year Ended December 31, |
| ||||
|
|
|
| 2010 |
| 2009 |
| ||
|
|
|
| Amount of Gain |
| Amount of Gain |
| ||
|
| Location of Gain (Loss) |
| (Loss) Recognized |
| (Loss) Recognized |
| ||
|
| Recognized in Earnings |
| in Earnings |
| in Earnings |
| ||
Derivatives not designated as hedges: |
|
|
|
|
|
|
| ||
Forward exchange contracts |
| Other income (expense) |
| $ | 1,206 |
| $ | 7,014 |
|
Interest rate swaps (after March 25, 2009) |
| Interest expense |
| (2,058 | ) | (5,520 | ) | ||
Amortization of interest rate swaps |
| Interest expense |
| (5,033 | ) | — |
| ||
Embedded derivatives |
| Interest expense |
| (1,235 | ) | 128 |
| ||
Interest rate caps |
| Other income (expense) |
| — |
| (45 | ) | ||
Total derivatives not designated as hedges |
|
|
| $ | (7,120 | ) | $ | 1,577 |
|
17. Supplemental Cash Flow Information:
The following are supplemental disclosures of cash flow information (amounts in thousands):
|
| For the Year Ended December 31, |
| |||||||
|
| 2010 |
| 2009 |
| 2008 |
| |||
|
|
|
|
|
|
|
| |||
Cash paid for interest |
| $ | 80,797 |
| $ | 100,181 |
| $ | 99,265 |
|
Cash paid for income taxes |
| 3,046 |
| 1,504 |
| 4,276 |
| |||
Noncash investing and financing activities: |
|
|
|
|
|
|
| |||
Fair value of assets acquired |
| — |
| 15,168 |
| 139,489 |
| |||
Liabilities assumed from acquisitions |
| — |
| 13,224 |
| 127,928 |
| |||
Capital leases |
| — |
| — |
| 5,456 |
| |||
Adjustment to acquired assets and liabilities |
| — |
| — |
| (62 | ) | |||
Disposal of fixed assets |
| — |
| — |
| 13 |
| |||
18. Employee Benefit Plans:
The Company has a savings plan under Section 401(k) of the Internal Revenue Code, (the “Plan”), for its U.S. employees. The Plan allows all eligible employees to defer up to 15 percent of their income on a pretax basis through contributions to the Plan, subject to limitations under Section 401(k) of the Internal Revenue Code. The Company will provide a matching contribution of 25 percent of the first six percent of an employee’s contribution. The Company also has similar type plans for its international employees. The charges to operations for these benefits were $ 2.1 million, $2.3 million and $3.3 million for the years ended December 31, 2010, 2009 and 2008, respectively.
The Company has a deferred compensation plan, (the “Deferred Compensation Plan”), to permit eligible employees of the Company to defer receipt and taxation of their compensation from the Company each year up to the limit in effect under Section 402(g) of the Internal Revenue Code, less amounts contributed to the Deferred Compensation Plan. The Company, at its discretion, may make a contribution that will be allocated among participants in proportion to their deferrals for such year. All executive officers and other key employees designated by the Company are eligible to participate in the Deferred Compensation Plan. At December 31, 2010 and 2009, the Company had a liability of $957,000, related to the Deferred Compensation Plan.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
19. Commitments and Contingencies:
Purchase Commitments:
The Company enters into noncancelable agreements with certain vendors that require minimum purchase commitments. These agreements expire between 2011 and 2012. The following represents the future minimum payments, by year and in the aggregate, under noncancelable purchase commitments (amounts in thousands):
2011 |
| $ | 9,725 |
|
2012 |
| 7,392 |
| |
|
| �� |
| |
|
| $ | 17,117 |
|
The Company incurred $12.7 million, $12.8 million and $8.4 million of expense from vendors associated with these purchase commitments for the years ended December 31, 2010, 2009 and 2008, respectively.
Litigation and Investigations:
The Company is party, from time to time, to various legal proceedings, regulatory investigations, client audits and tax examinations incidental to its business. The Company continually monitors these legal proceedings, regulatory investigations, client audits and tax examinations to determine the impact and any required accruals.
Fort Washington Flood:
In June 2001, the first floor of the Company’s Fort Washington, Pennsylvania, headquarters was severely damaged by a flood caused by remnants of Tropical Storm Allison. The Company subsequently decided to relocate its corporate headquarters to Horsham, Pennsylvania. The Company filed a lawsuit on August 14, 2001 in the Court of Common Pleas, Montgomery County, Pennsylvania (Civil Action No. 01-15576) against the current landlord and the former landlord of the Fort Washington facilities to terminate the leases and to obtain other relief. The landlord and the former landlord filed counter-claims against the Company. The Company maintains a reserve that it believes is adequate to address its exposure to this matter and plans to continue to contest this matter.
Attorneys General:
From time to time, the Company receives subpoenas or other similar information requests from various states’ Attorneys General, requesting information relating to its Company’s debt collection practices in such states. The Company responds to such inquires or investigations and provides certain information to the respective Attorneys General offices. The Company believes it is in compliance with the laws of the states in which it does business relating to debt collection practices in all material respects. However, no assurance can be given that any such inquiries or investigations will not result in a formal investigation or an enforcement action. Any such enforcement actions could result in fines as well as the suspension or termination of its ability to conduct business in such states.
Other:
The Company is involved in other legal proceedings, regulatory investigations, client audits and tax examinations from time to time in the ordinary course of its business. Management believes that none of these other legal proceedings, regulatory investigations, client audits or tax examinations will have a materially adverse effect on the financial condition or results of operations of the Company.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
20. Segment Reporting:
The Company’s business consists of three operating divisions: ARM, CRM and Portfolio Management. The accounting policies of the segments are the same as those described in note 2, “Accounting Policies.”
ARM provides accounts receivable management services to consumer and commercial accounts for all market sectors including financial services, healthcare, retail and commercial, telecommunications, utilities, education, and government. ARM serves clients of all sizes in local, regional and national markets in North America, Europe and Australia through offices in North America, Asia, Europe and Australia. In addition to traditional accounts receivable collections, these services include developing the client relationship beyond bad debt recovery and delinquency management, and delivering cost-effective accounts receivable solutions to all market sectors. ARM also provides accounts receivable management services to Portfolio Management. ARM recorded service revenue of $42.1 million, $60.5 million and $82.8 million from these services for the years ended December 31, 2010, 2009 and 2008.
The following table presents ARM revenue from customers by country (amounts in thousands):
|
| For the Year Ended December 31, |
| |||||||
|
| 2010 |
| 2009 |
| 2008 |
| |||
U.S. |
| $ | 1,189,621 |
| $ | 1,102,449 |
| $ | 1,033,796 |
|
Canada |
| 47,197 |
| 40,872 |
| 46,831 |
| |||
Australia |
| 27,308 |
| 23,079 |
| 19,244 |
| |||
U.K. |
| 15,749 |
| 22,353 |
| 25,751 |
| |||
Mexico |
| 10,101 |
| 12,745 |
| 10,928 |
| |||
CRM provides customer relationship management services to clients in North America through offices in North America and Asia. CRM also provided certain services to ARM, and recorded revenue of $5.2 million and $2.9 million for these services for the years ended December 31, 2009 and 2008, respectively.
The following table presents CRM revenue from customers by country (amounts in thousands):
|
| For the Year Ended December 31, |
| |||||||
|
| 2010 |
| 2009 |
| 2008 |
| |||
U.S. |
| $ | 277,026 |
| $ | 330,401 |
| $ | 351,671 |
|
Canada |
| 1,673 |
| 2,536 |
| 7,985 |
| |||
Panama |
| 1,653 |
| 1,555 |
| 1,440 |
| |||
Portfolio Management purchases and manages defaulted consumer accounts receivable from consumer creditors such as banks, finance companies, retail merchants, utilities, healthcare companies and other consumer oriented companies. Portfolio Management’s revenue was impacted by impairment charges recorded for a valuation allowance against the carrying value of portfolios of $14.3 million, $21.5 million and $98.9 million for the years ended December 31, 2010, 2009 and 2008, respectively.
The following table presents total assets, net of intercompany balances, for each segment (amounts in thousands):
|
| December 31, |
| |||||||
|
| 2010 |
| 2009 |
| 2008 |
| |||
ARM |
| $ | 1,004,573 |
| $ | 1,079,180 |
| $ | 1,220,399 |
|
CRM |
| 151,626 |
| 239,373 |
| 283,328 |
| |||
Portfolio Management |
| 81,514 |
| 141,482 |
| 197,912 |
| |||
Total assets |
| $ | 1,237,713 |
| $ | 1,460,035 |
| $ | 1,701,639 |
|
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
20. Segment Reporting (continued):
The following tables present the revenue, payroll and related expenses, selling, general and administrative expenses, reimbursable costs and fees, restructuring charges, income (loss) from operations before depreciation and amortization (including impairment of intangible assets) and capital expenditures for each segment (amounts in thousands):
|
| For the Year Ended December 31, 2010 |
| |||||||||||||
|
| ARM |
| CRM |
| Portfolio |
| Eliminations |
| Total |
| |||||
Revenues |
| $ | 1,332,067 |
| $ | 280,352 |
| $ | 31,835 |
| $ | (42,091 | ) | $ | 1,602,163 |
|
Payroll and related expenses |
| 486,036 |
| 212,828 |
| 3,168 |
| — |
| 702,032 |
| |||||
Selling, general and admin. expenses |
| 374,378 |
| 57,019 |
| 43,746 |
| (40,730 | ) | 434,413 |
| |||||
Reimbursable costs and fees |
| 344,462 |
| — |
| — |
| (1,361 | ) | 343,101 |
| |||||
Restructuring charges |
| 14,653 |
| 2,077 |
| 1,542 |
| — |
| 18,272 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from operations before depreciation and amortization |
| $ | 112,538 |
| $ | 8,428 |
| $ | (16,621 | ) | $ | — |
| $ | 104,345 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Capital expenditures |
| $ | 17,415 |
| $ | 6,898 |
| $ | — |
| $ | — |
| $ | 24,313 |
|
|
| For the Year Ended December 31, 2009 |
| |||||||||||||
|
| ARM |
| CRM |
| Portfolio |
| Eliminations |
| Total |
| |||||
Revenues |
| $ | 1,261,998 |
| $ | 334,492 |
| $ | 48,482 |
| $ | (65,611 | ) | $ | 1,579,361 |
|
Payroll and related expenses |
| 542,919 |
| 238,836 |
| 5,244 |
| (5,111 | ) | 781,888 |
| |||||
Selling, general and admin. expenses |
| 443,040 |
| 59,892 |
| 62,779 |
| (57,333 | ) | 508,378 |
| |||||
Reimbursable costs and fees |
| 130,159 |
| — |
| — |
| (3,167 | ) | 126,992 |
| |||||
Restructuring charges |
| 10,644 |
| (635 | ) | 859 |
| — |
| 10,868 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from operations before depreciation and amortization |
| $ | 135,236 |
| $ | 36,399 |
| $ | (20,400 | ) | $ | — |
| $ | 151,235 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Capital expenditures |
| $ | 19,144 |
| $ | 12,998 |
| $ | — |
| $ | — |
| $ | 32,142 |
|
|
| For the Year Ended December 31, 2008 |
| |||||||||||||
|
| ARM |
| CRM |
| Portfolio |
| Eliminations |
| Total |
| |||||
Revenues |
| $ | 1,219,348 |
| $ | 361,096 |
| $ | 18,389 |
| $ | (85,692 | ) | $ | 1,513,141 |
|
Payroll and related expenses |
| 583,658 |
| 256,895 |
| 7,822 |
| (2,894 | ) | 845,481 |
| |||||
Selling, general and admin. expenses |
| 463,083 |
| 61,723 |
| 86,533 |
| (74,792 | ) | 536,547 |
| |||||
Reimbursable costs and fees |
| 33,798 |
| — |
| — |
| (8,006 | ) | 25,792 |
| |||||
Restructuring charges |
| 7,631 |
| 3,969 |
| — |
| — |
| 11,600 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from operations before depreciation and amortization |
| $ | 131,178 |
| $ | 38,509 |
| $ | (75,966 | ) | $ | — |
| $ | 93,721 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Capital expenditures |
| $ | 24,134 |
| $ | 19,262 |
| $ | — |
| $ | — |
| $ | 43,396 |
|
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
21. Related Party Transactions:
The Company pays OEP a management fee of $3.0 million per year, plus reimbursement of expenses, for management, advice and related services. These fees are included in selling, general and administrative expenses.
OEP is managed by OEP Holding Corporation, a wholly owned indirect subsidiary of JPMorgan Chase & Co. (“JPM”), and JPM is a client of the Company. For the years ended December 31, 2010, 2009 and 2008, the Company received fees for providing services to JPM of $10.0 million, $12.6 million and $14.8 million, respectively. Additionally, an affiliate of Citigroup is a co-investor of the Company, and Citigroup is a client of the Company. For the years ended December 31, 2010, 2009 and 2008, the Company received fees for providing services to Citigroup of $47.8 million, $57.5 million and $69.5 million, respectively. At December 31, 2010, 2009 and 2008, the Company had accounts receivable of $1.5 million, $5.8 million and $3.3 million, respectively, due from Citigroup.
JPMorgan Chase Bank, N.A., an affiliate of JPM, is a lender under the Company’s Credit Facility. The Credit Facility consists of substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions for unrelated parties, and does not involve more than the normal risk of uncollectibility or present other unfavorable features.
The Company also has certain corporate banking relationships with affiliates of JPM and is charged market rates for these services.
On January 2, 2008, the Company acquired SST, a third-party consumer receivable servicer. Prior to the acquisition, SST was an indirect wholly owned subsidiary JPM. JPM also indirectly wholly owns OEP, which has had a controlling interest in the Company since November 15, 2006 (note 4).
22. Recently Issued and Proposed Accounting Guidance:
In June 2009, the FASB issued authoritative guidance for transfers of financial assets. This guidance removes the concept of qualifying special-purpose entities and eliminates the exception from applying guidance related to consolidating of variable interest entities to qualifying special-purpose entities. This guidance requires additional disclosures in order to provide greater transparency about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. The Company adopted this guidance on January 1, 2010, and it did not have a material impact on its financial condition or results of operations.
In October 2009, the FASB issued amended guidance for revenue recognition related to multiple-deliverable revenue arrangements. This guidance, among other things, creates a hierarchy for determining the selling price of a deliverable, which will now include an estimated selling price if neither vendor-specific objective evidence nor third-party evidence exist. This may result in more instances of separating consideration in multiple-deliverable arrangements. Disclosures related to multiple-deliverable revenue arrangements have also been expanded. This guidance was effective for the Company for revenue arrangements entered into or materially modified on or after January 1, 2011, and it will not have a material impact on its financial condition or results of operations.
In June 2009, the FASB issued amended guidance for consolidation of variable interest entities. This guidance amends previous guidance to require companies to perform an analysis to determine if their variable interest gives them a controlling financial interest in the variable interest entity, and requires ongoing reassessments of who is the primary beneficiary of a variable interest entity. This guidance also requires enhanced disclosures of information about involvement in a variable interest entity. The Company adopted this guidance on January 1, 2010, and it did not have a material impact on its financial condition or results of operations.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
22. Recently Issued and Proposed Accounting Guidance (continued):
In January 2010, the FASB issued amended guidance for disclosures about fair value measurements, which requires new disclosures regarding transfers in and out of Level 1 and 2 measurements and requires additional disclosures regarding activity in Level 3 measurements. This guidance also clarifies existing fair value disclosures regarding the level of disaggregation and the input and valuation techniques used to measure fair value. The Company adopted this guidance on January 1, 2010, except for the requirement for additional disclosures of Level 3 activity which is effective on January 1, 2011, and it did not have a material impact on its financial condition or results of operations.
In April 2010, the FASB issued amended guidance for loan modifications when the loan is part of a pool that is accounted for as a single asset. This guidance clarifies that modifications of loans that are accounted for within a pool, which have evidence of credit deterioration upon acquisition, do not result in the removal of those loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amended guidance was effective for the Company for loan modifications made in or after the third quarter of 2010. The Company adopted this guidance and it did not have a material impact on its results of operations or financial position.
In July 2010, the FASB issued amended guidance for disclosures about financing receivables and allowances for credit losses. The guidance requires further disaggregated disclosures that improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The new disclosure requirements are effective for the Company for the annual reporting period ending December 31, 2010. Certain disclosures related to allowance and modification activities will be effective for the Company for reporting periods beginning January 1, 2011. The Company does not expect the adoption of this guidance to have a material impact on its financial condition or results of operations.
In December 2010, the FASB issued amended guidance for business combinations, specifically related to disclosures of supplementary pro forma information. The amended guidance specifies that if comparative financial statements are presented, then revenue and earnings of the combined entity should be disclosed as though the business combination, which occurred during the current year, had occurred as of the beginning of the comparable prior annual reporting period only. The amended guidance also expands the supplemental pro forma information disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination. The amended guidance is effective for the Company for acquisitions occurring on or after January 1, 2011. The Company does not expect the adoption of this guidance to have a material impact on its financial condition or results of operations.
In December 2010, the FASB issued amended guidance for goodwill and other intangible assets, specifically related to when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. Under the amended guidance, if a reporting unit’s carrying amount is zero or negative then step 2 of the goodwill impairment test is required to be performed if it is more likely than not that a goodwill impairment exists. The amended guidance is effective for the Company on January 1, 2011. The Company is reviewing the guidance to assess the impact of adoption.
NCO GROUP, INC.
Notes to Consolidated Financial Statements (continued)
23. Allowance for Doubtful Accounts:
The following table presents the activity in the allowance for doubtful accounts (amounts in thousands):
|
|
|
| Additions |
|
|
|
|
| |||||||
|
| Balance at |
| Charged to |
| Charged |
|
|
| Balance at |
| |||||
|
| beginning |
| costs and |
| to other |
|
|
| end of |
| |||||
|
| of year |
| expenses |
| accounts |
| Deductions(1) |
| year |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Year ended December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
| |||||
Allowance for doubtful accounts |
| $ | 5,824 |
| $ | 1,813 |
| $ | 56 |
| $ | (1,897 | ) | $ | 5,796 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Year ended December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
| |||||
Allowance for doubtful accounts |
| $ | 5,008 |
| $ | 2,797 |
| $ | 500 |
| $ | (2,481 | ) | $ | 5,824 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Year ended December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
| |||||
Allowance for doubtful accounts |
| $ | 3,137 |
| $ | 3,030 |
| $ | 3,786 |
| $ | (4,945 | ) | $ | 5,008 |
|
(1) Uncollectible accounts written off, net of recoveries.
24. Subsequent Events:
On March 18, 2011, the Company’s Board of Directors terminated the Company’s President and Chief Executive Officer, Michael J. Barrist, and appointed Ronald A. Rittenmeyer as the Company’s President and Chief Executive Officer. Mr. Barrist remains as the Company’s Chairman of the Board.
25. Subsidiary Guarantor Financial Information:
The Notes are fully and unconditionally guaranteed, jointly and severally, by certain domestic 100 percent owned subsidiaries of the Company (collectively, the “Guarantors”). Non-guarantors consist of all non-domestic subsidiaries, certain subsidiaries engaged in financing the purchase of delinquent accounts receivable portfolios, portfolio joint ventures (which are engaged in portfolio financing transactions) and certain immaterial subsidiaries (collectively, the “Non-Guarantors”). The following tables present the consolidating financial information for the Company (Parent), the Guarantors and the Non-Guarantors, together with eliminations, as of and for the periods indicated.
25. Subsidiary Guarantor Financial Information (continued):
NCO GROUP, INC.
December 31, 2010
(Amounts in thousands)
|
| Parent |
| Guarantors |
| Non-Guarantors |
| Eliminations |
| Consolidated |
| |||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | — |
| $ | 19,409 |
| $ | 13,668 |
| $ | — |
| $ | 33,077 |
|
Accounts receivable, trade, net of allowance for doubtful accounts |
| — |
| 153,526 |
| 17,824 |
| — |
| 171,350 |
| |||||
Purchased accounts receivable, current portion |
| — |
| 16,576 |
| 13,107 |
| — |
| 29,683 |
| |||||
Deferred income taxes |
| (10,468 | ) | 17,094 |
| 2,458 |
| — |
| 9,084 |
| |||||
Prepaid expenses and other current assets |
| 1,587 |
| 21,800 |
| 28,151 |
| — |
| 51,538 |
| |||||
Total current assets |
| (8,881 | ) | 228,405 |
| 75,208 |
| — |
| 294,732 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Property and equipment, net |
| — |
| 71,472 |
| 27,617 |
| — |
| 99,089 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Goodwill |
| — |
| 438,837 |
| 41,920 |
| — |
| 480,757 |
| |||||
Trade name, net of accumulated amortization |
| — |
| 80,661 |
| 2,847 |
| — |
| 83,508 |
| |||||
Customer relationships and other intangible assets, net of accumulated amortization |
| — |
| 182,734 |
| 12,337 |
| — |
| 195,071 |
| |||||
Purchased accounts receivable, net of current portion |
| — |
| 29,726 |
| 19,198 |
| — |
| 48,924 |
| |||||
Investment in subsidiaries |
| 754,036 |
| (16,347 | ) | — |
| (737,689 | ) | — |
| |||||
Deferred income taxes |
| 330 |
| 1,167 |
| 2,752 |
| — |
| 4,249 |
| |||||
Other assets |
| 11,037 |
| 18,713 |
| 1,633 |
| — |
| 31,383 |
| |||||
Total other assets |
| 765,403 |
| 735,491 |
| 80,687 |
| (737,689 | ) | 843,892 |
| |||||
Total assets |
| $ | 756,522 |
| $ | 1,035,368 |
| $ | 183,512 |
| $ | (737,689 | ) | $ | 1,237,713 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt, current portion |
| $ | 20,014 |
| $ | 245 |
| $ | 1,865 |
| $ | — |
| $ | 22,124 |
|
Intercompany payable (receivable) |
| 189,799 |
| (289,904 | ) | 100,105 |
| — |
| — |
| |||||
Income taxes payable |
| — |
| — |
| 4,662 |
| — |
| 4,662 |
| |||||
Accounts payable |
| 750 |
| 16,305 |
| 2,732 |
| — |
| 19,787 |
| |||||
Accrued expenses |
| 6,749 |
| 54,046 |
| 30,485 |
| — |
| 91,280 |
| |||||
Accrued compensation and related expenses |
| — |
| 23,517 |
| 13,061 |
| — |
| 36,578 |
| |||||
Deferred revenue, current portion |
| — |
| 30,698 |
| 601 |
| — |
| 31,299 |
| |||||
Deferred income taxes |
| — |
| 5 |
| 1,153 |
|
|
| 1,158 |
| |||||
Total current liabilities |
| 217,312 |
| (165,088 | ) | 154,664 |
| — |
| 206,888 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt, net of current portion |
| 487,801 |
| 374,263 |
| 5,165 |
| — |
| 867,229 |
| |||||
Deferred income taxes |
| (38,495 | ) | 79,609 |
| 4,649 |
| — |
| 45,763 |
| |||||
Deferred revenue, net of current portion |
| — |
| 696 |
| — |
| — |
| 696 |
| |||||
Other long-term liabilities |
| 9,498 |
| 10,286 |
| 10,427 |
| — |
| 30,211 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
| |||||
Total NCO Group, Inc. stockholders’ equity |
| 80,406 |
| 735,602 |
| 2,087 |
| (737,689 | ) | 80,406 |
| |||||
Noncontrolling interests |
| — |
| — |
| 6,520 |
| — |
| 6,520 |
| |||||
Total stockholders’ equity |
| 80,406 |
| 735,602 |
| 8,607 |
| (737,689 | ) | 86,926 |
| |||||
Total liabilities and stockholders’ equity |
| $ | 756,522 |
| $ | 1,035,368 |
| $ | 183,512 |
| $ | (737,689 | ) | $ | 1,237,713 |
|
25. Subsidiary Guarantor Financial Information (continued):
NCO GROUP, INC.
Consolidating Balance Sheet
December 31, 2009
(Amounts in thousands)
|
| Parent |
| Guarantors |
| Non-Guarantors |
| Eliminations |
| Consolidated |
| |||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | — |
| $ | 18,984 |
| $ | 20,237 |
| $ | — |
| $ | 39,221 |
|
Accounts receivable, trade, net of allowance for doubtful accounts |
| — |
| 156,600 |
| 21,467 |
| — |
| 178,067 |
| |||||
Purchased accounts receivable, current portion |
| — |
| 22,406 |
| 28,554 |
| — |
| 50,960 |
| |||||
Deferred income taxes |
| (28,808 | ) | 29,327 |
| 1,234 |
| — |
| 1,753 |
| |||||
Prepaid expenses and other current assets |
| 1,358 |
| 29,741 |
| 30,882 |
| — |
| 61,981 |
| |||||
Total current assets |
| (27,450 | ) | 257,058 |
| 102,374 |
| — |
| 331,982 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Property and equipment, net |
| — |
| 89,347 |
| 32,970 |
| — |
| 122,317 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Goodwill |
| — |
| 470,621 |
| 65,236 |
| — |
| 535,857 |
| |||||
Trade name, net of accumulated amortization |
| — |
| 81,065 |
| 2,847 |
| — |
| 83,912 |
| |||||
Customer relationships and other intangible assets, net of accumulated amortization |
| — |
| 239,393 |
| 19,289 |
| — |
| 258,682 |
| |||||
Purchased accounts receivable, net of current portion |
| — |
| 52,966 |
| 34,503 |
| — |
| 87,469 |
| |||||
Investment in subsidiaries |
| 729,604 |
| 19,005 |
| — |
| (748,609 | ) | — |
| |||||
Deferred income taxes |
| — |
| — |
| 3,548 |
| — |
| 3,548 |
| |||||
Other assets |
| 12,852 |
| 22,144 |
| 1,272 |
| — |
| 36,268 |
| |||||
Total other assets |
| 742,456 |
| 885,194 |
| 126,695 |
| (748,609 | ) | 1,005,736 |
| |||||
Total assets |
| $ | 715,006 |
| $ | 1,231,599 |
| $ | 262,039 |
| $ | (748,609 | ) | $ | 1,460,035 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt, current portion |
| $ | 29,334 |
| $ | 583 |
| $ | 11,782 |
| $ | — |
| $ | 41,699 |
|
Intercompany (receivable) payable |
| (953 | ) | (132,621 | ) | 133,574 |
| — |
| — |
| |||||
Income taxes payable |
| — |
| — |
| 2,838 |
| — |
| 2,838 |
| |||||
Accounts payable |
| — |
| 13,387 |
| 2,478 |
| — |
| 15,865 |
| |||||
Accrued expenses |
| 14,367 |
| 67,538 |
| 25,345 |
| — |
| 107,250 |
| |||||
Accrued compensation and related expenses |
| — |
| 26,225 |
| 11,869 |
| — |
| 38,094 |
| |||||
Deferred revenue, current portion |
| — |
| 39,101 |
| 427 |
| — |
| 39,528 |
| |||||
Total current liabilities |
| 42,748 |
| 14,213 |
| 188,313 |
| — |
| 245,274 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt, net of current portion |
| 517,521 |
| 388,531 |
| 3,779 |
| — |
| 909,831 |
| |||||
Deferred income taxes |
| (82,653 | ) | 108,563 |
| 6,062 |
| — |
| 31,972 |
| |||||
Deferred revenue, net of current portion |
| — |
| 1,147 |
| — |
| — |
| 1,147 |
| |||||
Other long-term liabilities |
| 8,290 |
| 9,153 |
| 13,818 |
| — |
| 31,261 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
| |||||
Total NCO Group, Inc. stockholders’ equity |
| 229,100 |
| 709,992 |
| 38,617 |
| (748,609 | ) | 229,100 |
| |||||
Noncontrolling interests |
| — |
| — |
| 11,450 |
| — |
| 11,450 |
| |||||
Total stockholders’ equity |
| 229,100 |
| 709,992 |
| 50,067 |
| (748,609 | ) | 240,550 |
| |||||
Total liabilities and stockholders’ equity |
| $ | 715,006 |
| $ | 1,231,599 |
| $ | 262,039 |
| $ | (748,609 | ) | $ | 1,460,035 |
|
25. Subsidiary Guarantor Financial Information (continued):
NCO GROUP, INC.
Consolidating Statement of Operations
For the Year Ended December 31, 2010
(Amounts in thousands)
|
| Parent |
| Guarantors |
| Non-Guarantors |
| Eliminations |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
| |||||
Services |
| $ | — |
| $ | 1,185,217 |
| $ | 290,953 |
| $ | (252,669 | ) | $ | 1,223,501 |
|
Portfolio |
| — |
| 14,468 |
| 21,093 |
| — |
| 35,561 |
| |||||
Reimbursable costs and fees |
| — |
| 342,798 |
| 303 |
| — |
| 343,101 |
| |||||
Total revenues |
| — |
| 1,542,483 |
| 312,349 |
| (252,669 | ) | 1,602,163 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
| |||||
Payroll and related expenses |
| 15 |
| 722,228 |
| 179,370 |
| (199,581 | ) | 702,032 |
| |||||
Selling, general and administrative expenses |
| 4,217 |
| 368,602 |
| 114,682 |
| (53,088 | ) | 434,413 |
| |||||
Reimbursable costs and fees |
| — |
| 342,798 |
| 303 |
| — |
| 343,101 |
| |||||
Depreciation and amortization expense |
| — |
| 85,610 |
| 23,212 |
| — |
| 108,822 |
| |||||
Impairment of intangible assets |
| — |
| 32,954 |
| 24,061 |
| — |
| 57,015 |
| |||||
Restructuring charges |
| — |
| 14,673 |
| 3,599 |
| — |
| 18,272 |
| |||||
Total operating costs and expenses |
| 4,232 |
| 1,566,865 |
| 345,227 |
| (252,669 | ) | 1,663,655 |
| |||||
(Loss) income from operations |
| (4,232 | ) | (24,382 | ) | (32,878 | ) | — |
| (61,492 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest and investment income |
| 244 |
| (945 | ) | 1,241 |
| — |
| 540 |
| |||||
Interest expense |
| (55,375 | ) | (32,232 | ) | (2,737 | ) | — |
| (90,344 | ) | |||||
Interest (expense) income to affiliate |
| (22,313 | ) | 29,913 |
| (7,600 | ) | — |
| — |
| |||||
Subsidiary (loss) income |
| (63,927 | ) | (37,922 | ) | — |
| 101,849 |
| — |
| |||||
Other income, net |
| 891 |
| 1,353 |
| 211 |
| — |
| 2,455 |
| |||||
Total other income (expense) |
| (140,480 | ) | (39,833 | ) | (8,885 | ) | 101,849 |
| (87,349 | ) | |||||
(Loss) income before income taxes |
| (144,712 | ) | (64,215 | ) | (41,763 | ) | 101,849 |
| (148,841 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income tax expense (benefit) |
| 10,288 |
| (1,494 | ) | (1,922 | ) | — |
| 6,872 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net (loss) income |
| (155,000 | ) | (62,721 | ) | (39,841 | ) | 101,849 |
| (155,713 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Less: Net loss attributable to noncontrolling interests |
| — |
| — |
| (713 | ) | — |
| (713 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net (loss) income attributable to NCO Group, Inc. |
| $ | (155,000 | ) | $ | (62,721 | ) | $ | (39,128 | ) | $ | 101,849 |
| $ | (155,000 | ) |
25. Subsidiary Guarantor Financial Information (continued):
NCO GROUP, INC.
Consolidating Statement of Operations
For the Year Ended December 31, 2009
(Amounts in thousands)
|
| Parent |
| Guarantors |
| Non-Guarantors |
| Eliminations |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
| |||||
Services |
| $ | — |
| $ | 1,407,142 |
| $ | 292,661 |
| $ | (299,193 | ) | $ | 1,400,610 |
|
Portfolio |
| — |
| 23,893 |
| 27,866 |
| — |
| 51,759 |
| |||||
Reimbursable costs and fees |
| — |
| 126,746 |
| 246 |
| — |
| 126,992 |
| |||||
Total revenues |
| — |
| 1,557,781 |
| 320,773 |
| (299,193 | ) | 1,579,361 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
| |||||
Payroll and related expenses |
| 16 |
| 822,506 |
| 185,043 |
| (225,677 | ) | 781,888 |
| |||||
Selling, general and administrative expenses |
| 4,273 |
| 456,016 |
| 121,605 |
| (73,516 | ) | 508,378 |
| |||||
Reimbursable costs and fees |
| — |
| 126,746 |
| 246 |
| — |
| 126,992 |
| |||||
Depreciation and amortization expense |
| — |
| 92,035 |
| 27,535 |
| — |
| 119,570 |
| |||||
Impairment of intangible assets |
| — |
| 30,032 |
| — |
| — |
| 30,032 |
| |||||
Restructuring charges |
| — |
| 4,204 |
| 6,664 |
| — |
| 10,868 |
| |||||
Total operating costs and expenses |
| 4,289 |
| 1,531,539 |
| 341,093 |
| (299,193 | ) | 1,577,728 |
| |||||
(Loss) income from operations |
| (4,289 | ) | 26,242 |
| (20,320 | ) | — |
| 1,633 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest and investment income |
| 44 |
| 1,784 |
| (493 | ) | — |
| 1,335 |
| |||||
Interest expense |
| (68,219 | ) | (31,621 | ) | 628 |
| — |
| (99,212 | ) | |||||
Interest (expense) income to affiliate |
| (6,047 | ) | 12,703 |
| (6,656 | ) | — |
| — |
| |||||
Subsidiary (loss) income |
| (18,687 | ) | (12,164 | ) | — |
| 30,851 |
| — |
| |||||
Other income (expense), net |
| 7,014 |
| (449 | ) | 371 |
| — |
| 6,936 |
| |||||
|
| (85,895 | ) | (29,747 | ) | (6,150 | ) | 30,851 |
| (90,941 | ) | |||||
(Loss) income before income taxes |
| (90,184 | ) | (3,505 | ) | (26,470 | ) | 30,851 |
| (89,308 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income tax (benefit) expense |
| (5,963 | ) | 12,528 |
| (7,731 | ) | — |
| (1,166 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net (loss) income |
| (84,221 | ) | (16,033 | ) | (18,739 | ) | 30,851 |
| (88,142 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Less: Net loss attributable to noncontrolling interests |
| — |
| — |
| (3,921 | ) | — |
| (3,921 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net (loss) income attributable to NCO Group, Inc. |
| $ | (84,221 | ) | $ | (16,033 | ) | $ | (14,818 | ) | $ | 30,851 |
| $ | (84,221 | ) |
25. Subsidiary Guarantor Financial Information (continued):
NCO GROUP, INC.
Consolidating Statement of Operations
For the Year Ended December 31, 2008
(Amounts in thousands)
|
| Parent |
| Guarantors |
| Non-Guarantors |
| Eliminations |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
| |||||
Services |
| $ | — |
| $ | 1,461,589 |
| $ | 345,138 |
| $ | (340,409 | ) | $ | 1,466,318 |
|
Portfolio |
| — |
| 21,557 |
| (526 | ) | — |
| 21,031 |
| |||||
Reimbursable costs and fees |
| — |
| 25,632 |
| 160 |
| — |
| 25,792 |
| |||||
Total revenues |
| — |
| 1,508,778 |
| 344,772 |
| (340,409 | ) | 1,513,141 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
| |||||
Payroll and related expenses |
| 15 |
| 868,516 |
| 222,085 |
| (245,135 | ) | 845,481 |
| |||||
Selling, general and administrative expenses |
| 4,200 |
| 491,496 |
| 136,125 |
| (95,274 | ) | 536,547 |
| |||||
Reimbursable costs and fees |
| — |
| 25,632 |
| 160 |
| — |
| 25,792 |
| |||||
Depreciation and amortization expense |
| — |
| 92,176 |
| 29,148 |
| — |
| 121,324 |
| |||||
Impairment of intangible assets |
| — |
| 268,908 |
| 20,584 |
| — |
| 289,492 |
| |||||
Restructuring charges |
| — |
| 6,050 |
| 5,550 |
| — |
| 11,600 |
| |||||
Total operating costs and expenses |
| 4,215 |
| 1,752,778 |
| 413,652 |
| (340,409 | ) | 1,830,236 |
| |||||
Loss from operations |
| (4,215 | ) | (244,000 | ) | (68,880 | ) | — |
| (317,095 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest and investment income |
| (10,396 | ) | 11,848 |
| (361 | ) | — |
| 1,091 |
| |||||
Interest expense |
| (65,080 | ) | (29,183 | ) | (568 | ) | — |
| (94,831 | ) | |||||
Interest (expense) income to affiliate |
| (2,660 | ) | 9,239 |
| (6,579 | ) | — |
| — |
| |||||
Subsidiary (loss) income |
| (281,167 | ) | (49,538 | ) | — |
| 330,705 |
| — |
| |||||
Other expense, net |
| — |
| (16,468 | ) | — |
| — |
| (16,468 | ) | |||||
|
| (359,303 | ) | (74,102 | ) | (7,508 | ) | 330,705 |
| (110,208 | ) | |||||
(Loss) income before income taxes |
| (363,518 | ) | (318,102 | ) | (76,388 | ) | 330,705 |
| (427,303 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income tax benefit |
| (26,412 | ) | (37,315 | ) | (8,220 | ) | — |
| (71,947 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net (loss) income |
| (337,106 | ) | (280,787 | ) | (68,168 | ) | 330,705 |
| (355,356 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Less: Net loss attributable to noncontrolling interests |
| — |
| — |
| (18,250 | ) | — |
| (18,250 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net (loss) income attributable to NCO Group, Inc. |
| $ | (337,106 | ) | $ | (280,787 | ) | $ | (49,918 | ) | $ | 330,705 |
| $ | (337,106 | ) |
25. Subsidiary Guarantor Financial Information (continued):
NCO GROUP, INC
Consolidating Statement of Cash Flows
For the Year Ended December 31, 2010
(Amounts in thousands)
|
| Parent |
| Guarantors |
| Non-Guarantors |
| Consolidated |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash (used in) provided by operating activities |
| $ | (25,069 | ) | $ | 44,443 |
| $ | 23,750 |
| $ | 43,124 |
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| ||||
Purchases of accounts receivable |
| — |
| (10,976 | ) | (1,733 | ) | (12,709 | ) | ||||
Collections applied to principal of purchased accounts receivable |
| — |
| 28,984 |
| 27,192 |
| 56,176 |
| ||||
Proceeds from sales of purchased accounts receivable |
| — |
| 1,686 |
| 1,702 |
| 3,388 |
| ||||
Purchases of property and equipment |
| — |
| (15,304 | ) | (9,009 | ) | (24,313 | ) | ||||
Net cash paid related to acquisitions |
| — |
| (1,600 | ) | — |
| (1,600 | ) | ||||
Other |
| — |
| 1,402 |
| — |
| 1,402 |
| ||||
Net cash provided by investing activities |
| — |
| 4,192 |
| 18,152 |
| 22,344 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| ||||
Repayment of notes payable |
| — |
| (302 | ) | (14,557 | ) | (14,859 | ) | ||||
Net repayment of borrowings under revolving credit facility |
| (7,000 | ) | — |
| — |
| (7,000 | ) | ||||
Repayment of borrowings under senior term loan |
| (42,039 | ) | — |
| — |
| (42,039 | ) | ||||
Borrowings under (repayment of) intercompany notes payable |
| 76,862 |
| (47,904 | ) | (28,958 | ) | — |
| ||||
Payment of fees related to debt |
| (2,754 | ) | (4 | ) | — |
| (2,758 | ) | ||||
Return of investment in subsidiary to noncontrolling interests |
| — |
| — |
| (4,733 | ) | (4,733 | ) | ||||
Net cash provided by (used in) financing activities |
| 25,069 |
| (48,210 | ) | (48,248 | ) | (71,389 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Effect of exchange rate on cash |
| — |
| — |
| (223 | ) | (223 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net decrease in cash and cash equivalents |
| — |
| 425 |
| (6,569 | ) | (6,144 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents at beginning of the period |
| — |
| 18,984 |
| 20,237 |
| 39,221 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents at end of the period |
| $ | — |
| $ | 19,409 |
| $ | 13,668 |
| $ | 33,077 |
|
25. Subsidiary Guarantor Financial Information (continued):
NCO GROUP, INC
Consolidating Statement of Cash Flows
For the Year Ended December 31, 2009
(Amounts in thousands)
|
| Parent |
| Guarantors |
| Non-Guarantors |
| Consolidated |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash (used in) provided by operating activities |
| $ | (28,783 | ) | $ | 123,770 |
| $ | 3,487 |
| $ | 98,474 |
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| ||||
Purchases of accounts receivable |
| — |
| (54,196 | ) | (2,413 | ) | (56,609 | ) | ||||
Collections applied to principal of purchased accounts receivable |
| — |
| 36,443 |
| 47,657 |
| 84,100 |
| ||||
Proceeds from sales of purchased accounts receivable |
| — |
| 124 |
| 401 |
| 525 |
| ||||
Purchases of property and equipment |
| — |
| (23,939 | ) | (8,203 | ) | (32,142 | ) | ||||
Cash received from sale of business |
| — |
| 20,000 |
| — |
| 20,000 |
| ||||
Net cash received (paid) related to acquisitions |
| — |
| 1,728 |
| (1,024 | ) | 704 |
| ||||
Other |
| — |
| 136 |
| — |
| 136 |
| ||||
Net cash (used in) provided by investing activities |
| — |
| (19,704 | ) | 36,418 |
| 16,714 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| ||||
Repayment of notes payable |
| — |
| (360 | ) | (24,234 | ) | (24,594 | ) | ||||
Net repayments of revolving credit facility |
| (64,500 | ) | — |
| — |
| (64,500 | ) | ||||
Repayment of borrowings under senior term loan |
| (39,345 | ) | — |
| — |
| (39,345 | ) | ||||
Borrowings under (repayments of) intercompany notes payable |
| 103,487 |
| (100,056 | ) | (3,431 | ) | — |
| ||||
Payment of fees to obtain debt |
| (2,477 | ) | — |
| — |
| (2,477 | ) | ||||
Return of investment in subsidiary to noncontrolling interests |
| — |
| — |
| (7,855 | ) | (7,855 | ) | ||||
Issuance of stock, net |
| 39,667 |
| — |
| — |
| 39,667 |
| ||||
Payment of deemed dividend to JPM |
| (8,049 | ) | — |
| — |
| (8,049 | ) | ||||
Net cash provided by (used in) financing activities |
| 28,783 |
| (100,416 | ) | (35,520 | ) | (107,153 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Effect of exchange rate on cash |
| — |
| — |
| 1,306 |
| 1,306 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net increase in cash and cash equivalents |
| — |
| 3,650 |
| 5,691 |
| 9,341 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents at beginning of the period |
| — |
| 15,334 |
| 14,546 |
| 29,880 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents at end of the period |
| $ | — |
| $ | 18,984 |
| $ | 20,237 |
| $ | 39,221 |
|
25. Subsidiary Guarantor Financial Information (continued):
NCO GROUP, INC
Consolidating Statement of Cash Flows
For the Year Ended December 31, 2008
(Amounts in thousands)
|
| Parent |
| Guarantors |
| Non-Guarantors |
| Consolidated |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash (used in) provided by operating activities |
| $ | (7,991 | ) | $ | 55,591 |
| $ | 46,133 |
| $ | 93,733 |
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| ||||
Purchases of accounts receivable |
| — |
| (64,651 | ) | (61,896 | ) | (126,547 | ) | ||||
Collections applied to principal of purchased accounts receivable |
| — |
| 16,634 |
| 72,691 |
| 89,325 |
| ||||
Proceeds from sales of purchased accounts receivable |
| — |
| 1,274 |
| 3,483 |
| 4,757 |
| ||||
Purchases of property and equipment |
| — |
| (34,756 | ) | (8,640 | ) | (43,396 | ) | ||||
Net cash paid related to acquisitions |
| — |
| (324,207 | ) | (25,213 | ) | (349,420 | ) | ||||
Other |
| — |
| 1,122 |
| — |
| 1,122 |
| ||||
Net cash used in investing activities |
| — |
| (404,584 | ) | (19,575 | ) | (424,159 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| ||||
Repayment of notes payable |
| — |
| (215 | ) | (35,261 | ) | (35,476 | ) | ||||
Borrowings under notes payable |
| — |
| — |
| 21,691 |
| 21,691 |
| ||||
Net borrowings under revolving credit facility |
| 34,500 |
| — |
| — |
| 34,500 |
| ||||
Repayment of borrowings under senior term loan |
| — |
| (10,745 | ) | — |
| (10,745 | ) | ||||
Borrowings under senior term loan, net of fees |
| — |
| 134,135 |
| — |
| 134,135 |
| ||||
Borrowings under (repayments of) intercompany notes payable |
| (228,721 | ) | 227,704 |
| 1,017 |
| — |
| ||||
Payment of fees related to debt |
| (10 | ) | (4,307 | ) | — |
| (4,317 | ) | ||||
Investment in subsidiary by noncontrolling interests |
| — |
| — |
| 2,436 |
| 2,436 |
| ||||
Return of investment in subsidiary to noncontrolling interests |
| — |
| — |
| (12,242 | ) | (12,242 | ) | ||||
Issuance of stock, net |
| 219,722 |
| — |
| — |
| 219,722 |
| ||||
Payment of deemed dividend to JPM |
| (17,500 | ) | — |
| — |
| (17,500 | ) | ||||
Net cash provided by (used in) financing activities |
| 7,991 |
| 346,572 |
| (22,359 | ) | 332,204 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Effect of exchange rate on cash |
| — |
| — |
| (3,181 | ) | (3,181 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net (decrease) increase in cash and cash equivalents |
| — |
| (2,421 | ) | 1,018 |
| (1,403 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents at beginning of the period |
| — |
| 17,755 |
| 13,528 |
| 31,283 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents at end of the period |
| $ | — |
| $ | 15,334 |
| $ | 14,546 |
| $ | 29,880 |
|