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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

**(Markone)**

 

**x****      Quarterly report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the quarterly period ended September 30, 2010**

 

**or**

 

**o****         Transition reportpursuant to Section 13 or 15(d) of the Securities Exchange Act of1934**

 

**For the transition period from           to           **

 

**Commission File Number 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 incorporation or organization) |   | (I.R.S. Employer Identification No.) |
|                                                           |   |                                 |
| **507 Prudential Road, Horsham, Pennsylvania**                 |   | **19044**                            |
| (Address of principal executive offices)                       |   | (Zip Code)                           |

 

**215-441-3000**

(Registrant’s telephone number, including area code)

 

**Not Applicable**

(Former name, former address and former fiscal year, if changed sincelast report)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes  x   No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes  o   No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o                      |   | Accelerated filer o         |
|------------------------------------------------|--------|-----------------------------|
|                                           |   |                        |
| Non-accelerated filer x                        |   | Smaller reporting company o |
| (Do not check if a smaller  reporting company) |   |                        |

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No x

 

Thenumber of shares outstanding of each of the issuer’s classes of common stock asof November 15, 2010 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 parvalue.

 

 

 

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**NCO GROUP, INC.**

 

**INDEX**

 
| ** **                                    | ** **                                                                                             | **PAGE** |
|-----------------------------------------------|--------------------------------------------------------------------------------------------------------|----------|
|                                          |                                                                                                   |     |
| **PART I  — FINANCIAL INFORMATION** |                                                                                                   |
|                                          |                                                                                                   |     |
| Item  1.                                      | FINANCIAL STATEMENTS (Unaudited)                                                                       |     |
|                                          |                                                                                                   |     |
|                                          | Consolidated  Balance Sheets -

September 30,  2010 and December 31, 2009                    | 1        |
|                                          |                                                                                                   |     |
|                                          | Consolidated Statements of Operations -

Three  and Nine Months Ended September 30, 2010 and 2009 | 2        |
|                                          |                                                                                                   |     |
|                                          | Consolidated  Statements of Cash Flows - 

Nine  Months Ended September 30, 2010 and 2009         | 3        |
|                                          |                                                                                                   |     |
|                                          | Notes to Consolidated Financial Statements                                                             | 4        |
|                                          |                                                                                                   |     |
| Item 2.                                       | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF

FINANCIAL  CONDITION AND RESULTS OF OPERATIONS          | 31       |
|                                          |                                                                                                   |     |
| Item 3.                                       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES

ABOUT MARKET  RISK                                          | 41       |
|                                          |                                                                                                   |     |
| Item 4.                                       | CONTROLS AND  PROCEDURES                                                                               | 41       |
|                                          |                                                                                                   |     |
| **PART II  — OTHER INFORMATION**    |                                                                                                   |
|                                          |                                                                                                   |     |
| Item 1.                                       | LEGAL PROCEEDINGS                                                                                      | 42       |
|                                          |                                                                                                   |     |
| Item  1A.                                     | RISK FACTORS                                                                                           | 42       |
|                                          |                                                                                                   |     |
| Item 2.                                       | UNREGISTERED  SALES OF EQUITY SECURITIES AND

USE OF  PROCEEDS                                         | 42       |
|                                          |                                                                                                   |     |
| Item 3.                                       | DEFAULTS UPON  SENIOR SECURITIES                                                                       | 42       |
|                                          |                                                                                                   |     |
| Item 4.                                       | [REMOVED AND RESERVED]                                                                                 | 42       |
|                                          |                                                                                                   |     |
| Item 5.                                       | OTHER INFORMATION                                                                                      | 43       |
|                                          |                                                                                                   |     |
| Item  6.                                      | EXHIBITS                                                                                               | 43       |
|                                          |                                                                                                   |     |
| SIGNATURES                                    |                                                                                                   | 44       |

 

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**Part I. Financial Information**

**Item 1. Financial Statements**

 

**NCO GROUP, INC.**

**ConsolidatedBalance Sheets**

**(Unaudited)**

**(Amounts in thousands, except per share amounts)**

** **
| ** **                                                                                                                                                                                                                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                  | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                  |       |                   | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                                                                             |       |                   |       |                  |       |
| Cash and cash equivalents (includes cash and cash  equivalents of consolidated variable interest entities: 2010, $835; 2009,  $982)                                                                                                         |       | $                      | 31,610     |                  | $          | 39,221 |   |
| Accounts receivable, trade, net of allowance for  doubtful accounts of $5,244 and $5,824, respectively                                                                                                                                      |       | 170,416                |       | 178,067               |       |
| Purchased accounts receivable, current portion,  net of allowance for impairment of $151,609 and $144,397, respectively  (includes purchased accounts receivable of consolidated variable interest  entities: 2010, $11,008; 2009, $22,020) |       | 37,340                 |       | 50,960                |       |
| Deferred income taxes                                                                                                                                                                                                                       |       | 2,003                  |       | 1,753                 |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                   |       | 66,004                 |       | 61,981                |       |
| Total current assets                                                                                                                                                                                                                        |       | 307,373                |       | 331,982               |       |
|                                                                                                                                                                                                                                        |       |                   |       |                  |       |
| Funds held on behalf of clients (note 9)                                                                                                                                                                                                    |       |                   |       |                  |       |
|                                                                                                                                                                                                                                        |       |                   |       |                  |       |
| Property and equipment, net                                                                                                                                                                                                                 |       | 103,899                |       | 122,317               |       |
|                                                                                                                                                                                                                                        |       |                   |       |                  |       |
| Other assets:                                                                                                                                                                                                                               |       |                   |       |                  |       |
| Goodwill                                                                                                                                                                                                                                    |       | 537,427                |       | 535,857               |       |
| Trade name, net of accumulated amortization                                                                                                                                                                                                 |       | 83,609                 |       | 83,912                |       |
| Customer relationships and other intangible  assets, net of accumulated amortization                                                                                                                                                        |       | 210,990                |       | 258,682               |       |
| Purchased accounts receivable, net of current portion  (includes purchased accounts receivable of consolidated variable interest  entities: 2010, $15,798; 2009, $18,586)                                                                   |       | 57,372                 |       | 87,469                |       |
| Deferred income taxes                                                                                                                                                                                                                       |       | 3,584                  |       | 3,548                 |       |
| Other assets                                                                                                                                                                                                                                |       | 33,320                 |       | 36,268                |       |
| Total other assets                                                                                                                                                                                                                          |       | 926,302                |       | 1,005,736             |       |
| Total assets                                                                                                                                                                                                                                |       | $                      | 1,337,574  |                  | $          | 1,460,035 |   |
|                                                                                                                                                                                                                                        |       |                   |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                               |       |                   | ** ** | ** **            | ** ** |
|                                                                                                                                                                                                                                        |       |                   |       |                  |       |
| Current liabilities:                                                                                                                                                                                                                        |       |                   |       |                  |       |
| Long-term debt, current portion (includes debt of  consolidated variable interest entities: 2010, $1,498; 2009, $10,027)                                                                                                                    |       | $                      | 10,552     |                  | $          | 41,699 |   |
| Income taxes payable                                                                                                                                                                                                                        |       | 7,390                  |       | 2,838                 |       |
| Accounts payable                                                                                                                                                                                                                            |       | 23,095                 |       | 15,865                |       |
| Accrued expenses (includes accrued expenses of  consolidated variable interest entities: 2010, $735; 2009, $795)                                                                                                                            |       | 104,334                |       | 107,250               |       |
| Accrued compensation and related expenses                                                                                                                                                                                                   |       | 43,829                 |       | 38,094                |       |
| Deferred revenue, current portion                                                                                                                                                                                                           |       | 32,740                 |       | 39,528                |       |
| Total current liabilities                                                                                                                                                                                                                   |       | 221,940                |       | 245,274               |       |
|                                                                                                                                                                                                                                        |       |                   |       |                  |       |
| Funds held on behalf of clients (note 9)                                                                                                                                                                                                    |       |                   |       |                  |       |
|                                                                                                                                                                                                                                        |       |                   |       |                  |       |
| Long-term liabilities:                                                                                                                                                                                                                      |       |                   |       |                  |       |
| Long-term debt, net of current portion                                                                                                                                                                                                      |       | 871,810                |       | 909,831               |       |
| Deferred income taxes (includes deferred income  taxes of consolidated variable interest entities: 2010, $690; 2009, $1,475)                                                                                                                |       | 37,749                 |       | 31,972                |       |
| Deferred revenue, net of current portion                                                                                                                                                                                                    |       | 858                    |       | 1,147                 |       |
| Other long-term liabilities                                                                                                                                                                                                                 |       | 36,397                 |       | 31,261                |       |
|                                                                                                                                                                                                                                        |       |                   |       |                  |       |
| Commitments and contingencies (note 16)                                                                                                                                                                                                     |       |                   |       |                  |       |
|                                                                                                                                                                                                                                        |       |                   |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                                                                  |       |                   |       |                  |       |
| Preferred stock, par value $0.01 per share, 7,500  shares authorized, 3,501 and 3,152 shares issued and outstanding,  respectively                                                                                                          |       | 35                     |       | 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                                                                                                                                                                                                                  |       | 764,385                |       | 763,828               |       |
| Accumulated other comprehensive income (loss)                                                                                                                                                                                               |       | 3,763                  |       | (551                  | )          |
| Accumulated deficit                                                                                                                                                                                                                         |       | (608,563               | )          | (534,242              | )          |
| Total NCO Group, Inc. stockholders’ equity                                                                                                                                                                                        |       | 159,654                |       | 229,100               |       |
| Noncontrolling interests                                                                                                                                                                                                                    |       | 9,166                  |       | 11,450                |       |
| Total stockholders’ equity                                                                                                                                                                                                             |       | 168,820                |       | 240,550               |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                             |       | $                      | 1,337,574  |                  | $          | 1,460,035 |   |

 

See accompanying notes.

 

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**NCO GROUP, INC.**

**ConsolidatedStatements of Operations**

**(Unaudited)**

**(Amounts in thousands)**

 
| ** **                                                        | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                        | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| ** **                                                        | ** ** | **2010**                                           | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                              |       |                                               |       |                                              |       |   |   |   |   |
| Revenues:                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Services                                                          |       | $                                                  | 292,049    |                                              | $          | 346,560 |   | $ | 921,963 |   | $ | 1,067,007 |   |
| Portfolio                                                         |       | 4,271                                              |       | (278                                              | )          | 32,195 |   | 42,588 |   |
| Reimbursable costs and fees                                       |       | 74,227                                             |       | 27,388                                            |       | 215,626 |   | 44,823 |   |
|                                                              |       |                                               |       |                                              |       |   |   |   |   |
| Total revenues                                                    |       | 370,547                                            |       | 373,670                                           |       | 1,169,784 |   | 1,154,418 |   |
|                                                              |       |                                               |       |                                              |       |   |   |   |   |
| Operating costs and expenses:                                     |       |                                               |       |                                              |       |   |   |   |   |
| Payroll and related expenses                                      |       | 166,886                                            |       | 188,631                                           |       | 528,805 |   | 592,318 |   |
| Selling, general and administrative expenses                      |       | 104,637                                            |       | 128,779                                           |       | 329,423 |   | 391,178 |   |
| Reimbursable costs and fees                                       |       | 74,227                                             |       | 27,388                                            |       | 215,626 |   | 44,823 |   |
| Depreciation and amortization expense                             |       | 27,280                                             |       | 29,251                                            |       | 82,367 |   | 90,952 |   |
| Restructuring charges                                             |       | 7,445                                              |       | 1,466                                             |       | 13,828 |   | 3,246 |   |
| Total operating costs and expenses                                |       | 380,475                                            |       | 375,515                                           |       | 1,170,049 |   | 1,122,517 |   |
|                                                              |       |                                               |       |                                              |       |   |   |   |   |
| (Loss) Income from operations                                     |       | (9,928                                             | )          | (1,845                                            | )          | (265 | ) | 31,901 |   |
|                                                              |       |                                               |       |                                              |       |   |   |   |   |
| Other income (expense):                                           |       |                                               |       |                                              |       |   |   |   |   |
| Interest and investment income                                    |       | 101                                                |       | 461                                               |       | 374 |   | 1,397 |   |
| Interest expense                                                  |       | (23,003                                            | )          | (27,196                                           | )          | (68,760 | ) | (76,980 | ) |
| Other income, net                                                 |       | 1,156                                              |       | 3,925                                             |       | 2,225 |   | 7,087 |   |
| Total other income (expense)                                      |       | (21,746                                            | )          | (22,810                                           | )          | (66,161 | ) | (68,496 | ) |
| Loss before income taxes                                          |       | (31,674                                            | )          | (24,655                                           | )          | (66,426 | ) | (36,595 | ) |
|                                                              |       |                                               |       |                                              |       |   |   |   |   |
| Income tax expense (benefit)                                      |       | 2,126                                              |       | 2,628                                             |       | 7,031 |   | (1,056 | ) |
|                                                              |       |                                               |       |                                              |       |   |   |   |   |
| Net loss                                                          |       | (33,800                                            | )          | (27,283                                           | )          | (73,457 | ) | (35,539 | ) |
|                                                              |       |                                               |       |                                              |       |   |   |   |   |
| Less: Net (loss) income attributable to  noncontrolling interests |       | (273                                               | )          | (2,679                                            | )          | 864 |   | (3,610 | ) |
|                                                              |       |                                               |       |                                              |       |   |   |   |   |
| Net loss attributable to NCO Group, Inc.                     |       | $                                                  | (33,527    | )                                                 | $          | (24,604 | ) | $ | (74,321 | ) | $ | (31,929 | ) |

 

See accompanying notes.

 

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**NCO GROUP, INC**

**ConsolidatedStatements of Cash Flows**

**(Unaudited)**

**(Amounts in thousands)**

** **
| ** **                                                                       | ** ** | **For the Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                       | ** ** | **September 30,**                            | ** ** |
| ** **                                                                       | ** ** | **2010**                                          | ** ** | **2009** | ** ** |
| ** **                                                                       | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Cash flows from operating activities:                                            |       |                                              |       |   |   |
| Net loss                                                                         |       | $                                                 | (73,457    | ) | $ | (35,539 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                    |       | 82,367                                            |       | 90,952 |   |
| Provision for doubtful accounts                                                  |       | 1,088                                             |       | 2,583 |   |
| Impairment of purchased accounts receivable                                      |       | 7,220                                             |       | 15,125 |   |
| Noncash interest                                                                 |       | 5,993                                             |       | 5,422 |   |
| Noncash net gains on derivative instruments                                      |       | (140                                              | )          | (573 | ) |
| Gain on sale of purchased accounts receivable                                    |       | (9                                                | )          | (361 | ) |
| Deferred income taxes                                                            |       | 1,752                                             |       | (4,511 | ) |
| Other                                                                            |       | 3,622                                             |       | 2,146 |   |
| Changes in operating assets and liabilities, net  of acquisitions:               |       |                                              |       |   |   |
| Accounts receivable, trade                                                       |       | 7,025                                             |       | 28,272 |   |
| Accounts payable and accrued expenses                                            |       | 8,709                                             |       | (17,768 | ) |
| Income taxes payable                                                             |       | 3,930                                             |       | (2,634 | ) |
| Other assets and liabilities                                                     |       | 1,760                                             |       | 10,823 |   |
| Net cash provided by operating activities                                        |       | 49,860                                            |       | 93,937 |   |
|                                                                             |       |                                              |       |   |   |
| Cash flows from investing activities:                                            |       |                                              |       |   |   |
| Purchases of accounts receivable                                                 |       | (10,890                                           | )          | (47,935 | ) |
| Collections applied to principal of purchased  accounts receivable               |       | 47,210                                            |       | 65,454 |   |
| Proceeds from sales and resales of purchased  accounts receivable                |       | 332                                               |       | 525 |   |
| Purchases of property and equipment                                              |       | (18,376                                           | )          | (26,279 | ) |
| Net cash paid related to acquisitions                                            |       | (1,600                                            | )          | (4,029 | ) |
| Other                                                                            |       | 1,366                                             |       | 121 |   |
| Net cash provided by (used in) investing  activities                             |       | 18,042                                            |       | (12,143 | ) |
|                                                                             |       |                                              |       |   |   |
| Cash flows from financing activities:                                            |       |                                              |       |   |   |
| Repayment of notes payable                                                       |       | (12,038                                           | )          | (19,397 | ) |
| Net repayment of borrowings under revolving credit  facility                     |       | (17,000                                           | )          | (47,000 | ) |
| Repayment of borrowings under senior term loan                                   |       | (40,541                                           | )          | (19,541 | ) |
| Payment of fees to obtain debt                                                   |       | (2,758                                            | )          | (2,477 | ) |
| Return of investment in subsidiary to  noncontrolling interests                  |       | (3,148                                            | )          | (5,784 | ) |
| Issuance of stock, net                                                           |       | —                                            |       | 39,667 |   |
| Payment of deemed dividend to JPM                                                |       | —                                            |       | (8,049 | ) |
| Net cash used in financing activities                                            |       | (75,485                                           | )          | (62,581 | ) |
|                                                                             |       |                                              |       |   |   |
| Effect of exchange rate on cash                                                  |       | (28                                               | )          | 1,345 |   |
|                                                                             |       |                                              |       |   |   |
| Net (decrease) increase in cash and cash  equivalents                            |       | (7,611                                            | )          | 20,558 |   |
|                                                                             |       |                                              |       |   |   |
| Cash and cash equivalents at beginning of the  period                            |       | 39,221                                            |       | 29,880 |   |
|                                                                             |       |                                              |       |   |   |
| Cash and cash equivalents at end of the period                                   |       | $                                                 | 31,610     |   | $ | 50,438 |   |

 

See accompanying notes.

 

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**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

**1.****             ****Natureof Operations:**

 

NCOGroup, Inc. is a holding company and conducts substantially all of itsbusiness 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 customerrelationship management (“CRM”). NCO provides services through over 100 officesthroughout North America, Asia, Europe and Australia. The Company providesservices to more than 18,500 active clients, including many of the Fortune 500,supporting a broad spectrum of industries, including financial services,telecommunications, healthcare, retail and commercial, utilities, education andgovernment, technology and transportation/logistics services. These clients areprimarily located throughout North America, Europe and Australia. Excludingreimbursable costs and fees, the Company’s largest client during the ninemonths ended September 30, 2010, was in the telecommunications sector andrepresented 7.4 percent of the Company’s consolidated revenue for the ninemonths ended September 30, 2010.

 

Historically,the Company’s Portfolio Management business has also purchased and collectedpast due consumer accounts receivable from consumer creditors. Beginning in2009, the Company significantly reduced its purchases of accounts receivableand made a decision to minimize further investments in the future. Thisdecision resulted from declines in liquidation rates, competition for purchasedaccounts receivable and the continued uncertainty of collectibility.

 

TheCompany’s business consists of three operating segments: ARM, CRM and PortfolioManagement.

 

**2.****    ****Accounting Policies:**

 

*Principles of Consolidation:*

 

Theconsolidated financial statements include the accounts of the Company and allsubsidiaries and entities controlled by the Company. All intercompany accountsand transactions have been eliminated.

 

TheCompany also considers whether any of its investments represent a variableinterest entity (“VIE”) that is required to be consolidated by the primarybeneficiary. The primary beneficiary is the entity that has both (i) thepower to direct the activities of the VIE that most significantly impact theVIE’s economic performance, and (ii) the obligation to absorb losses orthe 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 entitycan change with changes in factors other than the amount of investment in theentity.

 

TheCompany has investments in VIEs that purchase portfolios of purchased accountsreceivable. Based on the Company’s significant participation in the VIEs’profits or losses and its ability to direct the activities of the VIEs, theCompany consolidates these VIEs as it is considered the primary beneficiary.The aggregate assets of the VIEs, that can only be used to settle obligationsof the VIEs, and liabilities of the VIEs, for which beneficial interest holdersdo not have recourse to the Company’s general credit, are presented on thebalance sheet.

 

*Interim Financial Information:*

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information. Accordingly, they do not includeall of the information and footnotes required by accounting principlesgenerally accepted in the United States of America for annual financialstatements. The December 31, 2009 balance sheet was derived from theconsolidated audited financial statements of the Company, but does not includeall disclosures required by accounting principles generally accepted in theUnited States of America. In the opinion of management, all adjustments(consisting of only normal recurring adjustments, except as otherwise disclosedherein) considered necessary for a fair presentation have been included.Because of the seasonal nature of the Company’s business, operating results forthe three-month and nine-month period ended September 30, 2010, are notnecessarily indicative of the results that may be expected for the year ending December 31,2010, or for any other interim period.

 

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**2.****    ****Accounting Policies (continued):**

 

*Interim Financial Information (continued):*

 

Theaccompanying unaudited consolidated financial statements should be read inconjunction with the Company’s consolidated financial statements and footnotesthereto included in the Company’s Annual Report on Form 10-K/A for theyear ended December 31, 2009, filed with the Securities and ExchangeCommission (“SEC”).

 

*Use of Estimates:*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and the accompanying notes. Actual results could differ from thoseestimates.

 

*Reclassifications:*

 

Certain amounts in the statement of operations for the three and ninemonths ended September 30, 2009, and the statement of cash flows for thenine months ended September 30, 2009, have been reclassified forcomparative purposes.

 

**3.****    ****Restructuring Charges:**

 

TheCompany has several restructuring plans under which it has recordedrestructuring charges, primarily in conjunction with streamlining the coststructure of the Company’s operations. These charges primarily related to theelimination of certain redundant facilities and severance costs. The Companycurrently expects to pay the remaining severance balance through 2013 and theremaining lease balance through 2016.

 

Thefollowing presents the activity in the accruals recorded for restructuringcharges (amounts in thousands):

 
| ** **                         | ** ** | **Leases** | ** ** | **Severance** | ** ** | **Total** | ** ** |
|------------------------------------|------------|------------|------------|---------------|------------|-----------|------------|
| Balance at December 31, 2009  |       | $          | 8,562      |          | $          | 2,997     |       | $ | 11,559 |   |
| Accruals                           |       | 11,148     |       | 2,680         |       | 13,828    |       |
| Cash payments                      |       | (6,684     | )          | (3,934        | )          | (10,618   | )          |
| Balance at September 30, 2010 |       | $          | 13,026     |          | $          | 1,743     |       | $ | 14,769 |   |

 

**4.****    ****Business Combinations:**

 

OnAugust 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. TheCompany allocated $983,000 of the purchase price to the customer relationshipsand recorded goodwill of $1.1 million. The TDM acquisition was included in theARM segment.

 

**5.****     ****Disposal of Business:**

 

InOctober 2009, the Company sold its print and mail business, from the ARMsegment, for approximately $18.7 million in cash.  The net proceeds from the sale were used topay down the Company’s senior term loan.

 

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**6.****     ****Deferred Revenue:**

 

Deferredrevenue primarily relates to prepaid fees for ARM collection and letterservices for which revenue is recognized when the services are provided or thetime period for which the Company is obligated to provide the services hasexpired. The following summarizes the change in the balance of deferred revenue(amounts in thousands):

 
| Balance at December 31, 2009       |   | $       | 40,675 |   |
|-----------------------------------------|--------|---------|--------|--------|
| Additions                               |   | 25,093  |   |
| Revenue recognized                      |   | (32,202 | )      |
| Foreign currency translation adjustment |   | 32      |   |
| Balance at September 30, 2010      |   | $       | 33,598 |   |

 

**7.****     ****Fair Value:**

 

*Recurring Measurement:*

 

TheCompany uses various valuation techniques and assumptions when measuring fairvalue of its assets and liabilities. The Company utilizes market data orassumptions that market participants would use in pricing the asset orliability, including assumptions about risk and the risks inherent in theinputs to the valuation technique. These inputs can be readily observable (“Level1”), market corroborated (“Level 2”), or generally unobservable (“Level 3”).The significant majority of the fair value amounts included in the Company’scurrent period earnings resulted from Level 2 fair value methodologies; thatis, the Company is able to value the assets and liabilities based on observablemarket data for similar instruments (the “market approach”). The Companyapplied an income approach to amounts included in its current period earningsresulting from Level 3 fair value methodologies.

 

Thefinancial assets and liabilities are classified in their entirety based on thelowest level of input that is significant to the fair value measurement. TheCompany’s assessment of the significance of a particular input to the fairvalue measurement requires judgment and may affect the valuation of fair valueassets and liabilities and their placement within the fair value hierarchylevels. The following table sets forth, by level within the fair valuehierarchy, the Company’s financial assets and liabilities that were measured atfair value on a recurring basis (amounts in thousands):

 
| ** **                 | ** ** | **At Fair Value as of** | ** ** |
|----------------------------|------------|---------------------------------------------|------------|
| ** **                 | ** ** | **September 30, 2010**            | ** ** | **December 31, 2009** | ** ** |
| ** **                 | ** ** | **Level 1**                            | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|                       |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Assets:                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Forward exchange contracts |       | $                                           | —     |   | $ | 488 |   | $ | — |   | $ | 488 |   | $ | — |   | $ | 2 |   | $ | — |   | $ | 2 |   |
|                       |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:               |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate swaps        |       | —                                      |       | 3,779 |   | — |   | 3,779 |   | — |   | 9,104 |   | — |   | 9,104 |   |
| Forward exchange contracts |       | —                                      |       | — |   | — |   | — |   | — |   | 60 |   | — |   | 60 |   |
| Embedded derivatives       |       | —                                      |       | — |   | 1,839 |   | 1,839 |   | — |   | — |   | 3,306 |   | 3,306 |   |
|                       |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net liabilities            |       | $                                           | —     |   | $ | 3,291 |   | $ | 1,839 |   | $ | 5,130 |   | $ | — |   | $ | 9,162 |   | $ | 3,306 |   | $ | 12,468 |   |

 

Duringthe nine months ended September 30, 2010, there were no transfers in orout of the Company’s Level 1, Level 2 or Level 3 fair value measurements.

 

Tovalue the interest rate swaps and foreign currency forward exchange contracts,the Company obtains quotes from its counterparties. The Company considers suchquotes to be Level 2 measurements. To gain assurance that such quotes reflectmarket participant views, the Company independently values its interest rateswaps, and independently validates the relevant exchange rates of its forwardexchange contracts.

 

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**7.****     ****Fair Value (continued):**

 

*Recurring Measurement (continued):*

 

Forpurposes of valuation adjustments to its interest rate swap derivativepositions, the Company has evaluated liquidity premiums that may be demanded bymarket participants, as well as the credit risk of its counterparties and itsown credit. The Company has considered factors such as the likelihood ofdefault by itself and counterparties, its net exposures and remaining maturitiesin determining the appropriate fair value adjustment to record.

 

Embeddedderivatives represent the contingent payment provision embedded in the Company’snonrecourse credit facility related to purchased accounts receivable and thesellers’ participation in collections that are in excess of minimum targets forcertain portfolios of purchased accounts receivable. The Company values theseembedded derivatives based on the present value of expected cash flows. Inputsused to value these embedded derivatives are considered Level 3 measurementsbecause they are unobservable. Changes in the fair market value of the embeddedderivatives are recorded in interest expense on the statement of operations.

 

Thefollowing summarizes the change in the fair value of the embedded derivatives(amounts in thousands):

 
| ** **                     | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                     | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| ** **                     | ** ** | **2010**                                           | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| Balance at beginning of period |       | $                                                  | 2,140      |                                              | $          | 3,332 |   | $ | 3,306 |   | $ | 4,457 |   |
| Accrued interest additions     |       | 134                                                |       | 237                                               |       | 543 |   | 1,271 |   |
| Payments                       |       | (562                                               | )          | (510                                              | )          | (1,376 | ) | (1,655 | ) |
| Change in fair value           |       | 127                                                |       | 97                                                |       | (634 | ) | (917 | ) |
| Balance at end of period       |       | $                                                  | 1,839      |                                              | $          | 3,156 |   | $ | 1,839 |   | $ | 3,156 |   |

 

*Non-Recurring Measurement:*

 

TheCompany has goodwill and other intangible assets that are measured at fairvalue on a non-recurring basis and are adjusted to fair value only when theircarrying values exceed their fair values. Inputs used to value these assets areconsidered Level 3 measurements because they are unobservable.

 

Duringthe nine months ended September 30, 2010 and 2009, there were noadjustments to fair value as there were no indicators that would have requiredinterim testing. The Company performs its annual testing of indefinite-livedintangible assets during the fourth quarter of each year.

 

*Fair Value of Financial Instruments:*

 

Thefollowing methods and assumptions were used to estimate the fair value of eachclass of financial instrument for which it is practicable to estimate thatvalue:

 

Cash and Cash Equivalents, Trade AccountsReceivable, and Accounts Payable:

 

Thecarrying amount reported in the balance sheets approximates fair value becauseof the short maturity of these instruments.

 

Purchased Accounts Receivable:

 

TheCompany records purchased accounts receivable at cost, which is discounted fromthe contractual receivable balance. The carrying value of purchased accountsreceivable, which is estimated based upon future cash flows, approximates fairvalue at September 30, 2010 and December 31, 2009.

 

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**7.****     ****Fair Value (continued):**

 

*Fair Value of Financial Instruments (continued):*

 

Notes Receivable:

 

TheCompany had notes receivable of $5.0 million and $5.1 million as of September 30,2010 and December 31, 2009, respectively. The carrying amounts reported inthe balance sheets, included in current and long-term other assets, approximatemarket rates for notes with similar terms and maturities, and, accordingly, thecarrying amounts approximate fair value. The Company continually evaluates thecollectibility of these notes.

 

Long-Term Debt:

 

Thefollowing presents the carrying values and the estimated fair values of the Company’slong-term debt at September 30, 2010 (amounts in thousands):

 
| ** **                  | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
|-----------------------------|------------|-------------------------|------------|---------------------|------------|
| Senior term loan            |       | $                       | 508,719    |                | $          | 518,830 |   |
| Senior subordinated notes   |       | 200,000                 |       | 179,800             |       |
| Senior notes                |       | 165,000                 |       | 135,795             |       |
| Nonrecourse credit facility |       | 3,102                   |       | 3,102               |       |
|                             |            |                         |            |                     |            |  |  |

 

Thefair values of the Company’s senior term loan and senior revolving creditfacility were based on market interest rates for debt with similar terms andmaturities. The fair values of the Company’s senior notes and seniorsubordinated notes were based on their approximate trading prices at September 30,2010. The stated interest rates of the Company’s nonrecourse credit facilityapproximate market rates for debt with similar terms and maturities, and,accordingly, the carrying value approximates fair value.

 

**8.****    ****Purchased Accounts Receivable:**

 

As of September 30, 2010, the carrying value of PortfolioManagement’s and ARM’s purchased accounts receivable were $91.5 million and$3.2 million, respectively. The total outstanding balance due, representing theoriginal undiscounted contractual amount less collections since acquisition,was $55.8 billion and $55.2 billion at September 30, 2010 and December 31,2009, respectively.

 

Thefollowing summarizes the change in the carrying amount of the purchasedaccounts receivable (amounts in thousands):

 
| ** **                                                           | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                           | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| ** **                                                           | ** ** | **2010**                                           | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| Balance at beginning of period                                       |       | $                                                  | 111,430    |                                              | $          | 172,274 |   | $ | 138,429 |   | $ | 185,659 |   |
| Purchases                                                            |       | 1,937                                              |       | 14,981                                            |       | 10,890 |   | 47,935 |   |
| Collections                                                          |       | (22,700                                            | )          | (31,919                                           | )          | (85,831 | ) | (121,511 | ) |
| Revenue recognized                                                   |       | 11,126                                             |       | 13,118                                            |       | 38,621 |   | 56,057 |   |
| Proceeds from portfolio sales and resales applied  to carrying value |       | (323                                               | )          | —                                            |       | (323 | ) | (164 | ) |
| Impairment                                                           |       | (7,081                                             | )          | (13,784                                           | )          | (7,220 | ) | (15,125 | ) |
| Other                                                                |       | 323                                                |       | (102                                              | )          | 146 |   | 1,717 |   |
| Balance at end of period                                             |       | $                                                  | 94,712     |                                              | $          | 154,568 |   | $ | 94,712 |   | $ | 154,568 |   |

 

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**8.****    ****Purchased Accounts Receivable(continued):**

 

The following presents the change in the allowance for impairment ofpurchased accounts receivable (amounts in thousands):

 
| ** **                     | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                     | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| ** **                     | ** ** | **2010**                                           | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| Balance at beginning of period |       | $                                                  | 144,488    |                                              | $          | 125,229 |   | $ | 144,397 |   | $ | 123,804 |   |
| Additions                      |       | 8,378                                              |       | 14,330                                            |       | 11,589 |   | 19,985 |   |
| Recoveries                     |       | (1,297                                             | )          | (546                                              | )          | (4,369 | ) | (4,860 | ) |
| Other                          |       | 40                                                 |       | 49                                                |       | (8 | ) | 133 |   |
| Balance at end of period       |       | $                                                  | 151,609    |                                              | $          | 139,062 |   | $ | 151,609 |   | $ | 139,062 |   |

 

Accretableyield represents the excess of the cash flows expected to be collected duringthe life of the portfolio over the initial investment in the portfolio. Thefollowing presents the change in accretable yield (amounts in thousands):

 
| ** **                                    | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                    | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| ** **                                    | ** ** | **2010**                                           | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| Balance at beginning of period                |       | $                                                  | 89,476     |                                              | $          | 160,275 |   | $ | 112,108 |   | $ | 167,411 |   |
| Additions                                     |       | 1,077                                              |       | 12,242                                            |       | 7,602 |   | 50,605 |   |
| Revenue recognition                           |       | (11,126                                            | )          | (13,118                                           | )          | (38,621 | ) | (56,057 | ) |
| Reclassifications to nonaccretable difference |       | (8,906                                             | )          | (29,176                                           | )          | (10,797 | ) | (31,396 | ) |
| Foreign currency translation adjustment       |       | (340                                               | )          | (41                                               | )          | (111 | ) | (381 | ) |
| Balance at end of period                      |       | $                                                  | 70,181     |                                              | $          | 130,182 |   | $ | 70,181 |   | $ | 130,182 |   |

 

Duringthe three months ended September 30, 2010 and 2009, the Company purchasedaccounts receivable with a cost of $1.9 million and $15.0 million,respectively, that had contractually required payments receivable at the dateof acquisition of $74.0 million and $573.0 million, respectively, and expectedcash flows at the date of acquisition of $3.0 million and $27.2 million,respectively. During the nine months ended September 30, 2010 and 2009,the Company purchased accounts receivable with a cost of $10.9 million and$47.9 million, respectively, that had contractually required paymentsreceivable at the date of acquisition of $649.8 million and $2.4 billion,respectively, and expected cash flows at the date of acquisition of $18.5million and $98.5 million, respectively.

 

**9.****    ****Funds Held on Behalf of Clients:**

 

Inthe course of the Company’s regular business activities as a provider ofaccounts receivable management services, the Company receives clients’ fundsarising from the collection of accounts placed with the Company. These fundsare placed in segregated cash accounts and are generally remitted to clientswithin 30 days. Funds held on behalf of clients of $79.1 million and $75.1million at September 30, 2010 and December 31, 2009, respectively,have been shown net of their offsetting liability for financial statementpresentation.

 

**10.**** ****Goodwill and Other IntangibleAssets:**

 

Goodwillis allocated and tested at the reporting unit level. Goodwill is tested forimpairment each year during the fourth quarter, and between annual tests if anevent occurs or circumstances change that would more likely than not reduce thefair value of a reporting unit below its carrying amount. No event occurred orcircumstances changed since the last annual test that would more likely thannot reduce the fair value of a reporting unit below its carrying value.However, if the Company continues to experience adverse effects of thechallenging economic and business environment, including changes in financialprojections, the Company may have to recognize an impairment of all or someportion of its goodwill.  The Company’sreporting units are ARM, CRM and Portfolio Management.

 

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**10.**** ****Goodwill and Other IntangibleAssets (continued):**

 

The following summarizes the change in the Company’sreporting units’ goodwill (amounts in thousands): 

 
| ** **                             | ** ** | **ARM** | ** ** | **CRM** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|---------|------------|---------|------------|-----------|------------|
| Balance at January 1, 2010:       |       |    |       |    |       |      |       |
| Goodwill                               |       | $       | 552,047    |    | $          | 128,365   |       | $ | 680,412 |   |
| Accumulated impairment                 |       | (73,205 | )          | (71,350 | )          | (144,555  | )          |
|                                   |       | 478,842 |       | 57,015  |       | 535,857   |       |
| Acquisitions                           |       | 1,170   |       | —  |       | 1,170     |       |
| Foreign currency translation and other |       | 400     |       | —  |       | 400       |       |
| Balance at September 30, 2010:    |       |    |       |    |       |      |       |
| Goodwill                               |       | 553,617 |       | 128,365 |       | 681,982   |       |
| Accumulated impairment                 |       | (73,205 | )          | (71,350 | )          | (144,555  | )          |
|                                   |       | $       | 480,412    |    | $          | 57,015    |       | $ | 537,427 |   |

 

Tradename includes the NCO trade name, which is an indefinite-lived intangible assetand therefore is not subject to amortization. Similar to goodwill, the NCOtrade name is reviewed at least annually for impairment. At September 30,2010, the balance of the NCO trade name was $82.6 million.

 

Tradename also includes certain trade names which are not considered to haveindefinite lives and are therefore subject to amortization. At September 30,2010, the gross carrying amount of these trade names was $2.0 million, and theaccumulated amortization was $1.0 million.

 

Otherintangible assets subject to amortization consist of customer relationships andnon-compete agreements. The following represents the other intangible assetssubject to amortization (amounts in thousands):

** **
| ** **             | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **Gross Carrying  Amount**  | ** ** | **Accumulated  Amortization**   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|                   |       |                             |       |                            |       |   |   |   |   |
| Customer relationships |       | $                                | 438,068    |                            | $          | 228,248 |   | $ | 437,412 |   | $ | 180,379 |   |
| Non-compete agreements |       | 3,372                            |       | 2,202                           |       | 3,955 |   | 2,306 |   |
|                   |       |                             |       |                            |       |   |   |   |   |
| Total                  |       | $                                | 441,440    |                            | $          | 230,450 |   | $ | 441,367 |   | $ | 182,685 |   |

 

TheCompany recorded amortization expense for intangible assets of $16.2 millionand $16.8 million during the three months ended September 30, 2010 and2009, respectively, and $48.4 million and $51.4 million during the nine monthsended September 30, 2010 and 2009, respectively.

 

Thefollowing represents the Company’s expected amortization expense from theseother intangible assets over the next five years (amounts in thousands):

 
| **For the Years Ended  December 31,** | ** ** | **Estimated  Amortization Expense** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------|------------|
|                                                      |       |                                     |       |
| 2010                                                      |       | $                                        | 64,497     |   |
| 2011                                                      |       | 64,087                                   |       |
| 2012                                                      |       | 59,817                                   |       |
| 2013                                                      |       | 53,584                                   |       |
| 2014                                                      |       | 15,761                                   |       |
|                                                           |            |                                          |            |  |

 

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**11.  Long-Term Debt:**

 

Long-term debt consisted of the following (amounts in thousands):

 
| ** **                       | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
|                             |       |                             |       |                            |       |
| Senior term loan                 |       | $                                | 508,719    |                            | $          | 549,260 |   |
| Senior revolving credit facility |       | —                           |       | 17,000                          |       |
| Senior subordinated notes        |       | 200,000                          |       | 200,000                         |       |
| Senior notes                     |       | 165,000                          |       | 165,000                         |       |
| Nonrecourse credit facility      |       | 3,102                            |       | 14,322                          |       |
| Capital leases and other         |       | 5,541                            |       | 5,948                           |       |
| Less current portion             |       | (10,552                          | )          | (41,699                         | )          |
|                             |       | $                                | 871,810    |                            | $          | 909,831 |   |

 

*Senior Credit Facility:*

 

TheCompany has a senior credit facility (“Credit Facility”) with a syndicate offinancial institutions that consists of a term loan and a $100.0 millionrevolving credit facility. The Company is required to make quarterly principalrepayments 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 alsorequired to make quarterly prepayments of 75 percent of the excess cash flowfrom the Company’s purchased accounts receivable, and annual prepayments of 75percent or 50 percent of its excess annual cash flow, based on its leverageratio, less the amounts paid during the year from the purchased accountsreceivable excess cash flow prepayments. The revolving credit facility requiresno minimum principal payments until its maturity in November 2011. Theavailability of the revolving credit facility is reduced by any unused lettersof credit ($5.7 million at September 30, 2010). As of September 30,2010, the Company had $94.3 million of remaining availability under therevolving credit facility.

 

OnMarch 31, 2010, the Company amended the Credit Facility to, among otherthings, adjust the financial covenants, including increasing maximum leverageratios and decreasing minimum interest coverage ratios, and adjust the requiredprincipal prepayments. The amended Credit Facility also limits purchases ofaccounts receivable in 2010 to $20 million and purchases in 2011 and each yearthereafter to $10 million per year.

 

Allborrowings bear interest at an annual variable rate, based on either the primerate (3.25 percent at September 30, 2010), the federal funds rate (0.15percent at September 30, 2010) or LIBOR (0.26 percent 30-day LIBOR at September 30,2010) plus an applicable margin, which is based on the type of rate and theCompany’s funded debt to earnings before interest, taxes, depreciation andamortization (“EBITDA”) ratio, as defined in the loan agreement, subject tocertain interest rate minimum requirements. The Company is charged a quarterlycommitment fee on the unused portion of the revolving credit facility at anannual rate of 0.50 percent. The effective interest rate on the Credit Facilitywas approximately 9.23 percent and 9.32 percent for the three months ended September 30,2010 and 2009, respectively, and 9.21 percent and 8.42 percent for the ninemonths ended September 30, 2010 and 2009, respectively. The CreditFacility also requires that the Company obtain certain levels of interest rateprotection.

 

Borrowingsunder the Credit Facility are collateralized by substantially all of theCompany’s assets. The Credit Facility contains certain financial and othercovenants such as maintaining a maximum leverage ratio and a minimum interestcoverage ratio, and includes restrictions on, among other things, acquisitions,the incurrence of additional debt, investments, investments in purchasedaccounts receivable, disposition of assets, liens and dividends and other distributions.

 

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**11.  Long-Term Debt (continued):**

 

*Senior Credit Facility (continued):*

 

AtSeptember 30, 2010, the Company’s leverage ratio was 5.59, compared to thecovenant maximum of 5.75, and the interest coverage ratio was 1.85, compared tothe covenant minimum of 1.80. The Company was in compliance with all requiredfinancial covenants and was not aware of any events of default as of September 30,2010.

 

TheCompany’s ability to maintain compliance with the financial covenants will behighly dependent on the Company’s results of operations and, to the extentnecessary, the Company’s ability to implement remedial measures such as furtherreductions in operating costs. The economic and business climate in 2010continues to be very difficult and there is uncertainty as to whether theeconomic and business climate in 2011 will improve. In addition, other factors,such as the loss of a significant client or reduced client volumes, may impactthe Company’s ability to meet its debt covenants in the future. Therefore, noassurance can be given that the Company will be able to maintain compliancewith its financial covenants in future periods.

 

TheCompany may seek to amend its existing Credit Facility to obtain covenantcompliance relief or waivers, or seek additional funding or replacementfinancing. There can be no assurance that the Company will be able to obtaincovenant relief, other funding or replacement financing. Any such covenantrelief or new financing may result in additional fees and higher interestrates. In addition, the Company will seek to amend or replace its CreditFacility prior to the expiration of the current facility in May 2013.

 

Ifan event of default, such as failure to comply with covenants, were to occurunder the Credit Facility and the Company was not able to obtain an amendmentor waiver from the lenders, the Company would not be able to borrow under therevolving credit facility and the lenders would be entitled to declare allamounts outstanding under the Credit Facility immediately due and payable andforeclose on the pledged assets. In addition, the acceleration of the amountsdue under the Credit Facility could be an event of default under the Company’sSenior Notes and Senior Subordinated Notes and entitle the holders toaccelerate the payment of these obligations. Under these circumstances, theacceleration of the payment of the Company’s debt would have a material adverseeffect on its business.

 

*Senior Notes and Senior Subordinated Notes:*

 

TheCompany has $165.0 million of floating rate senior notes due 2013 (“SeniorNotes”) and $200.0 million of 11.875 percent senior subordinated notes due 2014(“Senior Subordinated Notes”) (collectively, “the Notes”). The Notes areguaranteed, jointly and severally, on a senior basis with respect to the SeniorNotes and on a senior subordinated basis with respect to the SeniorSubordinated Notes, in each case by all of the Company’s existing and futuredomestic restricted subsidiaries (other than certain subsidiaries and jointventures engaged in financing the purchase of delinquent accounts receivableportfolios and certain immaterial subsidiaries).

 

TheSenior Notes are senior unsecured obligations and are senior in right ofpayment to all existing and future senior subordinated indebtedness, includingthe Senior Subordinated Notes, and all future subordinated indebtedness. TheSenior Notes bear interest at an annual rate equal to LIBOR plus 4.875 percent,reset quarterly. The effective interest rate of the Senior Notes wasapproximately 5.28 percent and 5.54 percent for the three months ended September 30,2010 and 2009, respectively, and 5.21 percent and 6.02 percent for the ninemonths ended September 30, 2010 and 2009, respectively. The Company mayredeem the Senior Notes, in whole or in part, at any time at varying redemptionprices depending on the redemption date, plus accrued and unpaid interest.

 

TheSenior Subordinated Notes are unsecured senior subordinated obligations and aresubordinated in right of payment to all existing and future seniorindebtedness, including the Senior Notes and borrowings under the CreditFacility. The Company may redeem the Senior Subordinated Notes, in whole or inpart, at any time on or after November 15, 2010 at varying redemptionprices depending on the redemption date, plus accrued and unpaid interest. TheCompany also may redeem some or all of the Senior Subordinated Notes at anytime prior to November 15, 2010, at a redemption price equal to 100percent of the principal amount of the respective Notes to be redeemed, plusaccrued and unpaid interest and an additional premium.

 

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**11.  Long-Term Debt (continued):**

 

*Senior Notes and Senior Subordinated Notes(continued):*

 

The indentures governing the Notes contain a numberof covenants that limit the Company’s and its restricted subsidiaries’ ability,among other things, to: incur additional indebtedness and issue certainpreferred stock, pay certain dividends, acquire shares of capital stock, makepayments on subordinated debt or make investments, place limitations ondistributions from restricted subsidiaries, issue or sell capital stock ofrestricted subsidiaries, guarantee indebtedness, sell or exchange assets, enterinto transactions with affiliates, create certain liens, engage in unrelatedbusinesses, and consolidate, merge or transfer all or substantially all of theCompany’s assets and the assets of its subsidiaries on a consolidated basis. Asof September 30, 2010, the Company was in compliance with all requiredcovenants. In addition, upon a change of control, the Company is required tooffer to repurchase all of the Notes then outstanding, at a purchase priceequal to 101 percent of their principal amount, plus any accrued interest tothe date of repurchase.

 

*Nonrecourse Credit Facility:*

 

TheCompany has a nonrecourse credit facility that funded certain purchases ofaccounts receivable prior to 2009. The Company does not have the ability tomake any additional borrowings under the nonrecourse credit facility. Thefinancing was structured, depending on the size and nature of the portfolio tobe purchased, either as a borrowing arrangement or under various equity sharingarrangements. The lender financed non-equity borrowings with floating interestat an annual rate equal to LIBOR (0.26 percent 30-day LIBOR at September 30,2010) plus 2.50 percent, or as negotiated. These borrowings are due two yearsfrom the date of each respective loan, unless otherwise negotiated. Asadditional return on the debt financed portfolios, the lender receives residualcash flows, as negotiated, which is defined as all cash collections afterservicing fees, floating rate interest, repayment of the borrowing, and theinitial investment by the Company, including interest. Residual cash flowpayments are accrued for as embedded derivatives.

 

Borrowingsunder this credit facility are nonrecourse to the Company, except for theassets within the entities established in connection with the financingagreement. The nonrecourse debt agreements contain a collections performancerequirement, among other covenants, that, if not met, provides forcross-collateralization with any other portfolios financed by the nonrecourselender, in addition to other remedies.

 

Totaldebt outstanding under this facility was $3.1 million and $14.3 million as of September 30,2010 and December 31, 2009, respectively, which included $1.1 million and$2.1 million, respectively, of accrued residual interest. The effectiveinterest rate on these loans, including the residual interest component, wasapproximately 11.2 percent and 8.7 percent for the three months ended September 30,2010 and 2009, respectively, and 10.4 percent and 11.0 percent for the ninemonths ended September 30, 2010 and 2009, respectively. The nonrecoursecredit facility contains certain covenants such as meeting minimum cumulativecollection targets. As of September 30, 2010, the Company was incompliance with all required covenants.

 

**12.  Income Taxes:**

 

The Company recorded income tax expense of $2.1 million and $2.6 millionfor the three months ended September 30, 2010 and 2009, respectively, andincome tax expense of $7.0 million and an income tax benefit of $1.1 millionfor the nine months ended September 30, 2010 and 2009, respectively. TheCompany’s income tax expense differs from the amount of income tax determinedby applying the statutory U.S. federal income tax rate to pre-tax income (loss)primarily as a result of the recognition of a valuation allowance on certaindomestic net deferred tax assets and income tax expense to be paid in state andforeign jurisdictions.

 

As a result of cumulative losses incurred by the Company since 2007, avaluation allowance was established due to the uncertainty that federal andcertain state deferred tax assets would be realized in future years. TheCompany increased its valuation allowance by $30.4 million to $98.8 million asof September 30, 2010 from $68.4 million as of December 31, 2009,primarily as a result of federal and certain state deferred tax assetsexceeding deferred tax liabilities (after consideration for any net deferredtax liabilities associated with non-amortizable assets such as goodwill andcertain trade names).

 

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** **

**12.  Income Taxes (continued):**

 

The Company has also considered future taxable income and ongoingprudent and feasible tax-planning strategies in assessing the need for thevaluation allowance.  On a quarterly basis, management assesses whether itremains more likely than not that the deferred tax assets will not berealized.  In the event the Company determines at a future time that itcould realize its deferred tax assets in excess of the net amount recorded, theCompany will reduce its deferred tax asset valuation allowance and decreaseincome tax expense in the period when the Company makes such determination.

 

**13.  Stockholders’ Equity:**

 

*Preferred Stock and Common Stock:*

 

TheCompany 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 A14 percent PIK Preferred Stock (“Series A”), Series B-1 19 percentPIK Preferred Stock (“Series B-1”), and Series B-2 19 percentPreferred Stock (“Series B-2”), are issued and outstanding.

 

Series Ais entitled to a quarterly “paid-in-kind” dividend at an annual rate of 14percent and Series B-1 is entitled to a quarterly “paid-in-kind” dividendat an annual rate of 19 percent. The following presents the Series A and Series B-1shares issued for the “paid-in-kind” dividends:

 
| ** **      | ** ** | **For the Three Months** | ** ** | **For the Nine Months** | ** ** |
|-----------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **      | ** ** | **Ended September 30,**       | ** ** | **Ended September 30,**      | ** ** |
| ** **      | ** ** | **2010**                                | ** ** | **2009**                               | ** ** | **2010** | ** ** | **2009** | ** ** |
| Series A   |       | 110,088                                 |       | 95,935                                 |       | 316,975 |   | 275,811 |   |
| Series B-1 |       | 11,442                                  |       | 9,503                                  |       | 32,565 |   | 18,453 |   |

 

InFebruary 2009, the Company issued 7,400 shares of Series A PreferredStock to JPMorgan Chase & Co. (“JPM”) as additional consideration forthe acquisition of Systems & Services Technologies, Inc. (“SST”),which occurred in January 2008.

 

On March 25, 2009, in connection withthe amendment of the Company’s Credit Facility, the Companysold 148,463.6 shares of its Series B-1 Preferred Stock and 19,957.4shares of its Series B-2 Preferred Stock to One Equity Partners, MichaelJ. Barrist and certain members of executive management, and other co-investorsfor an aggregate purchase price of $40.0 million. The proceeds were used to paydown $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 creditfacility.

 

*Noncontrolling Interests:*

 

Thefollowing table summarizes the activity in stockholders’ equity attributable toNCO Group, Inc. and noncontrolling interests (amounts in thousands):

 
| ** **                                     | ** ** | **NCO Group, Inc.  Stockholders’  Equity** | ** ** | **Noncontrolling  Interests** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------|------------|---------------------------------------|------------|
|                                           |       |                                                      |       |                          |       |                                  |       |
| Balance at December 31, 2009              |       | $                                                         | 229,100    |                          | $          | 11,450                                |       | $ | 240,550 |   |
| Stock-based compensation                       |       | 561                                                       |       | —                        |       | 561                                   |       |
| Distributions to noncontrolling interests, net |       | —                                                    |       | (3,148                        | )          | (3,148                                | )          |
| Net (loss) income                              |       | (74,321                                                   | )          | 864                           |       | (73,457                               | )          |
| Accumulated other comprehensive loss           |       | 4,314                                                     |       | —                        |       | 4,314                                 |       |
| Balance at September 30, 2010             |       | $                                                         | 159,654    |                          | $          | 9,166                                 |       | $ | 168,820 |   |

 

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**13.  Stockholders’ Equity(continued):**

 

*Comprehensive Income (Loss):*

 

Comprehensive income (loss) was as follows (amounts in thousands):

 
| ** **                                                             | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                             | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| ** **                                                             | ** ** | **2010**                                           | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net loss attributable to NCO Group, Inc.                          |       | $                                                  | (33,527    | )                                                 | $          | (24,604 | ) | $ | (74,321 | ) | $ | (31,929 | ) |
| Foreign currency translation adjustments                               |       | 3,587                                              |       | 282                                               |       | 1,788 |   | 1,178 |   |
| Change in fair value of cash flow hedges, net of  tax                  |       | —                                             |       | —                                            |       | — |   | (719 | ) |
| Net losses on cash flow hedges reclassified into earnings,  net of tax |       | 780                                                |       | 1,501                                             |       | 2,526 |   | 4,302 |   |
| Comprehensive loss - NCO Group, Inc.                              |       | (29,160                                            | )          | (22,821                                           | )          | (70,007 | ) | (27,168 | ) |
| Net (loss) income attributable to noncontrolling interests             |       | (273                                               | )          | (2,679                                            | )          | 864 |   | (3,610 | ) |
| Total comprehensive loss                                               |       | $                                                  | (29,433    | )                                                 | $          | (25,500 | ) | $ | (69,143 | ) | $ | (30,778 | ) |

 

**14.  Derivative FinancialInstruments:**

 

TheCompany enters into forward exchange contracts to minimize the impact ofcurrency fluctuations on transactions and cash flows. These contracts may bedesignated as cash flow hedges. The Company had forward exchange contracts forthe purchase of 85.9 million Philippine pesos and 9.8 million of Canadiandollars outstanding at September 30, 2010, which mature throughout theremainder of 2010.

 

TheCompany has interest rate swap agreements to minimize the impact of LIBORfluctuations on interest payments on the Company’s floating rate debt. Theinterest rate swaps may be designated as cash flow hedges. The interest rateswaps cover an aggregate notional amount of $301.0 million. The Company isrequired to pay the counterparties quarterly interest payments at a weightedaverage fixed rate ranging from 3.41 to 3.44 percent, and receives from thecounterparties variable quarterly interest payments based on LIBOR. The netinterest paid or received is included in interest expense. On March 25,2009, the Company amended its senior credit facility, which amendment includeda minimum LIBOR of 2.50 percent. This amendment caused the existing interestrate swaps to become ineffective and, as of March 25, 2009, these interestrate swaps were not accounted for as cash flow hedges. Accordingly, the fairmarket value of the interest rate swaps at March 25, 2009 is beingamortized to interest expense, using the effective interest rate method, over theremaining lives of the interest rate swap agreements, and future changes in thefair market value of these interest rate swaps after March 25, 2009 arerecorded in interest expense.

 

TheCompany has embedded derivatives relating to the contingent payment provisionin its nonrecourse credit facility relating to purchased accounts receivable,and relating to the sellers’ participation in collections that are in excess ofminimum targets for certain portfolios of purchased accounts receivable.

 

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**14.  Derivative FinancialInstruments (continued):**

 

Thefollowing summarizes the fair value of the Company’s derivatives (amounts inthousands):

 
| ** **                                            | ** ** | **Balance Sheet**              | ** ** | **Fair Value**              | ** ** |
|-------------------------------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **Location**                        | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
| Derivatives not designated as hedges:                 |       |                                |       |                             |       |   |   |
| *Asset derivatives*                                   |       |                                |       |                             |       |   |   |
| Forward exchange contracts                            |       | Other current assets                |       | $                                | 488        |   | $ | 2 |   |
| Total asset derivatives not designated as hedges      |       |                                |       | $                                | 488        |   | $ | 2 |   |
|                                                  |       |                                |       |                             |       |   |   |
| *Liability derivatives*                               |       |                                |       |                             |       |   |   |
| Interest rate swaps                                   |       | Accrued expenses                    |       | $                                | 3,779      |   | $ | 9,104 |   |
| Forward exchange contracts                            |       | Accrued expenses                    |       | —                           |       | 60 |   |
| Embedded derivatives                                  |       | Long-term debt and accrued expenses |       | 1,839                            |       | 3,306 |   |
| Total liability derivatives not designated as  hedges |       |                                |       | $                                | 5,618      |   | $ | 12,470 |   |

 

Thefollowing table summarizes the effect of derivatives designated as hedges onthe Company for the nine months ended September 30, 2009 (there were noderivatives designated as hedges for the three months ended September 30,2010 and 2009, and for the nine months ended September 30, 2010) (amountsin thousands):

 
| ** **                                         | ** ** | ** **             | ** ** | **For the Nine Months Ended   September 30, 2009** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                         | ** ** | ** **             | ** ** | **Amount of**                                                                    | ** ** | **Amount of** | ** ** |
| ** **                                         | ** ** | **Location of**   | ** ** | **Gain (Loss)**                                                                  | ** ** | **Gain (Loss)** | ** ** |
| ** **                                         | ** ** | **Gain (Loss)**   | ** ** | **Recognized**                                                                        | ** ** | **Reclassified** | ** ** |
| ** **                                         | ** ** | **Reclassified**       | ** ** | **in OCI (net**                                                             | ** ** | **into** | ** ** |
| ** **                                         | ** ** | **into Earnings** | ** ** | **of taxes)**                                                                    | ** ** | **Earnings** | ** ** |
| Derivatives designated as hedges:                  |       |                   |       |                                                                                  |       |   |   |
| Interest rate swaps (prior to March 25, 2009) |       | Interest expense       |       | $                                                                                     | (719       | ) | $ | (2,056 | ) |
|                                               |       |                   |       |                                                                                  |       |   |   |
| Total derivatives designated as hedges             |       |                   |       | $                                                                                     | (719       | ) | $ | (2,056 | ) |

 

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**14.  Derivative FinancialInstruments (continued):**

 

Thefollowing tables summarize the effect of derivatives not designated as hedgeson the Company (amounts in thousands):

 
| ** **                                 | ** ** | ** **                                 | ** ** | **For the Three Months Ended September 30,** | ** **   |
|--------------------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------------------|--------------|
| ** **                                 | ** ** | ** **                                 | ** ** | **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)                    |       | $                                                                          |  748    |   | $ |  3,912 |   |
| Interest rate swaps (after March 25, 2009) |       | Interest  expense                          |       | (803                                                                       | )            | (5,142 | ) |
| Amortization of interest rate swaps        |       | Interest  expense                          |       | (1,225                                                                     | )            | — |   |
| Embedded derivatives                       |       | Interest  expense                          |       | (127                                                                       | )            | (97 | ) |
| Interest rate caps                         |       | Other  income (expense)                    |       | —                                                                     |         | (7 | ) |
| Total derivatives not designated as hedges |       |                                       |       | $                                                                          |  (1,407 | ) | $ |  (1,334 | ) |

** **
| ** **                                 | ** ** | ** **                                 | ** ** | **For the Nine Months Ended September 30,** | ** **   |
|--------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------------------------------------------|--------------|
| ** **                                 | ** ** | ** **                                 | ** ** | **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)                    |       | $                                                                         | 1,100        |   | $ | 6,695 |   |
| Interest rate swaps (after March 25, 2009) |       | Interest  expense                          |       | (1,961                                                                    | )            | (9,058 | ) |
| Amortization of interest rate swaps        |       | Interest  expense                          |       | (3,966                                                                    | )            | — |   |
| Embedded derivatives                       |       | Interest  expense                          |       | 634                                                                       |         | 917 |   |
| Interest rate caps                         |       | Other  income (expense)                    |       | —                                                                    |         | (37 | ) |
| Total derivatives not designated as hedges |       |                                       |       | $                                                                         |  (4,193 | ) | $ |  (1,483 | ) |

 

**15.  Supplemental Cash FlowInformation:**

 

The following are supplemental disclosures of cash flow information(amounts in thousands):

 
| ** **                                       | ** ** | **For the Nine Months Ended** | ** **   |
|--------------------------------------------------|------------|---------------------------------------------------|--------------|
| ** **                                       | ** ** | **September 30,**                            | ** **   |
| ** **                                       | ** ** | **2010**                                          | ** **   | **2009** | ** ** |
| Noncash investing and financing activities:      |       |                                              |         |   |   |
| Fair value of assets acquired                    |       | $                                                 |  — |   | $ |  15,585 |   |
| Liabilities assumed from acquisitions            |       | —                                            |         | 13,062 |   |
| Issuance of stock to JPM for the SST acquisition |       | —                                            |         |  1,758 |   |
| Adjustments to acquired assets and liabilities   |       | —                                            |         | 1,378 |   |
|                                                  |            |                                                   |              |  |  |  |  |

 

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** **

**16.  Commitments andContingencies:**

 

*Purchase Commitments:*

 

The Company enters into noncancelable agreements withvarious telecommunications companies, a labor subcontractor in India and othervendors that require minimum purchase commitments. These agreements expirebetween 2010 and 2012. The following represents the future minimum payments, byyear and in the aggregate, under noncancelable purchase commitments (amounts inthousands):

 
| 2010   |   | $      |  28,004 |   |
|--------|--------|--------|--------------|--------|
| 2011   |   | 18,897 |         |
| 2012   |   | 7,392  |         |
|   |   |   |         |
|   |   | $      |  54,293 |   |

 

The Company incurred $11.1 million and $18.1 million ofexpense from vendors associated with these purchase commitments for the threemonths ended September 30, 2010 and 2009, respectively and $38.4 million and $53.0 million for the ninemonths ended September 30, 2010 and 2009, respectively.

 

*Forward-Flow Agreements:*

 

The Company has two fixed price agreements, orforward-flows, that obligate the Company to purchase, on a monthly basis,portfolios of charged-off accounts receivable meeting certain criteria. Theforward flow agreements expire in December 2010 and April 2011. The remainingestimated future forward-flow commitments in the fourth quarter of 2010 and forthe full year 2011 are approximately $1.9 million and $600,000, respectively.

 

*Litigation and Investigations:*

 

The Company is party, from time to time, to variouslegal proceedings, regulatory investigations, client audits and taxexaminations incidental to its business. The Company continually monitors theselegal proceedings, regulatory investigations, client audits and taxexaminations to determine the impact and any required accruals. See “Item 3.Legal Proceedings” in the Company’s Annual Report on Form 10-K/A for the yearended December 31, 2009.

 

Attorneys General:

 

From time to time, the Company receives subpoenas orother similar information requests from various states’ Attorneys General,requesting information relating to the Company’s debt collection practices insuch states. The Company responds to such inquires or investigations andprovides certain information to the respective Attorneys General offices. TheCompany believes it is in compliance with the laws of the states in which itdoes business relating to debt collection practices in all material respects.However, no assurance can be given that any such inquiries or investigationswill not result in a formal investigation or an enforcement action. Any suchenforcement actions could result in fines as well as the suspension ortermination of the Company’s 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 timein the ordinary course of its business. Management believes that none of theseother legal proceedings, regulatory investigations, client audits or taxexaminations will have a materially adverse effect on the financial conditionor results of operations of the Company.

 

**17.  Segment Reporting:**

 

Asof September 30, 2010, the Company’s business consisted of three operatingsegments: ARM, CRM and Portfolio Management. The accounting policies of the segmentsare the same as those described in note 2, “Accounting Policies.”

 

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**17.  Segment Reporting(continued):**

 

ARMprovides accounts receivable management services to consumer and commercialaccounts for all market sectors including financial services, healthcare,retail and commercial, telecommunications, utilities, education, andgovernment. ARM serves clients of all sizes in local, regional and nationalmarkets in North America, Europe and Australia through offices in NorthAmerica, Asia, Europe and Australia. In addition to traditional accountsreceivable collections, these services include developing the clientrelationship beyond bad debt recovery and delinquency management, anddelivering cost-effective accounts receivable solutions to all market sectors.ARM also provides accounts receivable management services to PortfolioManagement. ARM recorded revenue of $9.3 million and $13.7 million forintercompany services to Portfolio Management for the three months endedSeptember 30, 2010 and 2009, respectively, and $33.8 million and $47.7 millionfor the nine months ended September 30, 2010 and 2009, respectively.

 

CRMprovides customer relationship management services to clients in North Americathrough offices in North America and Asia. CRM also provided certain servicesto ARM, and recorded revenue of $1.7 million and $3.0 million for the three andnine months ended September 30, 2009, respectively, for the intercompanyservices to ARM.

 

PortfolioManagement purchases and manages defaulted consumer accounts receivable fromconsumer creditors such as banks, finance companies, retail merchants,utilities, healthcare companies and other consumer oriented companies.Portfolio Management’s revenue was impacted by an impairment of purchasedaccounts receivable of $7.1 million and $13.8 million for the three monthsended September 30, 2010 and 2009, respectively, and $7.2 million and $15.1million for nine months ended September 30, 2010 and 2009, respectively.

 

Thefollowing table presents total assets, net of any intercompany balances, foreach segment (amounts in thousands):

 
| ** **           | ** ** | **September 30, 2010** | ** **      | **December 31, 2009** | ** ** |
|----------------------|------------|----------------------------------|-----------------|---------------------------------|------------|
| ARM                  |       | $                                |  1,026,873 |                            | $          |  1,079,180 |   |
| CRM                  |       | 213,219                          |            | 239,373                         |       |
| Portfolio Management |       | 97,482                           |            | 141,482                         |       |
| Total assets         |       | $                                |  1,337,574 |                            | $          |  1,460,035 |   |

 

Thefollowing 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 andamortization and capital expenditures for each segment (amounts in thousands):

 
| ** **                                                          | ** ** | **For the Three Months Ended September 30, 2010** | ** **    |
|---------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|---------------|
| ** **                                                          | ** ** | **ARM**                                                                              | ** **    | **CRM** | ** ** | **Portfolio   Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenues                                                            |       | $                                                                                    |  310,935 |   | $ |  65,511 |   | $ |   3,357 |   | $ |  (9,256 | ) | $ |  370,547 |   |
| Payroll and related expenses                                        |       | 116,201                                                                              |          | 49,914 |   | 771 |   | — |   | 166,886 |   |
| Selling, general and admin. expenses                                |       | 89,831                                                                               |          | 13,961 |   | 9,587 |   | (8,742 | ) | 104,637 |   |
| Reimbursable costs and fees                                         |       | 74,741                                                                               |          | — |   | — |   | (514 | ) | 74,227 |   |
| Restructuring charges                                               |       | 5,707                                                                                |          | 1,738 |   | — |   | — |   | 7,445 |   |
|                                                                |       |                                                                                 |          |   |   |   |   |   |   |   |   |
| Income (loss) from operations before depreciation  and amortization |       | $                                                                                    | 24,455        |   | $ | (102 | ) | $ |  (7,001 | ) | $ |   — |   | $ | 17,352 |   |

 

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**17.  Segment Reporting(continued):**

** **
| ** **                                                          | ** ** | **For the Three Months Ended September 30, 2009** | ** **    |
|---------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|---------------|
| ** **                                                          | ** ** | **ARM**                                                                              | ** **    | **CRM** | ** ** | **Portfolio   Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|                                                                |       |                                                                                 |          |   |   |   |   |   |   |   |   |
| Revenues                                                            |       | $                                                                                    |  307,468 |   | $ |  79,275 |   | $ |  2,310 |   | $ |  (15,383 | ) | $ |  373,670 |   |
|                                                                |       |                                                                                 |          |   |   | *** *** |   | *** *** |   | *** *** | *** *** |
| Payroll and related expenses                                        |       | 133,066                                                                              |          | 56,513 |   | 776 |   | (1,724 | ) | 188,631 |   |
| Selling, general and admin. expenses                                |       | 111,858                                                                              |          | 15,624 |   | 14,343 |   | (13,046 | ) | 128,779 |   |
| Reimbursable costs and fees                                         |       | 28,001                                                                               |          | — |   | — |   | (613 | ) | 27,388 |   |
| Restructuring charges                                               |       | 1,134                                                                                |          | 197 |   | 135 |   | — |   | 1,466 |   |
|                                                                |       |                                                                                 |          |   |   |   |   |   |   |   |   |
| Income (loss) from operations before depreciation  and amortization |       | $                                                                                    | 33,409        |   | $ | 6,941 |   | $ |  (12,944 | ) | $ |   — |   | $ | 27,406 |   |

 
| ** **                                                          | ** ** | **For the Nine Months Ended September 30, 2010** | ** **    |
|---------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|---------------|
| ** **                                                          | ** ** | **ARM**                                                                             | ** **    | **CRM** | ** ** | **Portfolio   Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|                                                                |       |                                                                                |          |   |   |   |   |   |   |   |   |
| Revenues                                                            |       | $                                                                                   |  965,625 |   | $ |  208,568 |   | $ |  29,423 |   | $ |  (33,832 | ) | $ | 1,169,784 |   |
|                                                                |       |                                                                                |          |   |   |   |   |   |   |   |   |
| Payroll and related expenses                                        |       | 368,270                                                                             |          | 158,054 |   | 2,481 |   | — |   | 528,805 |   |
| Selling, general and admin. expenses                                |       | 284,791                                                                             |          | 42,250 |   | 35,076 |   | (32,694 | ) | 329,423 |   |
| Reimbursable costs and fees                                         |       | 216,764                                                                             |          | — |   | — |   | (1,138 | ) | 215,626 |   |
| Restructuring charges                                               |       | 9,958                                                                               |          | 2,389 |   | 1,481 |   | — |   | 13,828 |   |
|                                                                |       |                                                                                |          |   |   |   |   |   |   |   |   |
| Income (loss) from operations before depreciation  and amortization |       | $                                                                                   | 85,842        |   | $ | 5,875 |   | $ |  (9,615 | ) | $ | — |   | $ | 82,102 |   |
| Capital expenditures                                                |       | $                                                                                   | 12,516        |   | $ | 5,860 |   | $ |  — |   | $ | — |   | $ | 18,376 |   |

 
| ** **                                                          | ** ** | **For the Nine Months Ended September 30, 2009** | ** **    |
|---------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|---------------|
| ** **                                                          | ** ** | **ARM**                                                                             | ** **    | **CRM** | ** ** | **Portfolio   Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|                                                                |       |                                                                                |          |   |   |   |   |   |   |   |   |
| Revenues                                                            |       | $                                                                                   |  916,070 |   | $ |  248,736 |   | $ | 40,256 |   | $ |  (50,644 | ) | $ |  1,154,418 |   |
|                                                                |       |                                                                                |          |   |   |   |   |   |   |   |   |
| Payroll and related expenses                                        |       | 413,576                                                                             |          | 177,905 |   | 3,826 |   | (2,989 | ) | 592,318 |   |
| Selling, general and admin. expenses                                |       | 341,778                                                                             |          | 44,981 |   | 49,433 |   | (45,014 | ) | 391,178 |   |
| Reimbursable costs and fees                                         |       | 47,464                                                                              |          | — |   | — |   | (2,641 | ) | 44,823 |   |
| Restructuring charges                                               |       | 2,706                                                                               |          | 379 |   | 161 |   | — |   | 3,246 |   |
|                                                                |       |                                                                                |          |   |   |   |   |   |   |   |   |
| Income (loss) from operations before depreciation  and amortization |       | $                                                                                   |  110,546 |   | $ | 25,471 |   | $ |  (13,164 | ) | $ | — |   | $ |  122,853 |   |
| Capital expenditures                                                |       | $                                                                                   | 14,603        |   | $ | 11,676 |   | $ | — |   | $ | — |   | $ | 26,279 |   |

 

20

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**18.          Related PartyTransactions:**

 

TheCompany pays OEP a management fee of $3.0 million per year, plus reimbursementof expenses, for management, advice and related services. During the three andnine months ended September 30, 2010, the Company incurred $750,000 and $2.3million, respectively, relating to such management fees, which were included inselling, general and administrative expenses.

 

OEPis managed by OEP Holding Corporation, a wholly owned indirect subsidiary ofJPM, and JPM is a client of the Company. The Company received fees forproviding services to JPM of $3.2 million and $8.8 million for the three andnine months ended September 30, 2010, respectively, and $3.2 million and $10.0million for the three and nine months ended September 30, 2009, respectively.Additionally, affiliates of Citigroup are investors of the Company, andCitigroup is a client of the Company. The Company received fees for providingservices to Citigroup of $11.4 million and $36.9 million for the three and ninemonths ended September 30, 2010, respectively, and $12.9 million and $42.1million for the three and nine months ended September 30, 2009, respectively.At September 30, 2010 and December 31, 2009, the Company had accountsreceivable of $5.3 million and $5.8 million, respectively, due from Citigroup.

 

TheCompany has certain corporate banking relationships with affiliates of JPM andis charged market rates for these services.

 

**19.  Recently Issued and ProposedAccounting Guidance:**

 

InJune 2009, the FASB issued authoritative guidance for transfers of financialassets. This guidance removes the concept of qualifying special-purposeentities and eliminates the exception from applying guidance related toconsolidating of variable interest entities to qualifying special-purposeentities. This guidance requires additional disclosures in order to providegreater transparency about transfers of financial assets and a transferor’scontinuing involvement with transferred financial assets. The Company adoptedthis guidance on January 1, 2010, and it did not have a material impact on itsfinancial condition or results of operations.

 

InJune 2009, the FASB issued amended guidance for consolidation of variableinterest entities. This guidance amends previous guidance to require companiesto perform an analysis to determine if their variable interest gives them acontrolling financial interest in the variable interest entity, and requiresongoing reassessments of who is the primary beneficiary of a variable interestentity. This guidance also requires enhanced disclosures of information aboutinvolvement in a variable interest entity. The Company adopted this guidance onJanuary 1, 2010, and it did not have a material impact on its financialcondition or results of operations.

 

InJanuary 2010, the FASB issued amended guidance for disclosures about fairvalue measurements, which requires new disclosures regarding transfers in andout of Level 1 and 2 measurements and requires additional disclosures regardingactivity in Level 3 measurements. This guidance also clarifies existing fairvalue disclosures regarding the level of disaggregation and the input andvaluation techniques used to measure fair value. The Company adopted thisguidance on January 1, 2010, except for the requirement for additionaldisclosures of Level 3 activity which is effective on January 1, 2011, and itdid not have a material impact on its financial condition or results ofoperations.

 

InApril 2010, the FASB issued amended guidance for loan modifications when theloan is part of a pool that is accounted for as a single asset.  This guidance clarifies that modifications ofloans that are accounted for within a pool, which have evidence of creditdeterioration upon acquisition, do not result in the removal of those loansfrom the pool even if the modification would otherwise be considered a troubleddebt restructuring. An entity will continue to be required to consider whetherthe pool of assets in which the loan is included is impaired if expected cashflows for the pool change. The amended guidance is effective for the Companyfor loan modifications made in or after the third quarter of 2010.  The Company adopted this guidance and it didnot have a material impact on its results of operations or financial position.

 

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**19.  Recently Issued and ProposedAccounting Guidance (continued):**

 

InJuly 2010, the FASB issued amended guidance for disclosures about financingreceivables and allowances for credit losses. The guidance requires furtherdisaggregated disclosures that improve financial statement users’ understandingof (1) the nature of an entity’s credit risk associated with its financingreceivables and (2) the entity’s assessment of that risk in estimating itsallowance for credit losses as well as changes in the allowance and the reasonsfor those changes. The new disclosure requirements will be effective forthe Company for the annual reporting period ending December 31, 2010. Certaindisclosures related to allowance and modification activities will be effectivefor the Company for reporting periods beginning January 1, 2011. The Companydoes not expect the adoption of this guidance to have an impact on itsfinancial condition or results of operations.

 

**20.  Subsidiary GuarantorFinancial Information:**

 

TheNotes are fully and unconditionally guaranteed, jointly and severally, bycertain 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 accountsreceivable portfolios, portfolio joint ventures (which are engaged in portfoliofinancing transactions) and certain immaterial subsidiaries (collectively, the “Non-Guarantors”).The following tables present the consolidating financial information for theCompany (Parent), the Guarantors and the Non-Guarantors, together witheliminations, as of and for the periods indicated.

 

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**20.  SubsidiaryGuarantor Financial Information (continued):**

 

**NCO GROUP, INC.**

**Consolidating Balance Sheet**

**September 30, 2010**

**(Unaudited)**

**(Amounts in thousands)**

 
| ** **                                                                           | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current assets:                                                                      |       |       |       |           |       |               |       |             |       |             |       |
| Cash and cash equivalents                                                            |       | $          | —     |           | $          | 15,670             |       | $                | 15,940     |             | $          | — |   | $ | 31,610 |   |
| Accounts receivable, trade, net of allowance for doubtful  accounts                  |       | —     |       | 152,351        |       | 18,065             |       | —           |       | 170,416          |       |
| Purchased accounts receivable, current portion                                       |       | —     |       | 16,876         |       | 20,464             |       | —           |       | 37,340           |       |
| Deferred income taxes                                                                |       | (28,808    | )          | 29,327         |       | 1,484              |       | —           |       | 2,003            |       |
| Prepaid expenses and other current assets                                            |       | 1,795      |       | 32,032         |       | 32,177             |       | —           |       | 66,004           |       |
| Total current assets                                                                 |       | (27,013    | )          | 246,256        |       | 88,130             |       | —           |       | 307,373          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Property and equipment, net                                                          |       | —     |       | 74,003         |       | 29,896             |       | —           |       | 103,899          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Other assets:                                                                        |       |       |       |           |       |               |       |             |       |             |       |
| Goodwill                                                                             |       | —     |       | 471,791        |       | 65,636             |       | —           |       | 537,427          |       |
| Trade name, net of accumulated amortization                                          |       | —     |       | 80,762         |       | 2,847              |       | —           |       | 83,609           |       |
| Customer relationships and other intangible  assets, net of accumulated amortization |       | —     |       | 196,912        |       | 14,078             |       | —           |       | 210,990          |       |
| Purchased accounts receivable, net of current  portion                               |       | —     |       | 36,482         |       | 20,890             |       | —           |       | 57,372           |       |
| Investment in subsidiaries                                                           |       | 806,779    |       | 4,591          |       | —             |       | (811,370         | )          | —           |       |
| Deferred income taxes                                                                |       | —     |       | —         |       | 3,584              |       | —           |       | 3,584            |       |
| Other assets                                                                         |       | 11,715     |       | 37,511         |       | (15,906            | )          | —           |       | 33,320           |       |
| Total other assets                                                                   |       | 818,494    |       | 828,049        |       | 91,129             |       | (811,370         | )          | 926,302          |       |
| Total assets                                                                         |       | $          | 791,481    |           | $          | 1,148,308          |       | $                | 209,155    |             | $          | (811,370 | ) | $ | 1,337,574 |   |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                       | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Current liabilities:                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt, current portion                                                      |       | $          | 6,054      |           | $          | 293                |       | $                | 4,205      |             | $          | — |   | $ | 10,552 |   |
| Intercompany payable (receivable)                                                    |       | 182,814    |       | (283,809       | )          | 100,995            |       | —           |       | —           |       |
| Income taxes payable                                                                 |       | —     |       | —         |       | 7,390              |       | —           |       | 7,390            |       |
| Accounts payable                                                                     |       | 750        |       | 19,789         |       | 2,556              |       | —           |       | 23,095           |       |
| Accrued expenses                                                                     |       | 14,725     |       | 62,594         |       | 27,015             |       | —           |       | 104,334          |       |
| Accrued compensation and related expenses                                            |       | —     |       | 30,183         |       | 13,646             |       | —           |       | 43,829           |       |
| Deferred revenue, current portion                                                    |       | —     |       | 32,113         |       | 627                |       | —           |       | 32,740           |       |
| Total current liabilities                                                            |       | 204,343    |       | (138,837       | )          | 156,434            |       | —           |       | 221,940          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Long-term liabilities:                                                               |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt, net of current portion                                               |       | 493,260    |       | 374,068        |       | 4,482              |       | —           |       | 871,810          |       |
| Deferred income taxes                                                                |       | (75,319    | )          | 110,787        |       | 2,281              |       | —           |       | 37,749           |       |
| Deferred revenue, net of current portion                                             |       | —     |       | 858            |       | —             |       | —           |       | 858              |       |
| Other long-term liabilities                                                          |       | 9,543      |       | 11,772         |       | 15,082             |       | —           |       | 36,397           |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Stockholders’ equity:                                                           |       |       |       |           |       |               |       |             |       |             |       |
| Total NCO Group, Inc. stockholders’ equity                                 |       | 159,654    |       | 789,660        |       | 21,710             |       | (811,370         | )          | 159,654          |       |
| Noncontrolling interests                                                             |       | —     |       | —         |       | 9,166              |       | —           |       | 9,166            |       |
| Total stockholders’ equity                                                      |       | 159,654    |       | 789,660        |       | 30,876             |       | (811,370         | )          | 168,820          |       |
| Total liabilities and stockholders’ equity                                      |       | $          | 791,481    |           | $          | 1,148,308          |       | $                | 209,155    |             | $          | (811,370 | ) | $ | 1,337,574 |   |

 

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**20.  SubsidiaryGuarantor Financial Information (continued):**

 

**NCO GROUP, INC.**

**Consolidating Balance Sheet**

**December 31, 2009**

**(Unaudited)**

**(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     |       | 45,492         |       | (22,076            | )          | —           |       | 36,268           |       |
| Total other assets                                                                   |       | 742,456    |       | 908,542        |       | 103,347            |       | (748,609         | )          | 1,005,736        |       |
| Total assets                                                                         |       | $          | 715,006    |           | $          | 1,254,947          |       | $                | 238,691    |             | $          | (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       | )          | (109,273       | )          | 110,226            |       | —           |       | —           |       |
| 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     |       | 37,561         |       | 164,965            |       | —           |       | 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    |           | $          | 1,254,947          |       | $                | 238,691    |             | $          | (748,609 | ) | $ | 1,460,035 |   |

 

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** **

**20.  SubsidiaryGuarantor Financial Information (continued):**

 

**NCO GROUP, INC.**

**Consolidating Statement of Operations**

**For the Three Months Ended September 30, 2010**

**(Unaudited)**

**(Amounts in thousands)**

 
| ** **                                               | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                 |       | $          | —     |           | $          | 275,480            |       | $                | 75,497     |             | $          | (58,928 | ) | $ | 292,049 |   |
| Portfolio                                                |       | —     |       | 655            |       | 3,616              |       | —           |       | 4,271            |       |
| Reimbursable costs and fees                              |       | —     |       | 74,158         |       | 69                 |       | —           |       | 74,227           |       |
| Total revenues                                           |       | —     |       | 350,293        |       | 79,182             |       | (58,928          | )          | 370,547          |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Operating costs and expenses:                            |       |       |       |           |       |               |       |             |       |             |       |
| Payroll and related expenses                             |       | 4          |       | 165,565        |       | 48,048             |       | (46,731          | )          | 166,886          |       |
| Selling, general and administrative expenses             |       | 961        |       | 86,833         |       | 29,040             |       | (12,197          | )          | 104,637          |       |
| Reimbursable costs and fees                              |       | —     |       | 74,158         |       | 69                 |       | —           |       | 74,227           |       |
| Depreciation and amortization expense                    |       | —     |       | 21,002         |       | 6,278              |       | —           |       | 27,280           |       |
| Restructuring charges                                    |       | —     |       | 5,177          |       | 2,268              |       | —           |       | 7,445            |       |
| Total operating costs and expenses                       |       | 965        |       | 352,735        |       | 85,703             |       | (58,928          | )          | 380,475          |       |
| (Loss) income from operations                            |       | (965       | )          | (2,442         | )          | (6,521             | )          | —           |       | (9,928           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Other income (expense):                                  |       |       |       |           |       |               |       |             |       |             |       |
| Interest and investment income                           |       | —     |       | 154            |       | (53                | )          | —           |       | 101              |       |
| Interest expense                                         |       | (14,125    | )          | (7,952         | )          | (926               | )          | —           |       | (23,003          | )          |
| Interest (expense) income to affiliate                   |       | (7,734     | )          | 9,925          |       | (2,191             | )          | —           |       | —           |       |
| Subsidiary (loss) income                                 |       | (6,506     | )          | (6,120         | )          | —             |       | 12,626           |       | —           |       |
| Other income, net                                        |       | 747        |       | 148            |       | 261                |       | —           |       | 1,156            |       |
| Total other income (expense)                             |       | (27,618    | )          | (3,845         | )          | (2,909             | )          | 12,626           |       | (21,746          | )          |
| (Loss) income before income taxes                        |       | (28,583    | )          | (6,287         | )          | (9,430             | )          | 12,626           |       | (31,674          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Income tax expense (benefit)                             |       | 4,944      |       | (634           | )          | (2,184             | )          | —           |       | 2,126            |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss) income                                        |       | (33,527    | )          | (5,653         | )          | (7,246             | )          | 12,626           |       | (33,800          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Less: Net loss attributable to noncontrolling  interests |       | —     |       | —         |       | (273               | )          | —           |       | (273             | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss) income attributable to NCO  Group, Inc.  |       | $          | (33,527    | )              | $          | (5,653             | )          | $                | (6,973     | )                | $          | 12,626 |   | $ | (33,527 | ) |

 

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**20.  SubsidiaryGuarantor Financial Information (continued):**

 

**NCO GROUP, INC.**

**Consolidating Statement of Operations**

**For the Three Months Ended September 30, 2009**

**(Unaudited)**

**(Amounts in thousands)**

 
| ** **                                               | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                 |       | $          | —     |           | $          | 338,503            |       | $                | 81,310     |             | $          | (73,253 | ) | $ | 346,560 |   |
| Portfolio                                                |       | —     |       | 3,064          |       | (3,342             | )          | —           |       | (278             | )          |
| Reimbursable costs and fees                              |       | —     |       | 27,343         |       | 45                 |       | —           |       | 27,388           |       |
| Total revenues                                           |       | —     |       | 368,910        |       | 78,013             |       | (73,253          | )          | 373,670          |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Operating costs and expenses:                            |       |       |       |           |       |               |       |             |       |             |       |
| Payroll and related expenses                             |       | 4          |       | 197,827        |       | 46,641             |       | (55,841          | )          | 188,631          |       |
| Selling, general and administrative expenses             |       | 1,132      |       | 115,678        |       | 29,381             |       | (17,412          | )          | 128,779          |       |
| Reimbursable costs and fees                              |       | —     |       | 27,343         |       | 45                 |       | —           |       | 27,388           |       |
| Depreciation and amortization expense                    |       | —     |       | 22,695         |       | 6,556              |       | —           |       | 29,251           |       |
| Restructuring charges                                    |       | —     |       | 539            |       | 927                |       | —           |       | 1,466            |       |
| Total operating costs and expenses                       |       | 1,136      |       | 364,082        |       | 83,550             |       | (73,253          | )          | 375,515          |       |
| (Loss) income from operations                            |       | (1,136     | )          | 4,828          |       | (5,537             | )          | —           |       | (1,845           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Other income (expense):                                  |       |       |       |           |       |               |       |             |       |             |       |
| Interest and investment income                           |       | 7          |       | 177            |       | 277                |       | —           |       | 461              |       |
| Interest expense                                         |       | (18,651    | )          | (8,180         | )          | (365               | )          | —           |       | (27,196          | )          |
| Interest (expense) income to affiliate                   |       | (1,824     | )          | 3,772          |       | (1,948             | )          | —           |       | —           |       |
| Subsidiary income (loss)                                 |       | (2,340     | )          | (3,296         | )          | —             |       | 5,636            |       | —           |       |
| Other income, net                                        |       | 3,912      |       | 13             |       | —             |       | —           |       | 3,925            |       |
| Total other income (expense)                             |       | (18,896    | )          | (7,514         | )          | (2,036             | )          | 5,636            |       | (22,810          | )          |
| (Loss) income before income taxes                        |       | (20,032    | )          | (2,686         | )          | (7,573             | )          | 5,636            |       | (24,655          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Income tax expense (benefit)                             |       | 4,572      |       | (1,069         | )          | (875               | )          | —           |       | 2,628            |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss) income                                        |       | (24,604    | )          | (1,617         | )          | (6,698             | )          | 5,636            |       | (27,283          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Less: Net loss attributable to noncontrolling  interests |       | —     |       | —         |       | (2,679             | )          | —           |       | (2,679           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss) income attributable to NCO Group, Inc.        |       | $          | (24,604    | )              | $          | (1,617             | )          | $                | (4,019     | )                | $          | 5,636 |   | $ | (24,604 | ) |

 

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**20.  SubsidiaryGuarantor Financial Information (continued):**

 

**NCO GROUP, INC.**

**ConsolidatingStatement of Operations**

**For theNine Months Ended September 30, 2010**

**(Unaudited)**

**(Amounts inthousands)**

 
| ** **                                                 | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                  |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                   |       | $          | —     |           | $          | 889,738            |       | $                | 216,476    |             | $          | (184,251 | ) | $ | 921,963 |   |
| Portfolio                                                  |       | —     |       | 12,568         |       | 19,627             |       | —           |       | 32,195           |       |
| Reimbursable costs and fees                                |       | —     |       | 215,437        |       | 189                |       | —           |       | 215,626          |       |
| Total revenues                                             |       | —     |       | 1,117,743      |       | 236,292            |       | (184,251         | )          | 1,169,784        |       |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Operating costs and expenses:                              |       |       |       |           |       |               |       |             |       |             |       |
| Payroll and related expenses                               |       | 12         |       | 535,900        |       | 134,760            |       | (141,867         | )          | 528,805          |       |
| Selling, general and administrative expenses               |       | 3,089      |       | 279,774        |       | 88,944             |       | (42,384          | )          | 329,423          |       |
| Reimbursable costs and fees                                |       | —     |       | 215,437        |       | 189                |       | —           |       | 215,626          |       |
| Depreciation and amortization expense                      |       | —     |       | 64,664         |       | 17,703             |       | —           |       | 82,367           |       |
| Restructuring charges                                      |       | —     |       | 10,684         |       | 3,144              |       | —           |       | 13,828           |       |
| Total operating costs and expenses                         |       | 3,101      |       | 1,106,459      |       | 244,740            |       | (184,251         | )          | 1,170,049        |       |
| (Loss) income from operations                              |       | (3,101     | )          | 11,284         |       | (8,448             | )          | —           |       | (265             | )          |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Other income (expense):                                    |       |       |       |           |       |               |       |             |       |             |       |
| Interest and investment income                             |       | 244        |       | (1,202         | )          | 1,332              |       | —           |       | 374              |       |
| Interest expense                                           |       | (42,745    | )          | (23,890        | )          | (2,125             | )          | —           |       | (68,760          | )          |
| Interest (expense) income to affiliate                     |       | (15,356    | )          | 21,119         |       | (5,763             | )          | —           |       | —           |       |
| Subsidiary (loss) income                                   |       | (7,421     | )          | (11,239        | )          | —             |       | 18,660           |       | —           |       |
| Other income, net                                          |       | 785        |       | 1,023          |       | 417                |       | —           |       | 2,225            |       |
| Total other income (expense)                               |       | (64,493    | )          | (14,189        | )          | (6,139             | )          | 18,660           |       | (66,161          | )          |
| (Loss) income before income taxes                          |       | (67,594    | )          | (2,905         | )          | (14,587            | )          | 18,660           |       | (66,426          | )          |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Income tax expense (benefit)                               |       | 6,727      |       | 2,301          |       | (1,997             | )          | —           |       | 7,031            |       |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss) income                                          |       | (74,321    | )          | (5,206         | )          | (12,590            | )          | 18,660           |       | (73,457          | )          |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Less: Net income attributable to noncontrolling  interests |       | —     |       | —         |       | 864                |       | —           |       | 864              |       |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss) income attributable to NCO  Group, Inc.    |       | $          | (74,321    | )              | $          | (5,206             | )          | $                | (13,454    | )                | $          | 18,660 |   | $ | (74,321 | ) |

 

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**20.  SubsidiaryGuarantor Financial Information (continued):**

 

**NCO GROUP, INC.**

**ConsolidatingStatement of Operations**

**For theNine Months Ended September 30, 2009**

**(Unaudited)**

**(Amounts inthousands)**

 
| ** **                                               | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                 |       | $          | —     |           | $          | 1,070,294          |       | $                | 216,695    |             | $          | (219,982 | ) | $ | 1,067,007 |   |
| Portfolio                                                |       | —     |       | 23,503         |       | 19,085             |       | —           |       | 42,588           |       |
| Reimbursable costs and fees                              |       | —     |       | 44,642         |       | 181                |       | —           |       | 44,823           |       |
| Total revenues                                           |       | —     |       | 1,138,439      |       | 235,961            |       | (219,982         | )          | 1,154,418        |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Operating costs and expenses:                            |       |       |       |           |       |               |       |             |       |             |       |
| Payroll and related expenses                             |       | 12         |       | 615,408        |       | 139,172            |       | (162,274         | )          | 592,318          |       |
| Selling, general and administrative expenses             |       | 3,312      |       | 356,395        |       | 89,179             |       | (57,708          | )          | 391,178          |       |
| Reimbursable costs and fees                              |       | —     |       | 44,642         |       | 181                |       | —           |       | 44,823           |       |
| Depreciation and amortization expense                    |       | —     |       | 69,547         |       | 21,405             |       | —           |       | 90,952           |       |
| Restructuring charges                                    |       | —     |       | 2,113          |       | 1,133              |       | —           |       | 3,246            |       |
| Total operating costs and expenses                       |       | 3,324      |       | 1,088,105      |       | 251,070            |       | (219,982         | )          | 1,122,517        |       |
| (Loss) income from operations                            |       | (3,324     | )          | 50,334         |       | (15,109            | )          | —           |       | 31,901           |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Other income (expense):                                  |       |       |       |           |       |               |       |             |       |             |       |
| Interest and investment income                           |       | 37         |       | 941            |       | 419                |       | —           |       | 1,397            |       |
| Interest expense                                         |       | (52,058    | )          | (23,400        | )          | (1,522             | )          | —           |       | (76,980          | )          |
| Interest (expense) income to affiliate                   |       | (3,491     | )          | 8,236          |       | (4,745             | )          | —           |       | —           |       |
| Subsidiary income (loss)                                 |       | 12,486     |       | (10,823        | )          | —             |       | (1,663           | )          | —           |       |
| Other income, net                                        |       | 6,695      |       | 392            |       | —             |       | —           |       | 7,087            |       |
| Total other income (expense)                             |       | (36,331    | )          | (24,654        | )          | (5,848             | )          | (1,663           | )          | (68,496          | )          |
| (Loss) income before income taxes                        |       | (39,655    | )          | 25,680         |       | (20,957            | )          | (1,663           | )          | (36,595          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Income tax (benefit) expense                             |       | (7,726     | )          | 11,285         |       | (4,615             | )          | —           |       | (1,056           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss) income                                        |       | (31,929    | )          | 14,395         |       | (16,342            | )          | (1,663           | )          | (35,539          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Less: Net loss attributable to noncontrolling  interests |       | —     |       | —         |       | (3,610             | )          | —           |       | (3,610           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss) income attributable to NCO  Group, Inc.  |       | $          | (31,929    | )              | $          | 14,395             |       | $                | (12,732    | )                | $          | (1,663 | ) | $ | (31,929 | ) |

 

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**20.  SubsidiaryGuarantor Financial Information (continued):**

 

**NCO GROUP, INC**

**ConsolidatingStatement of Cash Flows**

**For theNine Months Ended September 30, 2010**

**(Unaudited)**

**(Amounts inthousands)**

 
| ** **                                                         | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** |
| Net cash (used in) provided by operating  activities               |       | $          | (40,026    | )              | $          | 80,883             |       | $                | 9,003      |   | $ | 49,860 |   |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from investing activities:                              |       |       |       |           |       |               |       |             |       |
| Purchases of accounts receivable                                   |       | —     |       | (9,645         | )          | (1,245             | )          | (10,890          | )          |
| Collections applied to principal of purchased  accounts receivable |       | —     |       | 25,602         |       | 21,608             |       | 47,210           |       |
| Proceeds from sales and resales of purchased  accounts receivable  |       | —     |       | 172            |       | 160                |       | 332              |       |
| Purchases of property and equipment                                |       | —     |       | (10,087        | )          | (8,289             | )          | (18,376          | )          |
| Net cash paid related to acquisitions                              |       | —     |       | (1,600         | )          | —             |       | (1,600           | )          |
| Other                                                              |       | —     |       | 1,366          |       | —             |       | 1,366            |       |
| Net cash provided by investing activities                          |       | —     |       | 5,808          |       | 12,234             |       | 18,042           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from financing activities:                              |       |       |       |           |       |               |       |             |       |
| Repayment of notes payable                                         |       | —     |       | (244           | )          | (11,794            | )          | (12,038          | )          |
| Net repayment of borrowings under revolving credit  facility       |       | (17,000    | )          | —         |       | —             |       | (17,000          | )          |
| Repayment of borrowings under senior term loan                     |       | (40,541    | )          | —         |       | —             |       | (40,541          | )          |
| Borrowings under (repayment of) intercompany notes  payable        |       | 100,321    |       | (89,757        | )          | (10,564            | )          | —           |       |
| Payment of fees to obtain debt                                     |       | (2,754     | )          | (4             | )          | —             |       | (2,758           | )          |
| Return of investment in subsidiary to  noncontrolling interests    |       | —     |       | —         |       | (3,148             | )          | (3,148           | )          |
| Net cash provided by (used in) financing  activities               |       | 40,026     |       | (90,005        | )          | (25,506            | )          | (75,485          | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Effect of exchange rate on cash                                    |       | —     |       | —         |       | (28                | )          | (28              | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Net decrease in cash and cash equivalents                          |       | —     |       | (3,314         | )          | (4,297             | )          | (7,611           | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash equivalents at beginning of the  period              |       | —     |       | 18,984         |       | 20,237             |       | 39,221           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash equivalents at end of the period                     |       | $          | —     |           | $          | 15,670             |       | $                | 15,940     |   | $ | 31,610 |   |

 

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**20.  SubsidiaryGuarantor Financial Information (continued):**

 

**NCO GROUP, INC**

**ConsolidatingStatement of Cash Flows**

**For theNine Months Ended September 30, 2009**

**(Unaudited)**

**(Amounts inthousands)**

 
| ** **                                                         | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** |
| Net cash (used in) provided by operating  activities               |       | $          | (29,306    | )              | $          | 128,399            |       | $                | (5,156     | ) | $ | 93,937 |   |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from investing activities:                              |       |       |       |           |       |               |       |             |       |
| Purchases of accounts receivable                                   |       | —     |       | (44,049        | )          | (3,886             | )          | (47,935          | )          |
| Collections applied to principal of purchased  accounts receivable |       | —     |       | 23,990         |       | 41,464             |       | 65,454           |       |
| Proceeds from sales and resales of purchased  accounts receivable  |       | —     |       | 124            |       | 401                |       | 525              |       |
| Purchases of property and equipment                                |       | —     |       | (18,658        | )          | (7,621             | )          | (26,279          | )          |
| Net cash paid related to acquisitions                              |       | —     |       | (3,377         | )          | (652               | )          | (4,029           | )          |
| Other                                                              |       | —     |       | 121            |       | —             |       | 121              |       |
| Net cash (used in) provided by investing  activities               |       | —     |       | (41,849        | )          | 29,706             |       | (12,143          | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from financing activities:                              |       |       |       |           |       |               |       |             |       |
| Repayment of notes payable                                         |       | —     |       | (294           | )          | (19,103            | )          | (19,397          | )          |
| Net repayment of borrowings under revolving credit  facility       |       | (47,000    | )          | —         |       | —             |       | (47,000          | )          |
| Repayment of borrowings under senior term loan                     |       | (19,541    | )          | —         |       | —             |       | (19,541          | )          |
| Borrowings under (repayment of) intercompany notes  payable        |       | 66,706     |       | (73,486        | )          | 6,780              |       | —           |       |
| Payment of fees to obtain debt                                     |       | (2,477     | )          | —         |       | —             |       | (2,477           | )          |
| Return of investment in subsidiary to  noncontrolling interests    |       | —     |       | —         |       | (5,784             | )          | (5,784           | )          |
| 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               |       | 29,306     |       | (73,780        | )          | (18,107            | )          | (62,581          | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Effect of exchange rate on cash                                    |       | —     |       | —         |       | 1,345              |       | 1,345            |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Net increase in cash and cash equivalents                          |       | —     |       | 12,770         |       | 7,788              |       | 20,558           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash equivalents at beginning of the  period              |       | —     |       | 15,334         |       | 14,546             |       | 29,880           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash equivalents at end of the period                     |       | $          | —     |           | $          | 28,104             |       | $                | 22,334     |   | $ | 50,438 |   |

 

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**Item 2.    Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

***Forward-Looking Statements***

 

Certain statements included in this Quarterly Report on Form 10-Q,other than historical facts, are forward-looking statements (as such term isdefined in the Securities Exchange Act of 1934, as amended, and the regulationsthereunder), which are intended to be covered by the safe harbors createdthereby. Forward-looking statements include, without limitation, statements asto:

 

·                  the Company’sexpected future results of operations;

·                  economicconditions;

·                  the Company’sbusiness and growth strategy;

·                  fluctuations inquarterly operating results;

·                  the integrationof acquisitions;

·                  the finaloutcome of the Company’s litigation with its former landlord;

·                  statements asto liquidity and compliance with debt covenants;

·                  the effects ofterrorist attacks, war and the economy on the Company’s business;

·                  expectedincreases in operating efficiencies;

·                  anticipatedtrends in the business process outsourcing industry;

·                  estimates offuture cash flows and allowances for impairments of purchased accountsreceivable;

·                  estimates ofintangible asset impairments and amortization expense of customer relationshipsand other intangible assets;

·                  the effects oflegal proceedings, regulatory investigations and tax examinations;

·                  the effects ofchanges in accounting guidance; and

·                  statements asto 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 identifyforward-looking statements. These statements are based on assumptions andassessments made by the Company’s management in light of their experience andtheir perception of historical trends, current conditions, expected futuredevelopments and other factors they believe to be appropriate. Forward-lookingstatements are not guarantees of the Company’s future performance and aresubject to risks and uncertainties and may be affected by various factors thatmay cause actual results, developments and business decisions to differmaterially from those in the forward-looking statements. Some of the factorsthat may cause actual results, developments and business decisions to differmaterially from those contemplated by such forward-looking statements include:

 

·                  risks relatedto the instability in the financial markets;

·                  risks relatedto adverse capital and credit market conditions;

·                  the ability ofgovernmental and regulatory bodies to stabilize the financial markets;

·                  risks relatedto the domestic and international economies;

·                  risks relatedto derivative transactions;

·                  risks relatedto the Company’s ability to grow internally;

·                  risks relatedto the Company’s ability to compete;

·                  risks relatedto the Company’s substantial indebtedness, its ability to service such debt andits ability to comply with debt covenants;

·                  risks relatedto the Company’s ability to meet liquidity needs;

·                  the risk thatthe Company will not be able to implement its growth strategy as and when planned;

·                  risksassociated with growth and acquisitions;

·                  the risk thatthe Company will not be able to realize operating efficiencies in theintegration of its acquisitions;

·                  fluctuations inquarterly operating results;

·                  risks relatedto the timing of contracts;

·                  risks relatedto purchased accounts receivable;

·                  risks relatedto possible impairment of goodwill and other intangible assets;

·                  the Company’sdependence on senior management;

 

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·                  risks relatedto security and privacy breaches;

·                  risks relatedto union organizing efforts at the Company’s facilities;

·                  risksassociated with technology;

·                  risks relatedto the final outcome of the Company’s litigation with its former landlord;

·                  risks relatedto litigation, regulatory investigations and tax examinations;

·                  risks relatedto past or possible future terrorist attacks;

·                  risks relatedto natural disasters or the threat or outbreak of war or hostilities;

·                  the risk thatthe Company will not be able to improve margins;

·                  risks relatedto the Company’s international operations;

·                  risks relatedto the availability of qualified employees, particularly in new or morecost-effective locations;

·                  risks relatedto currency fluctuations;

·                  risks relatedto reliance on independent telecommunications service providers;

·                  risks relatedto concentration of the Company’s clients in the financial services,telecommunications and healthcare sectors;

·                  risks relatedto the possible loss of key clients or loss of significant volumes from keyclients; and

·                  risks relatedto changes in government regulations.

 

The Company can give no assurance that any of the events anticipated bythe forward-looking statements will occur or, if any of them does, what impactthey will have on our results of operations and financial condition. TheCompany disclaims any intent or obligation to publicly update or revise anyforward-looking statements, regardless of whether new information becomesavailable, future developments occur or otherwise. For additional informationconcerning the risks that affect us, see our Annual Report on Form 10-K/Afor the year ended December 31, 2009 and “Part II. Other Information- Item 1A. Risk Factors” of this Report on Form 10-Q.

 

***Overview***

 

We are a holding company and conduct substantially all of our businessoperations through our subsidiaries. We are an international provider ofbusiness process outsourcing services, referred to as BPO, primarily focused onaccounts receivable management, referred to as ARM, and customer relationshipmanagement, referred to as CRM, serving a wide range of clients in NorthAmerica and abroad through our global network of over 100 offices.

 

Historically, we have participated in the purchased accounts receivablebusiness on an opportunistic basis. Beginning in 2009, we significantly reducedour purchases of accounts receivable. This decision resulted from declines inliquidation rates, competition for purchased accounts receivable and thecontinued uncertainty of collectibility.

 

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 andadministrative personnel. Selling, general and administrative expenses includetelephone, postage and mailing costs, outside collection attorneys and otherthird-party collection services providers, and other collection costs, as wellas 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 ordecrease due to changes in the value of the U.S. dollar against the Canadiandollar and the Philippine peso.

 

The continuing deterioration in economic conditions in the U.S. hasimpacted our business over the course of 2009 and 2010. Factors such as reducedavailability of credit for consumers, a depressed real estate market, increasedunemployment and other factors have had a negative impact on the ability andwillingness of consumers to pay their debts and a negative impact on ourclients’ businesses, which has adversely affected our results of operations,collections and revenue.

 

Further changes to the economic conditions in the U.S., either positiveor negative, could have a significant impact on our business, including, butnot limited to:

 

·                  fluctuations in the volume of placements ofaccounts and the collectability of those accounts for our ARM contingency feebased services;

·                  volume fluctuations in our ARM fixed feebased services;

·                  volume fluctuations in our CRM services; and,

·                  variability in the collectability of existingportfolios.

 

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Effective August 31, 2009, we acquired TSYS Total Debt Management, Inc.,referred to as TDM, a provider of specialty accounts receivable managementservices, for approximately $4.5 million.

 

In October 2009, we sold our print and mail business forapproximately $18.7 million in cash.

 

We operate our business in three segments: ARM, CRM and PortfolioManagement.

 

***Three Months Ended September 30, 2010 Comparedto Three Months Ended September 30, 2009***

 

*Revenue.*  Revenue decreased $3.1 million, or 0.8percent, to $370.5 million for the three months ended September 30, 2010,from $373.7 million for the three months ended September 30, 2009.

 

Revenue by segment(dollars in thousands):

 
| ** **           | ** ** | **For the Three Months Ended September 30,** | ** ** | ** **    | ** ** | ** ** | ** ** |
|----------------------|------------|----------------------------------------------------------------------------|------------|---------------|------------|------------|------------|
| ** **           | ** ** | ** **                                                                 | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2010**                                                                   | ** ** | **Revenue**   | ** ** | **2009**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                  |       | $                                                                          | 310,935    |          | 83.9       | %          | $          | 307,468 |   | 82.3 | % | $ | 3,467 |   | 1.1 | % |
| CRM                  |       | 65,511                                                                     |       | 17.7          | %          | 79,275     |       | 21.2 | % | (13,764 | ) | (17.4 | )% |
| Portfolio Management |       | 3,357                                                                      |       | 0.9           | %          | 2,310      |       | 0.6 | % | 1,047 |   | 45.3 | % |
| Eliminations         |       | (9,256                                                                     | )          | (2.5          | )%         | (15,383    | )          | (4.1 | )% | 6,127 |   | (39.8 | )% |
| Total                |       | $                                                                          | 370,547    |          | 100.0      | %          | $          | 373,670 |   | 100.0 | % | $ | (3,123 | ) | (0.8 | )% |

 

ARM’srevenue for the three months ended September 30, 2010, included $9.3million of intercompany revenue from Portfolio Management which was eliminatedupon consolidation. For the three months ended September 30, 2009, ARM’srevenue included $13.7 million of intercompany revenue from PortfolioManagement and CRM’s revenue included $1.7 million of intercompany revenue fromARM, which were eliminated upon consolidation.

 

ARM’srevenue for the three months ended September 30, 2010 and 2009 included$74.7 million and $28.0 million, respectively, of reimbursable costs and fees(discussed in more detail below), which resulted in a $46.7 million increase inARM’s revenue. This increase was partially offset by decreases primarilyattributable to the weaker third-party collection environment and lower volumesin the first-party collections business during 2010, a $13.9 million decreaseresulting from the sale of our print and mail business in October 2009,and a $4.4 million decrease in fees from collection services performed forPortfolio Management.

 

Thedecrease in CRM’s revenue was primarily due to lower volumes from certainexisting clients, attributable to the impact of the economy on the clients’business, partially offset by increased client volume related to theimplementation of new contracts during 2010.

 

PortfolioManagement’s collections decreased $12.7 million, or 37.6 percent, to $21.1million for the three months ended September 30, 2010, from $33.8 millionfor the three months ended September 30, 2009. Revenue for the threemonths ended September 30, 2010, included a $7.1 million impairment chargerecorded for a valuation allowance against the carrying value of theportfolios, compared to an impairment charge of $13.9 million for the threemonths ended September 30, 2009. Excluding the effect of the impairmentcharges, Portfolio Management’s revenue represented 48.7 percent of collectionsfor the three months ended September 30, 2010, as compared to 47.0 percentof collections for the three months ended September 30, 2009. The decreasein revenue and collections was primarily attributable to lower portfoliopurchases and the effect of the weaker collection environment during 2010.

 

*Payroll and related expenses.*  Payroll and related expenses decreased $21.7million to $166.9 million for the three months ended September 30, 2010,from $188.6 million for the three months ended September 30, 2009, anddecreased as a percentage of revenue to 45.0 percent from 50.5 percent.

 

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Payroll and related expensesby segment (dollars in thousands):

 
| ** **           | ** ** | **For the Three Months Ended September 30,** | ** ** | ** **    | ** ** | ** ** | ** ** |
|----------------------|------------|----------------------------------------------------------------------------|------------|---------------|------------|------------|------------|
| ** **           | ** ** | ** **                                                                 | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2010**                                                                   | ** ** | **Revenue**   | ** ** | **2009**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                  |       | $                                                                          | 116,201    |          | 37.4       | %          | $          | 133,066 |   | 43.3 | % | $ | (16,865 | ) | (12.7 | )% |
| CRM                  |       | 49,914                                                                     |       | 76.2          | %          | 56,513     |       | 71.3 | % | (6,599 | ) | (11.7 | )% |
| Portfolio Management |       | 771                                                                        |       | 23.0          | %          | 776        |       | 33.6 | % | (5 | ) | (0.6 | )% |
| Eliminations         |       | —                                                                     |       | —        |       | (1,724     | )          | 11.2 | % | 1,724 |   | (100.0 | )% |
| Total                |       | $                                                                          | 166,886    |          | 45.0       | %          | $          | 188,631 |   | 50.5 | % | $ | (21,745 | ) | (11.5 | )% |

 

Thedecrease in ARM’s payroll and related expenses as a percentage of revenue wasprimarily due to the higher revenue base, which was attributable to theincrease in reimbursable costs and fees. Included in ARM’s payroll and relatedexpenses for the three months ended September 30, 2009, was $1.7 millionof intercompany expense from CRM, for services provided to ARM, which waseliminated upon consolidation.

 

The increase in CRM’spayroll and related expenses as a percentage of revenue was primarily a resultof leveraging its infrastructure over the lower revenue base.

 

Portfolio Managementoutsources all of its collection services to ARM and, therefore, has arelatively small fixed payroll cost structure.

 

*Selling, general and administrative expenses.*  Selling, general and administrative expensesdecreased $24.2 million to $104.6 million for the three months ended September 30,2010, from $128.8 million for the three months ended September 30, 2009,and decreased as a percentage of revenue to 28.2 percent from 34.5 percent.

 

Selling, general andadministrative expenses by segment (dollars in thousands):

 
| ** **           | ** ** | **For the Three Months Ended September 30,** | ** ** | ** **    | ** ** | ** ** | ** ** |
|----------------------|------------|----------------------------------------------------------------------------|------------|---------------|------------|------------|------------|
| ** **           | ** ** | ** **                                                                 | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2010**                                                                   | ** ** | **Revenue**   | ** ** | **2009**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                  |       | $                                                                          | 89,831     |          | 28.9       | %          | $          | 111,858 |   | 36.4 | % | $ | (22,027 | ) | (19.7 | )% |
| CRM                  |       | 13,961                                                                     |       | 21.3          | %          | 15,624     |       | 19.7 | % | (1,663 | ) | (10.6 | )% |
| Portfolio Management |       | 9,587                                                                      |       | 285.6         | %          | 14,343     |       | 620.9 | % | (4,756 | ) | (33.2 | )% |
| Eliminations         |       | (8,742                                                                     | )          | 94.4          | %          | (13,046    | )          | 84.8 | % | 4,304 |   | (33.0 | )% |
| Total                |       | $                                                                          | 104,637    |          | 28.2       | %          | $          | 128,779 |   | 34.5 | % | $ | (24,142 | ) | (18.7 | )% |

 

The decrease in ARM’sselling, general and administrative expenses as a percentage of revenue wasprimarily due to the higher revenue base, which was attributable to theincrease in reimbursable costs and fees, as well as cost saving initiatives andthe sale of the print and mail business, which had a higher selling, generaland administrative expense cost structure.

 

The increase in CRM’sselling, general and administrative expenses as a percentage of revenue wasprimarily attributable to leveraging its infrastructure over the lower revenuebase.

 

The decrease in PortfolioManagement’s selling, general and administrative expenses resulted from a $4.4million decrease in fees for collection services provided by ARM. Included inPortfolio Management’s selling, general and administrative expenses for thethree months ended September 30, 2010 and 2009, was $9.3 million and $13.7million, respectively, of intercompany expense from ARM, for services providedto Portfolio Management, which was eliminated in consolidation.

 

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*Reimbursable costs and fees. *Reimbursablecosts and fees consist of court costs, legal fees and repossession fees,representing out-of-pocket expenses that are reimbursed by our clients.Reimbursable costs and fees of $74.2 million and $27.4 million for the threemonths ended September 30, 2010 and 2009, respectively, are recorded asboth revenue and operating expenses on the statement of operations. Theincrease in reimbursable costs and fees was due to the acquisition of TDM in August 2009.

 

*Restructuring charges. *During the three monthsended September 30, 2010, we incurred restructuring charges of $7.4million, related to streamlining the cost structure of the Company’soperations. The charges consisted primarily of costs associated with theclosing of redundant facilities and severance. This compares to $1.5 million ofrestructuring charges for the three months ended September 30, 2009.

 

*Depreciationand amortization.*  Depreciationand amortization decreased to $27.3 million for the three months ended September 30,2010, from $29.3 million for the three months ended September 30, 2009.The decrease was primarily attributable to lower depreciation resulting from alower level of property and equipment, as well as lower amortization becausecertain intangible assets are now fully amortized.

 

*Other income (expense).*  Interest expense decreased to $23.0 millionfor the three months ended September 30, 2010, from $27.2 million for thethree months ended September 30, 2009. Interest expense for the threemonths ended September 30, 2010 and 2009 included $2.2 and $5.2 million,respectively, of net losses from interest rate swap agreements and embeddedderivatives. The remaining decrease in interest expense was primarilyattributable to lower debt balances. Other income, net for the three monthsended September 30, 2010 and 2009 included approximately $748,000 and $3.9million, respectively, of net gains resulting from foreign exchange contracts.

 

*Income tax expense (benefit)*.  For the three months ended September 30,2010, we recorded income tax expense of $2.1 million on a pre-tax loss of $31.7million, or an effective income tax rate of (6.7) percent. For the three monthsended September 30, 2009, we recorded income tax expense of $2.6 millionon a pre-tax loss of $24.7 million, or an effective tax rate of (10.7) percent.The change in the effective income tax rate was due primarily to therecognition of a valuation allowance on certain domestic net deferred tax assetsand income tax expense to be paid in state and foreign jurisdictions.

 

***Nine Months Ended September 30, 2010 Comparedto Nine Months Ended September 30, 2009***

 

*Revenue.*  Revenue increased $15.4 million, or 1.3percent, to $1,169.8 million for the nine months ended September 30, 2010,from $1,154.4 million for the nine months ended September 30, 2009.

 

Revenue by segment(dollars in thousands):

 
| ** **           | ** ** | **For the Nine Months Ended September 30,** | ** ** | ** **    | ** ** | ** ** | ** ** |
|----------------------|------------|---------------------------------------------------------------------------|------------|---------------|------------|------------|------------|
| ** **           | ** ** | ** **                                                                | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2010**                                                                  | ** ** | **Revenue**   | ** ** | **2009**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                  |       | $                                                                         | 965,625    |          | 82.6       | %          | $          | 916,070 |   | 79.4 | % | $ | 49,555 |   | 5.4 | % |
| CRM                  |       | 208,568                                                                   |       | 17.8          | %          | 248,736    |       | 21.5 | % | (40,168 | ) | (16.1 | )% |
| Portfolio Management |       | 29,423                                                                    |       | 2.5           | %          | 40,256     |       | 3.5 | % | (10,833 | ) | (26.9 | )% |
| Eliminations         |       | (33,832                                                                   | )          | (2.9          | )%         | (50,644    | )          | (4.4 | )% | 16,812 |   | (33.2 | )% |
| Total                |       | $                                                                         | 1,169,784  |          | 100.0      | %          | $          | 1,154,418 |   | 100.0 | % | $ | 15,366 |   | 1.3 | % |

 

ARM’srevenue for the nine months ended September 30, 2010, included $33.8million of intercompany revenue from Portfolio Management which was eliminatedupon consolidation. For the nine months ended September 30, 2009, ARM’srevenue included $47.6 million of intercompany revenue from PortfolioManagement and CRM’s revenue included $3.0 million of intercompany revenue fromARM, which were eliminated upon consolidation.

 

ARM’srevenue for the nine months ended September 30, 2010 and 2009 included$216.8 million and $47.5 million, respectively, of reimbursable costs and fees(discussed in more detail below), which resulted in a $169.3 million increasein ARM’s revenue. This increase was partially offset by decreases primarilyattributable to the 

 

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weakerthird-party collection environment and lower volumes in the first-partycollections business during 2010, a $40.9 million decrease resulting from thesale of our print and mail business in October 2009, and a $13.8 milliondecrease in fees from collection services performed for Portfolio Management.

 

Thedecrease in CRM’s revenue was primarily due to lower volumes from certainexisting clients attributable to the impact of the economy on the clients’business, partially offset by increased client volume related to theimplementation of new contracts during 2010.

 

PortfolioManagement’s collections decreased $35.5 million, or 30.5 percent, to $81.0million for the nine months ended September 30, 2010, from $116.5 millionfor the nine months ended September 30, 2009. Revenue for the nine monthsended September 30, 2010, included a $7.2 million impairment chargerecorded for a valuation allowance against the carrying value of theportfolios, compared to an impairment charge of $15.3 million for the ninemonths ended September 30, 2009. Excluding the effect of the impairmentcharges, Portfolio Management’s revenue represented 44.5 percent of collectionsfor the nine months ended September 30, 2010, as compared to 46.3 percentof collections for the nine months ended September 30, 2009. The decreasein revenue and collections was primarily attributable to lower portfoliopurchases and the effect of the weaker collection environment during 2010.

 

*Payroll and related expenses.*  Payroll and related expenses decreased $63.5million to $528.8 million for the nine months ended September 30, 2010,from $592.3 million for the nine months ended September 30, 2009, anddecreased as a percentage of revenue to 45.2 percent from 51.3 percent.

 

Payroll and related expensesby segment (dollars in thousands):

 
| ** **           | ** ** | **For the Nine Months Ended September 30,** | ** ** | ** **    | ** ** | ** ** | ** ** |
|----------------------|------------|---------------------------------------------------------------------------|------------|---------------|------------|------------|------------|
| ** **           | ** ** | ** **                                                                | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2010**                                                                  | ** ** | **Revenue**   | ** ** | **2009**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                  |       | $                                                                         | 368,270    |          | 38.1       | %          | $          | 413,576 |   | 45.1 | % | $ | (45,306 | ) | (11.0 | )% |
| CRM                  |       | 158,054                                                                   |       | 75.8          | %          | 177,905    |       | 71.5 | % | (19,851 | ) | (11.2 | )% |
| Portfolio Management |       | 2,481                                                                     |       | 8.4           | %          | 3,826      |       | 9.5 | % | (1,345 | ) | (35.2 | )% |
| Eliminations         |       | —                                                                    |       | —        |       | (2,989     | )          | 5.9 | % | 2,989 |   | (100.0 | )% |
| Total                |       | $                                                                         | 528,805    |          | 45.2       | %          | $          | 592,318 |   | 51.3 | % | $ | (63,513 | ) | (10.7 | )% |

 

Thedecrease in ARM’s payroll and related expenses as a percentage of revenue wasprimarily due to the higher revenue base, which was attributable to theincrease in reimbursable costs and fees. Included in ARM’s payroll and relatedexpenses for the nine months ended September 30, 2009, was $3.0 million ofintercompany expense from CRM, for services provided to ARM, which waseliminated upon consolidation.

 

The increase in CRM’spayroll and related expenses as a percentage of revenue was primarily a resultof leveraging its infrastructure over the lower revenue base.

 

Portfolio Management outsourcesall of its collection services to ARM and, therefore, has a relatively smallfixed payroll cost structure. The decrease in Portfolio Management’s payrolland related expenses was attributable to the restructuring activities followingthe Company’s decision to limit purchases in this business.

 

*Selling, general and administrative expenses.*  Selling, general and administrative expensesdecreased $61.8 million to $329.4 million for the nine months ended September 30,2010, from $391.2 million for the nine months ended September 30, 2009,and decreased as a percentage of revenue to 28.2 percent from 33.9 percent.

 

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Selling, general andadministrative expenses by segment (dollars in thousands):

 
| ** **           | ** ** | **For the Nine Months Ended September 30,** | ** ** | ** **    | ** ** | ** ** | ** ** |
|----------------------|------------|---------------------------------------------------------------------------|------------|---------------|------------|------------|------------|
| ** **           | ** ** | ** **                                                                | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2010**                                                                  | ** ** | **Revenue**   | ** ** | **2009**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                  |       | $                                                                         | 284,791    |          | 29.5       | %          | $          | 341,778 |   | 37.3 | % | $ | (56,987 | ) | (16.7 | )% |
| CRM                  |       | 42,250                                                                    |       | 20.3          | %          | 44,981     |       | 18.1 | % | (2,731 | ) | (6.1 | )% |
| Portfolio Management |       | 35,076                                                                    |       | 119.2         | %          | 49,433     |       | 122.8 | % | (14,357 | ) | (29.0 | )% |
| Eliminations         |       | (32,694                                                                   | )          | 96.6          | %          | (45,014    | )          | 88.9 | % | 12,320 |   | (27.4 | )% |
| Total                |       | $                                                                         | 329,423    |          | 28.2       | %          | $          | 391,178 |   | 33.9 | % | $ | (61,755 | ) | (15.8 | )% |

 

The decrease in ARM’sselling, general and administrative expenses as a percentage of revenue wasprimarily due to the higher revenue base, which was attributable to theincrease in reimbursable costs and fees, as well as cost saving initiatives andthe sale of the print and mail business, which had a higher selling, generaland administrative expense cost structure.

 

The increase in CRM’sselling, general and administrative expenses as a percentage of revenue wasprimarily attributable to leveraging its infrastructure over the lower revenuebase.

 

The decrease in PortfolioManagement’s selling, general and administrative expenses resulted from a $13.8million decrease in fees for collection services provided by ARM. Included inPortfolio Management’s selling, general and administrative expenses for thenine months ended September 30, 2010 and 2009, was $33.8 million and $47.6million, respectively, of intercompany expense from ARM, for services providedto Portfolio Management, which was eliminated in consolidation.

 

*Reimbursable costs and fees. *Reimbursablecosts and fees consist of court costs, legal fees and repossession fees,representing out-of-pocket expenses that are reimbursed by our clients.Reimbursable costs and fees of $215.6 million and $44.8 million for the ninemonths ended September 30, 2010 and 2009, respectively, are recorded asboth revenue and operating expenses on the statement of operations. Theincrease in reimbursable costs and fees was due to the acquisition of TDM in August 2009.

 

*Restructuring charges. *During the nine months endedSeptember 30, 2010, we incurred restructuring charges of $13.8 million,related to streamlining the cost structure of the Company’s operations and ourdecision to limit purchases in the Portfolio Management business. The chargesconsisted primarily of costs associated with the closing of redundantfacilities and severance. This compares to $3.2 million of restructuringcharges for the nine months ended September 30, 2009.

 

*Depreciationand amortization.*  Depreciationand amortization decreased to $82.4 million for the nine months ended September 30,2010, from $91.0 million for the nine months ended September 30, 2009. Thedecrease was primarily attributable to lower depreciation resulting from alower level of property and equipment, as well as lower amortization becausecertain intangible assets are now fully amortized.

 

*Other income (expense).*  Interest expense decreased to $68.8 millionfor the nine months ended September 30, 2010, from $77.0 million for thenine months ended September 30, 2009. Interest expense for the nine monthsended September 30, 2010 and 2009 included $5.3 million and $10.2 million,respectively, of net losses from interest rate swap agreements and embeddedderivatives. The remaining decrease in interest expense was primarilyattributable to lower debt balances. Other income, net for the nine monthsended September 30, 2010 and 2009 included approximately $1.1 million and$6.7 million, respectively, of net gains resulting from foreign exchangecontracts.

 

*Income tax expense (benefit)*.  For the nine months ended September 30,2010, we recorded income tax expense of $7.0 million on a pre-tax loss of $66.4million, or an effective income tax rate of (10.6) percent. For the nine monthsended September 30, 2009, we recorded an income tax benefit of $1.1million on a pre-tax loss of $36.6 million, or an effective income tax rate of2.9 percent. The change in the effective income tax rate was due primarily 

 

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tothe recognition of a valuation allowance on certain domestic net deferred taxassets and income tax expense to be paid in state and foreign jurisdictions.

 

***Liquidity and Capital Resources***

 

Our primary sources of cashare cash flows from operations, including collections on purchased accountsreceivable, bank borrowings, and equity and debt offerings. Cash has been usedfor acquisitions, repayments of bank borrowings, purchases of equipment,purchases of accounts receivable, and working capital to support our growth.

 

The cash flow from ourcontingency collection business and our purchased portfolio business isdependent upon our ability to collect from consumers and businesses. Manyfactors, including the economy and our ability to hire and retain qualifiedcollectors and managers, are essential to our ability to generate cash flows.The cash flow from our first-party collections and our CRM businesses aredependent upon the volume of business that our clients place with us.Fluctuations in these factors that cause a negative impact on our businesscould have a material impact on our expected future cash flows.

 

The capital and creditmarkets have experienced significant volatility in the recent past and if thiscontinues, it is possible that our ability to access the capital and creditmarkets may be limited. Our senior notes and senior subordinated notes are assignedratings by certain rating agencies. Changes in our business environment,operating results, cash flows, or financial position could impact the ratingsassigned by these rating agencies. Significant changes in assigned ratingscould also significantly affect the costs of borrowing, which could have amaterial impact on our financial condition and results of operations.

 

We have a senior creditfacility that consists of a term loan ($508.7 million outstanding as of September 30,2010) and a $100.0 million revolving credit facility (none outstanding as of September 30,2010). Additionally, we have $165.0 million of floating rate senior notes and$200.0 million 11.875 percent senior subordinated notes outstanding. As aresult, we are significantly leveraged.

 

Borrowingsunder the senior credit facility are collateralized by substantially all of ourassets. The senior credit facility contains certain financial and othercovenants such as maintaining a maximum leverage ratio and a minimum interestcoverage ratio, and includes restrictions on, among other things, acquisitions,the incurrence of additional debt, investments, investments in purchasedaccounts receivable, disposition of assets, liens and dividends and otherdistributions. At September 30, 2010, our leverage ratio was 5.59,compared to the covenant maximum of 5.75, and our interest coverage ratio was1.85, compared to the covenant minimum of 1.80. We were in compliance with allrequired financial covenants under our senior credit facility and we were notaware of any events of default as of September 30, 2010.

 

Our ability to maintaincompliance with the financial covenants under our senior credit facility willbe highly dependent on our results of operations and, to the extent necessary,our ability to implement remedial measures such as further reductions inoperating costs. The economic and business climate in 2010 continues to be verydifficult and there is uncertainty as to whether the economic and businessclimate in 2011 will improve. In addition, other factors, such as the loss of asignificant client or reduced client volumes, may impact our ability to meetour debt covenants in the future. Therefore, no assurance can be given that wewill be able to maintain compliance with our financial covenants in futureperiods.

 

We may seek to amend ourexisting senior credit facility to obtain covenant compliance relief orwaivers, or seek additional funding or replacement financing. There can be noassurance that the Company will be able to obtain covenant relief, otherfunding or replacement financing. Any such covenant relief or new financing mayresult in additional fees and higher interest rates. In addition, we will seekto amend or replace our senior credit facility prior to the expiration of the currentfacility in May 2013.

 

If an event of default, suchas failure to comply with covenants, were to occur under the senior creditfacility and we were not able to obtain an amendment or waiver from thelenders, we would not be able to borrow under the revolving credit facility andthe lenders would be entitled to declare all amounts outstanding under thesenior credit facility immediately due and payable and foreclose on the pledgedassets. In addition, the acceleration of the amounts due under the seniorcredit facility could be an event of default under our Senior Notes and SeniorSubordinated Notes and entitle the holders to accelerate the payment of theseobligations. Under these circumstances, the acceleration of the payment of ourdebt would have a material adverse effect on our business.

 

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Our senior credit facility,as amended, does not give us the ability to use available excess cash flow torepurchase our senior notes and senior subordinated notes. However, our seniorcredit facility, as amended, permits us to repurchase our senior notes andsenior subordinated notes out of the net cash proceeds of new equityissuances. We are aware that our senior notes and senior subordinatednotes may trade at substantial discounts to their face amounts. We or ourstockholders may from time to time seek to retire or purchase our outstandingnotes through cash purchases and/or exchanges for equity securities, in openmarket purchases, privately negotiated transactions or otherwise. Ourstockholders who acquire such notes may seek to contribute them to us, forretirement, in exchange for the issuance of additional equity. The amountsinvolved may be material.

 

Beginning in 2009, wesignificantly reduced our purchases of accounts receivable and made a decisionto minimize further investments in the future. This decision resulted fromdeclines in liquidation rates, competition for purchased accounts receivableand the continued uncertainty of collectability. We currently expect to limitour purchases in 2010 to certain of our non-cancelable forward flowcommitments, which are estimated to be approximately $1.9 million for thefourth quarter of 2010.

 

*Cash Flows from OperatingActivities*.  Cashprovided by operating activities was $49.9 million for the nine months ended September 30,2010, compared to $93.9 million for the nine months ended September 30,2009. The decrease was primarily attributable to lower operating results forthe nine months ended September 30, 2010.

 

*Cash Flowsfrom Investing Activities.*  Cash provided by investing activities was$18.0 million for the nine months ended September 30, 2010, compared tocash used in investing activities of $12.1 million for the nine months ended September 30,2009. The increase in cash from investing activities was primarily attributableto lower purchases of accounts receivable and lower purchases of property andequipment, partially offset by lower collections of purchased accountsreceivable.

 

*Cash Flowsfrom Financing Activities.*  Cash used in financing activities was $75.5million for the nine months ended September 30, 2010, compared to $62.6million for the nine months ended September 30, 2009. The increase in cashused in financing activities was due primarily to $57.5 million of totalrepayments of borrowings under our senior credit facility during the ninemonths ended September 30, 2010, which was funded primarily by operatingcash. During the nine months ended September 30, 2009, we repaid a totalof $66.5 million of borrowings under our senior credit facility, which wasfunded primarily by the issuance of $40.0 million of stock.

 

*SeniorCredit Facility*.  Our seniorcredit facility is with a syndicate of financial institutions and consists of aterm loan and a $100.0 million revolving credit facility. We are required tomake quarterly principal repayments of $1.5 million on the term loan until itsmaturity in May 2013, at which time its remaining balance outstanding isdue. We are also required to make quarterly prepayments of 75 percent of theexcess cash flow from our purchased accounts receivable, and annual prepaymentsof 75 percent or 50 percent of our excess annual cash flow, based on ourleverage ratio, less the amounts paid during the year from the purchasedaccounts receivable excess cash flow prepayments. The revolving credit facilityrequires no minimum principal payments until its maturity in November 2011.At September 30, 2010, the balance outstanding on the term loan was $508.7million and there was no outstanding balance on the revolving credit facility.The availability of the revolving credit facility is reduced by any unusedletters of credit ($5.7 million at September 30, 2010). As of September 30,2010, we had $94.3 million of remaining availability under the revolving creditfacility.

 

Allborrowings bear interest at an annual variable rate, based on either the primerate (3.25 percent at September 30, 2010), the federal funds rate (0.15percent at September 30, 2010) or LIBOR (0.26 percent 30-day LIBOR at September 30,2010) plus an applicable margin, which is based on the type of rate and ourfunded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”)ratio, as defined in the loan agreement, subject to certain interest rateminimum requirements. We are charged a quarterly commitment fee on the unusedportion of the revolving credit facility at an annual rate of 0.50 percent. Theeffective interest rate on the senior credit facility was approximately 9.23percent and 9.32 percent for the three months ended September 30, 2010 and2009, respectively, and 9.21 percent and 8.42 percent for the nine months endedSeptember 30, 2010 and 2009, respectively.

 

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*Senior Notes and Senior Subordinated Notes.*  We have $165.0 million of floating ratesenior notes due 2013, referred to as the Senior Notes, and $200.0 million of11.875 percent senior subordinated notes due 2014, referred to as the SeniorSubordinated Notes, collectively referred to as the Notes. The Notes areguaranteed, jointly and severally, on a senior basis with respect to the SeniorNotes and on a senior subordinated basis with respect to the SeniorSubordinated Notes, in each case by all of our existing and future domesticrestricted subsidiaries (other than certain subsidiaries and joint venturesengaged in financing the purchase of delinquent accounts receivable portfoliosand certain immaterial subsidiaries). The Senior Notes bear interest at anannual rate equal to LIBOR plus 4.875 percent, reset quarterly.

 

Fora description of the covenants and other material terms of the Notes, see “Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations - Liquidity and Capital Resources” in our Annual Report on Form 10-K/Afor the year ended December 31, 2009.

 

*Nonrecourse Credit Facility.*  We have a nonrecourse credit facility thatfunded certain purchases of accounts receivable prior to 2009. We do not havethe ability to make any additional borrowings under the nonrecourse creditfacility. The financing was structured, depending on the size and nature of theportfolio to be purchased, either as a borrowing arrangement or under variousequity sharing arrangements. The lender financed non-equity borrowings withfloating interest at an annual rate equal to LIBOR (0.26 percent 30-day LIBORat September 30, 2010) plus 2.50 percent, or as negotiated. Theseborrowings are due two years from the date of each respective loan, unlessotherwise negotiated. As additional return on the debt financed portfolios thelender receives residual cash flows, as negotiated, which is defined as allcash collections after servicing fees, floating rate interest, repayment of theborrowing, and the initial investment by us, including interest. Residual cashflow payments are accrued for as embedded derivatives.

 

Borrowingsunder this credit facility are nonrecourse to us, except for the assets withinthe entities established in connection with the financing agreement. Thenonrecourse debt agreements contain a collections performance requirement,among other covenants, that, if not met, provides for cross-collateralizationwith any other portfolios financed by the nonrecourse lender, in addition toother remedies.

 

Thetotal nonrecourse debt outstanding was $3.1 million as of September 30,2010, which included $1.1 million of accrued residual interest. The effectiveinterest rate on these loans, including the residual interest component, wasapproximately 11.2 percent and 10.4 percent for the three and nine months endedSeptember 30, 2010, respectively. The nonrecourse debt agreements containcertain covenants such as meeting minimum cumulative collection targets. As of September 30,2010, we were in compliance with all required covenants.

 

*Contractual Obligations.* There have been no materialchanges, outside the ordinary course of our business, to our contractualobligations as reported in our Annual Report on Form 10-K/A for the yearended December 31, 2009.

 

***Market Risk***

 

Weare exposed to various types of market risk in the normal course of business,including the impact of interest rate changes, foreign currency exchange ratefluctuations, changes in corporate tax rates, and inflation. We employ riskmanagement strategies that may include the use of derivatives, such as interestrate swap agreements, interest rate cap agreements, and foreign currencyforwards and options to manage these exposures. As of September 30, 2010,none of our derivatives were accounted for as hedges. We do not enter intoderivatives for trading purposes.

 

*ForeignCurrency Risk.* Foreign currency exposures arise fromtransactions denominated in a currency other than the functional currency andfrom foreign denominated revenue and profit translated into U.S. dollars. Theprimary currencies to which we are exposed include the Philippine peso, theCanadian dollar, the British pound and the Australian dollar. Due to the sizeof the Philippine operations, we currently use forward exchange contracts tolimit potential losses in earnings or cash flows from adverse foreign currencyexchange rate movements. These contracts are entered into to protect againstthe risk that the eventual cash flows resulting from such contracts will be 

 

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adverselyaffected by changes in exchange rates. Our objective is to maintaineconomically balanced currency risk management strategies that provide adequatedownside protection.

 

*InterestRate Risk. *At September 30,2010, we had $676.8 million in outstanding variable rate borrowings. A materialchange in interest rates could adversely affect our operating results and cashflows. A 25 basis-point increase in interest rates could increase our annualinterest expense by $125,000 for each $50 million of variable debt outstandingfor the entire year. Currently, weprimarily use interest rate swap agreements to limit potential losses fromadverse interest rate changes. Our interest rate swap agreements minimize theimpact of LIBOR fluctuations on the interest payments on our floating ratedebt. We are required to pay the counterparties quarterly interest payments ata weighted average fixed rate, and we receive from the counterparties variablequarterly interest payments based on LIBOR.

 

***Critical Accounting Policies and Estimates***

 

*General.* The preparation of consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and the accompanying notes.Actual results could differ from those estimates. We believe the followingaccounting policies and estimates are the most critical and could have the mostimpact on our results of operations: goodwill, other intangible assets andpurchase accounting, revenue recognition for purchased accounts receivable,income taxes, and allowance for doubtful accounts. These are described in “Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and in note 2 to our 2009 financial statements, both of which areincluded in our Annual Report on Form 10-K/A for the year ended December 31,2009. During the nine months ended September 30, 2010, we did not make anymaterial changes to our estimates or methods by which estimates are derivedwith regard to our critical accounting policies.

 

***Recently Issued Accounting Guidance***

 

Fora discussion of recently issued accounting guidance, see note 19 in our Notesto Consolidated Financial Statements included in this Form 10-Q.

 

**Item 3.****   ****Quantitative and QualitativeDisclosures about Market Risk**

 

Included in Item 2, Management’s Discussion and Analysis of FinancialCondition and Results of Operations, of this Report on Form 10-Q.

 

**Item4.  Controls and Procedures**

 

Our management, with theparticipation of our chief executive officer and chief financial officer,conducted an evaluation of the effectiveness of our disclosure controls andprocedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e),as of September 30, 2010. Based on that evaluation, our chief executiveofficer and chief financial officer concluded that, as of the end of the periodcovered by this Report, our disclosure controls and procedures were effectivein reaching a reasonable level of assurance that the (i) informationrequired to be disclosed by us in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms and (ii) information required to be disclosed by us in the reportsthat we file or submit under the Exchange Act is accumulated and communicatedto our management including our principal executive and principal financialofficers, or persons performing similar functions, as appropriate to allowtimely decisions regarding required disclosure.

 

Our management, with theparticipation of our chief executive officer and chief financial officer, alsoconducted an evaluation of our internal control over financial reporting, asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f), to determinewhether any changes occurred during the quarter ended September 30, 2010,that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting. Based on that evaluation, therewere no such changes during the quarter ended September 30, 2010.

 

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A control system, no matterhow well conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Further, thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all controls systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within our company have been detected. Becauseof the inherent limitations in a cost-effective control system, misstatementsdue to error or fraud may occur and not be detected.

 

**Part II.  Other Information**

 

**Item 1.****   ****LegalProceedings**

 

The Company is party, from time to time, to variouslegal proceedings, regulatory investigations, client audits and taxexaminations incidental to its business. The Company continually monitors theselegal proceedings, regulatory investigations, client audits and taxexaminations to determine the impact and any required accruals. See “Item 3.Legal Proceedings” in the Company’s Annual Report on Form 10-K/A for theyear ended December 31, 2009.

 

Attorneys General:

 

From time to time, the Company receives subpoenas orother similar information requests from various states’ Attorneys General,requesting information relating to the Company’s debt collection practices insuch states. The Company responds to such inquires or investigations andprovides certain information to the respective Attorneys General offices. TheCompany believes it is in compliance with the laws of the states in which itdoes business relating to debt collection practices in all material respects.However, no assurance can be given that any such inquiries or investigationswill not result in a formal investigation or an enforcement action. Any suchenforcement actions could result in fines as well as the suspension ortermination of the Company’s 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 timein the ordinary course of its business. Management believes that none of theseother legal proceedings, regulatory investigations or tax examinations willhave a materially adverse effect on the financial condition or results ofoperations of the Company.

 

**Item 1A.********RiskFactors**

 

In addition to the other information set forth in thisQuarterly Report on Form 10-Q, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K/Afor the year ended December 31, 2009, referred to as the “2009 Form 10-K”,which could materially affect our business, financial condition or futureresults. The risk factors in our 2009 Form 10-K have not materiallychanged. The risks described in our 2009 Form 10-K are not the only riskswe face. Additional risks and uncertainties not currently known to us or thatwe currently deem to be immaterial also may materially adversely affect ourbusiness, financial condition and/or operating results.

 

**Item 2.****   ****UnregisteredSales of Equity Securities and Use of Proceeds**

 

None

 

**Item 3.****   ****DefaultsUpon Senior Securities**

 

None

 

**Item 4.****   ****[Removedand Reserved]**

 

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**Item 5.****   ****OtherInformation**

 

(a)   None.

 

(b)   Not applicable

 

**Item 6.****   ****Exhibits**

 
| 12     | Statement  of Computation of Ratio of Earnings to Fixed Charges.                                                                                                                   |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                               |
| 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. |

 

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**Signatures**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|   | NCO  Group, Inc.  |
|--------|------------------------|
|   |                   |
|   |                   |
| Date:  | November 15, 2010 |   | By: | /s/ Michael J. Barrist |
|   |                   | Michael  J. Barrist |
|   |                   | Chairman  of the Board, President |
|   |                   | and  Chief Executive Officer |
|   |                   | (principal  executive officer) |
|   |                   |   |
|   |                   |   |
| Date:  | November 15, 2010 |   | By: | /s/ John R. Schwab |
|   |                   | John  R. Schwab |
|   |                   | Executive  Vice President, Finance |
|   |                   | and  Chief Financial Officer |
|   |                   | (principal  financial and accounting officer) |

 

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Exhibit Index

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                    |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                               |
| 12                   |       | Statement  of Computation of Ratio of Earnings to Fixed Charges.                                                                                                                   |
|                 |       |                                                                                                                                                                               |
| 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. |

 

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