Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-Q**

 

**(Markone)**

 

**x****     ****Quarterly report pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934**

 

**For thequarterly period ended March 31, 2010**

 

**or**

 

**o****        ****Transition report pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**For the transition period from               to                **

 

**CommissionFile Number 333-165975; 333-158745; 333-150885**

 

**NCOGROUP, INC.**

(Exact name ofregistrant 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’stelephone number, including area code)

 

**NotApplicable**

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities 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

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate 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  Noo

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of 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 registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The number ofshares outstanding of each of the issuer’s classes of common stock as of May 14,2010 was: 2,960,847 shares of Class A common stock, $0.01 par value and399,814 shares of Class L common stock, $0.01 par value.

 

 

 

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**NCOGROUP, INC.**

 

**INDEX**

 
| ** **                                   | ** **                                                                                  | **PAGE** |
|----------------------------------------------|---------------------------------------------------------------------------------------------|----------|
|                                         |                                                                                        |     |
| **PART I – FINANCIAL INFORMATION** |                                                                                        |
|                                         |                                                                                        |     |
| Item 1.                                      | FINANCIAL STATEMENTS (Unaudited)                                                            |     |
|                                         |                                                                                        |     |
|                                         | Consolidated  Balance Sheets - March 31, 2010 and December 31, 2009               | 1        |
|                                         |                                                                                        |     |
|                                         | Consolidated  Statements of Operations - Three Months Ended March 31, 2010 and 2009    | 2        |
|                                         |                                                                                        |     |
|                                         | Consolidated  Statements of Cash Flows - Three Months Ended March 31, 2010 and 2009    | 3        |
|                                         |                                                                                        |     |
|                                         | Notes to Consolidated Financial Statements                                                  | 4        |
|                                         |                                                                                        |     |
| Item 2.                                      | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 27       |
|                                         |                                                                                        |     |
| Item 3.                                      | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 | 34       |
|                                         |                                                                                        |     |
| Item 4T.                                     | CONTROLS AND  PROCEDURES                                                                    | 34       |
|                                         |                                                                                        |     |
| **PART II  – OTHER INFORMATION**   |                                                                                        |
|                                         |                                                                                        |     |
| Item 1.                                      | LEGAL PROCEEDINGS                                                                           | 35       |
|                                         |                                                                                        |     |
| Item 1A.                                     | RISK FACTORS                                                                                | 35       |
|                                         |                                                                                        |     |
| Item 2.                                      | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                | 36       |
|                                         |                                                                                        |     |
| Item 3.                                      | DEFAULTS UPON  SENIOR SECURITIES                                                            | 36       |
|                                         |                                                                                        |     |
| Item 4.                                      | [REMOVED AND RESERVED]                                                                      | 36       |
|                                         |                                                                                        |     |
| Item 5.                                      | OTHER INFORMATION                                                                           | 36       |
|                                         |                                                                                        |     |
| Item 6.                                      | EXHIBITS                                                                                    | 36       |
|                                         |                                                                                        |     |
| SIGNATURES                                   | 37                                                                                          |

 

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**Part I.Financial Information**

**Item1. Financial Statements**

**NCOGROUP, INC.**

**Consolidated Balance Sheets**

**(Unaudited)**

**(Amountsin thousands, except per share amounts)**

 
| ** **                                                                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                         | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **                                                                                                                         | ** ** | ** **         | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                         | ** ** | ** **         | ** ** | ** **            | ** ** |
| ** **                                                                                                                         | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current  assets:                                                                                                                   |       |               |       |                  |       |
| Cash  and cash equivalents                                                                                                         |       | $                  | 34,100     |                  | $          | 39,221 |   |
| Accounts  receivable, trade, net of allowance for doubtful accounts of $5,333 and  $5,824, respectively                            |       | 178,271            |       | 178,067               |       |
| Purchased  accounts receivable, current portion, net of allowance for impairment of  $142,951 and $144,397, respectively           |       | 47,867             |       | 50,960                |       |
| Deferred  income taxes                                                                                                             |       | 1,779              |       | 1,753                 |       |
| Prepaid  expenses and other current assets                                                                                         |       | 61,416             |       | 61,981                |       |
| Total  current assets                                                                                                              |       | 323,433            |       | 331,982               |       |
|                                                                                                                               |       |               |       |                  |       |
| Funds  held on behalf of clients (note 9)                                                                                          |       |               |       |                  |       |
|                                                                                                                               |       |               |       |                  |       |
| Property  and equipment, net                                                                                                       |       | 116,913            |       | 122,317               |       |
|                                                                                                                               |       |               |       |                  |       |
| Other  assets:                                                                                                                     |       |               |       |                  |       |
| Goodwill                                                                                                                           |       | 535,924            |       | 535,857               |       |
| Trade  name, net of accumulated amortization                                                                                       |       | 83,811             |       | 83,912                |       |
| Customer  relationships and other intangible assets, net of accumulated amortization                                               |       | 242,630            |       | 258,682               |       |
| Purchased  accounts receivable, net of current portion                                                                             |       | 77,006             |       | 87,469                |       |
| Deferred  income taxes                                                                                                             |       | 3,556              |       | 3,548                 |       |
| Other  assets                                                                                                                      |       | 36,867             |       | 36,268                |       |
| Total  other assets                                                                                                                |       | 979,794            |       | 1,005,736             |       |
| Total  assets                                                                                                                      |       | $                  | 1,420,140  |                  | $          | 1,460,035 |   |
|                                                                                                                               |       |               |       |                  |       |
|                                                                                                                               | ** ** | ** **         | ** ** | ** **            | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                     | ** ** | ** **         | ** ** | ** **            | ** ** |
|                                                                                                                               |       |               |       |                  |       |
| Current  liabilities:                                                                                                              |       |               |       |                  |       |
| Long-term  debt, current portion                                                                                                   |       | $                  | 16,227     |                  | $          | 41,699 |   |
| Income  taxes payable                                                                                                              |       | 8,656              |       | 2,838                 |       |
| Accounts  payable                                                                                                                  |       | 34,405             |       | 15,865                |       |
| Accrued  expenses                                                                                                                  |       | 95,156             |       | 107,250               |       |
| Accrued  compensation and related expenses                                                                                         |       | 46,213             |       | 38,094                |       |
| Deferred  revenue, current portion                                                                                                 |       | 37,561             |       | 39,528                |       |
| Total  current liabilities                                                                                                         |       | 238,218            |       | 245,274               |       |
|                                                                                                                               |       |               |       |                  |       |
| Funds  held on behalf of clients (note 9)                                                                                          |       |               |       |                  |       |
|                                                                                                                               |       |               |       |                  |       |
| Long-term  liabilities:                                                                                                            |       |               |       |                  |       |
| Long-term  debt, net of current portion                                                                                            |       | 888,085            |       | 909,831               |       |
| Deferred  income taxes                                                                                                             |       | 34,033             |       | 31,972                |       |
| Deferred  revenue, net of current portion                                                                                          |       | 763                |       | 1,147                 |       |
| Other  long-term liabilities                                                                                                       |       | 32,328             |       | 31,261                |       |
|                                                                                                                               |       |               |       |                  |       |
| Commitments  and contingencies (note 16)                                                                                           |       |               |       |                  |       |
|                                                                                                                               |       |               |       |                  |       |
| Stockholders’  equity:                                                                                                        |       |               |       |                  |       |
| Preferred  stock, par value $0.01 per share, 7,500 shares authorized, 3,262 and 3,152  shares issued and outstanding, respectively |       | 32                 |       | 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                                                                                                        |       | 764,012            |       | 763,828               |       |
| Accumulated  other comprehensive income (loss)                                                                                     |       | 1,029              |       | (551                  | )          |
| Accumulated  deficit                                                                                                               |       | (549,514           | )          | (534,242              | )          |
| Total  NCO Group, Inc. stockholders’ equity                                                                              |       | 215,593            |       | 229,100               |       |
| Noncontrolling  interests                                                                                                          |       | 11,120             |       | 11,450                |       |
| Total  stockholders’ equity                                                                                                   |       | 226,713            |       | 240,550               |       |
| Total  liabilities and stockholders’ equity                                                                                   |       | $                  | 1,420,140  |                  | $          | 1,460,035 |   |

 

See accompanyingnotes.

 

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**NCOGROUP, INC.**

**Consolidated Statements of Operations**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                        | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                        | ** ** | **March 31,**             | ** ** |
| ** **                                                        | ** ** | **2010**                       | ** ** | **2009** | ** ** |
|                                                              |       |                           |       |   |   |
| Revenues:                                                         |       |                           |       |   |   |
| Services                                                          |       | $                              | 322,926    |   | $ | 367,501 |   |
| Portfolio                                                         |       | 16,297                         |       | 25,654 |   |
| Portfolio  sales                                                  |       | —                         |       | 361 |   |
| Reimbursable  costs and fees                                      |       | 73,845                         |       | 8,613 |   |
|                                                              |       |                           |       |   |   |
| Total  revenues                                                   |       | 413,068                        |       | 402,129 |   |
|                                                              |       |                           |       |   |   |
| Operating  costs and expenses:                                    |       |                           |       |   |   |
| Payroll  and related expenses                                     |       | 186,268                        |       | 205,765 |   |
| Selling,  general and administrative expenses                     |       | 111,532                        |       | 133,579 |   |
| Reimbursable  costs and fees                                      |       | 73,845                         |       | 8,613 |   |
| Depreciation  and amortization expense                            |       | 27,730                         |       | 31,082 |   |
| Restructuring  charges                                            |       | 1,434                          |       | 443 |   |
| Total  operating costs and expenses                               |       | 400,809                        |       | 379,482 |   |
|                                                              |       |                           |       |   |   |
| Income  from operations                                           |       | 12,259                         |       | 22,647 |   |
|                                                              |       |                           |       |   |   |
| Other  income (expense):                                          |       |                           |       |   |   |
| Interest  and investment income                                   |       | 88                             |       | 342 |   |
| Interest  expense                                                 |       | (23,601                        | )          | (23,110 | ) |
| Other  expense, net                                               |       | (44                            | )          | (3,704 | ) |
| Total  other income (expense)                                     |       | (23,557                        | )          | (26,472 | ) |
| Loss  before income taxes                                         |       | (11,298                        | )          | (3,825 | ) |
|                                                              |       |                           |       |   |   |
| Income  tax expense (benefit)                                     |       | 3,040                          |       | (1,146 | ) |
|                                                              |       |                           |       |   |   |
| Net  loss                                                         |       | (14,338                        | )          | (2,679 | ) |
|                                                              |       |                           |       |   |   |
| Less:  Net income (loss) attributable to noncontrolling interests |       | 934                            |       | (570 | ) |
|                                                              |       |                           |       |   |   |
| Net  loss attributable to NCO Group, Inc.                    |       | $                              | (15,272    | ) | $ | (2,109 | ) |

 

See accompanyingnotes.

 

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**NCOGROUP, INC**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                                       | ** ** | **For the Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                       | ** ** | **March 31,**             | ** ** |
| ** **                                                                       | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| ** **                                                                       | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Cash  flows from operating activities:                                           |       |                           |       |   |   |
| Net  loss                                                                        |       | $                              | (14,338    | ) | $ | (2,679 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities: |       |                           |       |   |   |
| Depreciation  and amortization                                                   |       | 27,730                         |       | 31,082 |   |
| Provision  for doubtful accounts                                                 |       | 384                            |       | 1,213 |   |
| (Recovery)  impairment of purchased accounts receivable                          |       | (1,446                         | )          | 33 |   |
| Noncash  interest                                                                |       | 1,673                          |       | 1,220 |   |
| Noncash  net losses on derivative instruments                                    |       | 545                            |       | 4,452 |   |
| Gain  on sale of purchased accounts receivable                                   |       | —                         |       | (361 | ) |
| Deferred  income taxes                                                           |       | 1,079                          |       | (1,066 | ) |
| Other                                                                            |       | 797                            |       | 880 |   |
| Changes  in operating assets and liabilities, net of acquisitions:               |       |                           |       |   |   |
| Accounts  receivable, trade                                                      |       | (407                           | )          | 2,387 |   |
| Accounts  payable and accrued expenses                                           |       | 13,902                         |       | (12,618 | ) |
| Income  taxes payable                                                            |       | 5,259                          |       | (622 | ) |
| Other  assets and liabilities                                                    |       | 1,946                          |       | 16,277 |   |
| Net  cash provided by operating activities                                       |       | 37,124                         |       | 40,198 |   |
|                                                                             |       |                           |       |   |   |
| Cash  flows from investing activities:                                           |       |                           |       |   |   |
| Purchases  of accounts receivable                                                |       | (5,830                         | )          | (16,431 | ) |
| Collections  applied to principal of purchased accounts receivable               |       | 20,829                         |       | 25,124 |   |
| Proceeds  from sales and resales of purchased accounts receivable                |       | —                         |       | 525 |   |
| Purchases  of property and equipment                                             |       | (5,958                         | )          | (9,793 | ) |
| Net  cash paid related to acquisitions                                           |       | —                         |       | (32 | ) |
| Other                                                                            |       | 20                             |       | 149 |   |
| Net  cash provided by (used in) investing activities                             |       | 9,061                          |       | (458 | ) |
|                                                                             |       |                           |       |   |   |
| Cash  flows from financing activities:                                           |       |                           |       |   |   |
| Repayment  of notes payable                                                      |       | (4,413                         | )          | (8,927 | ) |
| Net  repayments of borrowings under revolving credit facility                    |       | (17,000                        | )          | (38,000 | ) |
| Repayment  of borrowings under senior term loan                                  |       | (25,803                        | )          | (16,514 | ) |
| Payment  of fees to obtain debt                                                  |       | (2,597                         | )          | (2,477 | ) |
| Return  of investment in subsidiary to noncontrolling interests                  |       | (1,264                         | )          | (2,317 | ) |
| Issuance  of stock, net                                                          |       | —                         |       | 40,000 |   |
| Net  cash used in financing activities                                           |       | (51,077                        | )          | (28,235 | ) |
|                                                                             |       |                           |       |   |   |
| Effect  of exchange rate on cash                                                 |       | (229                           | )          | (322 | ) |
|                                                                             |       |                           |       |   |   |
| Net  (decrease) increase in cash and cash equivalents                            |       | (5,121                         | )          | 11,183 |   |
|                                                                             |       |                           |       |   |   |
| Cash  and cash equivalents at beginning of the period                            |       | 39,221                         |       | 29,880 |   |
|                                                                             |       |                           |       |   |   |
| Cash  and cash equivalents at end of the period                                  |       | $                              | 34,100     |   | $ | 41,063 |   |

 

See accompanying notes.

 

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**NCO GROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

**1.****             ****Nature of Operations:**

 

NCO Group, Inc. is a holding company and conductssubstantially all of its business operations through its subsidiaries(collectively, the “Company” or “NCO”). NCO is an international provider ofbusiness process outsourcing solutions, primarily focused on accountsreceivable management (“ARM”) and customer relationship management (“CRM”). NCOprovides services through over 100 offices throughout North America, Asia,Europe and Australia. The Company provides services to more than 18,500 activeclients, including many of the Fortune 500, supporting a broad spectrum of industries,including financial services, telecommunications, healthcare, retail andcommercial, utilities, education and government, technology andtransportation/logistics services. These clients are primarily locatedthroughout North America, Europe and Australia. Excluding reimbursable costsand fees, the Company’s largest client during the three months ended March 31,2010, was in the telecommunications sector and represented 8.7 percent of theCompany’s consolidated revenue for the three months ended March 31, 2010.

 

Historically, the Company has also purchased and collectedpast due consumer accounts receivable from consumer creditors. During 2009, theCompany significantly reduced its purchases of accounts following declines inliquidation rates, competition for purchased accounts receivable and thecontinued uncertainty of collectibility. The Company currently expects to limitpurchases in 2010 to certain of its non-cancelable forward-flow commitments.Additionally, the Company may opportunistically purchase accounts receivablethat allow the Company to leverage meaningful third-party servicing contracts.The Company’s amended senior credit facility (note 11) limits purchases in 2010to $20 million and purchases in 2011 and each year thereafter to $10 millionper year.

 

The Company’s business consists of three operating segments:ARM, CRM and Portfolio Management.

 

**2.     Accounting Policies:**

 

*Principles ofConsolidation:*

 

The consolidatedfinancial statements include the accounts of the Company and all subsidiariesand entities controlled by the Company. All intercompany accounts andtransactions have been eliminated.

 

The Company alsoconsiders whether any of its investments represent variable interest entitiesthat are required to be consolidated by the primary beneficiary. The primarybeneficiary is the entity that holds the majority of the beneficial interestsin the variable interest entity.  Avariable interest entity is an entity for which the primary beneficiary’sinterest in the entity can change with changes in factors other than the amountof investment in the entity.

 

The Company owns 50percent of entities that purchase portfolios of purchased accounts receivable,which it consolidates. Based on its evaluation of these entities, the Companyis the primary beneficiary.

 

*InterimFinancial Information:*

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim financial information. Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for annual financial statements. The December 31,2009 balance sheet was derived from the consolidated audited financialstatements of the Company, but does not include all disclosures required byaccounting principles generally accepted in the United States of America. Inthe opinion of management, all adjustments (consisting of only normal recurringadjustments, except as otherwise disclosed herein) considered necessary for afair presentation have been included. Because of the seasonal nature of theCompany’s business, operating results for the three-month period ended March 31,2010, are not necessarily indicative of the results that may be expected forthe year ending December 31, 2010, or for any other interim period.

 

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

 

*InterimFinancial Information (continued):*

 

The accompanyingunaudited consolidated financial statements should be read in conjunction withthe Company’s consolidated financial statements and footnotes thereto includedin the Company’s Annual Report on Form 10-K/A for the year ended December 31,2009, filed with the Securities and Exchange Commission (“SEC”).

 

*Use ofEstimates:*

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand the accompanying notes. Actual results could differ from those estimates.

 

*Reclassifications:*

 

Certain amounts in the statement ofoperations and the statement of cash flows for the three months ended March 31,2009, have been reclassified for comparative purposes.

 

**3.     Restructuring Charges:**

 

The Company has severalrestructuring plans under which it has recorded restructuring charges,primarily in conjunction with streamlining the cost structure of the Company’soperations. These charges primarily related to the elimination of certainredundant facilities and severance costs. The Company currently expects to paythe remaining severance balance through 2013 and the remaining lease balancethrough 2016.

 

The following presentsthe activity in the accruals recorded for restructuring charges (amounts inthousands):

 
| ** **                         | ** ** | **Leases** | ** ** | **Severance** | ** ** | **Total** | ** ** |
|------------------------------------|------------|------------|------------|---------------|------------|-----------|------------|
| Balance  at December 31, 2009 |       | $          | 8,562      |          | $          | 2,997     |       | $ | 11,559 |   |
| Accruals                           |       | 128        |       | 1,306         |       | 1,434     |       |
| Cash  payments                     |       | (953       | )          | (1,332        | )          | (2,285    | )          |
| Balance  at March 31, 2010    |       | $          | 7,737      |          | $          | 2,971     |       | $ | 10,708 |   |

 

**4.     Business Combinations:**

 

On August 31, 2009,the Company acquired TSYS Total Debt Management, Inc. (“TDM”), a providerof accounts receivable management legal network solutions, for $4.5 million incash which included $1.3 million of acquired cash, subject to certainpost-closing adjustments. The Company allocated $694,000 of the purchase priceto the customer relationships and recorded goodwill of $1.4 million. The TDMacquisition was included in the ARM segment.

 

**5.      Disposal of Business:**

 

In October 2009, theCompany sold its print and mail business, from the ARM segment, forapproximately $18.7 million in cash.  Thenet proceeds from the sale were used to pay down the Company’s senior termloan.

 

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**6.      Deferred Revenue:**

 

Deferred revenueprimarily relates to prepaid fees for ARM collection and letter services forwhich revenue is recognized when the services are provided or the time periodfor which the Company is obligated to provide the services has expired. Thefollowing summarizes the change in the balance of deferred revenue (amounts inthousands):

 
| Balance  at December 31, 2009 |   | $       | 40,675 |   |
|------------------------------------|--------|---------|--------|--------|
| Additions                          |   | 8,182   |   |
| Revenue  recognized                |   | (10,533 | )      |
| Balance  at March 31, 2010    |   | $       | 38,324 |   |

 

**7.      Fair Value:**

 

*RecurringMeasurement:*

 

The Company uses variousvaluation techniques and assumptions when measuring fair value of its assetsand liabilities. The Company utilizes market data or assumptions that marketparticipants would use in pricing the asset or liability, including assumptionsabout risk and the risks inherent in the inputs to the valuation technique.These inputs can be readily observable (“Level 1”), market corroborated (“Level2”), or generally unobservable (“Level 3”). The significant majority of thefair value amounts included in the Company’s current period earnings resultedfrom Level 2 fair value methodologies; that is, the Company is able to valuethe assets and liabilities based on observable market data for similar instruments(the “market approach”). The Company applied an income approach to amountsincluded in its current period earnings resulting from Level 3 fair valuemethodologies.

 

The financial assets andliabilities are classified in their entirety based on the lowest level of inputthat is significant to the fair value measurement. The Company’s assessment ofthe significance of a particular input to the fair value measurement requiresjudgment and may affect the valuation of fair value assets and liabilities andtheir placement within the fair value hierarchy levels. The following tablesets forth, by level within the fair value hierarchy, the Company’s financialassets and liabilities that were measured at fair value on a recurring basis(amounts in thousands):

 
| ** **                  | ** ** | **At Fair Value as of** | ** ** |
|-----------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
| ** **                  | ** ** | **Level 1**             | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets:                     |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Forward  exchange contracts |       | $                       | —     |   | $ | 117 |   | $ | — |   | $ | 117 |   | $ | — |   | $ | 2 |   | $ | — |   | 2 |   |
|                        |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  rate swaps        |       | —                  |       | 7,960 |   | — |   | 7,960 |   | — |   | 9,104 |   | — |   | 9,104 |   |
| Forward  exchange contracts |       | —                  |       | — |   | — |   | — |   | — |   | 60 |   | — |   | 60 |   |
| Embedded  derivatives       |       | —                  |       | — |   | 2,593 |   | 2,593 |   | — |   | — |   | 3,306 |   | 3,306 |   |
|                        |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  liabilities            |       | $                       | —     |   | $ | 7,843 |   | $ | 2,593 |   | $ | 10,436 |   | $ | — |   | $ | 9,162 |   | $ | 3,306 |   | $ | 12,468 |   |
|                             |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

During the three monthsended March 31, 2010, there were no transfers in or out of the Company’sLevel 1, Level 2 or Level 3 fair value measurements.

 

Derivatives includeinterest rate swaps and foreign currency forward exchange contracts. To valuethese derivatives, the Company obtains quotes from its counterparties. TheCompany considers such quotes to be Level 2 measurements. To gain assurancethat such quotes reflect market participant views, the Company independentlyvalues its interest rate swaps, and independently validates the relevantexchange rates of its forward exchange contracts.

 

6

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

 

*RecurringMeasurement (continued):*

 

For purposes of valuationadjustments to its interest rate swap derivative positions, the Company hasevaluated liquidity premiums that may be demanded by market participants, aswell as the credit risk of its counterparties and its own credit. The Companyhas considered factors such as the likelihood of default by itself andcounterparties, its net exposures and remaining maturities in determining theappropriate fair value adjustment to record.

 

Embedded derivativesrepresent 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.

 

The following summarizesthe change in the fair value of the embedded derivatives (amounts in thousands):

 
| ** **                      | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **March 31,**             | ** ** |
| ** **                      | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Balance  at beginning of period |       | $                              | 3,306      |   | $ | 4,457 |   |
| Additions                       |       | 225                            |       | 321 |   |
| Payments                        |       | (438                           | )          | (578 | ) |
| Changes  in fair value          |       | (500                           | )          | (670 | ) |
| Balance  at end of period       |       | $                              | 2,593      |   | $ | 3,530 |   |

 

*Non-RecurringMeasurement:*

 

The Company has goodwilland other intangible assets that are measured at fair value on a non-recurringbasis and are adjusted to fair value only when their carrying values exceedtheir fair values. Inputs used to value these assets are considered Level 3measurements because they are unobservable.

 

During the three monthsended March 31, 2010 and 2009, there were no adjustments to fair value asthere were no indicators that would have required interim testing. The Companyperforms its annual testing of indefinite-lived intangible assets during thefourth quarter of each year.

 

*FairValue of Financial Instruments:*

 

The following methods andassumptions were used to estimate the fair value of each class of financialinstrument for which it is practicable to estimate that value:

 

Cashand Cash Equivalents, Trade Accounts Receivable, and Accounts Payable:

 

The carrying amount reported in the balance sheetsapproximates fair value because of the short maturity of these instruments.

 

PurchasedAccounts Receivable:

 

The Company recordspurchased accounts receivable at cost, which is discounted from the contractualreceivable balance. The carrying value of purchased accounts receivable, whichis estimated based upon future cash flows, approximates fair value at March 31,2010 and December 31, 2009.

 

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

 

*FairValue of Financial Instruments (continued):*

 

NotesReceivable:

 

The Company had notesreceivable of $5.1 million as of March 31, 2010 and December 31,2009. The carrying amounts reported in the balance sheets, included in currentand long-term other assets, approximated market rates for notes with similarterms and maturities, and, accordingly, the carrying amounts approximated fairvalue. The Company continually evaluates the collectibility of these notes.

 

Long-TermDebt:

 

The following presentsthe carrying values and the estimated fair values of the Company’s long-termdebt at March 31, 2010 (amounts in thousands):

 
| ** **                   | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
|------------------------------|------------|--------------------|------------|----------------|------------|
| Senior  term loan            |       | $                  | 523,457    |           | $          | 542,486 |   |
| Senior  subordinated notes   |       | 200,000            |       | 183,000        |       |
| Senior  notes                |       | 165,000            |       | 141,075        |       |
| Nonrecourse  credit facility |       | 10,026             |       | 10,026         |       |
|                              |            |                    |            |                |            |  |  |

 

The fair values of theCompany’s senior term loan and senior revolving credit facility were based onmarket interest rates for debt with similar terms and maturities. The fairvalues of the Company’s senior notes and senior subordinated notes were basedon their approximate trading prices at March 31, 2010. The stated interestrates of the Company’s nonrecourse credit facility approximate market rates fordebt with similar terms and maturities, and, accordingly, the carrying valueapproximates fair value.

 

**8.     Purchased Accounts Receivable:**

 

As of March 31,2010, the carrying value of Portfolio Management’s and ARM’s purchased accountsreceivable were $118.6 million and $6.3 million, respectively. The totaloutstanding balance due, representing the original undiscounted contractualamount less collections since acquisition, was $55.5 billion and $55.2 billionat March 31, 2010 and December 31, 2009, respectively.

 

The following summarizesthe change in the carrying amount of the purchased accounts receivable (amountsin thousands):

 
| ** **                                                           | ** ** | **For the Three Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                           | ** ** | **March 31,**             | ** ** |
| ** **                                                           | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Balance  at beginning of period                                      |       | $                              | 138,429    |   | $ | 185,659 |   |
| Purchases                                                            |       | 5,830                          |       | 16,431 |   |
| Collections                                                          |       | (35,371                        | )          | (50,346 | ) |
| Revenue  recognized                                                  |       | 14,542                         |       | 25,222 |   |
| Proceeds  from portfolio sales and resales applied to carrying value |       | —                         |       | (164 | ) |
| Recovery  (impairment)                                               |       | 1,446                          |       | (33 | ) |
| Other                                                                |       | (3                             | )          | 345 |   |
| Balance  at end of period                                            |       | $                              | 124,873    |   | $ | 177,114 |   |

 

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

 

The following presentsthe change in the allowance for impairment of purchased accounts receivable(amounts in thousands):

 
| ** **                      | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **March 31,**             | ** ** |
| ** **                      | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Balance  at beginning of period |       | $                              | 144,397    |   | $ | 123,804 |   |
| Additions                       |       | 1,175                          |       | 2,790 |   |
| Recoveries                      |       | (2,621                         | )          | (2,757 | ) |
| Other                           |       | —                         |       | (36 | ) |
| Balance  at end of period       |       | $                              | 142,951    |   | $ | 123,801 |   |

 

Accretable yieldrepresents the excess of the cash flows expected to be collected during thelife 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** | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **March 31,**             | ** ** |
| ** **                                            | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Balance  at beginning of period                       |       | $                              | 112,108    |   | $ | 167,411 |   |
| Additions                                             |       | 4,243                          |       | 19,300 |   |
| Revenue  recognition                                  |       | (14,542                        | )          | (25,222 | ) |
| Reclassifications  from (to) nonaccretable difference |       | 1,703                          |       | (7,339 | ) |
| Foreign  currency translation adjustment              |       | 22                             |       | 46 |   |
| Balance  at end of period                             |       | $                              | 103,534    |   | $ | 154,196 |   |

 

During the three monthsended March 31, 2010 and 2009, the Company purchased accounts receivablewith a cost of $5.8 million and $16.4 million, respectively, that had contractuallyrequired payments receivable at the date of acquisition of $387.8 million and$1.2 billion, respectively, and expected cash flows at the date of acquisitionof $10.1 million and $35.7 million, respectively.

 

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

 

In the course of theCompany’s regular business activities as a provider of accounts receivablemanagement services, the Company receives clients’ funds arising from thecollection of accounts placed with the Company. These funds are placed insegregated cash accounts and are generally remitted to clients within 30 days.Funds held on behalf of clients of $85.4 million and $75.1 million at March 31,2010 and December 31, 2009, respectively, have been shown net of theiroffsetting liability for financial statement presentation.

 

**10.  Goodwill and Other Intangible Assets:**

 

Goodwill is allocated andtested at the reporting unit level. Goodwill is tested for impairment each yearduring the fourth quarter, and between annual tests if an event occurs orcircumstances change that would more likely than not reduce the fair value of areporting unit below its carrying amount. No event occurred or circumstanceschanged since the last annual test that would more likely than not reduce thefair value of a reporting unit below its carrying value. However, if theCompany continues to experience adverse effects of the challenging economic andbusiness environment, including changes in financial projections, the Companymay have to recognize an impairment of all or some portion of itsgoodwill.  The Company’s reporting unitsare ARM, CRM and Portfolio Management.

 

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**10.  Goodwill and Other Intangible Assets (continued):**

 

The following summarizesthe change in the Company’s reporting 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   |       |
| TDM  acquisition                        |       | 12      |       | —  |       | 12        |       |
| Foreign  currency translation and other |       | 55      |       | —  |       | 55        |       |
| Balance  at March 31, 2010:        |       |    |       |    |       |      |       |
| Goodwill                                |       | 552,114 |       | 128,365 |       | 680,479   |       |
| Accumulated  impairment                 |       | (73,205 | )          | (71,350 | )          | (144,555  | )          |
|                                    |       | $       | 478,909    |    | $          | 57,015    |       | $ | 535,924 |   |

 

Trade name includes theNCO trade name, which is an indefinite-lived intangible asset and therefore isnot subject to amortization.  Similar togoodwill, the NCO trade name is reviewed at least annually for impairment. At March 31,2010, the balance of the NCO trade name was $82.6 million.

 

Trade name also includescertain trade names which are not considered to have indefinite lives and aretherefore subject to amortization. At March 31, 2010, the gross carryingamount of these trade names was $2.0 million, and the accumulated amortizationof the OSI trade names was $842,000.

 

Other intangible assetssubject to amortization consist of customer relationships and non-competeagreements. The following represents the other intangible assets subject toamortization (amounts in thousands):

** **
| ** **              | ** ** | **March 31, 2010**    | ** ** | **December 31, 2009**    | ** ** |
|-------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Customer  relationships |       | $                          | 437,489    |                          | $          | 196,317 |   | $ | 437,412 |   | $ | 180,379 |   |
| Non-compete  agreements |       | 3,955                      |       | 2,497                         |       | 3,955 |   | 2,306 |   |
| Total                   |       | $                          | 441,444    |                          | $          | 198,814 |   | $ | 441,367 |   | $ | 182,685 |   |

 

The Company recordedamortization expense for intangible assets of $16.1 million and $16.9 millionduring the three months ended March 31, 2010 and 2009, respectively.

 

The following representsthe Company’s expected amortization expense from these other intangible assetsover the next five years (amounts in thousands):

 
| **For the Years Ended  December 31,** | ** ** | **Estimated  Amortization Expense** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|
| 2010                                       |       | $                                   | 64,366     |   |
| 2011                                       |       | 63,982                              |       |
| 2012                                       |       | 59,730                              |       |
| 2013                                       |       | 53,517                              |       |
| 2014                                       |       | 15,727                              |       |
|                                            |            |                                     |            |  |

 

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**11.  Long-Term Debt:**

 

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

 
| ** **                        | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------------------------|------------|
| Senior  term loan                 |       | $                       | 523,457    |                       | $          | 549,260 |   |
| Senior  revolving credit facility |       | —                  |       | 17,000                     |       |
| Senior  subordinated notes        |       | 200,000                 |       | 200,000                    |       |
| Senior  notes                     |       | 165,000                 |       | 165,000                    |       |
| Nonrecourse  credit facility      |       | 10,026                  |       | 14,322                     |       |
| Capital  leases                   |       | 4,672                   |       | 4,789                      |       |
| Other                             |       | 1,157                   |       | 1,159                      |       |
| Less  current portion             |       | (16,227                 | )          | (41,699                    | )          |
|                              |       | $                       | 888,085    |                       | $          | 909,831 |   |

 

*Senior Credit Facility:*

 

The Company has a seniorcredit facility (“Credit Facility”) with a syndicate of financial institutionsthat consists of a term loan and a $100.0 million revolving credit facility.The Company is required to make quarterly principal repayments of $1.5 millionon the term loan until its maturity in May 2013, at which time itsremaining balance outstanding is due. The Company is also required to makequarterly prepayments of 75 percent of the excess cash flow from the Company’spurchased accounts receivable, and annual prepayments of 75 percent or 50percent of its excess annual cash flow, based on its leverage ratio, less theamounts paid during the year from the purchased accounts receivable excess cashflow prepayments. The revolving credit facility requires no minimum principalpayments until its maturity in November 2011. The availability of therevolving credit facility is reduced by any unused letters of credit ($12.3million at March 31, 2010). As of March 31, 2010, the Company had$87.7 million of remaining availability under the revolving credit facility.

 

On March 31, 2010,the Company amended the Credit Facility to, among other things, adjust thefinancial covenants, including increasing maximum leverage ratios anddecreasing minimum interest coverage ratios, and adjust the required principalprepayments.

 

All borrowings bearinterest at an annual rate equal to either, at the option of the Company, (i) thehigher of the prime rate (3.25 percent at March 31, 2010), the federalfunds rate (0.09 percent at March 31, 2010) plus 0.50 percent, or LIBOR(0.23 percent 30-day LIBOR at March 31, 2010) plus 1.00 percent, plus amargin of 2.25 percent to 2.75 percent in the case of the revolving creditfacility and 3.75 percent to 4.00 percent in the case of the term loan, basedon the Company’s funded debt to earnings before interest, taxes, depreciationand amortization (“EBITDA”) ratio, as defined; or (ii) LIBOR, but in noevent less than 2.50 percent, plus a margin of 3.25 percent to 3.75 percent inthe case of the revolving credit facility and 4.75 percent to 5.00 percent inthe case of the term loan, based on the Company’s funded debt to EBITDA ratio,as defined. The Company is charged a quarterly commitment fee on the unusedportion of the revolving credit facility at an annual rate of 0.50 percent. Forthe three months ended March 31, 2010 and 2009, the effective interestrate on the Credit Facility was approximately 9.23 percent and 7.03 percent,respectively. The Credit Facility also requires that the Company obtain certainlevels of interest rate protection.

 

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

 

*Senior Credit Facility (continued):*

 

Borrowings under the CreditFacility are collateralized by substantially all of the Company’s assets. TheCredit Facility contains certain financial and other covenants such asmaintaining a maximum leverage ratio and a minimum interest coverage ratio, andincludes restrictions on, among other things, acquisitions, the incurrence ofadditional debt, investments, investments in purchased accounts receivable, dispositionof assets, liens and dividends and other distributions. If an event of default,such as failure to comply with covenants or a change of control, and thefailure to negotiate and obtain any required relief from the Company’s lenders,were to occur under the Credit Facility, the lenders would be entitled todeclare all amounts outstanding under it immediately due and payable andforeclose on the pledged assets. Under these circumstances, the acceleration ofthe Company’s debt could have a material adverse effect on its business.Notwithstanding the foregoing, the Company may from time to time seek to amendits existing Credit Facility or obtain other funding or additional financing,which may result in additional fees and higher interest rates. Amending theCompany’s Credit Facility or obtaining other funding or additional financingprior to the expiration of the current agreement will be essential as theremaining outstanding balance under the term loan will be due upon theexpiration of the Credit Facility in May 2013. At March 31, 2010, theCompany’s leverage ratio was 4.79, compared to the maximum of 5.75, and theinterest coverage ratio was 2.11, compared to the minimum of 1.80. The Companywas in compliance with all required financial covenants and was not aware ofany events of default as of March 31, 2010.

 

Management believes thatover the next 12 months the Company will continue to maintain compliance withthese covenants. The Company’s ability to maintain compliance with thecovenants will be highly dependent on the Company’s results of operations and,to the extent necessary, the Company’s ability to implement remedial measuressuch as further reductions in operating costs. If the Company were to enterinto an agreement with its lenders for future covenant compliance relief, suchrelief could result in additional fees and higher interest expense.

 

*Senior Notes and Senior Subordinated Notes:*

 

The Company has $165.0million of floating rate senior notes due 2013 (“Senior Notes”) and $200.0million of 11.875 percent senior subordinated notes due 2014 (“SeniorSubordinated Notes”) (collectively, “the Notes”). The Notes are guaranteed,jointly and severally, on a senior basis with respect to the Senior Notes andon a senior subordinated basis with respect to the Senior Subordinated Notes,in each case by all of the Company’s existing and future domestic restrictedsubsidiaries (other than certain subsidiaries and joint ventures engaged infinancing the purchase of delinquent accounts receivable portfolios and certainimmaterial subsidiaries).

 

The Senior Notes aresenior unsecured obligations and are senior in right of payment to all existingand future senior subordinated indebtedness, including the Senior SubordinatedNotes, and all future subordinated indebtedness. The Senior Notes bear interestat an annual rate equal to LIBOR plus 4.875 percent, reset quarterly. The effectiveinterest rate of the Senior Notes was approximately 5.14 percent and 6.60percent for the three months ended March 31, 2010 and 2009, respectively.The Company may redeem the Senior Notes, in whole or in part, at any time atvarying redemption prices depending on the redemption date, plus accrued andunpaid interest.

 

The Senior SubordinatedNotes are unsecured senior subordinated obligations and are subordinated inright of payment to all existing and future senior indebtedness, including theSenior Notes and borrowings under the Credit Facility. The Company may redeemthe Senior Subordinated Notes, in whole or in part, at any time on or after November 15,2010 at varying redemption prices depending on the redemption date, plusaccrued and unpaid interest. The Company also may redeem some or all of theSenior Subordinated Notes at any time prior to November 15, 2010, at aredemption price equal to 100 percent of the principal amount of the respectiveNotes to be redeemed, plus accrued and unpaid interest and an additionalpremium.

 

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

 

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

 

Theindentures governing the Notes contain a number of covenants that limit theCompany’s and its restricted subsidiaries’ ability, among other things, to:incur additional indebtedness and issue certain preferred stock, pay certaindividends, acquire shares of capital stock, make payments on subordinated debtor make investments, place limitations on distributions from restrictedsubsidiaries, issue or sell capital stock of restricted subsidiaries, guaranteeindebtedness, sell or exchange assets, enter into transactions with affiliates,create certain liens, engage in unrelated businesses, and consolidate, merge ortransfer all or substantially all of the Company’s assets and the assets of itssubsidiaries on a consolidated basis. As of March 31, 2010, the Companywas in compliance with all required covenants. In addition, upon a change ofcontrol, the Company is required to offer to repurchase all of the Notes thenoutstanding, at a purchase price equal to 101 percent of their principal amount,plus any accrued interest to the date of repurchase.

 

*Nonrecourse Credit Facility:*

 

The Company had arelationship with a lender to provide nonrecourse financing for certainpurchases of accounts receivable, at the discretion of the lender.  If the lender chose to participate in thefinancing of a portfolio of accounts receivable, the financing was structured,depending on the size and nature of the portfolio to be purchased, either as aborrowing arrangement or under various equity sharing arrangements. The lenderfinanced non-equity borrowings with floating interest at an annual rate equalto LIBOR (0.23 percent 30-day LIBOR at March 31, 2010) plus 2.50 percent,or as negotiated. These borrowings are nonrecourse to the Company and are duetwo years from the date of each respective loan, unless otherwise negotiated.As additional return on the debt financed portfolios, the lender receivesresidual cash flows, as negotiated, which is defined as all cash collectionsafter servicing fees, floating rate interest, repayment of the borrowing, andthe initial investment by the Company, including interest. Residual cash flowpayments are accrued for as embedded derivatives. There were no non-equityborrowings under this relationship during 2009 or for the three months ended March 31,2010.

 

Borrowings under thisrelationship are nonrecourse to the Company, except for the assets within theentities 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.

 

Total debt outstandingunder this facility was $10.0 million and $14.3 million as of March 31,2010 and December 31, 2009, respectively, which included $1.6 million and$2.1 million, respectively, of accrued residual interest. The effectiveinterest rate on these loans, including the residual interest component, wasapproximately 9.4 percent and 9.1 percent for the three months ended March 31,2010 and 2009, respectively. The nonrecourse credit facility contains certaincovenants such as meeting minimum cumulative collection targets. As of March 31,2010, the Company was in compliance with all required covenants.

 

**12.  Income Taxes:**

 

The Companyrecorded income tax expense of $3.0 million and an income tax benefit of $1.1million for the three months ended March 31, 2010 and 2009, respectively.The Company’s income tax expense differs from the amount of income taxdetermined by applying the statutory U.S. federal income tax rate to pre-taxincome (loss) primarily as a result of the recognition of a valuation allowanceon certain domestic net deferred tax assets and income tax expense to be paidin state and foreign jurisdictions.

 

The Companyincreased its valuation allowance by $6.7 million to $75.1 million as of March 31,2010 from $68.4 million as of December 31, 2009, primarily as a result offederal and certain state deferred tax assets exceeding deferred taxliabilities (after consideration for any net deferred tax liabilitiesassociated with non-amortizable assets such as goodwill and certain tradenames). 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.

 

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

 

The Company hasalso considered future taxable income and ongoing prudent and feasibletax-planning strategies in assessing the need for the valuationallowance.  On a quarterly basis, management assesses whether it remainsmore likely than not that the deferred tax assets will not be realized. In the event the Company determines at a future time that it could realize itsdeferred tax assets in excess of the net amount recorded, the Company willreduce its deferred tax asset valuation allowance and decrease income taxexpense in the period when the Company makes such determination.

 

**13.  Stockholders’ Equity:**

 

*PreferredStock and Common Stock:*

 

The Company is authorizedto issue three classes of capital stock: Preferred Stock, par value $0.01 pershare, 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 A is entitledto a quarterly “paid-in-kind” dividend at an annual rate of 14 percent and Series B-1is entitled to a quarterly “paid-in-kind” dividend at an annual rate of 19percent. The following presents the Series A and Series B-1 sharesissued for the “paid-in-kind” dividends:

 
| ** **      | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|-----------------|------------|------------------------------------------------|------------|
| ** **      | ** ** | **2010**                                       | ** ** | **2009** | ** ** |
| Series A   |       | 100,552                                        |       | 87,211 |   |
| Series B-1 |       | 10,204                                         |       | 1,725 |   |

 

In February 2009,the Company issued 7,400 shares of Series A Preferred Stock to JPMorganChase & Co. (“JPM”) as additional consideration for the acquisition ofSystems & Services Technologies, Inc. (“SST”), which occurred in January 2008.

 

On March 25, 2009, in connection with the amendment of the Company’sCredit Facility (note11), the Company sold 147,447 shares of its Series B-1 Preferred Stock and20,973 shares of its Series B-2 Preferred Stock to One Equity Partners,Michael J. Barrist and certain members of executive management, and otherco-investors for an aggregate purchase price of $40.0 million. The proceedswere used to pay down $15.0 million of term loan borrowings, and the remainder,net of expenses, of $22.5 million was used to repay borrowings under therevolving credit facility.

 

*NoncontrollingInterests:*

 

The following tablesummarizes the activity in stockholders’ equity attributable to NCO 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                  |       | 185                                                  |       | —                        |       | 185                                   |       |
| Distributions  to noncontrolling interests |       | —                                               |       | (1,264                        | )          | (1,264                                | )          |
| Net  (loss) income                         |       | (15,272                                              | )          | 934                           |       | (14,338                               | )          |
| Accumulated  other comprehensive income    |       | 1,580                                                |       | —                        |       | 1,580                                 |       |
| Balance  at March 31, 2010            |       | $                                                    | 215,593    |                          | $          | 11,120                                |       | $ | 226,713 |   |

 

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

 

*ComprehensiveIncome (Loss):*

 

Comprehensiveincome (loss) was as follows (amounts in thousands):

 
| ** **                                                             | ** ** | **For the Three Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                             | ** ** | **March 31,**             | ** ** |
| ** **                                                             | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Net  loss attributable to NCO Group, Inc.                         |       | $                              | (15,272    | ) | $ | (2,109 | ) |
| Foreign  currency translation adjustments                              |       | 687                            |       | (3,157 | ) |
| Change  in fair value of cash flow hedges, net of tax                  |       | —                         |       | (719 | ) |
| Net  losses on cash flow hedges reclassified into earnings, net of tax |       | 893                            |       | 1,309 |   |
| Comprehensive  loss - NCO Group, Inc.                             |       | (13,692                        | )          | (4,676 | ) |
| Net  income (loss) attributable to noncontrolling interests            |       | 934                            |       | (570 | ) |
| Total  comprehensive loss                                              |       | $                              | (12,758    | ) | $ | (5,246 | ) |

 

**14.  Derivative Financial Instruments:**

 

The Company enters intoforward exchange contracts to minimize the impact of currency fluctuations ontransactions and cash flows. These contracts may be designated as cash flowhedges. The Company had forward exchange contracts for the purchase of 265.7million Philippine pesos outstanding at March 31, 2010, which maturethroughout the remainder of 2010.

 

The Company has interestrate swap agreements to minimize the impact of LIBOR fluctuations on interestpayments on the Company’s floating rate debt. The interest rate swaps may bedesignated as cash flow hedges. The interest rate swaps cover an aggregatenotional amount of $315.7 million. The Company is required to pay thecounterparties quarterly interest payments at a weighted average fixed rateranging from 3.41 to 3.44 percent, and receives from the counterpartiesvariable quarterly interest payments based on LIBOR. The net interest paid orreceived is included in interest expense. On March 25, 2009, the Companyamended its senior credit facility, which amendment included a minimum LIBOR of2.50 percent. This amendment caused the existing interest rate swaps to becomeineffective and, as of March 25, 2009, these interest rate swaps were notaccounted for as cash flow hedges. Accordingly, the fair market value of theinterest rate swaps at March 25, 2009 is being amortized to interestexpense, using the effective interest rate method, over the remaining lives ofthe interest rate swap agreements, and future changes in the fair market value ofthese interest rate swaps after March 25, 2009 are recorded in interestexpense.

 

The Company has embeddedderivatives relating to the contingent payment provision in its nonrecoursecredit facility relating to purchased accounts receivable, and relating to thesellers’ participation in collections that are in excess of minimum targets forcertain portfolios of purchased accounts receivable.

 

15

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Table of Contents

 

**14.  Derivative Financial Instruments (continued):**

 

The following summarizesthe fair value of the Company’s derivatives (amounts in thousands):

 
| ** **                                            | ** ** | ** **                           | ** ** | **Fair Value**     | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|--------------------|------------|
| ** **                                            | ** ** | **Balance Sheet**                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| ** **                                            | ** ** | **Location**                         | ** ** | **2010**           | ** ** | **2009** | ** ** |
| Derivatives  not designated as hedges:                |       |                                 |       |               |       |   |   |
| *Asset derivatives*                                   |       |                                 |       |               |       |   |   |
| Forward  exchange contracts                           |       | Other current  assets                |       | $                  | 117        |   | $ | 2 |   |
| Total  asset derivatives not designated as hedges     |       |                                 |       | $                  | 117        |   | $ | 2 |   |
|                                                  |       |                                 |       |               |       |   |   |
| *Liability derivatives*                               |       |                                 |       |               |       |   |   |
| Interest  rate swaps                                  |       | Accrued expenses                     |       | $                  | 7,960      |   | $ | 9,104 |   |
| Forward  exchange contracts                           |       | Accrued expenses                     |       | —             |       | 60 |   |
| Embedded  derivatives                                 |       | Long-term debt  and accrued expenses |       | 2,593              |       | 3,306 |   |
| Total  liability derivatives not designated as hedges |       |                                 |       | $                  | 10,553     |   | $ | 12,470 |   |

 

The following tablessummarize the effect of derivatives on the Company (amounts in thousands):

 
| ** **                              | ** ** | ** **        | ** ** | **For the Three Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|-------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | ** **        | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| ** **                              | ** ** | ** **        | ** ** | **Amount of**                                 | ** ** | **Amount of** | ** ** | **Amount of** | ** ** | **Amount of** | ** ** |
| ** **                              | ** ** | **Location of**   | ** ** | **Gain (Loss)**                               | ** ** | **Gain (Loss)** | ** ** | **Gain (Loss)** | ** ** | **Gain (Loss)** | ** ** |
| ** **                              | ** ** | **Gain (Loss)**   | ** ** | **Recognized**                                | ** ** | **Reclassified** | ** ** | **Recognized** | ** ** | **Reclassified** | ** ** |
| ** **                              | ** ** | **Reclassified**  | ** ** | **in OCI (net**                               | ** ** | **into** | ** ** | **in OCI (net** | ** ** | **into** | ** ** |
| ** **                              | ** ** | **into Earnings** | ** ** | **of taxes)**                                 | ** ** | **Earnings** | ** ** | **of taxes)** | ** ** | **Earnings** | ** ** |
| Derivatives  designated as hedges:      |       |              |       |                                          |       |   |   |   |   |   |   |
| Interest  rate swaps                    |       | Interest          |       |                                          |       |   |   |   |   |   |   |
| (prior  to March 25, 2009)         |       | expense           |       | $                                             | —     |   | $ | — |   | $ | (719 | ) | $ | (2,056 | ) |
| Total  derivatives designated as hedges |       |              |       | $                                             | —     |   | $ | — |   | $ | (719 | ) | $ | (2,056 | ) |

 
| ** **                                       | ** ** | ** **                  | ** ** | **For the Three Months Ended March 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|-----------------------------------------------|------------|
| ** **                                       | ** ** | ** **                  | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| ** **                                       | ** ** | ** **                  | ** ** | **Amount of Gain**                            | ** ** | **Amount of Gain** | ** ** |
| ** **                                       | ** ** | **Location of Gain (Loss)** | ** ** | **(Loss) Recognized**                         | ** ** | **(Loss) Recognized** | ** ** |
| ** **                                       | ** ** | **Recognized in Earnings**  | ** ** | **in Earnings**                               | ** ** | **in Earnings** | ** ** |
| Derivatives  not designated as hedges:           |       |                        |       |                                          |       |   |   |
| Forward  exchange contracts                      |       | Other income (expense)      |       | $                                             | 198        |   | $ | (3,423 | ) |
| Interest  rate swaps (after March 25, 2009) |       | Interest expense            |       | (1,396                                        | )          | — |   |
| Amortization  of interest rate swaps             |       | Interest expense            |       | (1,402                                        | )          | — |   |
| Embedded  derivatives                            |       | Interest expense            |       | 500                                           |       | 670 |   |
| Interest  rate caps                              |       | Other income (expense)      |       | —                                        |       | (23 | ) |
| Total  derivatives not designated as hedges      |       |                        |       | $                                             | (2,100     | ) | $ | (2,776 | ) |

 

16

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**15.  Supplemental Cash Flow Information:**

 

Thefollowing are supplemental disclosures of cash flow information (amounts inthousands):

 

| ** **                                        | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------------------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | **March 31,**             | ** ** |
| ** **                                        | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Noncash  investing and financing activities:      |       |                           |       |   |   |
| Issuance  of stock to JPM for the SST acquisition |       | $                              | —     |   | $ | 1,758 |   |
| Adjustments  to acquired assets and liabilities   |       | —                         |       | 1,378 |   |
|                                                   |            |                                |            |  |  |  |  |

 

**16.  Commitments and Contingencies:**

 

*Purchase Commitments:*

 

TheCompany enters into noncancelable agreements with various telecommunicationscompanies, a labor subcontractor in India and other vendors that requireminimum purchase commitments. These agreements expire between 2010 and 2012.The following represents the future minimum payments, by year and in theaggregate, under noncancelable purchase commitments (amounts in thousands):

 

| 2010   |   | $      | 29,653 |   |
|--------|--------|--------|--------|--------|
| 2011   |   | 19,583 |   |
| 2012   |   | 7,392  |   |
|   |   |   |   |
|   |   | $      | 56,628 |   |

 

TheCompany incurred $14.1 million and $16.5 million of expense from vendorsassociated with these purchase commitments for the three months ended March 31, 2010 and 2009, respectively.

 

*Forward-Flow Agreements:*

 

TheCompany has several fixed price agreements, or forward-flows, that obligate theCompany to purchase, on a monthly basis, portfolios of charged-off accountsreceivable meeting certain criteria. The forward flow agreements expirethroughout 2010. The remaining estimated future forward-flow commitments in2010 are approximately $6.1 million.

 

*Litigation and Investigations:*

 

TheCompany is party, from time to time, to various legal proceedings, regulatoryinvestigations, client audits and tax examinations incidental to its business.The Company continually monitors these legal proceedings, regulatoryinvestigations, client audits and tax examinations to determine the impact andany required accruals. Some of these matters are described in “Item 3. LegalProceedings” in the Company’s Annual Report on Form 10-K/A for the yearended December 31, 2009.

 

AttorneysGeneral:

 

Fromtime to time, the Company receives subpoenas or other similar informationrequests from various states’ Attorneys General, requesting informationrelating to the Company’s debt collection practices in such states. The Companyresponds to such inquires or investigations and provides certain information tothe respective Attorneys General offices. The Company believes it is in compliancewith the laws of the states in which it does business relating to debtcollection practices in all material respects. However, no assurance can begiven that any such inquiries or investigations will not result in a formalinvestigation or an enforcement action. Any such enforcement actions couldresult in fines as well as the suspension or termination of the Company’sability to conduct business in such states.

 

17

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**16.  Commitments and Contingencies (continued):**

 

*Litigation and Investigations (continued):*

 

Other:

 

TheCompany is involved in other legal proceedings, regulatory investigations,client audits and tax examinations from time to time in the ordinary course ofits business. Management believes that none of these other legal proceedings,regulatory investigations, client audits or tax examinations will have amaterially adverse effect on the financial condition or results of operationsof the Company.

 

**17.  Segment Reporting:**

 

As of March 31,2010, the Company’s business consisted of three operating segments: ARM, CRMand Portfolio Management. The accounting policies of the segments are the sameas those described in note 2, “Accounting Policies.”

 

ARM provides accountsreceivable management services to consumer and commercial accounts for allmarket sectors including financial services, healthcare, retail and commercial,telecommunications, utilities, education, and government. ARM serves clients ofall sizes in local, regional and national markets in North America, Europe andAustralia through offices in North America, Asia, Europe and Australia. Inaddition to traditional accounts receivable collections, these services includedeveloping the client relationship beyond bad debt recovery and delinquencymanagement, and delivering cost-effective accounts receivable solutions to allmarket sectors. ARM also provides accounts receivable management services to PortfolioManagement. ARM recorded revenue of $13.7 million and $17.7 million forintercompany services to Portfolio Management for the three months ended March 31,2010 and 2009, respectively.

 

CRM provides customerrelationship management services to clients in North America through offices inNorth America and Asia. CRM also provides certain services to ARM. CRM recordedrevenue of $628,000 for intercompany services to ARM for the three months endedMarch 31, 2009.

 

Portfolio Managementpurchases and manages defaulted consumer accounts receivable from consumercreditors such as banks, finance companies, retail merchants, utilities,healthcare companies and other consumer oriented companies. PortfolioManagement’s revenue was impacted by a benefit from the recovery of portfolioallowances of $1.4 million for the three months ended March 31, 2010 andan impairment charge of $33,000 for the three months ended March 31, 2009,respectively.

 

The following tablepresents total assets, net of any intercompany balances, for each segment(amounts in thousands):

 

| ** **            | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------|------------|-------------------------|------------|----------------------------|------------|
| ARM                   |       | $                       | 1,059,046  |                       | $          | 1,079,180 |   |
| CRM                   |       | 231,450                 |       | 239,373                    |       |
| Portfolio  Management |       | 129,644                 |       | 141,482                    |       |
| Total  assets         |       | $                       | 1,420,140  |                       | $          | 1,460,035 |   |

 

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

 

The following tablespresent the revenue, payroll and related expenses, selling, general, andadministrative expenses, reimbursable costs and fees, restructuring charges,income from operations before depreciation and amortization and capitalexpenditures for each segment (amounts in thousands):

** **
| ** **                                                          | ** ** | **For the Three Months Ended March 31, 2010** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                          | ** ** | **ARM**                                            | ** ** | **CRM** | ** ** | **Portfolio  Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenues                                                            |       | $                                                  | 334,980    |   | $ | 76,534 |   | $ | 15,274 |   | $ | (13,720 | ) | $ | 413,068 |   |
|                                                                |       |                                               |       |   |   |   |   |   |   |   |   |
| Payroll  and related expenses                                       |       | 128,670                                            |       | 56,406 |   | 1,192 |   | — |   | 186,268 |   |
| Selling,  general and admin. expenses                               |       | 96,583                                             |       | 14,152 |   | 14,192 |   | (13,395 | ) | 111,532 |   |
| Reimbursable  costs and fees                                        |       | 74,170                                             |       | — |   | — |   | (325 | ) | 73,845 |   |
| Restructuring  charges                                              |       | 279                                                |       | 12 |   | 1,143 |   | — |   | 1,434 |   |
| Income  (loss) from operations before depreciation and amortization |       | $                                                  | 35,278     |   | $ | 5,964 |   | $ | (1,253 | ) | $ | — |   | $ | 39,989 |   |
|                                                                |       |                                               |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                               |       | $                                                  | 4,001      |   | $ | 1,957 |   | $ | — |   | $ | — |   | $ | 5,958 |   |

** **
| ** **                                                   | ** ** | **For the  Three Months Ended March 31, 2009** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                   | ** ** | **ARM**                                             | ** ** | **CRM** | ** ** | **Portfolio  Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenues                                                     |       | $                                                   | 311,841    |   | $ | 88,198 |   | $ | 20,389 |   | $ | (18,299 | ) | $ | 402,129 |   |
|                                                         |       |                                                |       |   |   |   |   |   |   |   |   |
| Payroll  and related expenses                                |       | 142,459                                             |       | 62,437 |   | 1,497 |   | (628 | ) | 205,765 |   |
| Selling,  general and admin. expenses                        |       | 117,467                                             |       | 14,530 |   | 18,245 |   | (16,663 | ) | 133,579 |   |
| Reimbursable  costs and fees                                 |       | 9,621                                               |       | — |   | — |   | (1,008 | ) | 8,613 |   |
| Restructuring  charges                                       |       | 239                                                 |       | 178 |   | 26 |   | — |   | 443 |   |
| Income  from operations before depreciation and amortization |       | $                                                   | 42,055     |   | $ | 11,053 |   | $ | 621 |   | $ | — |   | $ | 53,729 |   |
|                                                         |       |                                                |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                        |       | $                                                   | 5,483      |   | $ | 4,310 |   | $ | — |   | $ | — |   | $ | 9,793 |   |

** **

**18.  Related Party Transactions:**

 

The Company pays OEP amanagement fee of $3.0 million per year, plus reimbursement of expenses, formanagement, advice and related services. During the three months ended March 31,2010, the Company incurred $750,000, relating to such management fees, whichwere included in selling, general and administrative expenses.

 

OEP is managed by OEPHolding Corporation, a wholly owned indirect subsidiary of JPM, and JPM is aclient of the Company. For the three months ended March 31, 2010 and 2009,the Company received fees for providing services to JPM of $2.8 million and$3.4 million, respectively.  At March 31,2010, the Company had accounts receivable of $2,000 due from JPM. At December 31,2009, the Company had no accounts receivable due from JPM. Additionally,affiliates of Citigroup are investors of the Company, and Citigroup is a clientof the Company. For the three months ended March 31, 2010 and 2009, theCompany received fees for providing services to Citigroup of $13.0 million and$15.4 million, respectively. At March 31, 2010 and December 31, 2009,the Company had accounts receivable of $7.4 million and $5.8 million,respectively, due from Citigroup.

 

The Company has certaincorporate banking relationships with affiliates of JPM and is charged marketrates for these services.

 

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**19.  Recently Issued and Proposed AccountingGuidance:**

 

In June 2009, theFASB issued authoritative guidance for transfers of financial assets. Thisguidance removes the concept of qualifying special-purpose entities andeliminates the exception from applying guidance related to consolidating ofvariable interest entities to qualifying special-purpose entities. Thisguidance requires additional disclosures in order to provide greatertransparency about transfers of financial assets and a transferor’s continuinginvolvement with transferred financial assets. The Company adopted thisguidance on January 1, 2010, and it did not have a material impact on itsfinancial condition or results of operations.

 

In June 2009, theFASB issued amended guidance for consolidation of variable interest entities.This guidance amends previous guidance to require companies to perform ananalysis to determine if their variable interest gives them a controllingfinancial interest in the variable interest entity, and requires ongoingreassessments of who is the primary beneficiary of a variable interest entity.This guidance also requires enhanced disclosures of information about involvementin a variable interest entity. The Company adopted this guidance on January 1,2010, and it did not have a material impact on its financial condition orresults of operations.

 

In January 2010, theFASB issued amended guidance for disclosures about fair value measurements,which requires new disclosures regarding transfers in and out of Level 1 and 2measurements and requires additional disclosures regarding activity in Level 3measurements. This guidance also clarifies existing fair value disclosures regardingthe level of disaggregation and the input and valuation techniques used tomeasure fair value. The Company adopted this guidance on January 1, 2010,except for the requirement for additional disclosures of Level 3 activity whichis effective on January 1, 2011, and it did not have a material impact onits financial condition or results of operations.

 

**20.  Subsidiary Guarantor Financial Information:**

 

The Notes are fully andunconditionally guaranteed, jointly and severally, by certain domestic 100 percentowned subsidiaries of the Company (collectively, the “Guarantors”).Non-guarantors consist of all non-domestic subsidiaries, certain subsidiariesengaged in financing the purchase of delinquent accounts receivable portfolios,portfolio joint ventures (which are engaged in portfolio financingtransactions) 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.

 

20

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** **

**20.  Subsidiary Guarantor Financial Information(continued):**

 

**NCOGROUP, INC.**

**ConsolidatingBalance Sheet**

**March 31,2010**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                                           | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Current  assets:                                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Cash  and cash equivalents                                                           |       | $          | —     |           | $          | 14,467             |       | $                | 19,633     |             | $          | — |   | $ | 34,100 |   |
| Accounts  receivable, trade, net of allowance for doubtful accounts                  |       | —     |       | 156,009        |       | 22,262             |       | —           |       | 178,271          |       |
| Purchased  accounts receivable, current portion                                      |       | —     |       | 23,219         |       | 24,648             |       | —           |       | 47,867           |       |
| Deferred  income taxes                                                               |       | (28,808    | )          | 29,327         |       | 1,260              |       | —           |       | 1,779            |       |
| Prepaid  expenses and other current assets                                           |       | 1,528      |       | 28,052         |       | 31,836             |       | —           |       | 61,416           |       |
| Total  current assets                                                                |       | (27,280    | )          | 251,074        |       | 99,639             |       | —           |       | 323,433          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Property  and equipment, net                                                         |       | —     |       | 85,827         |       | 31,086             |       | —           |       | 116,913          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Other  assets:                                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Goodwill                                                                             |       | —     |       | 470,520        |       | 65,404             |       | —           |       | 535,924          |       |
| Trade  name, net of accumulated amortization                                         |       | —     |       | 80,964         |       | 2,847              |       | —           |       | 83,811           |       |
| Customer  relationships and other intangible assets, net of accumulated amortization |       | —     |       | 225,112        |       | 17,518             |       | —           |       | 242,630          |       |
| Purchased  accounts receivable, net of current portion                               |       | —     |       | 47,498         |       | 29,508             |       | —           |       | 77,006           |       |
| Investment  in subsidiaries                                                          |       | 734,697    |       | 17,950         |       | —             |       | (752,647         | )          | —           |       |
| Deferred  income taxes                                                               |       | —     |       | —         |       | 3,556              |       | —           |       | 3,556            |       |
| Other  assets                                                                        |       | 14,738     |       | 44,081         |       | (21,952            | )          | —           |       | 36,867           |       |
| Total  other assets                                                                  |       | 749,435    |       | 886,125        |       | 96,881             |       | (752,647         | )          | 979,794          |       |
| Total  assets                                                                        |       | $          | 722,155    |           | $          | 1,223,026          |       | $                | 227,606    |             | $          | (752,647 | ) | $ | 1,420,140 |   |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                        |       |       |       |           |       |               |       |             |       |             |       |
| ** **                                                                           |       |       |       |           |       |               |       |             |       |             |       |
| Current  liabilities:                                                                |       |       |       |           |       |               |       |             |       |             |       |
| Long-term  debt, current portion                                                     |       | $          | 6,054      |           | $          | 575                |       | $                | 9,598      |             | $          | — |   | $ | 16,227 |   |
| Intercompany  payable (receivable)                                                   |       | 47,213     |       | (144,593       | )          | 97,380             |       | —           |       | —           |       |
| Income  taxes payable                                                                |       | —     |       | —         |       | 8,656              |       | —           |       | 8,656            |       |
| Accounts  payable                                                                    |       | 750        |       | 31,290         |       | 2,365              |       | —           |       | 34,405           |       |
| Accrued  expenses                                                                    |       | 18,986     |       | 51,531         |       | 24,639             |       | —           |       | 95,156           |       |
| Accrued  compensation and related expenses                                           |       | —     |       | 32,914         |       | 13,299             |       | —           |       | 46,213           |       |
| Deferred  revenue, current portion                                                   |       | —     |       | 36,882         |       | 679                |       | —           |       | 37,561           |       |
| Total  current liabilities                                                           |       | 73,003     |       | 8,599          |       | 156,616            |       | —           |       | 238,218          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Long-term  liabilities:                                                              |       |       |       |           |       |               |       |             |       |             |       |
| Long-term  debt, net of current portion                                              |       | 507,998    |       | 378,259        |       | 1,828              |       | —           |       | 888,085          |       |
| Deferred  income taxes                                                               |       | (83,101    | )          | 110,382        |       | 6,752              |       | —           |       | 34,033           |       |
| Deferred  revenue, net of current portion                                            |       | —     |       | 763            |       | —             |       | —           |       | 763              |       |
| Other  long-term liabilities                                                         |       | 8,662      |       | 9,048          |       | 14,618             |       | —           |       | 32,328           |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Stockholders’  equity:                                                          |       |       |       |           |       |               |       |             |       |             |       |
| Total  NCO Group, Inc. stockholders’ equity                                |       | 215,593    |       | 715,975        |       | 36,672             |       | (752,647         | )          | 215,593          |       |
| Noncontrolling  interests                                                            |       | —     |       | —         |       | 11,120             |       | —           |       | 11,120           |       |
| Total  stockholders’ equity                                                     |       | 215,593    |       | 715,975        |       | 47,792             |       | (752,647         | )          | 226,713          |       |
| Total  liabilities and stockholders’ equity                                     |       | $          | 722,155    |           | $          | 1,223,026          |       | $                | 227,606    |             | $          | (752,647 | ) | $ | 1,420,140 |   |

 

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**20.  Subsidiary Guarantor Financial Information(continued):**

 

**NCOGROUP, INC.**

**ConsolidatingBalance Sheet**

**December 31,2009**

**(Unaudited)**

**(Amountsin 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.  Subsidiary Guarantor Financial Information(continued):**

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

**Forthe Three Months Ended March 31, 2010**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                 | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                  |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                   |       | $          | —     |           | $          | 309,344            |       | $                | 77,565     |             | $          | (63,983 | ) | $ | 322,926 |   |
| Portfolio                                                  |       | —     |       | 8,051          |       | 8,246              |       | —           |       | 16,297           |       |
| Reimbursable  costs and fees                               |       | —     |       | 73,785         |       | 60                 |       | —           |       | 73,845           |       |
| Total  revenues                                            |       | —     |       | 391,180        |       | 85,871             |       | (63,983          | )          | 413,068          |       |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Operating  costs and expenses:                             |       |       |       |           |       |               |       |             |       |             |       |
| Payroll  and related expenses                              |       | 4          |       | 190,165        |       | 43,374             |       | (47,275          | )          | 186,268          |       |
| Selling,  general and administrative expenses              |       | 1,084      |       | 96,023         |       | 31,133             |       | (16,708          | )          | 111,532          |       |
| Reimbursable  costs and fees                               |       | —     |       | 73,785         |       | 60                 |       | —           |       | 73,845           |       |
| Depreciation  and amortization expense                     |       | —     |       | 21,932         |       | 5,798              |       | —           |       | 27,730           |       |
| Restructuring  charges                                     |       | —     |       | 177            |       | 1,257              |       | —           |       | 1,434            |       |
| Total  operating costs and expenses                        |       | 1,088      |       | 382,082        |       | 81,622             |       | (63,983          | )          | 400,809          |       |
| (Loss)  income from operations                             |       | (1,088     | )          | 9,098          |       | 4,249              |       | —           |       | 12,259           |       |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Other  income (expense):                                   |       |       |       |           |       |               |       |             |       |             |       |
| Interest  and investment income                            |       | —     |       | (864           | )          | 952                |       | —           |       | 88               |       |
| Interest  expense                                          |       | (15,282    | )          | (7,803         | )          | (516               | )          | —           |       | (23,601          | )          |
| Interest  (expense) income to affiliate                    |       | (2,983     | )          | 4,776          |       | (1,793             | )          | —           |       | —           |       |
| Subsidiary  income (loss)                                  |       | 3,235      |       | 834            |       | —             |       | (4,069           | )          | —           |       |
| Other  income, net                                         |       | 128        |       | (172           | )          | —             |       | —           |       | (44              | )          |
|                                                       |       | (14,902    | )          | (3,229         | )          | (1,357             | )          | (4,069           | )          | (23,557          | )          |
| (Loss)  income before income taxes                         |       | (15,990    | )          | 5,869          |       | 2,892              |       | (4,069           | )          | (11,298          | )          |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Income  tax (benefit) expense                              |       | (718       | )          | 1,963          |       | 1,795              |       | —           |       | 3,040            |       |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income                                         |       | (15,272    | )          | 3,906          |       | 1,097              |       | (4,069           | )          | (14,338          | )          |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Less:  Net income attributable to noncontrolling interests |       | —     |       | —         |       | 934                |       | —           |       | 934              |       |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income attributable to NCO Group, Inc.    |       | $          | (15,272    | )              | $          | 3,906              |       | $                | 163        |             | $          | (4,069 | ) | $ | (15,272 | ) |

 

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**20.  Subsidiary Guarantor Financial Information(continued):**

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

**Forthe Three Months Ended March 31, 2009**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                               | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                 |       | $          | —     |           | $          | 378,860            |       | $                | 60,543     |             | $          | (71,902 | ) | $ | 367,501 |   |
| Portfolio                                                |       | —     |       | 11,640         |       | 14,014             |       | —           |       | 25,654           |       |
| Portfolio  sales                                         |       | —     |       | 83             |       | 278                |       | —           |       | 361              |       |
| Reimbursable  costs and fees                             |       | —     |       | 8,552          |       | 61                 |       | —           |       | 8,613            |       |
| Total  revenues                                          |       | —     |       | 399,135        |       | 74,896             |       | (71,902          | )          | 402,129          |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Operating  costs and expenses:                           |       |       |       |           |       |               |       |             |       |             |       |
| Payroll  and related expenses                            |       | 5          |       | 211,332        |       | 45,522             |       | (51,094          | )          | 205,765          |       |
| Selling,  general and administrative expenses            |       | 1,084      |       | 125,134        |       | 28,169             |       | (20,808          | )          | 133,579          |       |
| Reimbursable  costs and fees                             |       | —     |       | 8,552          |       | 61                 |       | —           |       | 8,613            |       |
| Depreciation  and amortization expense                   |       | —     |       | 23,843         |       | 7,239              |       | —           |       | 31,082           |       |
| Restructuring  charges                                   |       | —     |       | 226            |       | 217                |       | —           |       | 443              |       |
| Total  operating costs and expenses                      |       | 1,089      |       | 369,087        |       | 81,208             |       | (71,902          | )          | 379,482          |       |
| (Loss)  income from operations                           |       | (1,089     | )          | 30,048         |       | (6,312             | )          | —           |       | 22,647           |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Other  income (expense):                                 |       |       |       |           |       |               |       |             |       |             |       |
| Interest  and investment income                          |       | (3,401     | )          | 3,766          |       | (23                | )          | —           |       | 342              |       |
| Interest  expense                                        |       | (15,956    | )          | (6,851         | )          | (303               | )          | —           |       | (23,110          | )          |
| Interest  (expense) income to affiliate                  |       | (666       | )          | 2,040          |       | (1,374             | )          | —           |       | —           |       |
| Subsidiary  income (loss)                                |       | 10,995     |       | (4,572         | )          | —             |       | (6,423           | )          | —           |       |
| Other  expense, net                                      |       | —     |       | (3,704         | )          | —             |       | —           |       | (3,704           | )          |
|                                                     |       | (9,028     | )          | (9,321         | )          | (1,700             | )          | (6,423           | )          | (26,472          | )          |
| (Loss)  income before income taxes                       |       | (10,117    | )          | 20,727         |       | (8,012             | )          | (6,423           | )          | (3,825           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Income  tax (benefit) expense                            |       | (8,008     | )          | 9,002          |       | (2,140             | )          | —           |       | (1,146           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income                                       |       | (2,109     | )          | 11,725         |       | (5,872             | )          | (6,423           | )          | (2,679           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Less:  Net loss attributable to noncontrolling interests |       | —     |       | —         |       | (570               | )          | —           |       | (570             | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income attributable to NCO Group, Inc.  |       | $          | (2,109     | )              | $          | 11,725             |       | $                | (5,302     | )                | $          | (6,423 | ) | $ | (2,109 | ) |

 

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**20.  Subsidiary Guarantor Financial Information(continued):**

 

**NCOGROUP, INC**

**ConsolidatingStatement of Cash Flows**

**Forthe Three Months Ended March 31, 2010**

**(Unaudited**

**(Amountsin thousands)**

 
| ** **                                                         | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** |
| Net  cash (used in) provided by operating activities               |       | $          | (12,095    | )              | $          | 38,308             |       | $                | 10,911     |   | $ | 37,124 |   |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  flows from investing activities:                             |       |       |       |           |       |               |       |             |       |
| Purchases  of accounts receivable                                  |       | —     |       | (5,523         | )          | (307               | )          | (5,830           | )          |
| Collections  applied to principal of purchased accounts receivable |       | —     |       | 10,180         |       | 10,649             |       | 20,829           |       |
| Purchases  of property and equipment                               |       | —     |       | (5,032         | )          | (926               | )          | (5,958           | )          |
| Other                                                              |       | —     |       | 20             |       | —             |       | 20               |       |
| Net  cash (used in) provided by investing activities               |       | —     |       | (355           | )          | 9,416              |       | 9,061            |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  flows from financing activities:                             |       |       |       |           |       |               |       |             |       |
| Repayment  of notes payable                                        |       | —     |       | (79            | )          | (4,334             | )          | (4,413           | )          |
| Net  repayments of revolving credit facility                       |       | (17,000    | )          | —         |       | —             |       | (17,000          | )          |
| Repayment  of borrowings under senior term loan                    |       | (25,803    | )          | —         |       | —             |       | (25,803          | )          |
| Borrowings  under (repayments of) intercompany notes payable       |       | 57,495     |       | (42,391        | )          | (15,104            | )          | —           |       |
| Payment  of fees to obtain debt                                    |       | (2,597     | )          | —         |       | —             |       | (2,597           | )          |
| Return  of investment in subsidiary to noncontrolling interests    |       | —     |       | —         |       | (1,264             | )          | (1,264           | )          |
| Net  cash provided by (used in) financing activities               |       | 12,095     |       | (42,470        | )          | (20,702            | )          | (51,077          | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Effect  of exchange rate on cash                                   |       | —     |       | —         |       | (229               | )          | (229             | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Net  decrease in cash and cash equivalents                         |       | —     |       | (4,517         | )          | (604               | )          | (5,121           | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  and cash equivalents at beginning of the period              |       | —     |       | 18,984         |       | 20,237             |       | 39,221           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  and cash equivalents at end of the period                    |       | $          | —     |           | $          | 14,467             |       | $                | 19,633     |   | $ | 34,100 |   |

 

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**20.  Subsidiary Guarantor Financial Information(continued):**

 

**NCOGROUP, INC**

**ConsolidatingStatement of Cash Flows**

**Forthe Three Months Ended March 31, 2009**

**(Unaudited**

**(Amountsin thousands)**

 
| ** **                                                         | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** |
| Net  cash (used in) provided by operating activities               |       | $          | (4,083     | )              | $          | 53,011             |       | $                | (8,730     | ) | $ | 40,198 |   |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  flows from investing activities:                             |       |       |       |           |       |               |       |             |       |
| Purchases  of accounts receivable                                  |       | —     |       | (14,967        | )          | (1,464             | )          | (16,431          | )          |
| Collections  applied to principal of purchased accounts receivable |       | —     |       | 4,413          |       | 20,711             |       | 25,124           |       |
| Proceeds  from sales and resales of purchased accounts receivable  |       | —     |       | 124            |       | 401                |       | 525              |       |
| Purchases  of property and equipment                               |       | —     |       | (6,186         | )          | (3,607             | )          | (9,793           | )          |
| Net  cash paid for acquisitions and related costs                  |       | —     |       | (29            | )          | (3                 | )          | (32              | )          |
| Other                                                              |       | —     |       | 149            |       | —             |       | 149              |       |
| Net  cash (used in) provided by investing activities               |       | —     |       | (16,496        | )          | 16,038             |       | (458             | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  flows from financing activities:                             |       |       |       |           |       |               |       |             |       |
| Repayment  of notes payable                                        |       | —     |       | (86            | )          | (8,841             | )          | (8,927           | )          |
| Net  repayments of revolving credit facility                       |       | (38,000    | )          | —         |       | —             |       | (38,000          | )          |
| Repayment  of borrowings under senior term loan                    |       | (15,000    | )          | (1,514         | )          | —             |       | (16,514          | )          |
| Borrowings  under (repayments of) intercompany notes payable       |       | 19,560     |       | (29,088        | )          | 9,528              |       | —           |       |
| Payment  of fees to obtain debt                                    |       | (2,477     | )          | —         |       | —             |       | (2,477           | )          |
| Return  of investment in subsidiary to noncontrolling interests    |       | —     |       | —         |       | (2,317             | )          | (2,317           | )          |
| Issuance  of stock, net                                            |       | 40,000     |       | —         |       | —             |       | 40,000           |       |
| Net  cash provided by (used in) financing activities               |       | 4,083      |       | (30,688        | )          | (1,630             | )          | (28,235          | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Effect  of exchange rate on cash                                   |       | —     |       | —         |       | (322               | )          | (322             | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Net  increase in cash and cash equivalents                         |       | —     |       | 5,827          |       | 5,356              |       | 11,183           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  and cash equivalents at beginning of the period              |       | —     |       | 15,334         |       | 14,546             |       | 29,880           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  and cash equivalents at end of the period                    |       | $          | —     |           | $          | 21,161             |       | $                | 19,902     |   | $ | 41,063 |   |

 

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**Item 2.   Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

***Forward-LookingStatements***

 

Certain statementsincluded in this Quarterly Report on Form 10-Q, other than historicalfacts, are forward-looking statements (as such term is defined in theSecurities Exchange Act of 1934, as amended, and the regulations thereunder),which are intended to be covered by the safe harbors created thereby.Forward-looking statements include, without limitation, statements as to:

 

·                  the Company’s expected future results of operations;

·                  economic conditions;

·                  the Company’s business and growth strategy;

·                  fluctuations in quarterly operating results;

·                  the integration of acquisitions;

·                  the final outcome of the Company’s litigation with itsformer landlord;

·                  the effects of terrorist attacks, war and the economyon the Company’s business;

·                  expected increases in operating efficiencies;

·                  anticipated trends in the business process outsourcingindustry;

·                  estimates of future cash flows and allowances forimpairments of purchased accounts receivable;

·                  estimates of intangible asset impairments andamortization expense of customer relationships and other intangible assets;

·                  the effects of legal proceedings, regulatoryinvestigations and tax examinations;

·                  the effects of changes in accounting guidance; and

·                  statements as to trends or the Company’s or management’sbeliefs, expectations and opinions.

 

The words “anticipate,”“believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” “would,” “should,”“guidance,” “potential,” “continue,” “project,” “forecast,” “confident,” andsimilar expressions are typically used to identify forward-looking statements.These statements are based on assumptions and assessments made by the Company’smanagement in light of their experience and their perception of historicaltrends, current conditions, expected future developments and other factors theybelieve to be appropriate. Forward-looking statements are not guarantees of theCompany’s future performance and are subject to risks and uncertainties and maybe affected by various factors that may cause actual results, developments andbusiness decisions to differ materially from those in the forward-lookingstatements. Some of the factors that may cause actual results, developments andbusiness decisions to differ materially from those contemplated by suchforward-looking statements include:

 

·                  risks related to the instability in the financialmarkets;

·                  risks related to adverse capital and credit marketconditions;

·                  the ability of governmental and regulatory bodies tostabilize the financial markets;

·                  risks related to the domestic and internationaleconomies;

·                  risks related to derivative transactions;

·                  risks related to the Company’s ability to growinternally;

·                  risks related to the Company’s ability to compete;

·                  risks related to the Company’s substantialindebtedness and its ability to service such debt;

·                  risks related to the Company’s ability to meetliquidity needs;

·                  the risk that the Company will not be able toimplement its growth strategy as and when planned;

·                  risks associated with growth and acquisitions;

·                  the risk that the Company will not be able to realizeoperating efficiencies in the integration of its acquisitions;

·                  fluctuations in quarterly operating results;

·                  risks related to the timing of contracts;

·                  risks related to purchased accounts receivable;

·                  risks related to possible impairment of goodwill andother intangible assets;

·                  the Company’s dependence on senior management;

·                  risks related to security and privacy breaches;

·                  risks related to union organizing efforts at theCompany’s facilities;

 

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·                  risks associated with technology;

·                  risks related to the final outcome of the Company’slitigation with its former landlord;

·                  risks related to litigation, regulatory investigationsand tax examinations;

·                  risks related to past or possible future terroristattacks;

·                  risks related to natural disasters or the threat oroutbreak of war or hostilities;

·                  the risk that the Company will not be able to improvemargins;

·                  risks related to the Company’s internationaloperations;

·                  risks related to the availability of qualifiedemployees, particularly in new or more cost-effective locations;

·                  risks related to currency fluctuations;

·                  risks related to reliance on independenttelecommunications service providers;

·                  risks related to concentration of the Company’sclients in the financial services, telecommunications and healthcare sectors;

·                  risks related to the possible loss of key clients; and

·                  risks related to changes in government regulations.

 

The Company cangive no assurance that any of the events anticipated by the forward-lookingstatements will occur or, if any of them does, what impact they will have onour results of operations and financial condition. The Company disclaims anyintent or obligation to publicly update or revise any forward-lookingstatements, regardless of whether new information becomes available, futuredevelopments occur or otherwise. For additional information concerning therisks that affect us, see our Annual Report on Form 10-K/A for the yearended December 31, 2009 and “Part II. Other Information - Item 1A.Risk Factors” of this Report on Form 10-Q.

 

# ***Overview***

 

We are a holdingcompany and conduct substantially all of our business operations through oursubsidiaries. We are an international provider of business process outsourcingservices, referred to as BPO, primarily focused on accounts receivablemanagement, referred to as ARM, and customer relationship management, referredto as CRM, serving a wide range of clients in North America and abroad throughour global network of over 100 offices. We also purchase and collect past dueconsumer accounts receivable from consumer creditors such as banks, financecompanies, retail merchants, utilities, healthcare companies, and otherconsumer-oriented companies.

 

Historically, wehave participated in the purchased accounts receivable business on anopportunistic basis. Given the decline in liquidation rates, competition forpurchased accounts receivable and the continued uncertainty of collectibility,we significantly reduced our purchases of accounts in 2009. We currently expectto limit our purchases in 2010 to certain of our non-cancelable forward flowcommitments. Additionally, we may opportunistically purchase accountsreceivable that allow us to leverage meaningful third-party servicingcontracts. Our amended senior credit facility limits purchases in 2010 to $20million and purchases in 2011 and each year thereafter to $10 million per year.

 

Our operatingcosts consist principally of payroll and related costs; selling, general andadministrative costs; and depreciation and amortization. Payroll and relatedexpenses consist of wages and salaries, commissions, bonuses, and benefits forall of our employees, including management and administrative personnel.Selling, general and administrative expenses include telephone, postage andmailing costs, outside collection attorneys and other third-party collectionservices providers, and other collection costs, as well as expenses thatdirectly support operations, including facility costs, equipment maintenance,sales and marketing, data processing, professional fees, and other managementcosts. Our payroll and related expenses may increase or decrease due to changesin the value of the U.S. dollar against the Canadian dollar and the Philippinepeso.

 

Changes to theeconomic conditions in the U.S., either positive or negative, could have asignificant impact on our business, including, but not limited to:

 

·                  fluctuations in the volume of placementsof accounts and the collectability of those accounts for our ARM contingencyfee based services;

·                  volume fluctuations in our ARM fixed feebased services;

·                  volume fluctuations in our CRM services;and,

 

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·                  variability in the collectability ofexisting portfolios.

 

We have grownrapidly, through both acquisitions as well as internal growth. Effective August 31,2009, we acquired TSYS Total Debt Management, Inc., referred to as TDM, aprovider of specialty accounts receivable management services, forapproximately $4.5 million, subject to certain post-closing adjustments.

 

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

 

We operate ourbusiness in three segments: ARM, CRM and Portfolio Management.

 

***ThreeMonths Ended March 31, 2010 Compared to Three Months Ended March 31,2009***

 

*Revenue.*  Revenue increased $10.9 million, or 2.7percent, to $413.1 million for the three months ended March 31, 2010, from$402.1 million for the three months ended March 31, 2009.

 

Revenue by segment (dollars in thousands):

 
| ** **            | ** ** | **For  the Three Months Ended March 31,** | ** ** | ** **  | ** ** | ** ** | ** ** |
|-----------------------|------------|------------------------------------------------|------------|-------------|------------|------------|------------|
| ** **            | ** ** | ** **                                     | ** ** | **% of**    | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **            | ** ** | **2010**                                       | ** ** | **Revenue** | ** ** | **2009**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                   |       | $                                              | 334,980    |        | 81.1       | %          | $          | 311,841 |   | 77.5 | % | $ | 23,139 |   | 7.4 | % |
| CRM                   |       | 76,534                                         |       | 18.5        | %          | 88,198     |       | 21.9 | % | (11,664 | ) | (13.2 | )% |
| Portfolio  Management |       | 15,274                                         |       | 3.7         | %          | 20,389     |       | 5.1 | % | (5,115 | ) | (25.1 | )% |
| Eliminations          |       | (13,720                                        | )          | (3.3        | )%         | (18,299    | )          | (4.5 | )% | 4,579 |   | (25.0 | )% |
| Total                 |       | $                                              | 413,068    |        | 100.0      | %          | $          | 402,129 |   | 100.0 | % | $ | 10,939 |   | 2.7 | % |

 

ARM’s revenue for the three monthsended March 31, 2010, included $13.7 million of intercompany revenue from PortfolioManagement which was eliminated upon consolidation. ARM’s revenue for the threemonths ended March 31, 2009, included $17.7 million of intercompanyrevenue from Portfolio Management and CRM’s revenue for the three months ended March 31,2009, included $628,000 of intercompany revenue from ARM, which were eliminatedupon consolidation.

 

ARM’s revenue for the three monthsended March 31, 2010 and 2009 included $74.2 million and $9.6 million,respectively, of reimbursable costs and fees (discussed in more detail below),which resulted in a $64.6 million increase in ARM’s revenue. This increase was partiallyoffset by decreases primarily attributable to the weaker collection environmentduring 2010, a $13.6 million decrease resulting from the sale of our print andmail business in October 2009, and a $4.0 million decrease in fees fromcollection services performed for Portfolio Management.

 

The decrease in CRM’s revenue wasprimarily due to lower volumes from certain existing clients attributable tothe impact of the economy on the clients’ business, partially offset byincreased client volume related to the implementation of new contracts during2009.

 

Portfolio Management’scollections decreased $10.1 million, or 23.1 percent, to $33.7 million for the threemonths ended March 31, 2010, from $43.8 million for the three months endedMarch 31, 2009. Revenue for the three months ended March 31, 2010,included a $1.4 million net recovery of previously recorded impairment chargesrecorded for a valuation allowance against the carrying value of theportfolios, compared to a net recovery of $93,000 for the three months ended March 31,2009. Excluding the effect of the recoveries of impairment charges, PortfolioManagement’s revenue represented 40.6 percent of collections for the threemonths ended March 31, 2010, as compared to 44.4 percent of collectionsfor the three months ended March 31, 2009. The remaining decrease inrevenue and collections was attributable to lower portfolio purchases and theeffect of the weaker collection environment during 2010.

 

*Payroll and relatedexpenses.*  Payroll andrelated expenses decreased $19.5 million to $186.3 million for the three monthsended March 31, 2010, from $205.8 million for the three months ended March 31,2009, and decreased as a percentage of revenue to 45.1 percent from 51.2percent.

 

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Payroll and related expenses by segment (dollars inthousands):

 
| ** **            | ** ** | **For  the Three Months Ended March 31,** | ** ** | ** **  | ** ** | ** ** | ** ** |
|-----------------------|------------|------------------------------------------------|------------|-------------|------------|------------|------------|
| ** **            | ** ** | ** **                                     | ** ** | **% of**    | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **            | ** ** | **2010**                                       | ** ** | **Revenue** | ** ** | **2009**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                   |       | $                                              | 128,670    |        | 38.4       | %          | $          | 142,459 |   | 45.7 | % | $ | (13,789 | ) | (9.7 | )% |
| CRM                   |       | 56,406                                         |       | 73.7        | %          | 62,437     |       | 70.8 | % | (6,031 | ) | (9.7 | )% |
| Portfolio  Management |       | 1,192                                          |       | 7.8         | %          | 1,497      |       | 7.3 | % | (305 | ) | (20.4 | )% |
| Eliminations          |       | —                                         |       | —      |       | (628       | )          | 3.4 | % | 628 |   | (100.0 | )% |
| Total                 |       | $                                              | 186,268    |        | 45.1       | %          | $          | 205,765 |   | 51.2 | % | $ | (19,497 | ) | (9.5 | )% |

 

The decrease in ARM’s payroll andrelated expenses as a percentage of revenue was primarily due to the higherrevenue base, which was attributable to the increase in reimbursable costs andfees. Included in ARM’s payroll and related expenses for the three months endedMarch 31, 2009, was $628,000 of intercompany expense from CRM, forservices provided to ARM, which was eliminated upon consolidation.

 

CRM’s payroll and related expenses increased as apercentage of revenue primarily as a result of leveraging its infrastructureover the lower revenue base.

 

Portfolio Management outsources all of its collectionservices to ARM and, therefore, has a relatively small fixed payroll coststructure.

 

*Selling, generaland administrative expenses.* Selling, general and administrative expenses decreased $22.1 million to$111.5 million for the three months ended March 31, 2010, from $133.6million for the three months ended March 31, 2009, and decreased as apercentage of revenue to 27.0 percent from 33.2 percent.

 

Selling, general and administrative expenses by segment (dollars inthousands):

 
| ** **            | ** ** | **For  the Three Months Ended March 31,** | ** ** | ** **  | ** ** | ** ** | ** ** |
|-----------------------|------------|------------------------------------------------|------------|-------------|------------|------------|------------|
| ** **            | ** ** | ** **                                     | ** ** | **% of**    | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **            | ** ** | **2010**                                       | ** ** | **Revenue** | ** ** | **2009**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                   |       | $                                              | 96,583     |        | 28.8       | %          | $          | 117,467 |   | 37.7 | % | $ | (20,884 | ) | (17.8 | )% |
| CRM                   |       | 14,152                                         |       | 18.5        | %          | 14,530     |       | 16.5 | % | (378 | ) | (2.6 | )% |
| Portfolio  Management |       | 14,192                                         |       | 92.9        | %          | 18,245     |       | 89.5 | % | (4,053 | ) | (22.2 | )% |
| Eliminations          |       | (13,395                                        | )          | 97.6        | %          | (16,663    | )          | 91.1 | % | 3,268 |   | (19.6 | )% |
| Total                 |       | $                                              | 111,532    |        | 27.0       | %          | $          | 133,579 |   | 33.2 | % | $ | (22,047 | ) | (16.5 | )% |

 

The decrease in ARM’s selling, general andadministrative expenses as a percentage of revenue was primarily attributableto the higher revenue base, which was attributable to the increase inreimbursable costs and fees, as well as cost saving initiatives and the sale ofthe print and mail business, which had a higher selling, general andadministrative expense cost structure.

 

The increase in CRM’s selling, general andadministrative expenses as a percentage of revenue was primarily attributableto leveraging its infrastructure over the lower revenue base.

 

The decrease in Portfolio Management’s selling,general and administrative expenses resulted from a $4.0 million decrease infees for collection services provided by ARM. Servicing fees are based on cashcollections so the increase as a percentage of revenue was primarily due to thedecrease in the percentage of collections recorded to revenue. Included inPortfolio Management’s selling, general and administrative expenses for thethree months ended March 31, 2010 and 2009, was $13.7 million and $17.7million, respectively, of intercompany expense from ARM, for services providedto Portfolio Management.

 

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*Reimbursable costsand fees.  *Reimbursable costs and fees consist of court costs, legal fees andrepossession fees, representing out-of-pocket expenses that are reimbursed byour clients. Reimbursable costs and fees of $73.8 million and $8.6 million forthe three months ended March 31, 2010 and 2009, respectively, are recordedas both 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.

 

*Restructuringcharges. *During the threemonths ended March 31, 2010, we incurred restructuring charges of $1.4million, related to our decision to limit purchases in the Portfolio Managementbusiness. The charges consisted primarily of severance costs. This compares to$443,000 of restructuring charges for the three months ended March 31,2009.

 

*Depreciation and amortization.* Depreciation and amortization decreased to $27.7 million for the threemonths ended March 31, 2010, from $31.1 million for the three months endedMarch 31, 2009. The decrease was primarily attributable to lowerdepreciation resulting from a lower level of property and equipment.

 

*Other income(expense).*  Interestexpense increased slightly to $23.6 million for the three months ended March 31,2010, from $23.1 million for the three months ended March 31, 2009.Interest expense for the three months ended March 31, 2010 and 2009included $2.3 million and $1.4 million, respectively, of losses from interestrate swap agreements and embedded derivatives. Other income (expense), net for thethree months ended March 31, 2010 and 2009 included approximately $198,000of net gains and $3.4 million of net losses, respectively, resulting fromforeign exchange contracts.

 

*Incometax expense (benefit)*.  For the three months ended March 31,2010, the effective income tax rate was (26.9) percent compared to 30.0 percentfor the three months ended March 31, 2009. The change in the effectiveincome tax rate was due primarily to the recognition of a valuation allowanceon certain domestic net deferred tax assets and income tax expense to be paidin state and foreign jurisdictions.

 

***Liquidity and Capital Resources***

 

Our primary sources of cash are cash flows fromoperations, including collections on purchased accounts receivable, bankborrowings, and equity and debt offerings. Cash has been used for acquisitions,repayments of bank borrowings, purchases of equipment, purchases of accountsreceivable, and working capital to support our growth.

 

The cash flow from our contingency collection businessand our purchased portfolio business is dependent upon our ability to collectfrom consumers and businesses. Many factors, including the economy and ourability to hire and retain qualified collectors and managers, are essential toour ability to generate cash flows. Fluctuations in these factors that cause anegative impact on our business could have a material impact on our expectedfuture cash flows.

 

The capital and credit markets have experiencedsignificant volatility in the recent past and if this continues, it is possiblethat our ability to access the capital and credit markets may be limited. Oursenior notes and senior subordinated notes are assigned ratings by certainrating agencies. Changes in our business environment, operating results, cashflows, or financial position could impact the ratings assigned by these ratingagencies. Significant changes in assigned ratings could also significantlyaffect the costs of borrowing, which could have a material impact on ourfinancial condition and results of operations. We are currently in compliancewith all of our debt covenants, but the future impact on the Company’soperations and financial projections from the challenging economic and businessenvironment may impact our ability to meet our debt covenants in the future.

 

At this time, we believe that we will be able tofinance our current operations, planned capital expenditure requirements,internal growth and debt service obligations, at least through the next twelvemonths, with the funds generated from our operations, with our existing cashand available borrowings under our senior credit facility. Additionally, we mayobtain cash through additional equity and debt offerings, if needed.

 

We have a senior credit facility that consists of aterm loan ($523.5 million outstanding as of March 31, 2010) and a $100.0million revolving credit facility (none outstanding as of March 31, 2010).Additionally, we have $165.0 million of floating rate senior notes and $200.0million 11.875 percent senior subordinated notes outstanding. As a result, weare significantly leveraged.

 

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On March 31, 2010, we amended our senior creditfacility to, among other things, adjust the financial covenants, includingincreasing maximum leverage ratios and decreasing minimum interest coverageratios, and adjusting the required principal payments. In 2010, our maximumleverage ratio covenant is 5.75 and our minimum interest coverage ratiocovenant is 1.80. We believe we will be able to maintain compliance with suchcovenants in 2010. Our ability to maintain compliance with our covenants 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. If we were to enter into an agreement with our lenders forfuture covenant compliance relief, such relief could result in additional feesand higher interest expense.

 

Our senior credit facility, as amended, does not giveus the ability to use available excess cash flow to repurchase our senior notesand senior subordinated notes. However, our senior credit facility, as amended,permits us to repurchase our senior notes and senior subordinated notes out ofthe net cash proceeds of new equity issuances. We are aware that oursenior notes and senior subordinated notes may trade at substantial discountsto their face amounts. We or our stockholders may from time to time seekto retire or purchase our outstanding notes through cash purchases and/orexchanges for equity securities, in open market purchases, privately negotiatedtransactions or otherwise. Our stockholders who acquire such notes may seekto contribute them to us, for retirement, in exchange for the issuance ofadditional equity. The amounts involved may be material.

 

Given the decline in liquidation rates, competitionfor purchased accounts receivable and the continued uncertainty of collectibility,we significantly reduced our purchases of accounts receivable in 2009. Wecurrently expect to limit our purchases in 2010 to certain of ournon-cancelable forward flow commitments. Additionally, we may opportunisticallypurchase accounts receivable that allow us to leverage meaningful third-partyservicing contracts. Our amended senior credit facility limits purchases in2010 to $20 million and purchases in 2011 and each year thereafter to $10million per year.

 

*Cash Flows from Operating Activities*.  Cash provided by operating activities was$37.1 million for the three months ended March 31, 2010, compared to $40.2million for the three months ended March 31, 2009. The decrease wasprimarily attributable to lower operating results for the three months ended March 31,2010 and a decrease in other assets and liabilities, offset in part by anincrease in accounts payable and accrued expenses of $13.9 million for thethree months ended March 31, 2010 compared to a decrease of $12.6 millionin the prior year period.

 

*Cash Flows from InvestingActivities.*  Cash provided by investing activities was$9.1 million for the three months ended March 31, 2010, compared to cashused in investing activities of $458,000 for the three months ended March 31,2009. 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 Flows from Financing Activities.* Cash used in financing activities was $51.1 million for the three monthsended March 31, 2010, compared to $28.2 million for the three months endedMarch 31, 2009. The increase in cash used in financing activities was dueprimarily to $42.8 million of total repayments of borrowings under our seniorcredit facility during the three months ended March 31, 2010, compared to$54.5 million of total repayments during the prior year period offset by theissuance of $40.0 million of stock which was used to fund those repayments in2009.

 

*Senior Credit Facility*. Our senior credit facility is with a syndicate of financial institutionsand consists of a term loan and a $100.0 million revolving credit facility. Weare required to make quarterly principal repayments of $1.5 million on the termloan until its maturity in May 2013, at which time its remaining balanceoutstanding is due. We are also required to make quarterly prepayments of 75percent of the excess cash flow from our purchased accounts receivable, andannual prepayments of 75 percent or 50 percent of our excess annual cash flow,based on our leverage ratio, less the amounts paid during the year from thepurchased accounts receivable excess cash flow prepayments. The revolvingcredit facility requires no minimum principal payments until its maturity in November 2011.At March 31, 2010, the balance outstanding on the term loan was $523.5million and there was no balance outstanding on the revolving credit facility.The availability of the revolving credit facility is reduced by any unusedletters of credit ($12.3 million at March 31, 2010). As of March 31,2010, we had $87.7 million of remaining availability under the revolving creditfacility.

 

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Borrowings under thesenior credit facility are collateralized by substantially all of our assets.The senior credit facility contains certain financial and other covenants suchas maintaining a maximum leverage ratio and a minimum interest coverage ratio,and includes restrictions on, among other things, acquisitions, the incurrenceof additional debt, investments, investments in purchased accounts receivable, dispositionof assets, liens and dividends and other distributions. If an event of default,such as failure to comply with covenants or a change of control, and thefailure to negotiate and obtain any required relief from our lenders, were tooccur under the senior credit facility, the lenders would be entitled todeclare all amounts outstanding under the senior credit facility immediatelydue and payable and foreclose on the pledged assets. Under these circumstances,the acceleration of our debt could have a material adverse effect on ourbusiness. Notwithstanding the foregoing, we may from time to time seek to amendour senior credit facility or obtain other funding or additional financing,which may result in additional fees and higher interest rates. Amending oursenior credit facility or obtaining other funding or additional financing priorto the expiration of the current agreement will be essential as the remainingoutstanding balance under the term loan will be due upon the expiration of thesenior credit facility in May 2013. At March 31, 2010, our leverageratio was 4.79, compared to the maximum of 5.75, and our interest coverageratio was 2.11, compared to the minimum of 1.80. We were in compliance with allrequired financial covenants and we were not aware of any events of default asof March 31, 2010.

 

*SeniorNotes and Senior Subordinated Notes.*  We have $165.0million of floating rate senior notes due 2013, referred to as the SeniorNotes, and $200.0 million of 11.875 percent senior subordinated notes due 2014,referred to as the Senior Subordinated Notes, collectively referred to as theNotes. The Notes are guaranteed, jointly and severally, on a senior basis withrespect to the Senior Notes and on a senior subordinated basis with respect tothe Senior Subordinated Notes, in each case by all of our existing and futuredomestic restricted subsidiaries (other than certain subsidiaries and jointventures engaged in financing the purchase of delinquent accounts receivableportfolios and certain immaterial subsidiaries). The Senior Notes bear interestat an annual rate equal to LIBOR plus 4.875 percent, reset quarterly.

 

For a description of thecovenants and other material terms of the Notes, see “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources” in our Annual Report on Form 10-K/A forthe year ended December 31, 2009.

 

*NonrecourseCredit Facility.*  We had a relationship with a lender toprovide nonrecourse financing for certain purchases of accounts receivable, atthe discretion of the lender.  If thelender chose to participate in the financing of a portfolio of accountsreceivable, the financing was structured, depending on the size and nature ofthe portfolio to be purchased, either as a borrowing arrangement or undervarious equity sharing arrangements. The lender financed non-equity borrowingswith floating interest at an annual rate equal to LIBOR (0.23 percent 30-dayLIBOR at March 31, 2010) plus 2.50 percent, or as negotiated. Theseborrowings are nonrecourse to us and are due two years from the date of eachrespective loan, unless otherwise negotiated. As additional return on the debtfinanced portfolios the lender receives residual cash flows, as negotiated,which is defined as all cash collections after servicing fees, floating rateinterest, repayment of the borrowing, and the initial investment by us,including interest. Residual cash flow payments are accrued for as embeddedderivatives. There were no non-equity borrowings under this relationship during2009 or during the three months ended March 31, 2010.

 

Borrowings under thisrelationship are nonrecourse to us, except for the assets within the entitiesestablished in connection with the financing agreement. The nonrecourse debtagreements contain a collections performance requirement, among othercovenants, that, if not met, provides for cross-collateralization with anyother portfolios financed by the nonrecourse lender, in addition to otherremedies.

 

The total nonrecoursedebt outstanding was $10.0 million as of March 31, 2010, which included$1.6 million of accrued residual interest. The effective interest rate on theseloans, including the residual interest component, was approximately 9.4 percentfor the three months ended March 31, 2010. The nonrecourse debt agreementscontain certain covenants such as meeting minimum cumulative collectiontargets. As of March 31, 2010, we were in compliance with all requiredcovenants.

 

*ContractualObligations.*There have been no material changes, outside the ordinary course of ourbusiness, to our contractual obligations as of December 31, 2009 asreported in our Annual Report on Form 10-K/A for the year ended December 31,2009.

 

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***Market Risk***

 

We are exposed to varioustypes of market risk in the normal course of business, including the impact ofinterest rate changes, foreign currency exchange rate fluctuations, changes incorporate tax rates, and inflation. We employ risk management strategies thatmay include the use of derivatives, such as interest rate swap agreements,interest rate cap agreements, and foreign currency forwards and options tomanage these exposures. We do not enter into derivatives for trading purposes.

 

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

 

*Interest Rate Risk. *At March 31, 2010, we had $698.5 million inoutstanding variable rate borrowings. A material change in interest rates couldadversely affect our operating results and cash flows. A 25 basis-pointincrease in interest rates could increase our annual interest expense by$125,000 for each $50 million of variable debt outstanding for the entire year.Currently, we primarily use interestrate swap agreements to limit potential losses from adverse interest ratechanges. Our interest rate swap agreements minimize the impact of LIBORfluctuations on the interest payments on our floating rate debt. We arerequired to pay the counterparties quarterly interest payments at a weightedaverage fixed rate, and we receive from the counterparties variable quarterlyinterest payments based on LIBOR.

 

***CriticalAccounting 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 three months ended March 31, 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***

 

For a discussion ofrecently issued accounting guidance, see note 19 in our Notes to ConsolidatedFinancial Statements included in this Form 10-Q.

 

**Item 3.   Quantitativeand Qualitative Disclosures about Market Risk**

 

Included in Item2, Management’s Discussion and Analysis of Financial Condition and Results ofOperations, of this Report on Form 10-Q.

 

## **Item4T.  Controls and Procedures**

 

Our management, with the participation of our chiefexecutive officer and chief financial officer, conducted an evaluation of theeffectiveness of our disclosure controls and procedures, as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e), as of March 31, 2010. Basedon that evaluation, our chief executive officer and chief financial officerconcluded that, as of the end of the period covered by this Report, ourdisclosure controls and procedures were effective in reaching a reasonablelevel of assurance that the (i) information required to be disclosed by usin 

 

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the reports that we file or submit under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms and (ii) informationrequired to be disclosed by us in the reports that we file or submit under theExchange Act is accumulated and communicated to our management including ourprincipal executive and principal financial officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding requireddisclosure.

 

Our management, with the participation of our chiefexecutive officer and chief financial officer, also conducted an evaluation ofour internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and15d-15(f), to determine whether any changes occurred during the quarter ended March 31,2010, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting. Based on thatevaluation, there were no such changes during the quarter ended March 31,2010.

 

A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all controls systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within our company have been detected. Because of the inherent limitationsin a cost-effective control system, misstatements due to error or fraud mayoccur and not be detected.

 

**Part II.  Other Information**

 

**Item 1.   Legal Proceedings**

 

TheCompany is party, from time to time, to various legal proceedings, regulatoryinvestigations, client audits and tax examinations incidental to its business.The Company continually monitors these legal proceedings, regulatoryinvestigations and tax examinations to determine the impact and any requiredaccruals. Some of these matters are described in “Item 3. Legal Proceedings” inthe Company’s Annual Report on Form 10-K/A for the year ended December 31,2009.

 

AttorneysGeneral:

 

Fromtime to time, the Company receives subpoenas or other similar informationrequests from various states’ Attorneys General, requesting informationrelating to the Company’s debt collection practices in such states. The Companyresponds to such inquires or investigations and provides certain information tothe respective Attorneys General offices. The Company believes it is incompliance with the laws of the states in which it does business relating todebt collection practices in all material respects. However, no assurance can begiven that any such inquiries or investigations will not result in a formalinvestigation or an enforcement action. Any such enforcement actions couldresult in fines as well as the suspension or termination of the Company’sability to conduct business in such states.

 

Other:

 

TheCompany is involved in other legal proceedings, regulatory investigations,client audits and tax examinations from time to time in the ordinary course ofits business. Management believes that none of these other legal proceedings,regulatory investigations or tax examinations will have a materially adverseeffect on the financial condition or results of operations of the Company.

 

**Item 1A.        Risk Factors**

 

Inaddition to the other information set forth in this Quarterly Report on Form 10-Q,you should carefully consider the factors discussed 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.

 

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**Item 2.   Unregistered Sales of Equity Securities andUse of Proceeds**

 

None

 

**Item 3.   Defaults Upon Senior Securities**

 

None

 

**Item 4.   [Removed and Reserved]**

 

**Item 5.   Other Information**

 

(a)   On May 10, 2010, our Board of Directorsappointed Thomas J. Kichler as a director to fill the vacancy created by thepreviously-announced resignation of David M. Cohen. Additionally, Mr. Kichlerwas appointed to the Audit Committee. Under the Stockholder’s Agreement dated as of November 15, 2006among us, One Equity Partners II, L.P. and certain of its affiliates, referredto collectively as “OEP”, and our other stockholders, OEP has the right todesignate three directors.  Mr. Kichlerwas appointed to our Board as one of OEP’s designees.

 

OEPis our principal stockholder. Mr. Kichler is a Managing Director of OEP.For information concerning certain transactions that we have had with OEP orits affiliates since January 1, 2009 that are required to be disclosed underItem 404(a) of SEC Regulation S-K, see “Item 11. Executive Compensation -Compensation Committee Interlocks and Insider Participation” in our AnnualReport on Form 10-K/A for the year ended December 31, 2009 and Note18 to our consolidated financial statements set forth in Part I - Item 1of this Quarterly Report on Form 10-Q, which information is incorporatedherein by reference.

 

(b)   Notapplicable

 

**Item 6.   Exhibits**

 
| 10     |   | Third Amendment to  Credit Agreement dated as of March 31, 2010 by and among NCO Group, Inc.,  NCO Financial Systems, Inc., certain guarantors under the Credit  Agreement, Citizens Bank of Pennsylvania as the administrative agent,  Citizens Bank of Pennsylvania as sole issuing bank and certain lenders  (incorporated by reference to Exhibit 10.34 in the Company’s Annual  Report on Form 10-K for the year ended December 31, 2009). |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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 therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                                      | NCO Group, Inc. |
|-------------------------------------------|----------------------|
|                                      |                 |
|                                      |                 |
| Date:   May 14,  2010 | By:                  | /s/ Michael J.  Barrist |
|                                      |                 | Michael J. Barrist |
|                                      |                 | Chairman of the Board,  President |
|                                      |                 | and Chief Executive  Officer |
|                                      |                 | (principal executive  officer) |
|                                      |                 |   |
|                                      |                 |   |
| Date:   May 14,  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**                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10                   |       | Third Amendment to  Credit Agreement dated as of March 31, 2010 by and among NCO  Group, Inc., NCO Financial Systems, Inc., certain guarantors under  the Credit Agreement, Citizens Bank of Pennsylvania as the administrative  agent, Citizens Bank of Pennsylvania as sole issuing bank and certain lenders  (incorporated by reference to Exhibit 10.34 in the Company’s Annual  Report on Form 10-K for the year ended December 31, 2009). |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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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