Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark one)**

 

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

** **

**For thequarterly period ended June 30, 2010**

** **

**or**

** **

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

 

**For the transition period from                    to                    **

 

**Commission File Number 333-165975; 333-158745; 333-150885**

 

**NCO GROUP, INC.**

(Exact name of registrant as specified in its charter)

 

| **DELAWARE**                                                   | ** ** | **02-0786880**                       |
|----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) |       | (I.R.S. Employer Identification No.) |
|                                                           |       |                                 |
| **507 Prudential Road, Horsham, Pennsylvania**                 | ** ** | **19044**                            |
| (Address of principal executive offices)                       |       | (Zip Code)                           |

** **

**215-441-3000**

(Registrant’s telephone number, including area code)

 

**Not Applicable**

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

 

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

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes o  No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer”and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o  No x

 

The number of shares outstanding of each of the issuer’s classes ofcommon stock as of August 13, 2010 was: 2,960,847 shares of Class Acommon stock, $0.01 par value and 399,814 shares of Class L common stock,$0.01 par value.

 

 

 

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**NCO GROUP, INC.**

 

**INDEX**

 
| ** **                                   | ** **                                                                                      | **PAGE**   |
|----------------------------------------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                                   | ** **                                                                                      | ** ** |
| **PART I — FINANCIAL INFORMATION** |                                                                                            |
| ** **                                   |                                                                                            |       |
| Item 1.                                      | FINANCIAL  STATEMENTS (Unaudited)                                                               |       |
|                                         |                                                                                            |       |
|                                         | Consolidated Balance Sheets - June 30, 2010 and  December 31, 2009                    | 1          |
|                                         |                                                                                            |       |
|                                         | Consolidated Statements of Operations - Three and Six  Months Ended June 30, 2010 and 2009 | 2          |
|                                         |                                                                                            |       |
|                                         | Consolidated Statements of Cash Flows - Three and Six  Months Ended June 30, 2010 and 2009 | 3          |
|                                         |                                                                                            |       |
|                                         | Notes to Consolidated Financial Statements                                                      | 4          |
|                                         |                                                                                            |       |
| Item 2.                                      | MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     | 30         |
|                                         |                                                                                            |       |
| Item 3.                                      | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                     | 40         |
|                                         |                                                                                            |       |
| Item 4.                                      | CONTROLS AND  PROCEDURES                                                                        | 40         |
|                                         |                                                                                            |       |
| **PART II  — OTHER INFORMATION**   |                                                                                            |
| ** **                                   |                                                                                            |       |
| Item 1.                                      | LEGAL PROCEEDINGS                                                                               | 41         |
|                                         |                                                                                            |       |
| Item 1A.                                     | RISK FACTORS                                                                                    | 41         |
|                                         |                                                                                            |       |
| Item 2.                                      | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                    | 41         |
|                                         |                                                                                            |       |
| Item 3.                                      | DEFAULTS  UPON SENIOR SECURITIES                                                                | 41         |
|                                         |                                                                                            |       |
| Item 4.                                      | [REMOVED AND  RESERVED]                                                                         | 41         |
|                                         |                                                                                            |       |
| Item 5.                                      | OTHER INFORMATION                                                                               | 41         |
|                                         |                                                                                            |       |
| Item  6.                                     | EXHIBITS                                                                                        | 42         |
|                                         |                                                                                            |       |
| SIGNATURES                                   | 43                                                                                              |

 

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**Part I. Financial Information**

**Item 1. Financial Statements**

 

**NCO GROUP, INC.**

**ConsolidatedBalance Sheets**

**(Unaudited)**

**(Amounts inthousands, except per share amounts)**

 
| ** **                                                                                                                                                                                                                                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                  | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                  | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                                                                                                                                                                                                                        |       |              |       |                  |       |
| Current assets:                                                                                                                                                                                                                             |       |              |       |                  |       |
| Cash and cash equivalents (includes cash and cash  equivalents of consolidated variable interest entities: 2010, $875; 2009,  $982)                                                                                                         |       | $                 | 25,743     |                  | $          | 39,221 |   |
| Accounts receivable, trade, net of allowance for  doubtful accounts of $4,669 and $5,824, respectively                                                                                                                                      |       | 166,958           |       | 178,067               |       |
| Purchased accounts receivable, current portion,  net of allowance for impairment of $144,488 and $144,397, respectively  (includes purchased accounts receivable of consolidated variable interest  entities: 2010, $17,588; 2009, $22,020) |       | 42,348            |       | 50,960                |       |
| Deferred income taxes                                                                                                                                                                                                                       |       | 1,732             |       | 1,753                 |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                   |       | 62,630            |       | 61,981                |       |
| Total current assets                                                                                                                                                                                                                        |       | 299,411           |       | 331,982               |       |
|                                                                                                                                                                                                                                        |       |              |       |                  |       |
| Funds held on behalf of clients (note 9)                                                                                                                                                                                                    |       |              |       |                  |       |
|                                                                                                                                                                                                                                        |       |              |       |                  |       |
| Property and equipment, net                                                                                                                                                                                                                 |       | 109,851           |       | 122,317               |       |
|                                                                                                                                                                                                                                        |       |              |       |                  |       |
| Other assets:                                                                                                                                                                                                                               |       |              |       |                  |       |
| Goodwill                                                                                                                                                                                                                                    |       | 535,454           |       | 535,857               |       |
| Trade name, net of accumulated amortization                                                                                                                                                                                                 |       | 83,711            |       | 83,912                |       |
| Customer relationships and other intangible  assets, net of accumulated amortization                                                                                                                                                        |       | 226,519           |       | 258,682               |       |
| Purchased accounts receivable, net of current  portion (includes purchased accounts receivable of consolidated variable  interest entities: 2010, $13,818; 2009, $18,586)                                                                   |       | 69,082            |       | 87,469                |       |
| Deferred income taxes                                                                                                                                                                                                                       |       | 3,517             |       | 3,548                 |       |
| Other assets                                                                                                                                                                                                                                |       | 34,784            |       | 36,268                |       |
| Total other assets                                                                                                                                                                                                                          |       | 953,067           |       | 1,005,736             |       |
| Total assets                                                                                                                                                                                                                                |       | $                 | 1,362,329  |                  | $          | 1,460,035 |   |
|                                                                                                                                                                                                                                        |       |              |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                              | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                                                                                                                                                                                                                        |       |              |       |                  |       |
| Current liabilities:                                                                                                                                                                                                                        |       |              |       |                  |       |
| Long-term debt, current portion (includes debt of  consolidated variable interest entities: 2010, $3,971; 2009, $10,027)                                                                                                                    |       | $                 | 13,334     |                  | $          | 41,699 |   |
| Income taxes payable                                                                                                                                                                                                                        |       | 6,992             |       | 2,838                 |       |
| Accounts payable                                                                                                                                                                                                                            |       | 21,713            |       | 15,865                |       |
| Accrued expenses (includes accrued expenses of  consolidated variable interest entities: 2010, $1,067; 2009, $795)                                                                                                                          |       | 93,746            |       | 107,250               |       |
| Accrued compensation and related expenses                                                                                                                                                                                                   |       | 43,702            |       | 38,094                |       |
| Deferred revenue, current portion                                                                                                                                                                                                           |       | 35,048            |       | 39,528                |       |
| Total current liabilities                                                                                                                                                                                                                   |       | 214,535           |       | 245,274               |       |
|                                                                                                                                                                                                                                        |       |              |       |                  |       |
| Funds held on behalf of clients (note 9)                                                                                                                                                                                                    |       |              |       |                  |       |
|                                                                                                                                                                                                                                        |       |              |       |                  |       |
| Long-term liabilities:                                                                                                                                                                                                                      |       |              |       |                  |       |
| Long-term debt, net of current portion                                                                                                                                                                                                      |       | 878,753           |       | 909,831               |       |
| Deferred income taxes (includes deferred income  taxes of consolidated variable interest entities: 2010, $954; 2009, $1,475)                                                                                                                |       | 35,806            |       | 31,972                |       |
| Deferred revenue, net of current portion                                                                                                                                                                                                    |       | 732               |       | 1,147                 |       |
| Other long-term liabilities                                                                                                                                                                                                                 |       | 34,023            |       | 31,261                |       |
|                                                                                                                                                                                                                                        |       |              |       |                  |       |
| Commitments and contingencies (note 16)                                                                                                                                                                                                     |       |              |       |                  |       |
|                                                                                                                                                                                                                                        |       |              |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                                                                  |       |              |       |                  |       |
| Preferred stock, par value $0.01 per share, 7,500  shares authorized, 3,380 and 3,152 shares issued and outstanding,  respectively                                                                                                          |       | 33                |       | 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                                                                                                                                                                                                                  |       | 764,202           |       | 763,828               |       |
| Accumulated other comprehensive loss                                                                                                                                                                                                        |       | (604              | )          | (551                  | )          |
| Accumulated deficit                                                                                                                                                                                                                         |       | (575,036          | )          | (534,242              | )          |
| Total NCO Group, Inc. stockholders’ equity                                                                                                                                                                                        |       | 188,629           |       | 229,100               |       |
| Noncontrolling interests                                                                                                                                                                                                                    |       | 9,851             |       | 11,450                |       |
| Total stockholders’ equity                                                                                                                                                                                                             |       | 198,480           |       | 240,550               |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                             |       | $                 | 1,362,329  |                  | $          | 1,460,035 |   |

 

See accompanying notes.

 

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**NCO GROUP, INC.**

**ConsolidatedStatements of Operations**

**(Unaudited)**

**(Amounts inthousands)**

 
| ** **                                                        | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                        | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| ** **                                                        | ** ** | **2010**                       | ** ** | **2009**                     | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                              |       |                           |       |                         |       |   |   |   |   |
| Revenues:                                                         |       |                           |       |                         |       |   |   |   |   |
| Services                                                          |       | $                              | 306,988    |                         | $          | 352,946 |   | $ | 629,914 |   | $ | 720,447 |   |
| Portfolio                                                         |       | 11,627                         |       | 16,851                       |       | 27,924 |   | 42,866 |   |
| Reimbursable costs and fees                                       |       | 67,554                         |       | 8,822                        |       | 141,399 |   | 17,435 |   |
|                                                              |       |                           |       |                         |       |   |   |   |   |
| Total revenues                                                    |       | 386,169                        |       | 378,619                      |       | 799,237 |   | 780,748 |   |
|                                                              |       |                           |       |                         |       |   |   |   |   |
| Operating costs and expenses:                                     |       |                           |       |                         |       |   |   |   |   |
| Payroll and related expenses                                      |       | 175,651                        |       | 197,922                      |       | 361,919 |   | 403,687 |   |
| Selling, general and administrative expenses                      |       | 113,254                        |       | 128,820                      |       | 224,786 |   | 262,399 |   |
| Reimbursable costs and fees                                       |       | 67,554                         |       | 8,822                        |       | 141,399 |   | 17,435 |   |
| Depreciation and amortization expense                             |       | 27,357                         |       | 30,619                       |       | 55,087 |   | 61,701 |   |
| Restructuring charges                                             |       | 4,949                          |       | 1,337                        |       | 6,383 |   | 1,780 |   |
| Total operating costs and expenses                                |       | 388,765                        |       | 367,520                      |       | 789,574 |   | 747,002 |   |
|                                                              |       |                           |       |                         |       |   |   |   |   |
| (Loss) Income from operations                                     |       | (2,596                         | )          | 11,099                       |       | 9,663 |   | 33,746 |   |
|                                                              |       |                           |       |                         |       |   |   |   |   |
| Other income (expense):                                           |       |                           |       |                         |       |   |   |   |   |
| Interest and investment income                                    |       | 185                            |       | 594                          |       | 273 |   | 936 |   |
| Interest expense                                                  |       | (22,156                        | )          | (26,674                      | )          | (45,757 | ) | (49,784 | ) |
| Other income, net                                                 |       | 1,113                          |       | 6,866                        |       | 1,069 |   | 3,162 |   |
| Total other income (expense)                                      |       | (20,858                        | )          | (19,214                      | )          | (44,415 | ) | (45,686 | ) |
| Loss before income taxes                                          |       | (23,454                        | )          | (8,115                       | )          | (34,752 | ) | (11,940 | ) |
|                                                              |       |                           |       |                         |       |   |   |   |   |
| Income tax expense (benefit)                                      |       | 1,865                          |       | (2,538                       | )          | 4,905 |   | (3,684 | ) |
|                                                              |       |                           |       |                         |       |   |   |   |   |
| Net loss                                                          |       | (25,319                        | )          | (5,577                       | )          | (39,657 | ) | (8,256 | ) |
|                                                              |       |                           |       |                         |       |   |   |   |   |
| Less: Net income (loss) attributable to  noncontrolling interests |       | 203                            |       | (361                         | )          | 1,137 |   | (931 | ) |
|                                                              |       |                           |       |                         |       |   |   |   |   |
| Net loss attributable to NCO Group, Inc.                     |       | $                              | (25,522    | )                            | $          | (5,216 | ) | $ | (40,794 | ) | $ | (7,325 | ) |

 

See accompanying notes.

 

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**NCO GROUP, INC**

**ConsolidatedStatements of Cash Flows**

**(Unaudited)**

**(Amounts in thousands)**

 
| ** **                                                                       | ** ** | **For the Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                       | ** ** | **June 30,**            | ** ** |
| ** **                                                                       | ** ** | **2010**                     | ** ** | **2009** | ** ** |
| ** **                                                                       | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Cash flows from operating activities:                                            |       |                         |       |   |   |
| Net loss                                                                         |       | $                            | (39,657    | ) | $ | (8,256 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |       |                         |       |   |   |
| Depreciation and amortization                                                    |       | 55,087                       |       | 61,701 |   |
| Provision for doubtful accounts                                                  |       | 672                          |       | 2,154 |   |
| Impairment of purchased accounts receivable                                      |       | 139                          |       | 1,341 |   |
| Noncash interest                                                                 |       | 3,773                        |       | 4,214 |   |
| Noncash net losses (gains) on derivative  instruments                            |       | 86                           |       | (195 | ) |
| Gain on sale of purchased accounts receivable                                    |       | —                       |       | (361 | ) |
| Deferred income taxes                                                            |       | 1,386                        |       | (5,744 | ) |
| Other                                                                            |       | 1,188                        |       | 1,928 |   |
| Changes in operating assets and liabilities, net  of acquisitions:               |       |                         |       |   |   |
| Accounts receivable, trade                                                       |       | 10,160                       |       | 16,423 |   |
| Accounts payable and accrued expenses                                            |       | (1,754                       | )          | (10,937 | ) |
| Income taxes payable                                                             |       | 3,903                        |       | (2,177 | ) |
| Other assets and liabilities                                                     |       | 1,403                        |       | (1,158 | ) |
| Net cash provided by operating activities                                        |       | 36,386                       |       | 58,933 |   |
|                                                                             |       |                         |       |   |   |
| Cash flows from investing activities:                                            |       |                         |       |   |   |
| Purchases of accounts receivable                                                 |       | (8,953                       | )          | (32,954 | ) |
| Collections applied to principal of purchased  accounts receivable               |       | 35,636                       |       | 46,653 |   |
| Proceeds from sales and resales of purchased  accounts receivable                |       | —                       |       | 525 |   |
| Purchases of property and equipment                                              |       | (12,247                      | )          | (18,055 | ) |
| Net cash paid related to acquisitions                                            |       | —                       |       | (780 | ) |
| Other                                                                            |       | 1,331                        |       | 149 |   |
| Net cash provided by (used in) investing  activities                             |       | 15,767                       |       | (4,462 | ) |
|                                                                             |       |                         |       |   |   |
| Cash flows from financing activities:                                            |       |                         |       |   |   |
| Repayment of notes payable                                                       |       | (8,481                       | )          | (15,148 | ) |
| Net repayments of borrowings under revolving  credit facility                    |       | (17,000                      | )          | (41,000 | ) |
| Repayment of borrowings under senior term loan                                   |       | (34,027                      | )          | (18,027 | ) |
| Payment of fees to obtain debt                                                   |       | (2,758                       | )          | (2,477 | ) |
| Return of investment in subsidiary to  noncontrolling interests                  |       | (2,736                       | )          | (4,287 | ) |
| Issuance of stock, net                                                           |       | —                       |       | 39,667 |   |
| Payment of deemed dividend to JPM                                                |       | —                       |       | (8,049 | ) |
| Net cash used in financing activities                                            |       | (65,002                      | )          | (49,321 | ) |
|                                                                             |       |                         |       |   |   |
| Effect of exchange rate on cash                                                  |       | (629                         | )          | 419 |   |
|                                                                             |       |                         |       |   |   |
| Net (decrease) increase in cash and cash  equivalents                            |       | (13,478                      | )          | 5,569 |   |
|                                                                             |       |                         |       |   |   |
| Cash and cash equivalents at beginning of the  period                            |       | 39,221                       |       | 29,880 |   |
|                                                                             |       |                         |       |   |   |
| Cash and cash equivalents at end of the period                                   |       | $                            | 25,743     |   | $ | 35,449 |   |

 

See accompanying notes.

 

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**NCO GROUP, INC.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

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

 

NCOGroup, Inc. is a holding company and conducts substantially all of itsbusiness operations through its subsidiaries (collectively, the “Company” or “NCO”).NCO is an international provider of business process outsourcing solutions,primarily focused on accounts receivable management (“ARM”) and customerrelationship management (“CRM”). NCO provides services through over 90 officesthroughout North America, Asia, Europe and Australia. The Company providesservices to more than 18,500 active clients, including many of the Fortune 500,supporting a broad spectrum of industries, including financial services,telecommunications, healthcare, retail and commercial, utilities, education andgovernment, technology and transportation/logistics services. These clients areprimarily located throughout North America, Europe and Australia. Excludingreimbursable costs and fees, the Company’s largest client during the six monthsended June 30, 2010, was in the telecommunications sector and represented7.9 percent of the Company’s consolidated revenue for the six months ended June 30,2010.

 

Historically,the Company has also purchased and collected past due consumer accountsreceivable from consumer creditors. During 2009, the Company significantlyreduced its purchases of accounts receivable and made a decision to minimizefurther investments in the future. This decision resulted from declines inliquidation rates, competition for purchased accounts receivable and thecontinued uncertainty of collectibility.

 

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

 

**2.     Accounting Policies:**

 

*Principles of Consolidation:*

 

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

 

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

 

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

 

*Interim Financial Information:*

 

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

 

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

 

*Interim Financial Information (continued):*

 

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

 

*Use of Estimates:*

 

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

 

*Reclassifications:*

 

Certain amounts in the statement of operations for the three and sixmonths ended June 30, 2009, and the statement of cash flows for the sixmonths ended June 30, 2009, have been reclassified for comparativepurposes.

 

**3.     Restructuring Charges:**

 

TheCompany has several restructuring plans under which it has recorded restructuringcharges, primarily in conjunction with streamlining the cost structure of theCompany’s operations. These charges primarily related to the elimination ofcertain redundant facilities and severance costs. The Company currently expectsto pay the remaining severance balance through 2013 and the remaining leasebalance through 2016.

 

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

 
| ** **                        | ** ** | **Leases** | ** ** | **Severance** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|------------|------------|---------------|------------|-----------|------------|
| Balance at December 31, 2009 |       | $          | 8,562      |          | $          | 2,997     |       | $ | 11,559 |   |
| Accruals                          |       | 4,502      |       | 1,881         |       | 6,383     |       |
| Cash payments                     |       | (3,673     | )          | (2,876        | )          | (6,549    | )          |
| Balance at June 30, 2010     |       | $          | 9,391      |          | $          | 2,002     |       | $ | 11,393 |   |

 

**4.     Business Combinations:**

 

OnAugust 31, 2009, the Company acquired TSYS Total Debt Management, Inc.(“TDM”), a provider of accounts receivable management legal network solutions,for $4.5 million in cash which included $1.3 million of acquired cash. TheCompany allocated $694,000 of the purchase price to the customer relationshipsand recorded goodwill of $1.4 million. The TDM acquisition was included in theARM segment.

 

**5.      Disposal of Business:**

 

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

 

**6.      Deferred Revenue:**

 

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

 
| Balance at December 31, 2009 |   | $       | 40,675 |   |
|-----------------------------------|--------|---------|--------|--------|
| Additions                         |   | 16,406  |   |
| Revenue recognized                |   | (21,301 | )      |
| Balance at June 30, 2010     |   | $       | 35,780 |   |

 

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**7.      Fair Value:**

 

*Recurring Measurement:*

 

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

 

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

 

 
| ** **                 | ** ** | **At Fair Value as of** | ** ** |
|----------------------------|------------|-------------------------|------------|
| ** **                 | ** ** | **June 30, 2010**  | ** ** | **December 31, 2009** | ** ** |
| ** **                 | ** ** | **Level 1**             | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|                       |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Assets:                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Forward exchange contracts |       | $                       | —     |   | $ | 158 |   | $ | — |   | $ | 158 |   | $ | — |   | $ | 2 |   | $ | — |   | 2 |   |
|                       |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:               |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate swaps        |       | —                  |       | 5,293 |   | — |   | 5,293 |   | — |   | 9,104 |   | — |   | 9,104 |   |
| Forward exchange contracts |       | —                  |       | 7 |   | — |   | 7 |   | — |   | 60 |   | — |   | 60 |   |
| Embedded derivatives       |       | —                  |       | — |   | 2,140 |   | 2,140 |   | — |   | — |   | 3,306 |   | 3,306 |   |
|                       |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net liabilities            |       | $                       | —     |   | $ | 5,142 |   | $ | 2,140 |   | $ | 7,282 |   | $ | — |   | $ | 9,162 |   | $ | 3,306 |   | $ | 12,468 |   |
|                            |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Duringthe six months ended June 30, 2010, there were no transfers in or out ofthe Company’s Level 1, Level 2 or Level 3 fair value measurements.

 

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

 

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

 

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

 

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

 

*Recurring Measurement (continued):*

 

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

 
| ** **                     | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|--------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                     | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| ** **                     | ** ** | **2010**                       | ** ** | **2009**                     | ** ** | **2010** | ** ** | **2009** | ** ** |
| Balance at beginning of period |       | $                              | 2,593      |                         | $          | 3,530 |   | $ | 3,306 |   | $ | 4,457 |   |
| Accrued interest additions     |       | 184                            |       | 713                          |       | 409 |   | 1,034 |   |
| Interest payments              |       | (376                           | )          | (567                         | )          | (814 | ) | (1,145 | ) |
| Change in fair value           |       | (261                           | )          | (344                         | )          | (761 | ) | (1,014 | ) |
| Balance at end of period       |       | $                              | 2,140      |                         | $          | 3,332 |   | $ | 2,140 |   | $ | 3,332 |   |

 

*Non-Recurring Measurement:*

 

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

 

Duringthe six months ended June 30, 2010 and 2009, there were no adjustments tofair value as there were no indicators that would have required interimtesting. The Company performs its annual testing of indefinite-lived intangibleassets during the fourth quarter of each year.

 

*Fair Value of Financial Instruments:*

 

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

 

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

 

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

 

Purchased Accounts Receivable:

 

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

 

Notes Receivable:

 

TheCompany had notes receivable of $5.0 million and $5.1 million as of June 30,2010 and December 31, 2009, respectively. The carrying amounts reported inthe balance sheets, included in current and long-term other assets,approximated market rates for notes with similar terms and maturities, and,accordingly, the carrying amounts approximated fair value. The Companycontinually evaluates the collectibility of these notes.

 

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

 

*Fair Value of Financial Instruments (continued):*

 

Long-Term Debt:

 

Thefollowing presents the carrying values and the estimated fair values of theCompany’s long-term debt at June 30, 2010 (amounts in thousands):

 
| ** **                  | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
|-----------------------------|------------|--------------------|------------|----------------|------------|
| Senior term loan            |       | $                  | 515,233    |           | $          | 521,522 |   |
| Senior subordinated notes   |       | 200,000            |       | 192,000        |       |
| Senior notes                |       | 165,000            |       | 140,250        |       |
| Nonrecourse credit facility |       | 6,213              |       | 6,213          |       |
|                             |            |                    |            |                |            |  |  |

 

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

 

**8.     Purchased AccountsReceivable:**

 

As of June 30, 2010, the carrying value of Portfolio Management’sand ARM’s purchased accounts receivable were $105.6 million and $5.8 million,respectively. The total outstanding balance due, representing the originalundiscounted contractual amount less collections since acquisition, was $55.7billion and $55.2 billion at June 30, 2010 and December 31, 2009,respectively.

 

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

 
| ** **                                                           | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                           | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| ** **                                                           | ** ** | **2010**                       | ** ** | **2009**                     | ** ** | **2010** | ** ** | **2009** | ** ** |
| Balance at beginning of period                                       |       | $                              | 124,873    |                         | $          | 177,114 |   | $ | 138,429 |   | $ | 185,659 |   |
| Purchases                                                            |       | 3,123                          |       | 16,523                       |       | 8,953 |   | 32,954 |   |
| Collections                                                          |       | (27,760                        | )          | (39,246                      | )          | (63,131 | ) | (89,592 | ) |
| Revenue recognized                                                   |       | 12,953                         |       | 17,717                       |       | 27,495 |   | 42,939 |   |
| Proceeds from portfolio sales and resales applied  to carrying value |       | —                         |       | —                       |       | — |   | (164 | ) |
| Impairment                                                           |       | (1,585                         | )          | (1,308                       | )          | (139 | ) | (1,341 | ) |
| Other                                                                |       | (174                           | )          | 1,474                        |       | (177 | ) | 1,819 |   |
| Balance at end of period                                             |       | $                              | 111,430    |                         | $          | 172,274 |   | $ | 111,430 |   | $ | 172,274 |   |

 

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**8.     Purchased AccountsReceivable (continued):**

 

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

 
| ** **                     | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|--------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                     | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| ** **                     | ** ** | **2010**                       | ** ** | **2009**                     | ** ** | **2010** | ** ** | **2009** | ** ** |
| Balance at beginning of period |       | $                              | 142,951    |                         | $          | 123,801 |   | $ | 144,397 |   | $ | 123,804 |   |
| Additions                      |       | 2,036                          |       | 2,865                        |       | 3,211 |   | 5,655 |   |
| Recoveries                     |       | (451                           | )          | (1,557                       | )          | (3,072 | ) | (4,314 | ) |
| Other                          |       | (48                            | )          | 120                          |       | (48 | ) | 84 |   |
| Balance at end of period       |       | $                              | 144,488    |                         | $          | 125,229 |   | $ | 144,488 |   | $ | 125,229 |   |

 

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

 
| ** **                                           | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                           | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| ** **                                           | ** ** | **2010**                       | ** ** | **2009**                     | ** ** | **2010** | ** ** | **2009** | ** ** |
| Balance at beginning of period                       |       | $                              | 103,534    |                         | $          | 154,196 |   | $ | 112,108 |   | $ | 167,411 |   |
| Additions                                            |       | 2,282                          |       | 19,063                       |       | 6,525 |   | 38,363 |   |
| Revenue recognition                                  |       | (12,953                        | )          | (17,717                      | )          | (27,495 | ) | (42,939 | ) |
| Reclassifications (to) from nonaccretable difference |       | (3,594                         | )          | 5,119                        |       | (1,891 | ) | (2,220 | ) |
| Foreign currency translation adjustment              |       | 207                            |       | (386                         | )          | 229 |   | (340 | ) |
| Balance at end of period                             |       | $                              | 89,476     |                         | $          | 160,275 |   | $ | 89,476 |   | $ | 160,275 |   |

 

Duringthe three months ended June 30, 2010 and 2009, the Company purchasedaccounts receivable with a cost of $3.1 million and $16.5 million,respectively, that had contractually required payments receivable at the dateof acquisition of $188.1 million and $671.5 million, respectively, and expectedcash flows at the date of acquisition of $5.4 million and $35.6 million,respectively. During the six months ended June 30, 2010 and 2009, theCompany purchased accounts receivable with a cost of $9.0 million and $32.9million, respectively, that had contractually required payments receivable atthe date of acquisition of $575.9 million and $1.8 billion, respectively, andexpected cash flows at the date of acquisition of $15.5 million and $71.3million, respectively.

 

**9.     Funds Held on Behalf ofClients:**

 

Inthe course of the Company’s regular business activities as a provider ofaccounts receivable management services, the Company receives clients’ fundsarising from the collection of accounts placed with the Company. These fundsare placed in segregated cash accounts and are generally remitted to clientswithin 30 days. Funds held on behalf of clients of $74.0 million and $75.1million at June 30, 2010 and December 31, 2009, respectively, havebeen shown net of their offsetting liability for financial statementpresentation.

 

**10.  Goodwill and Other IntangibleAssets:**

 

Goodwillis allocated and tested at the reporting unit level. Goodwill is tested forimpairment each year during the fourth quarter, and between annual tests if anevent occurs or circumstances change that would more likely than not reduce thefair value of a reporting unit below its carrying amount. No event occurred orcircumstances changed since the last annual test that would more likely thannot reduce the fair value of a reporting unit below its carrying value.However, if the Company continues to experience adverse effects of the challengingeconomic and business environment, including changes in financial projections,the Company may 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 IntangibleAssets (continued):**

 

Thefollowing summarizes the 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                        |       | 34      |       | —  |       | 34        |       |
| Foreign currency translation and other |       | (437    | )          | —  |       | (437      | )          |
| Balance at June 30, 2010:         |       |    |       |    |       |      |       |
| Goodwill                               |       | 551,644 |       | 128,365 |       | 680,009   |       |
| Accumulated impairment                 |       | (73,205 | )          | (71,350 | )          | (144,555  | )          |
|                                   |       | $       | 478,439    |    | $          | 57,015    |       | $ | 535,454 |   |

 

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

 

Tradename also includes certain trade names which are not considered to haveindefinite lives and are therefore subject to amortization. At June 30,2010, the gross carrying amount of these trade names was $2.0 million, and theaccumulated amortization was $943,000.

 

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

** **
| ** **             | ** ** | **June 30, 2010**     | ** ** | **December 31, 2009**    | ** ** |
|------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|                   |       |                       |       |                          |       |   |   |   |   |
| Customer relationships |       | $                          | 437,186    |                          | $          | 211,983 |   | $ | 437,412 |   | $ | 180,379 |   |
| Non-compete agreements |       | 3,372                      |       | 2,056                         |       | 3,955 |   | 2,306 |   |
|                   |       |                       |       |                          |       |   |   |   |   |
| Total                  |       | $                          | 440,558    |                          | $          | 214,039 |   | $ | 441,367 |   | $ | 182,685 |   |

 

TheCompany recorded amortization expense for intangible assets of $16.1 millionand $17.7 million during the three months ended June 30, 2010 and 2009,respectively, and $32.2 million and $34.6 million during the six months ended June 30,2010 and 2009, respectively.

 

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

 
| **For the Years Ended  December 31,** | ** ** | **Estimated  Amortization Expense** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|
|                                       |       |                                |       |
| 2010                                       |       | $                                   | 64,300     |   |
| 2011                                       |       | 63,925                              |       |
| 2012                                       |       | 59,693                              |       |
| 2013                                       |       | 53,504                              |       |
| 2014                                       |       | 15,727                              |       |
|                                            |            |                                     |            |  |

 

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**11.  Long-Term Debt:**

 

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

 
| ** **                       | ** ** | **June 30, 2010** | ** **    | **December 31, 2009** | ** ** |
|----------------------------------|------------|------------------------|---------------|----------------------------|------------|
|                             |       |                   |          |                       |       |
| Senior term loan                 |       | $                      | 515,233       |                       | $          | 549,260 |   |
| Senior revolving credit facility |       | —                 |          | 17,000                     |       |
| Senior subordinated notes        |       | 200,000                |          | 200,000                    |       |
| Senior notes                     |       | 165,000                |          | 165,000                    |       |
| Nonrecourse credit facility      |       | 6,213                  |          | 14,322                     |       |
| Capital leases                   |       | 4,988                  |          | 4,789                      |       |
| Other                            |       | 653                    |          | 1,159                      |       |
| Less current portion             |       | (13,334                | )             | (41,699                    | )          |
|                             |       | $                      |  878,753 |                       | $          | 909,831 |   |

 

*Senior Credit Facility:*

 

TheCompany has a senior credit facility (“Credit Facility”) with a syndicate offinancial institutions that consists of a term loan and a $100.0 millionrevolving credit facility. The Company is required to make quarterly principalrepayments of $1.5 million on the term loan until its maturity in May 2013,at which time its remaining balance outstanding is due. The Company is alsorequired to make quarterly prepayments of 75 percent of the excess cash flowfrom the Company’s purchased accounts receivable, and annual prepayments of 75percent or 50 percent of its excess annual cash flow, based on its leverageratio, less the amounts paid during the year from the purchased accountsreceivable excess cash flow prepayments. The revolving credit facility requiresno minimum principal payments until its maturity in November 2011. Theavailability of the revolving credit facility is reduced by any unused lettersof credit ($11.9 million at June 30, 2010). As of June 30, 2010, theCompany had $88.1 million of remaining availability under the revolving creditfacility.

 

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

 

Allborrowings bear interest at an annual variable rate, based on either the primerate (3.25 percent at June 30, 2010), the federal funds rate (0.09 percentat June 30, 2010) or LIBOR (0.35 percent 30-day LIBOR at June 30,2010) plus an applicable margin, which is based on the type of rate and theCompany’s funded debt to earnings before interest, taxes, depreciation andamortization (“EBITDA”) ratio, as defined in the loan agreement. The Company ischarged a quarterly commitment fee on the unused portion of the revolvingcredit facility at an annual rate of 0.50 percent. The effective interest rateon the Credit Facility was approximately 9.18 percent and 9.00 percent for thethree months ended June 30, 2010 and 2009, respectively, and 9.20 percentand 7.99 percent for the six months ended June 30, 2010 and 2009,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):*

 

Borrowingsunder the Credit Facility are collateralized by substantially all of theCompany’s assets. The Credit Facility contains certain financial and othercovenants such as maintaining a maximum leverage ratio and a minimum interestcoverage ratio, and includes restrictions on, among other things, acquisitions,the incurrence of additional debt, investments, investments in purchasedaccounts receivable, disposition of assets, liens and dividends and otherdistributions. If an event of default, such as failure to comply with covenantsor a change of control, and the failure to negotiate and obtain any requiredrelief from the Company’s lenders, were to occur under the Credit Facility, thelenders would be entitled to declare all amounts outstanding under itimmediately due and payable and foreclose on the pledged assets. Under thesecircumstances, the acceleration of the Company’s debt could have a materialadverse effect on its business. Notwithstanding the foregoing, the Company mayfrom time to time seek to amend its existing Credit Facility or obtain otherfunding or additional financing, which may result in additional fees and higherinterest rates. Amending the Company’s Credit Facility or obtaining otherfunding or additional financing prior to the expiration of the currentagreement will be essential as the remaining outstanding balance under the termloan will be due upon the expiration of the Credit Facility in May 2013.At June 30, 2010, the Company’s leverage ratio was 5.04, compared to themaximum of 5.75, and the interest coverage ratio was 2.00, compared to theminimum of 1.80. The Company was in compliance with all required financialcovenants and was not aware of any events of default as of June 30, 2010.

 

Managementbelieves that over the next 12 months the Company will continue to maintaincompliance with these covenants. The Company’s ability to maintain compliancewith the covenants will be highly dependent on the Company’s results ofoperations and, to the extent necessary, the Company’s ability to implementremedial measures such as further reductions in operating costs. If the Companywere to enter into an agreement with its lenders for future covenant compliancerelief, such relief could result in additional fees and higher interestexpense.

 

*Senior Notes and Senior Subordinated Notes:*

 

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

 

TheSenior Notes are senior unsecured obligations and are senior in right ofpayment to all existing and future senior subordinated indebtedness, includingthe Senior Subordinated Notes, and all future subordinated indebtedness. TheSenior Notes bear interest at an annual rate equal to LIBOR plus 4.875 percent,reset quarterly. The effective interest rate of the Senior Notes wasapproximately 5.21 percent and 5.93 percent for the three months ended June 30,2010 and 2009, respectively, and 5.18 percent and 6.26 percent for the sixmonths ended June 30, 2010 and 2009, respectively. The Company may redeemthe Senior Notes, in whole or in part, at any time at varying redemption pricesdepending on the redemption date, plus accrued and unpaid interest.

 

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

 

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

 

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

 

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

 

*Nonrecourse Credit Facility:*

 

TheCompany has a nonrecourse credit facility that funded certain purchases ofaccounts receivable prior to 2009. The Company does not have the ability tomake any additional borrowings under the nonrecourse credit facility. Thefinancing was structured, depending on the size and nature of the portfolio tobe purchased, either as a borrowing arrangement or under various equity sharingarrangements. The lender financed non-equity borrowings with floating interestat an annual rate equal to LIBOR (0.35 percent 30-day LIBOR at June 30,2010) plus 2.50 percent, or as negotiated. These borrowings are nonrecourse tothe Company and are due two years from the date of each respective loan, unlessotherwise negotiated. As additional return on the debt financed portfolios, thelender receives residual cash flows, as negotiated, which is defined as allcash collections after servicing fees, floating rate interest, repayment of theborrowing, and the initial investment by the Company, including interest.Residual cash flow payments are accrued for as embedded derivatives.

 

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

 

Totaldebt outstanding under this facility was $6.2 million and $14.3 million as of June 30,2010 and December 31, 2009, respectively, which included $1.3 million and$2.1 million, respectively, of accrued residual interest. The effectiveinterest rate on these loans, including the residual interest component, wasapproximately 11.4 percent and 8.3 percent for the three months ended June 30,2010 and 2009, respectively, and 10.2 percent and 9.9 percent for the sixmonths ended June 30, 2010 and 2009, respectively. The nonrecourse creditfacility contains certain covenants such as meeting minimum cumulativecollection targets. As of June 30, 2010, the Company was in compliancewith all required covenants.

 

**12.  Income Taxes:**

 

The Company recorded income tax expense of $1.9 million and an incometax benefit of $2.5 million for the three months ended June 30, 2010 and2009, respectively, and an income tax expense of $4.9 million and an income taxbenefit of $3.7 million for the six months ended June 30, 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.

 

As a result of cumulative losses incurred by the Company since 2007, avaluation allowance was established due to the uncertainty that federal andcertain state deferred tax assets would be realized in future years. TheCompany increased its valuation allowance by $16.5 million to $84.9 million asof June 30, 2010 from $68.4 million as of December 31, 2009,primarily as a result of federal and certain state deferred tax assetsexceeding deferred tax liabilities (after consideration for any net deferredtax liabilities associated with non-amortizable assets such as goodwill andcertain trade names).

 

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

 

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

 

**13.  Stockholders’ Equity:**

 

*Preferred Stock and Common Stock:*

 

TheCompany is authorized to issue three classes of capital stock: Preferred Stock,par value $0.01 per share, Class L Common Stock, par value $0.01 per share(“Class L”) and Class A common stock, par value $0.01 per share (“Class A”).Shares of Class L, Class A and three series of Preferred Stock: Series A14 percent PIK Preferred Stock (“Series A”), Series B-1 19 percentPIK Preferred Stock (“Series B-1”), and Series B-2 19 percentPreferred Stock (“Series B-2”), are issued and outstanding.

 

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

 
| ** **      | ** ** | **For the Three Months** | ** ** | **For the Six Months**  | ** ** |
|-----------------|------------|--------------------------|------------|-------------------------|------------|
| ** **      | ** ** | **Ended June 30,**  | ** ** | **Ended June 30,** | ** ** |
| ** **      | ** ** | **2010**                 | ** ** | **2009**                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Series A   |       | 106,335                  |       | 92,665                  |       | 206,887 |   | 179,876 |   |
| Series B-1 |       | 10,919                   |       | 7,225                   |       | 21,123 |   | 8,950 |   |

 

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

 

On March 25, 2009, in connection withthe amendment of the Company’s Credit Facility (note 11),the Company sold 148,463.6 shares of its Series B-1 Preferred Stock and19,957.4 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.

 

*Noncontrolling Interests:*

 

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

 
| ** **                                | ** ** | **NCO Group, Inc.  Stockholders’  Equity** | ** ** | **Noncontrolling  Interests** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------|------------|---------------------------------------|------------|
|                                      |       |                                                 |       |                          |       |                                  |       |
| Balance at December 31, 2009         |       | $                                                    | 229,100    |                          | $          | 11,450                                |       | $ | 240,550 |   |
| Stock-based compensation                  |       | 376                                                  |       | —                        |       | 376                                   |       |
| Distributions to noncontrolling interests |       | —                                               |       | (2,736                        | )          | (2,736                                | )          |
| Net (loss) income                         |       | (40,794                                              | )          | 1,137                         |       | (39,657                               | )          |
| Accumulated other comprehensive loss      |       | (53                                                  | )          | —                        |       | (53                                   | )          |
| Balance at June 30, 2010             |       | $                                                    | 188,629    |                          | $          | 9,851                                 |       | $ | 198,480 |   |

 

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

 

*Comprehensive Income (Loss):*

 

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

 
| ** **                                                             | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                             | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| ** **                                                             | ** ** | **2010**                       | ** ** | **2009**                     | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net loss attributable to NCO Group, Inc.                          |       | $                              | (25,522    | )                            | $          | (5,216 | ) | $ | (40,794 | ) | $ | (7,325 | ) |
| Foreign currency translation adjustments                               |       | (2,486                         | )          | 4,053                        |       | (1,799 | ) | 896 |   |
| Change in fair value of cash flow hedges, net of  tax                  |       | —                         |       | —                       |       | — |   | (719 | ) |
| Net losses on cash flow hedges reclassified into earnings,  net of tax |       | 853                            |       | 1,492                        |       | 1,746 |   | 2,801 |   |
| Comprehensive loss - NCO Group, Inc.                              |       | (27,155                        | )          | 329                          |       | (40,847 | ) | (4,347 | ) |
| Net income (loss) attributable to noncontrolling interests             |       | 203                            |       | (361                         | )          | 1,137 |   | (931 | ) |
| Total comprehensive loss                                               |       | $                              | (26,952    | )                            | $          | (32 | ) | $ | (39,710 | ) | $ | (5,278 | ) |

 

**14.  Derivative FinancialInstruments:**

 

TheCompany enters into forward exchange contracts to minimize the impact ofcurrency fluctuations on transactions and cash flows. These contracts may bedesignated as cash flow hedges. The Company had forward exchange contracts forthe purchase of 177.4 million Philippine pesos and 22.8 million of Canadiandollars outstanding at June 30, 2010, which mature throughout theremainder of 2010.

 

TheCompany has interest rate swap agreements to minimize the impact of LIBORfluctuations on interest payments on the Company’s floating rate debt. Theinterest rate swaps may be designated as cash flow hedges. The interest rateswaps cover an aggregate notional amount of $308.4 million. The Company isrequired to pay the counterparties quarterly interest payments at a weightedaverage fixed rate ranging from 3.41 to 3.44 percent, and receives from thecounterparties variable quarterly interest payments based on LIBOR. The net interestpaid or received is included in interest expense. On March 25, 2009, theCompany amended its senior credit facility, which amendment included a minimumLIBOR of 2.50 percent. This amendment caused the existing interest rate swapsto become ineffective and, as of March 25, 2009, these interest rate swapswere not accounted for as cash flow hedges. Accordingly, the fair market valueof the interest rate swaps at March 25, 2009 is being amortized tointerest expense, using the effective interest rate method, over the remaininglives of the interest rate swap agreements, and future changes in the fairmarket value of these interest rate swaps after March 25, 2009 arerecorded in interest expense.

 

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

 

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

 

The following summarizes thefair value of the Company’s derivatives (amounts in thousands):

 
| ** **                                            | ** ** | ** **                          | ** ** | **Fair Value**    | ** ** |
|-------------------------------------------------------|------------|-------------------------------------|------------|-------------------|------------|
| ** **                                            | ** ** | **Balance Sheet**                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| ** **                                            | ** ** | **Location**                        | ** ** | **2010**          | ** ** | **2009** | ** ** |
| Derivatives not designated as hedges:                 |       |                                |       |              |       |   |   |
| *Asset derivatives*                                   |       |                                |       |              |       |   |   |
| Forward exchange contracts                            |       | Other  current assets               |       | $                 | 158        |   | $ | 2 |   |
| Total asset derivatives not designated as hedges      |       |                                |       | $                 | 158        |   | $ | 2 |   |
|                                                  |       |                                |       |              |       |   |   |
| *Liability derivatives*                               |       |                                |       |              |       |   |   |
| Interest rate swaps                                   |       | Accrued  expenses                   |       | $                 | 5,293      |   | $ | 9,104 |   |
| Forward exchange contracts                            |       | Accrued  expenses                   |       | 7                 |       | 60 |   |
| Embedded derivatives                                  |       | Long-term debt and accrued expenses |       | 2,140             |       | 3,306 |   |
| Total liability derivatives not designated as  hedges |       |                                |       | $                 | 7,440      |   | $ | 12,470 |   |

 

Thefollowing table summarizes the effect of derivatives designated as hedges onthe Company for the six months ended June 30, 2009 (there were no derivativesdesignated as hedges for the three months ended June 30, 2010 and 2009,and for the six months ended June 30, 2010) (amounts in thousands):

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

 

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

 

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

 
| ** **                                      | ** ** | ** **                  | ** ** | **For the Three Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|----------------------------------------------|------------|
| ** **                                      | ** ** | ** **                  | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| ** **                                      | ** ** | ** **                  | ** ** | **Amount of Gain**                           | ** ** | **Amount of Gain** | ** ** |
| ** **                                      | ** ** | **Location of Gain (Loss)** | ** ** | **(Loss) Recognized**                        | ** ** | **(Loss) Recognized** | ** ** |
| ** **                                      | ** ** | **Recognized in Earnings**  | ** ** | **in Earnings**                              | ** ** | **in Earnings** | ** ** |
| Derivatives not designated as hedges:           |       |                        |       |                                         |       |   |   |
| Forward exchange contracts                      |       | Other  income (expense)     |       | $                                            | 154        |   | $ | 6,206 |   |
| Interest rate swaps (after March 25, 2009) |       | Interest  expense           |       | 238                                          |       | (3,916 | ) |
| Amortization of interest rate swaps             |       | Interest  expense           |       | (1,339                                       | )          | — |   |
| Embedded derivatives                            |       | Interest  expense           |       | 261                                          |       | 344 |   |
| Interest rate caps                              |       | Other  income (expense)     |       | —                                       |       | (7 | ) |
| Total derivatives not designated as hedges      |       |                        |       | $                                            | (686       | ) | $ | 2,627 |   |

 
| ** **                                      | ** ** | ** **                  | ** ** | **For the Six Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|--------------------------------------------|------------|
| ** **                                      | ** ** | ** **                  | ** ** | **2010**                                   | ** ** | **2009** | ** ** |
| ** **                                      | ** ** | ** **                  | ** ** | **Amount of Gain**                         | ** ** | **Amount of Gain** | ** ** |
| ** **                                      | ** ** | **Location of Gain (Loss)** | ** ** | **(Loss) Recognized**                      | ** ** | **(Loss) Recognized** | ** ** |
| ** **                                      | ** ** | **Recognized in Earnings**  | ** ** | **in Earnings**                            | ** ** | **in Earnings** | ** ** |
| Derivatives not designated as hedges:           |       |                        |       |                                       |       |   |   |
| Forward exchange contracts                      |       | Other  income (expense)     |       | $                                          | 352        |   | $ | 2,783 |   |
| Interest rate swaps (after March 25, 2009) |       | Interest  expense           |       | (1,158                                     | )          | (3,916 | ) |
| Amortization of interest rate swaps             |       | Interest  expense           |       | (2,741                                     | )          | — |   |
| Embedded derivatives                            |       | Interest  expense           |       | 761                                        |       | 1,014 |   |
| Interest rate caps                              |       | Other  income (expense)     |       | —                                     |       | (30 | ) |
| Total derivatives not designated as hedges      |       |                        |       | $                                          | (2,786     | ) | $ | (149 | ) |

 

**15.  Supplemental Cash FlowInformation:**

 

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

 
| ** **                                       | ** ** | **For the Six Months Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|
| ** **                                       | ** ** | **June 30,**            | ** ** |
| ** **                                       | ** ** | **2010**                     | ** ** | **2009** | ** ** |
| Noncash investing and financing activities:      |       |                         |       |   |   |
| Fair value of assets acquired                    |       | $                            | —     |   | $ | 1,450 |   |
| Liabilities assumed from acquisitions            |       | —                       |       | 625 |   |
| Issuance of stock to JPM for the SST acquisition |       | —                       |       | 1,758 |   |
| Adjustments to acquired assets and liabilities   |       | —                       |       | 1,378 |   |
|                                                  |            |                              |            |  |  |  |  |

 

**16.  Commitments andContingencies:**

 

*Purchase Commitments:*

 

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

 
| 2010   |   | $      | 27,924 |   |
|--------|--------|--------|--------|--------|
| 2011   |   |   | 18,499 |   |
| 2012   |   |   | 7,392  |   |
|   |   |   |   |   |
|   |   | $      | 53,815 |   |

 

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

 

*Purchase Commitments(continued):*

 

The Company incurred $13.2 million and $18.4 million ofexpense from vendors associated with these purchase commitments for the threemonths ended June 30, 2010 and 2009, respectively and $27.3 million and $34.9 million for the sixmonths ended June 30, 2010 and 2009, respectively.

 

*Forward-Flow Agreements:*

 

The Company has several fixed price agreements, orforward-flows, that obligate the Company to purchase, on a monthly basis,portfolios of charged-off accounts receivable meeting certain criteria. Theforward flow agreements expire throughout 2010. The remaining estimated futureforward-flow commitments in 2010 are approximately $3.5 million.

 

*Litigation and Investigations:*

 

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

 

Attorneys General:

 

From time to time, the Company receives subpoenas or othersimilar information requests from various states’ Attorneys General, requestinginformation relating to the Company’s debt collection practices in such states.The Company responds to such inquires or investigations and provides certaininformation to the respective Attorneys General offices. The Company believesit is in compliance with the laws of the states in which it does businessrelating to debt collection practices in all material respects. However, noassurance can be given that any such inquiries or investigations will notresult in a formal investigation or an enforcement action. Any such enforcementactions could result in fines as well as the suspension or termination of theCompany’s ability to conduct business in such states.

 

Other:

 

The Company is involved in other legal proceedings,regulatory investigations, client audits and tax examinations from time to timein the ordinary course of its business. Management believes that none of theseother legal proceedings, regulatory investigations, client audits or taxexaminations will have a materially adverse effect on the financial conditionor results of operations of the Company.

 

**17.  Segment Reporting:**

 

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

 

ARMprovides accounts receivable management services to consumer and commercialaccounts for all market sectors including financial services, healthcare,retail and commercial, telecommunications, utilities, education, andgovernment. ARM serves clients of all sizes in local, regional and nationalmarkets in North America, Europe and Australia through offices in North America,Asia, Europe and Australia. In addition to traditional accounts receivablecollections, these services include developing the client relationship beyondbad debt recovery and delinquency management, and delivering cost-effectiveaccounts receivable solutions to all market sectors. ARM also provides accountsreceivable management services to Portfolio Management. ARM recorded revenue of$10.9 million and $16.3 million for intercompany services to PortfolioManagement for the three months ended June 30, 2010 and 2009,respectively, and $24.6 million and $34.0 million for the six months ended June 30,2010 and 2009, respectively.

 

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

 

CRMprovides customer relationship management services to clients in North Americathrough offices in North America and Asia. CRM also provided certain servicesto ARM, and recorded revenue of $637,000 and $1.3 million for the three and sixmonths ended June 30, 2009, respectively, for the intercompany services toARM.

 

PortfolioManagement purchases and manages defaulted consumer accounts receivable fromconsumer creditors such as banks, finance companies, retail merchants,utilities, healthcare companies and other consumer oriented companies.Portfolio Management’s revenue was impacted by an impairment of purchasedaccounts receivable of $1.6 million and $1.4 million for the three months endedJune 30, 2010 and 2009, respectively, and $303,000 and $1.3 million forsix months ended June 30, 2010 and 2009, respectively.

 

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

 
| ** **           | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------|------------|------------------------|------------|----------------------------|------------|
| ARM                  |       | $                      | 1,027,353  |                       | $          | 1,079,180 |   |
| CRM                  |       | 219,435                |       | 239,373                    |       |
| Portfolio Management |       | 115,541                |       | 141,482                    |       |
| Total assets         |       | $                      | 1,362,329  |                       | $          | 1,460,035 |   |

 

Thefollowing tables present the revenue, payroll and related expenses, selling,general, and administrative expenses, reimbursable costs and fees,restructuring charges, income from operations before depreciation andamortization and capital expenditures for each segment (amounts in thousands):

 
| ** **                                                          | ** ** | **For the Three Months Ended June 30, 2010** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                          | ** ** | **ARM**                                           | ** ** | **CRM** | ** ** | **Portfolio  Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|                                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Revenues                                                            |       | $                                                 | 319,710    |   | $ | 66,523 |   | $ | 10,792 |   | $ | (10,856 | ) | $ | 386,169 |   |
|                                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Payroll and related expenses                                        |       | 123,399                                           |       | 51,734 |   | 518 |   | — |   | 175,651 |   |
| Selling, general and admin. expenses                                |       | 98,377                                            |       | 14,137 |   | 11,297 |   | (10,557 | ) | 113,254 |   |
| Reimbursable costs and fees                                         |       | 67,853                                            |       | — |   | — |   | (299 | ) | 67,554 |   |
| Restructuring charges                                               |       | 3,972                                             |       | 639 |   | 338 |   | — |   | 4,949 |   |
|                                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Income (loss) from operations before depreciation  and amortization |       | $                                                 | 26,109     |   | $ | 13 |   | $ | (1,361 | ) | $ | — |   | $ | 24,761 |   |

 
| ** **                                                          | ** ** | **For the Three Months Ended June 30, 2009** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                          | ** ** | **ARM**                                           | ** ** | **CRM** | ** ** | **Portfolio  Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|                                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Revenues                                                            |       | $                                                 | 296,761    |   | $ | 81,263 |   | $ | 17,557 |   | $ | (16,962 | ) | $ | 378,619 |   |
|                                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Payroll and related expenses                                        |       | 138,051                                           |       | 58,955 |   | 1,553 |   | (637 | ) | 197,922 |   |
| Selling, general and admin. expenses                                |       | 112,453                                           |       | 14,827 |   | 16,845 |   | (15,305 | ) | 128,820 |   |
| Reimbursable costs and fees                                         |       | 9,842                                             |       | — |   | — |   | (1,020 | ) | 8,822 |   |
| Restructuring charges                                               |       | 1,333                                             |       | 4 |   | — |   | — |   | 1,337 |   |
|                                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Income (loss) from operations before depreciation  and amortization |       | $                                                 | 35,082     |   | $ | 7,477 |   | $ | (841 | ) | $ | — |   | $ | 41,718 |   |

 

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

 
| ** **                                                          | ** ** | **For the Six Months Ended June 30, 2010** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                          | ** ** | **ARM**                                         | ** ** | **CRM** | ** ** | **Portfolio  Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|                                                                |       |                                            |       |   |   |   |   |   |   |   |   |
| Revenues                                                            |       | $                                               | 654,690    |   | $ | 143,057 |   | $ | 26,066 |   | $ | (24,576 | ) | $ | 799,237 |   |
|                                                                |       |                                            |       |   |   |   |   |   |   |   |   |
| Payroll and related expenses                                        |       | 252,069                                         |       | 108,140 |   | 1,710 |   | — |   | 361,919 |   |
| Selling, general and admin. expenses                                |       | 194,960                                         |       | 28,289 |   | 25,489 |   | (23,952 | ) | 224,786 |   |
| Reimbursable costs and fees                                         |       | 142,023                                         |       | — |   | — |   | (624 | ) | 141,399 |   |
| Restructuring charges                                               |       | 4,251                                           |       | 651 |   | 1,481 |   | — |   | 6,383 |   |
|                                                                |       |                                            |       |   |   |   |   |   |   |   |   |
| Income (loss) from operations before depreciation  and amortization |       | $                                               | 61,387     |   | $ | 5,977 |   | $ | (2,614 | ) | $ | — |   | $ | 64,750 |   |
|                                                                |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                                |       | $                                               | 8,863      |   | $ | 3,384 |   | $ | — |   | $ | — |   | $ | 12,247 |   |

 
| ** **                                                          | ** ** | **For the Six Months Ended June 30, 2009** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                          | ** ** | **ARM**                                         | ** ** | **CRM** | ** ** | **Portfolio  Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|                                                                |       |                                            |       |   |   |   |   |   |   |   |   |
| Revenues                                                            |       | $                                               | 608,602    |   | $ | 169,461 |   | $ | 37,946 |   | $ | (35,261 | ) | $ | 780,748 |   |
|                                                                |       |                                            |       |   |   |   |   |   |   |   |   |
| Payroll and related expenses                                        |       | 280,510                                         |       | 121,392 |   | 3,050 |   | (1,265 | ) | 403,687 |   |
| Selling, general and admin. expenses                                |       | 229,920                                         |       | 29,357 |   | 35,090 |   | (31,968 | ) | 262,399 |   |
| Reimbursable costs and fees                                         |       | 19,463                                          |       | — |   | — |   | (2,028 | ) | 17,435 |   |
| Restructuring charges                                               |       | 1,572                                           |       | 182 |   | 26 |   | — |   | 1,780 |   |
|                                                                |       |                                            |       |   |   |   |   |   |   |   |   |
| Income (loss) from operations before depreciation  and amortization |       | $                                               | 77,137     |   | $ | 18,530 |   | $ | (220 | ) | $ | — |   | $ | 95,447 |   |
|                                                                |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                                |       | $                                               | 8,819      |   | $ | 9,236 |   | $ | — |   | $ | — |   | $ | 18,055 |   |

 

**18.  Related Party Transactions:**

 

TheCompany pays OEP a management fee of $3.0 million per year, plus reimbursementof expenses, for management, advice and related services. During the three andsix months ended June 30, 2010, the Company incurred $750,000 and $1.5million, respectively, relating to such management fees, which were included inselling, general and administrative expenses.

 

OEPis managed by OEP Holding Corporation, a wholly owned indirect subsidiary ofJPM, and JPM is a client of the Company. For the three and six months ended June 30,2010, the Company received fees for providing services to JPM of $2.8 millionand $5.6 million, respectively.  For thethree and six months ended June 30, 2009, the Company received fees forproviding services to JPM of $3.4 million and $6.8 million, respectively.  Additionally, affiliates of Citigroup areinvestors of the Company, and Citigroup is a client of the Company. For thethree and six months ended June 30, 2010, the Company received fees forproviding services to Citigroup of $12.4 million and $25.5 million,respectively. For the three and six months ended June 30, 2009, theCompany received fees for providing services to Citigroup of $13.8 million and$29.2 million, respectively. At June 30, 2010 and December 31, 2009,the Company had accounts receivable of $4.5 million and $5.8 million,respectively, due from Citigroup.

 

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

 

20

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

 

InJune 2009, the FASB issued authoritative guidance for transfers offinancial assets. This guidance removes the concept of qualifyingspecial-purpose entities and eliminates the exception from applying guidancerelated to consolidating of variable interest entities to qualifyingspecial-purpose entities. This guidance requires additional disclosures inorder to provide greater transparency about transfers of financial assets and atransferor’s continuing involvement with transferred financial assets. TheCompany adopted this guidance on January 1, 2010, and it did not have amaterial impact on its financial condition or results of operations.

 

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

 

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

 

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

 

**20.  Subsidiary GuarantorFinancial Information:**

 

TheNotes are fully and unconditionally guaranteed, jointly and severally, bycertain domestic 100 percent owned subsidiaries of the Company (collectively,the “Guarantors”). Non-guarantors consist of all non-domestic subsidiaries,certain subsidiaries engaged in financing the purchase of delinquent accountsreceivable portfolios, portfolio joint ventures (which are engaged in portfoliofinancing transactions) and certain immaterial subsidiaries (collectively, the “Non-Guarantors”).The following tables present the consolidating financial information for theCompany (Parent), the Guarantors and the Non-Guarantors, together witheliminations, as of and for the periods indicated.

 

21

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

 

**NCOGROUP, INC.**

**ConsolidatingBalance Sheet**

**June 30,2010**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                                           | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| **ASSETS**                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current  assets:                                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Cash  and cash equivalents                                                           |       | $          | —     |           | $          | 9,816              |       | $                | 15,927     |             | $          | — |   | $ | 25,743 |   |
| Accounts  receivable, trade, net of allowance for doubtful accounts                  |       | —     |       | 146,383        |       | 20,575             |       | —           |       | 166,958          |       |
| Purchased  accounts receivable, current portion                                      |       | —     |       | 19,691         |       | 22,657             |       | —           |       | 42,348           |       |
| Deferred  income taxes                                                               |       | (28,808    | )          | 29,327         |       | 1,213              |       | —           |       | 1,732            |       |
| Prepaid  expenses and other current assets                                           |       | 1,525      |       | 25,075         |       | 36,030             |       | —           |       | 62,630           |       |
| Total  current assets                                                                |       | (27,283    | )          | 230,292        |       | 96,402             |       | —           |       | 299,411          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Property  and equipment, net                                                         |       | —     |       | 82,855         |       | 26,996             |       | —           |       | 109,851          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Other  assets:                                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Goodwill                                                                             |       | —     |       | 470,542        |       | 64,912             |       | —           |       | 535,454          |       |
| Trade  name, net of accumulated amortization                                         |       | —     |       | 80,864         |       | 2,847              |       | —           |       | 83,711           |       |
| Customer  relationships and other intangible assets, net of accumulated amortization |       | —     |       | 210,942        |       | 15,577             |       | —           |       | 226,519          |       |
| Purchased  accounts receivable, net of current portion                               |       | —     |       | 43,224         |       | 25,858             |       | —           |       | 69,082           |       |
| Investment  in subsidiaries                                                          |       | 807,644    |       | 11,797         |       | —             |       | (819,441         | )          | —           |       |
| Deferred  income taxes                                                               |       | —     |       | —         |       | 3,517              |       | —           |       | 3,517            |       |
| Other  assets                                                                        |       | 12,586     |       | 40,847         |       | (18,649            | )          | —           |       | 34,784           |       |
| Total  other assets                                                                  |       | 820,230    |       | 858,216        |       | 94,062             |       | (819,441         | )          | 953,067          |       |
| Total  assets                                                                        |       | $          | 792,947    |           | $          | 1,171,363          |       | $                | 217,460    |             | $          | (819,441 | ) | $ | 1,362,329 |   |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                        | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Current  liabilities:                                                                |       |       |       |           |       |               |       |             |       |             |       |
| Long-term  debt, current portion                                                     |       | $          | 6,054      |           | $          | 568                |       | $                | 6,712      |             | $          | — |   | $ | 13,334 |   |
| Intercompany  payable (receivable)                                                   |       | 158,510    |       | (261,131       | )          | 102,621            |       | —           |       | —           |       |
| Income  taxes payable                                                                |       | —     |       | —         |       | 6,992              |       | —           |       | 6,992            |       |
| Accounts  payable                                                                    |       | 750        |       | 18,581         |       | 2,382              |       | —           |       | 21,713           |       |
| Accrued  expenses                                                                    |       | 10,580     |       | 58,130         |       | 25,036             |       | —           |       | 93,746           |       |
| Accrued  compensation and related expenses                                           |       | —     |       | 30,087         |       | 13,615             |       | —           |       | 43,702           |       |
| Deferred  revenue, current portion                                                   |       | —     |       | 34,488         |       | 560                |       | —           |       | 35,048           |       |
| Total  current liabilities                                                           |       | 175,894    |       | (119,277       | )          | 157,918            |       | —           |       | 214,535          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Long-term  liabilities:                                                              |       |       |       |           |       |               |       |             |       |             |       |
| Long-term  debt, net of current portion                                              |       | 499,725    |       | 378,789        |       | 239                |       | —           |       | 878,753          |       |
| Deferred  income taxes                                                               |       | (80,422    | )          | 111,310        |       | 4,918              |       | —           |       | 35,806           |       |
| Deferred  revenue, net of current portion                                            |       | —     |       | 732            |       | —             |       | —           |       | 732              |       |
| Other  long-term liabilities                                                         |       | 9,121      |       | 10,127         |       | 14,775             |       | —           |       | 34,023           |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Stockholders’  equity:                                                          |       |       |       |           |       |               |       |             |       |             |       |
| Total  NCO Group, Inc. stockholders’ equity                                |       | 188,629    |       | 789,682        |       | 29,759             |       | (819,441         | )          | 188,629          |       |
| Noncontrolling  interests                                                            |       | —     |       | —         |       | 9,851              |       | —           |       | 9,851            |       |
| Total  stockholders’ equity                                                     |       | 188,629    |       | 789,682        |       | 39,610             |       | (819,441         | )          | 198,480          |       |
| Total  liabilities and stockholders’ equity                                     |       | $          | 792,947    |           | $          | 1,171,363          |       | $                | 217,460    |             | $          | (819,441 | ) | $ | 1,362,329 |   |

 

22

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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 June 30, 2010**

**(Unaudited)**

**(Amountsin thousands)**

 
|                                                       |   | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|--------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                       |   |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                  |   |       |       |           |       |               |       |             |       |             |       |
| Services                                                   |   | $          | —     |           | $          | 304,914            |       | $                | 63,414     |             | $          | (61,340 | ) | $ | 306,988 |   |
| Portfolio                                                  |   | —     |       | 3,862          |       | 7,765              |       | —           |       | 11,627           |       |
| Reimbursable  costs and fees                               |   | —     |       | 67,494         |       | 60                 |       | —           |       | 67,554           |       |
| Total  revenues                                            |   | —     |       | 376,270        |       | 71,239             |       | (61,340          | )          | 386,169          |       |
|                                                       |   |       |       |           |       |               |       |             |       |             |       |
| Operating  costs and expenses:                             |   |       |       |           |       |               |       |             |       |             |       |
| Payroll  and related expenses                              |   | 4          |       | 180,170        |       | 43,338             |       | (47,861          | )          | 175,651          |       |
| Selling,  general and administrative expenses              |   | 1,044      |       | 96,918         |       | 28,771             |       | (13,479          | )          | 113,254          |       |
| Reimbursable  costs and fees                               |   | —     |       | 67,494         |       | 60                 |       | —           |       | 67,554           |       |
| Depreciation  and amortization expense                     |   | —     |       | 21,730         |       | 5,627              |       | —           |       | 27,357           |       |
| Restructuring  charges                                     |   | —     |       | 5,330          |       | (381               | )          | —           |       | 4,949            |       |
| Total  operating costs and expenses                        |   | 1,048      |       | 371,642        |       | 77,415             |       | (61,340          | )          | 388,765          |       |
| (Loss)  income from operations                             |   | (1,048     | )          | 4,628          |       | (6,176             | )          | —           |       | (2,596           | )          |
|                                                       |   |       |       |           |       |               |       |             |       |             |       |
| Other  income (expense):                                   |   |       |       |           |       |               |       |             |       |             |       |
| Interest  and investment income                            |   | 244        |       | (492           | )          | 433                |       | —           |       | 185              |       |
| Interest  expense                                          |   | (13,338    | )          | (8,135         | )          | (683               | )          | —           |       | (22,156          | )          |
| Interest  (expense) income to affiliate                    |   | (4,639     | )          | 6,418          |       | (1,779             | )          | —           |       | —           |       |
| Subsidiary  (loss) income                                  |   | (4,150     | )          | (5,953         | )          | —             |       | 10,103           |       | —           |       |
| Other  (expense) income, net                               |   | (90        | )          | 1,047          |       | 156                |       | —           |       | 1,113            |       |
|                                                       |   | (21,973    | )          | (7,115         | )          | (1,873             | )          | 10,103           |       | (20,858          | )          |
| (Loss)  income before income taxes                         |   | (23,021    | )          | (2,487         | )          | (8,049             | )          | 10,103           |       | (23,454          | )          |
|                                                       |   |       |       |           |       |               |       |             |       |             |       |
| Income  tax expense (benefit)                              |   | 2,501      |       | 972            |       | (1,608             | )          | —           |       | 1,865            |       |
|                                                       |   |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income                                         |   | (25,522    | )          | (3,459         | )          | (6,441             | )          | 10,103           |       | (25,319          | )          |
|                                                       |   |       |       |           |       |               |       |             |       |             |       |
| Less:  Net income attributable to noncontrolling interests |   | —     |       | —         |       | 203                |       | —           |       | 203              |       |
|                                                       |   |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income attributable to NCO Group, Inc.    |   | $          | (25,522    | )              | $          | (3,459             | )          | $                | (6,644     | )                | $          | 10,103 |   | $ | (25,522 | ) |

 

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

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

**Forthe Three Months Ended June 30, 2009**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                               | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                 |       | $          | —     |           | $          | 352,931            |       | $                | 74,842     |             | $          | (74,827 | ) | $ | 352,946 |   |
| Portfolio                                                |       | —     |       | 8,716          |       | 8,135              |       | —           |       | 16,851           |       |
| Reimbursable  costs and fees                             |       | —     |       | 8,747          |       | 75                 |       | —           |       | 8,822            |       |
| Total  revenues                                          |       | —     |       | 370,394        |       | 83,052             |       | (74,827          | )          | 378,619          |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Operating  costs and expenses:                           |       |       |       |           |       |               |       |             |       |             |       |
| Payroll  and related expenses                            |       | 3          |       | 206,249        |       | 47,009             |       | (55,339          | )          | 197,922          |       |
| Selling,  general and administrative expenses            |       | 1,096      |       | 115,583        |       | 31,629             |       | (19,488          | )          | 128,820          |       |
| Reimbursable  costs and fees                             |       | —     |       | 8,747          |       | 75                 |       | —           |       | 8,822            |       |
| Depreciation  and amortization expense                   |       | —     |       | 23,009         |       | 7,610              |       | —           |       | 30,619           |       |
| Restructuring  charges                                   |       | —     |       | 1,348          |       | (11                | )          | —           |       | 1,337            |       |
| Total  operating costs and expenses                      |       | 1,099      |       | 354,936        |       | 86,312             |       | (74,827          | )          | 367,520          |       |
| (Loss)  income from operations                           |       | (1,099     | )          | 15,458         |       | (3,260             | )          | —           |       | 11,099           |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Other  income (expense):                                 |       |       |       |           |       |               |       |             |       |             |       |
| Interest  and investment income                          |       | 8          |       | 421            |       | 165                |       | —           |       | 594              |       |
| Interest  expense                                        |       | (17,451    | )          | (8,369         | )          | (854               | )          | —           |       | (26,674          | )          |
| Interest  (expense) income to affiliate                  |       | (1,001     | )          | 2,424          |       | (1,423             | )          | —           |       | —           |       |
| Subsidiary  income (loss)                                |       | 3,831      |       | (2,829         | )          | —             |       | (1,002           | )          | —           |       |
| Other  income, net                                       |       | 6,206      |       | 660            |       | —             |       | —           |       | 6,866            |       |
|                                                     |       | (8,407     | )          | (7,693         | )          | (2,112             | )          | (1,002           | )          | (19,214          | )          |
| (Loss)  income before income taxes                       |       | (9,506     | )          | 7,765          |       | (5,372             | )          | (1,002           | )          | (8,115           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Income  tax (benefit) expense                            |       | (4,290     | )          | 3,352          |       | (1,600             | )          | —           |       | (2,538           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income                                       |       | (5,216     | )          | 4,413          |       | (3,772             | )          | (1,002           | )          | (5,577           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Less:  Net loss attributable to noncontrolling interests |       | —     |       | —         |       | (361               | )          | —           |       | (361             | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income attributable to NCO Group, Inc.  |       | $          | (5,216     | )              | $          | 4,413              |       | $                | (3,411     | )                | $          | (1,002 | ) | $ | (5,216 | ) |

 

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

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

**Forthe Six Months Ended June 30, 2010**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                 | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                  |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                   |       | $          | —     |           | $          | 614,258            |       | $                | 140,979    |             | $          | (125,323 | ) | $ | 629,914 |   |
| Portfolio                                                  |       | —     |       | 11,913         |       | 16,011             |       | —           |       | 27,924           |       |
| Reimbursable  costs and fees                               |       | —     |       | 141,279        |       | 120                |       | —           |       | 141,399          |       |
| Total  revenues                                            |       | —     |       | 767,450        |       | 157,110            |       | (125,323         | )          | 799,237          |       |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Operating  costs and expenses:                             |       |       |       |           |       |               |       |             |       |             |       |
| Payroll  and related expenses                              |       | 8          |       | 370,335        |       | 86,712             |       | (95,136          | )          | 361,919          |       |
| Selling,  general and administrative expenses              |       | 2,128      |       | 192,941        |       | 59,904             |       | (30,187          | )          | 224,786          |       |
| Reimbursable  costs and fees                               |       | —     |       | 141,279        |       | 120                |       | —           |       | 141,399          |       |
| Depreciation  and amortization expense                     |       | —     |       | 43,662         |       | 11,425             |       | —           |       | 55,087           |       |
| Restructuring  charges                                     |       | —     |       | 5,507          |       | 876                |       | —           |       | 6,383            |       |
| Total  operating costs and expenses                        |       | 2,136      |       | 753,724        |       | 159,037            |       | (125,323         | )          | 789,574          |       |
| (Loss)  income from operations                             |       | (2,136     | )          | 13,726         |       | (1,927             | )          | —           |       | 9,663            |       |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Other  income (expense):                                   |       |       |       |           |       |               |       |             |       |             |       |
| Interest  and investment income                            |       | 244        |       | (1,356         | )          | 1,385              |       | —           |       | 273              |       |
| Interest  expense                                          |       | (28,620    | )          | (15,938        | )          | (1,199             | )          | —           |       | (45,757          | )          |
| Interest  (expense) income to affiliate                    |       | (7,622     | )          | 11,194         |       | (3,572             | )          | —           |       | —           |       |
| Subsidiary  (loss) income                                  |       | (915       | )          | (5,119         | )          | —             |       | 6,034            |       | —           |       |
| Other  income, net                                         |       | 38         |       | 875            |       | 156                |       | —           |       | 1,069            |       |
|                                                       |       | (36,875    | )          | (10,344        | )          | (3,230             | )          | 6,034            |       | (44,415          | )          |
| (Loss)  income before income taxes                         |       | (39,011    | )          | 3,382          |       | (5,157             | )          | 6,034            |       | (34,752          | )          |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Income  tax expense                                        |       | 1,783      |       | 2,935          |       | 187                |       | —           |       | 4,905            |       |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income                                         |       | (40,794    | )          | 447            |       | (5,344             | )          | 6,034            |       | (39,657          | )          |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Less:  Net income attributable to noncontrolling interests |       | —     |       | —         |       | 1,137              |       | —           |       | 1,137            |       |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income attributable to NCO Group, Inc.    |       | $          | (40,794    | )              | $          | 447                |       | $                | (6,481     | )                | $          | 6,034 |   | $ | (40,794 | ) |

 

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

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

**Forthe Six Months Ended June 30, 2009**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                               | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                 |       | $          | —     |           | $          | 731,791            |       | $                | 135,385    |             | $          | (146,729 | ) | $ | 720,447 |   |
| Portfolio                                                |       | —     |       | 20,439         |       | 22,427             |       | —           |       | 42,866           |       |
| Reimbursable  costs and fees                             |       | —     |       | 17,299         |       | 136                |       | —           |       | 17,435           |       |
| Total  revenues                                          |       | —     |       | 769,529        |       | 157,948            |       | (146,729         | )          | 780,748          |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Operating  costs and expenses:                           |       |       |       |           |       |               |       |             |       |             |       |
| Payroll  and related expenses                            |       | 8          |       | 417,581        |       | 92,531             |       | (106,433         | )          | 403,687          |       |
| Selling,  general and administrative expenses            |       | 2,180      |       | 240,717        |       | 59,798             |       | (40,296          | )          | 262,399          |       |
| Reimbursable  costs and fees                             |       | —     |       | 17,299         |       | 136                |       | —           |       | 17,435           |       |
| Depreciation  and amortization expense                   |       | —     |       | 46,852         |       | 14,849             |       | —           |       | 61,701           |       |
| Restructuring  charges                                   |       | —     |       | 1,574          |       | 206                |       | —           |       | 1,780            |       |
| Total  operating costs and expenses                      |       | 2,188      |       | 724,023        |       | 167,520            |       | (146,729         | )          | 747,002          |       |
| (Loss)  income from operations                           |       | (2,188     | )          | 45,506         |       | (9,572             | )          | —           |       | 33,746           |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Other  income (expense):                                 |       |       |       |           |       |               |       |             |       |             |       |
| Interest  and investment income                          |       | 30         |       | 764            |       | 142                |       | —           |       | 936              |       |
| Interest  expense                                        |       | (33,407    | )          | (15,220        | )          | (1,157             | )          | —           |       | (49,784          | )          |
| Interest  (expense) income to affiliate                  |       | (1,667     | )          | 4,464          |       | (2,797             | )          | —           |       | —           |       |
| Subsidiary  income (loss)                                |       | 14,826     |       | (7,527         | )          | —             |       | (7,299           | )          | —           |       |
| Other  income, net                                       |       | 2,783      |       | 379            |       | —             |       | —           |       | 3,162            |       |
|                                                     |       | (17,435    | )          | (17,140        | )          | (3,812             | )          | (7,299           | )          | (45,686          | )          |
| (Loss)  income before income taxes                       |       | (19,623    | )          | 28,366         |       | (13,384            | )          | (7,299           | )          | (11,940          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Income  tax (benefit) expense                            |       | (12,298    | )          | 12,354         |       | (3,740             | )          | —           |       | (3,684           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income                                       |       | (7,325     | )          | 16,012         |       | (9,644             | )          | (7,299           | )          | (8,256           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Less:  Net loss attributable to noncontrolling interests |       | —     |       | —         |       | (931               | )          | —           |       | (931             | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income attributable to NCO Group, Inc.  |       | $          | (7,325     | )              | $          | 16,012             |       | $                | (8,713     | )                | $          | (7,299 | ) | $ | (7,325 | ) |

 

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

 

**NCOGROUP, INC**

**ConsolidatingStatement of Cash Flows**

**Forthe Six Months Ended June 30, 2010**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                         | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** |
| Net  cash (used in) provided by operating activities               |       | $          | (29,980    | )              | $          | 63,777             |       | $                | 2,589      |   | $ | 36,386 |   |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  flows from investing activities:                             |       |       |       |           |       |               |       |             |       |
| Purchases  of accounts receivable                                  |       | —     |       | (8,202         | )          | (751               | )          | (8,953           | )          |
| Collections  applied to principal of purchased accounts receivable |       | —     |       | 20,665         |       | 14,971             |       | 35,636           |       |
| Purchases  of property and equipment                               |       | —     |       | (11,573        | )          | (674               | )          | (12,247          | )          |
| Other                                                              |       | —     |       | 1,331          |       | —             |       | 1,331            |       |
| Net  cash provided by investing activities                         |       | —     |       | 2,221          |       | 13,546             |       | 15,767           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  flows from financing activities:                             |       |       |       |           |       |               |       |             |       |
| Repayment  of notes payable                                        |       | —     |       | (164           | )          | (8,317             | )          | (8,481           | )          |
| Net  repayments of borrowings under revolving credit facility      |       | (17,000    | )          | —         |       | —             |       | (17,000          | )          |
| Repayment  of borrowings under senior term loan                    |       | (34,027    | )          | —         |       | —             |       | (34,027          | )          |
| Borrowings  under (repayments of) intercompany notes payable       |       | 83,761     |       | (74,998        | )          | (8,763             | )          | —           |       |
| Payment  of fees to obtain debt                                    |       | (2,754     | )          | (4             | )          | —             |       | (2,758           | )          |
| Return  of investment in subsidiary to noncontrolling interests    |       | —     |       | —         |       | (2,736             | )          | (2,736           | )          |
| Net  cash provided by (used in) financing activities               |       | 29,980     |       | (75,166        | )          | (19,816            | )          | (65,002          | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Effect  of exchange rate on cash                                   |       | —     |       | —         |       | (629               | )          | (629             | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Net  decrease in cash and cash equivalents                         |       | —     |       | (9,168         | )          | (4,310             | )          | (13,478          | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  and cash equivalents at beginning of the period              |       | —     |       | 18,984         |       | 20,237             |       | 39,221           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  and cash equivalents at end of the period                    |       | $          | —     |           | $          | 9,816              |       | $                | 15,927     |   | $ | 25,743 |   |

 

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

 

**NCOGROUP, INC**

**ConsolidatingStatement of Cash Flows**

**Forthe Six Months Ended June 30, 2009**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                         | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** |
| Net  cash (used in) provided by operating activities               |       | $          | (18,551    | )              | $          | 90,652             |       | $                | (13,168    | ) | $ | 58,933 |   |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  flows from investing activities:                             |       |       |       |           |       |               |       |             |       |
| Purchases  of accounts receivable                                  |       | —     |       | (30,679        | )          | (2,275             | )          | (32,954          | )          |
| Collections  applied to principal of purchased accounts receivable |       | —     |       | 13,676         |       | 32,977             |       | 46,653           |       |
| Proceeds  from sales and resales of purchased accounts receivable  |       | —     |       | 124            |       | 401                |       | 525              |       |
| Purchases  of property and equipment                               |       | —     |       | (11,415        | )          | (6,640             | )          | (18,055          | )          |
| Net  cash paid related to acquisitions                             |       | —     |       | (128           | )          | (652               | )          | (780             | )          |
| Other                                                              |       | —     |       | 149            |       | —             |       | 149              |       |
| Net  cash (used in) provided by investing activities               |       | —     |       | (28,273        | )          | 23,811             |       | (4,462           | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  flows from financing activities:                             |       |       |       |           |       |               |       |             |       |
| Repayment  of notes payable                                        |       | —     |       | (291           | )          | (14,857            | )          | (15,148          | )          |
| Net  repayments of borrowings under revolving credit facility      |       | (41,000    | )          | —         |       | —             |       | (41,000          | )          |
| Repayment  of borrowings under senior term loan                    |       | (18,027    | )          | —         |       | —             |       | (18,027          | )          |
| Borrowings  under (repayments of) intercompany notes payable       |       | 48,437     |       | (60,825        | )          | 12,388             |       | —           |       |
| Payment  of fees to obtain debt                                    |       | (2,477     | )          | —         |       | —             |       | (2,477           | )          |
| Return  of investment in subsidiary to noncontrolling interests    |       | —     |       | —         |       | (4,287             | )          | (4,287           | )          |
| Issuance  of stock, net                                            |       | 39,667     |       | —         |       | —             |       | 39,667           |       |
| Payment  of deemed dividend to JPM                                 |       | (8,049     | )          | —         |       | —             |       | (8,049           | )          |
| Net  cash provided by (used in) financing activities               |       | 18,551     |       | (61,116        | )          | (6,756             | )          | (49,321          | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Effect  of exchange rate on cash                                   |       | —     |       | —         |       | 419                |       | 419              |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Net  increase in cash and cash equivalents                         |       | —     |       | 1,263          |       | 4,306              |       | 5,569            |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  and cash equivalents at beginning of the period              |       | —     |       | 15,334         |       | 14,546             |       | 29,880           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  and cash equivalents at end of the period                    |       | $          | —     |           | $          | 16,597             |       | $                | 18,852     |   | $ | 35,449 |   |

 

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

 

***Forward-Looking Statements***

 

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

 

·                  the Company’sexpected future results of operations;

·                  economicconditions;

·                  the Company’sbusiness and growth strategy;

·                  fluctuations inquarterly operating results;

·                  the integrationof acquisitions;

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

·                  statements asto liquidity and compliance with debt covenants;

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

·                  expectedincreases in operating efficiencies;

·                  anticipatedtrends in the business process outsourcing industry;

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

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

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

·                  the effects ofchanges in accounting guidance; and

·                  statements asto trends or the Company’s or management’s beliefs, expectations and opinions.

 

The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,”“plan,” “will,” “would,” “should,” “guidance,” “potential,” “continue,” “project,”“forecast,” “confident,” and similar expressions are typically used to identifyforward-looking statements. These statements are based on assumptions andassessments made by the Company’s management in light of their experience andtheir perception of historical trends, current conditions, expected futuredevelopments and other factors they believe to be appropriate. Forward-lookingstatements are not guarantees of the Company’s future performance and aresubject to risks and uncertainties and may be affected by various factors thatmay cause actual results, developments and business decisions to differmaterially from those in the forward-looking statements. Some of the factorsthat may cause actual results, developments and business decisions to differmaterially from those contemplated by such forward-looking statements include:

 

·                  risks relatedto the instability in the financial markets;

·                  risks relatedto adverse capital and credit market conditions;

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

·                  risks relatedto the domestic and international economies;

·                  risks relatedto derivative transactions;

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

·                  risks relatedto the Company’s ability to compete;

·                  risks relatedto the Company’s substantial indebtedness and its ability to service such debt;

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

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

·                  risksassociated with growth and acquisitions;

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

·                  fluctuations inquarterly operating results;

·                  risks relatedto the timing of contracts;

·                  risks relatedto purchased accounts receivable;

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

·                  the Company’sdependence on senior management;

·                  risks relatedto security and privacy breaches;

 

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

·                  risksassociated with technology;

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

·                  risks relatedto litigation, regulatory investigations and tax examinations;

·                  risks relatedto past or possible future terrorist attacks;

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

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

·                  risks relatedto the Company’s international operations;

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

·                  risks relatedto currency fluctuations;

·                  risks relatedto reliance on independent telecommunications service providers;

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

·                  risks related tothe possible loss of key clients or loss of significant volumes from keyclients; and

·                  risks relatedto changes in government regulations.

 

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

 

***Overview***

 

We are a holding company and conduct substantially all of our businessoperations through our subsidiaries. We are an international provider ofbusiness process outsourcing services, referred to as BPO, primarily focused onaccounts receivable management, referred to as ARM, and customer relationshipmanagement, referred to as CRM, serving a wide range of clients in NorthAmerica and abroad through our global network of over 90 offices.

 

Historically, we have participated in the purchased accounts receivablebusiness on an opportunistic basis. During 2009, we significantly reduced ourpurchases of accounts receivable. This decision resulted from declines in liquidationrates, competition for purchased accounts receivable and the continueduncertainty of collectibility.

 

Our operating costs consist principally of payroll and related costs;selling, general and administrative costs; and depreciation and amortization.Payroll and related expenses consist of wages and salaries, commissions,bonuses, and benefits for all of our employees, including management andadministrative personnel. Selling, general and administrative expenses includetelephone, postage and mailing costs, outside collection attorneys and otherthird-party collection services providers, and other collection costs, as wellas expenses that directly support operations, including facility costs,equipment maintenance, sales and marketing, data processing, professional fees,and other management costs. Our payroll and related expenses may increase ordecrease due to changes in the value of the U.S. dollar against the Canadiandollar and the Philippine peso.

 

Changes to the economic conditions in the U.S., either positive ornegative, could have a significant impact on our business, including, but notlimited to:

 

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

·                  volume fluctuations in our ARM fixed feebased services;

·                  volume fluctuations in our CRM services; and,

·                  variability in the collectability of existingportfolios.

 

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We have grown rapidly, through both acquisitions as well as internalgrowth. Effective August 31, 2009, we acquired TSYS Total Debt Management, Inc.,referred to as TDM, a provider of specialty accounts receivable managementservices, for approximately $4.5 million.

 

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

 

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

 

***Three Months Ended June 30, 2010 Compared toThree Months Ended June 30, 2009***

 

*Revenue.*  Revenue increased $7.6 million, or 2.0 percent,to $386.2 million for the three months ended June 30, 2010, from $378.6million for the three months ended June 30, 2009.

 

Revenue by segment(dollars in thousands):

 
| ** **           | ** ** | **For  the Three Months Ended June 30,** | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------|------------|-----------------------------------------------|------------|-------------|------------|------------|------------|
| ** **           | ** ** | ** **                                    | ** ** | **% of**    | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2010**                                      | ** ** | **Revenue** | ** ** | **2009**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                  |       | $                                             | 319,710    |        | 82.8       | %          | $          | 296,761 |   | 78.4 | % | $ | 22,949 |   | 7.7 | % |
| CRM                  |       | 66,523                                        |       | 17.2        | %          | 81,263     |       | 21.5 | % | (14,740 | ) | (18.1 | )% |
| Portfolio Management |       | 10,792                                        |       | 2.8         | %          | 17,557     |       | 4.6 | % | (6,765 | ) | (38.5 | )% |
| Eliminations         |       | (10,856                                       | )          | (2.8        | )%         | (16,962    | )          | (4.5 | )% | 6,106 |   | (36.0 | )% |
| Total                |       | $                                             | 386,169    |        | 100.0      | %          | $          | 378,619 |   | 100.0 | % | $ | 7,550 |   | 2.0 | % |

 

ARM’srevenue for the three months ended June 30, 2010, included $10.9 millionof intercompany revenue from Portfolio Management which was eliminated uponconsolidation. For the three months ended June 30, 2009, ARM’s revenueincluded $16.3 million of intercompany revenue from Portfolio Management andCRM’s revenue included $637,000 of intercompany revenue from ARM, which wereeliminated upon consolidation.

 

ARM’srevenue for the three months ended June 30, 2010 and 2009 included $67.9million and $9.8 million, respectively, of reimbursable costs and fees(discussed in more detail below), which resulted in a $58.1 million increase inARM’s revenue. This increase was partially offset by decreases primarilyattributable to the weaker third-party collection environment and lower volumesin the first-party collections business during 2010, a $13.4 million decreaseresulting from the sale of our print and mail business in October 2009,and a $5.4 million decrease in fees from collection services performed forPortfolio Management.

 

Thedecrease in CRM’s revenue was primarily due to lower volumes from certainexisting clients, attributable to the impact of the economy on the clients’business, partially offset by increased client volume related to theimplementation of new contracts during 2009.

 

PortfolioManagement’s collections decreased $12.7 million, or 32.6 percent, to $26.2million for the three months ended June 30, 2010, from $38.9 million forthe three months ended June 30, 2009. Revenue for the three months ended June 30,2010, included a $1.6 million impairment charge recorded for a valuationallowance against the carrying value of the portfolios, compared to an impairmentcharge of $1.4 million for the three months ended June 30, 2009. Excludingthe effect of the impairment charges, Portfolio Management’s revenuerepresented 46.4 percent of collections for the three months ended June 30,2010, as compared to 47.7 percent of collections for the three months ended June 30,2009. The decrease in revenue and collections was primarily attributable tolower portfolio purchases and the effect of the weaker collection environmentduring 2010.

 

*Payroll and related expenses.*  Payroll and related expenses decreased $22.3million to $175.7 million for the three months ended June 30, 2010, from$197.9 million for the three months ended June 30, 2009, and decreased asa percentage of revenue to 45.5 percent from 52.3 percent.

 

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Payroll and related expensesby segment (dollars in thousands):

 
| ** **           | ** ** | **For  the Three Months Ended June 30,** | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------|------------|-----------------------------------------------|------------|-------------|------------|------------|------------|
| ** **           | ** ** | ** **                                    | ** ** | **% of**    | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2010**                                      | ** ** | **Revenue** | ** ** | **2009**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                  |       | $                                             | 123,399    |        | 38.6       | %          | $          | 138,051 |   | 46.5 | % | $ | (14,652 | ) | (10.6 | )% |
| CRM                  |       | 51,734                                        |       | 77.8        | %          | 58,955     |       | 72.5 | % | (7,221 | ) | (12.2 | )% |
| Portfolio Management |       | 518                                           |       | 4.8         | %          | 1,553      |       | 8.8 | % | (1,035 | ) | (66.6 | )% |
| Eliminations         |       | —                                        |       | —      |       | (637       | )          | 3.8 | % | 637 |   | (100.0 | )% |
| Total                |       | $                                             | 175,651    |        | 45.5       | %          | $          | 197,922 |   | 52.3 | % | $ | (22,271 | ) | (11.3 | )% |

 

Thedecrease in ARM’s payroll and related expenses as a percentage of revenue wasprimarily due to the higher revenue base, which was attributable to theincrease in reimbursable costs and fees. Included in ARM’s payroll and relatedexpenses for the three months ended June 30, 2009, was $637,000 ofintercompany expense from CRM, for services provided to ARM, which waseliminated upon consolidation.

 

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

 

Portfolio Managementoutsources all of its collection services to ARM and, therefore, has arelatively small fixed payroll cost structure. The decrease in PortfolioManagement’s payroll and related expenses was attributable to the restructuringactivities following the Company’s decision to limit purchases in thisbusiness.

 

*Selling, general and administrative expenses.*  Selling, general and administrative expensesdecreased $15.5 million to $113.3 million for the three months ended June 30,2010, from $128.8 million for the three months ended June 30, 2009, anddecreased as a percentage of revenue to 29.3 percent from 34.0 percent.

 

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

 
| ** **           | ** ** | **For  the Three Months Ended June 30,** | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------|------------|-----------------------------------------------|------------|-------------|------------|------------|------------|
| ** **           | ** ** | ** **                                    | ** ** | **% of**    | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2010**                                      | ** ** | **Revenue** | ** ** | **2009**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                  |       | $                                             | 98,377     |        | 30.8       | %          | $          | 112,453 |   | 37.9 | % | $ | (14,076 | ) | (12.5 | )% |
| CRM                  |       | 14,137                                        |       | 21.3        | %          | 14,827     |       | 18.2 | % | (690 | ) | (4.7 | )% |
| Portfolio Management |       | 11,297                                        |       | 104.7       | %          | 16,845     |       | 95.9 | % | (5,548 | ) | (32.9 | )% |
| Eliminations         |       | (10,557                                       | )          | 97.2        | %          | (15,305    | )          | 90.2 | % | 4,748 |   | (31.0 | )% |
| Total                |       | $                                             | 113,254    |        | 29.3       | %          | $          | 128,820 |   | 34.0 | % | $ | (15,566 | ) | (12.1 | )% |

 

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

 

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

 

The decrease in PortfolioManagement’s selling, general and administrative expenses resulted from a $5.4million decrease in fees for collection services provided by ARM. Servicingfees are based on cash collections so the increase as a percentage of revenuewas primarily due to the decrease in the percentage of collections recorded torevenue. Included in Portfolio Management’s selling, general and administrativeexpenses for the three months ended June 30, 2010 and 2009, was $10.9million and $16.3 million, respectively, of intercompany expense from ARM, forservices provided to Portfolio Management, which was eliminated inconsolidation.

 

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*Reimbursable costs and fees. *Reimbursablecosts and fees consist of court costs, legal fees and repossession fees,representing out-of-pocket expenses that are reimbursed by our clients.Reimbursable costs and fees of $67.6 million and $8.8 million for the threemonths ended June 30, 2010 and 2009, respectively, are recorded as bothrevenue and operating expenses on the statement of operations. The increase inreimbursable costs and fees was due to the acquisition of TDM in August 2009.

 

*Restructuring charges. *During the three monthsended June 30, 2010, we incurred restructuring charges of $4.9 million,related to streamlining the cost structure of the Company’s operations. Thecharges consisted primarily of costs associated with the closing of redundantfacilities and severance. This compares to $1.3 million of restructuringcharges for the three months ended June 30, 2009.

 

*Depreciationand amortization.*  Depreciationand amortization decreased to $27.4 million for the three months ended June 30,2010, from $30.6 million for the three months ended June 30, 2009. Thedecrease was primarily attributable to lower depreciation resulting from a lowerlevel of property and equipment, as well as lower amortization because certainintangible assets are now fully amortized.

 

*Other income (expense).*  Interest expense decreased to $22.2 millionfor the three months ended June 30, 2010, from $26.7 million for the threemonths ended June 30, 2009. Interest expense for the three months ended June 30,2010 and 2009 included $840,000 and $3.6 million, respectively, of net lossesfrom interest rate swap agreements and embedded derivatives. The remainingdecrease in interest expense was primarily attributable to lower debt balances.Other income, net for the three months ended June 30, 2010 and 2009included approximately $154,000 and $6.2 million, respectively, of net gainsresulting from foreign exchange contracts.

 

*Income tax expense (benefit)*.  For the three months ended June 30,2010, we recorded income tax expense of $1.9 million on a pre-tax loss of $23.5million, or an effective income tax rate of (8.0) percent. For the three monthsended June 30, 2009, we recorded an income tax benefit of $2.5 million ona pre-tax loss of $8.1 million, or an effective tax rate of 31.3 percent. Thechange in the effective income tax rate was due primarily to the recognition ofa valuation allowance on certain domestic net deferred tax assets and incometax expense to be paid in state and foreign jurisdictions.

 

***Six Months Ended June 30, 2010 Compared to SixMonths Ended June 30, 2009***

 

*Revenue.*  Revenue increased $18.5 million, or 2.4percent, to $799.2 million for the six months ended June 30, 2010, from$780.7 million for the six months ended June 30, 2009.

 

Revenue by segment(dollars in thousands):

 
| ** **           | ** ** | **For  the Six Months Ended June 30,** | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------|------------|---------------------------------------------|------------|-------------|------------|------------|------------|
| ** **           | ** ** | ** **                                  | ** ** | **% of**    | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2010**                                    | ** ** | **Revenue** | ** ** | **2009**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                  |       | $                                           | 654,690    |        | 81.9       | %          | $          | 608,602 |   | 77.9 | % | $ | 46,088 |   | 7.6 | % |
| CRM                  |       | 143,057                                     |       | 17.9        | %          | 169,461    |       | 21.7 | % | (26,404 | ) | (15.6 | )% |
| Portfolio Management |       | 26,066                                      |       | 3.3         | %          | 37,946     |       | 4.9 | % | (11,880 | ) | (31.3 | )% |
| Eliminations         |       | (24,576                                     | )          | (3.1        | )%         | (35,261    | )          | (4.5 | )% | 10,685 |   | (30.3 | )% |
| Total                |       | $                                           | 799,237    |        | 100.0      | %          | $          | 780,748 |   | 100.0 | % | $ | 18,489 |   | 2.4 | % |

 

ARM’srevenue for the six months ended June 30, 2010, included $24.6 million ofintercompany revenue from Portfolio Management which was eliminated uponconsolidation. For the six months ended June 30, 2009, ARM’s revenueincluded $34.0 million of intercompany revenue from Portfolio Management andCRM’s revenue included $1.3 million of intercompany revenue from ARM, whichwere eliminated upon consolidation.

 

ARM’srevenue for the six months ended June 30, 2010 and 2009 included $142.0million and $19.5 million, respectively, of reimbursable costs and fees(discussed in more detail below), which resulted in a $122.5 million increasein ARM’s revenue. This increase was partially offset by decreases primarilyattributable to the weaker third-party collection environment and lower volumesin the first-party collections business during 2010, a $27.0 

 

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milliondecrease resulting from the sale of our print and mail business in October 2009,and a $9.4 million decrease in fees from collection services performed forPortfolio Management.

 

Thedecrease in CRM’s revenue was primarily due to lower volumes from certainexisting clients attributable to the impact of the economy on the clients’business, partially offset by increased client volume related to theimplementation of new contracts during 2009.

 

PortfolioManagement’s collections decreased $22.8 million, or 27.6 percent, to $59.9million for the six months ended June 30, 2010, from $82.7 million for thesix months ended June 30, 2009. Revenue for the six months ended June 30,2010, included a $303,000 impairment charge recorded for a valuation allowanceagainst the carrying value of the portfolios, compared to an impairment chargeof $1.3 million for the six months ended June 30, 2009. Excluding theeffect of the impairment charges, Portfolio Management’s revenue represented43.1 percent of collections for the six months ended June 30, 2010, ascompared to 46.0 percent of collections for the six months ended June 30,2009. The decrease in revenue and collections was primarily attributable tolower portfolio purchases and the effect of the weaker collection environmentduring 2010.

 

*Payroll and related expenses.*  Payroll and related expenses decreased $41.8million to $361.9 million for the six months ended June 30, 2010, from$403.7 million for the six months ended June 30, 2009, and decreased as apercentage of revenue to 45.3 percent from 51.7 percent.

 

Payroll and related expensesby segment (dollars in thousands):

 
| ** **           | ** ** | **For  the Six Months Ended June 30,** | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------|------------|---------------------------------------------|------------|-------------|------------|------------|------------|
| ** **           | ** ** | ** **                                  | ** ** | **% of**    | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2010**                                    | ** ** | **Revenue** | ** ** | **2009**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                  |       | $                                           | 252,069    |        | 38.5       | %          | $          | 280,510 |   | 46.1 | % | $ | (28,441 | ) | (10.1 | )% |
| CRM                  |       | 108,140                                     |       | 75.6        | %          | 121,392    |       | 71.6 | % | (13,252 | ) | (10.9 | )% |
| Portfolio Management |       | 1,710                                       |       | 6.6         | %          | 3,050      |       | 8.0 | % | (1,340 | ) | (43.9 | )% |
| Eliminations         |       | —                                      |       | —      |       | (1,265     | )          | 3.6 | % | 1,265 |   | (100.0 | )% |
| Total                |       | $                                           | 361,919    |        | 45.3       | %          | $          | 403,687 |   | 51.7 | % | $ | (41,768 | ) | (10.3 | )% |

 

Thedecrease in ARM’s payroll and related expenses as a percentage of revenue wasprimarily due to the higher revenue base, which was attributable to theincrease in reimbursable costs and fees. Included in ARM’s payroll and relatedexpenses for the six months ended June 30, 2009, was $1.3 million ofintercompany expense from CRM, for services provided to ARM, which waseliminated upon consolidation.

 

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

 

Portfolio Managementoutsources all of its collection services to ARM and, therefore, has arelatively small fixed payroll cost structure. The decrease in PortfolioManagement’s payroll and related expenses was attributable to the restructuringactivities following the Company’s decision to limit purchases in thisbusiness.

 

*Selling, general and administrative expenses.*  Selling, general and administrative expensesdecreased $37.6 million to $224.8 million for the six months ended June 30,2010, from $262.4 million for the six months ended June 30, 2009, anddecreased as a percentage of revenue to 28.1 percent from 33.6 percent.

 

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

 
| ** **           | ** ** | **For  the Six Months Ended June 30,** | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------|------------|---------------------------------------------|------------|-------------|------------|------------|------------|
| ** **           | ** ** | ** **                                  | ** ** | **% of**    | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2010**                                    | ** ** | **Revenue** | ** ** | **2009**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                  |       | $                                           | 194,960    |        | 29.8       | %          | $          | 229,920 |   | 37.8 | % | $ | (34,960 | ) | (15.2 | )% |
| CRM                  |       | 28,289                                      |       | 19.8        | %          | 29,357     |       | 17.3 | % | (1,068 | ) | (3.6 | )% |
| Portfolio Management |       | 25,489                                      |       | 97.8        | %          | 35,090     |       | 92.5 | % | (9,601 | ) | (27.4 | )% |
| Eliminations         |       | (23,952                                     | )          | 97.5        | %          | (31,968    | )          | 90.7 | % | 8,016 |   | (25.1 | )% |
| Total                |       | $                                           | 224,786    |        | 28.1       | %          | $          | 262,399 |   | 33.6 | % | $ | (37,613 | ) | (14.3 | )% |

 

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

 

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

 

The decrease in PortfolioManagement’s selling, general and administrative expenses resulted from a $9.4million decrease in fees for collection services provided by ARM. Servicingfees are based on cash collections so the increase as a percentage of revenuewas primarily due to the decrease in the percentage of collections recorded torevenue. Included in Portfolio Management’s selling, general and administrativeexpenses for the six months ended June 30, 2010 and 2009, was $24.6million and $34.0 million, respectively, of intercompany expense from ARM, forservices provided to Portfolio Management, which was eliminated inconsolidation.

 

*Reimbursable costs and fees. *Reimbursablecosts and fees consist of court costs, legal fees and repossession fees,representing out-of-pocket expenses that are reimbursed by our clients. Reimbursablecosts and fees of $141.4 million and $17.4 million for the six months ended June 30,2010 and 2009, respectively, are recorded as both revenue and operatingexpenses on the statement of operations. The increase in reimbursable costs andfees was due to the acquisition of TDM in August 2009.

 

*Restructuring charges. *During the six months ended June 30,2010, we incurred restructuring charges of $6.4 million, related tostreamlining the cost structure of the Company’s operations and our decision tolimit purchases in the Portfolio Management business. The charges consistedprimarily of costs associated with the closing of redundant facilities andseverance. This compares to $1.8 million of restructuring charges for the sixmonths ended June 30, 2009.

 

*Depreciationand amortization.*  Depreciationand amortization decreased to $55.1 million for the six months ended June 30,2010, from $61.7 million for the six months ended June 30, 2009. Thedecrease was primarily attributable to lower depreciation resulting from alower level of property and equipment, as well as lower amortization becausecertain intangible assets are now fully amortized.

 

*Other income (expense).*  Interest expense decreased to $45.8 millionfor the six months ended June 30, 2010, from $49.8 million for the sixmonths ended June 30, 2009. Interest expense for the six months ended June 30,2010 and 2009 included $3.1 million and $5.0 million, respectively, of netlosses from interest rate swap agreements and embedded derivatives. The remainingdecrease in interest expense was primarily attributable to lower debt balances.Other income, net for the six months ended June 30, 2010 and 2009 includedapproximately $352,000 and $2.8 million, respectively, of net gains resultingfrom foreign exchange contracts.

 

*Income tax expense (benefit)*.  For the six months ended June 30, 2010,we recorded income tax expense of $4.9 million on a pre-tax loss of $34.8million, or an effective income tax rate of (14.1) percent. For the six monthsended June 30, 2009, we recorded an income tax benefit of $3.7 million ona pre-tax loss of $11.9 million, or an effective income tax rate of 30.9percent. The change in the effective income tax rate was due primarily to therecognition of a valuation allowance on certain domestic net deferred taxassets and income tax expense to be paid in state and foreign jurisdictions.

 

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***Liquidity and Capital Resources***

 

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

 

The cash flow from ourcontingency collection business and our purchased portfolio business isdependent upon our ability to collect from consumers and businesses. Manyfactors, including the economy and our ability to hire and retain qualifiedcollectors and managers, are essential to our ability to generate cash flows.Fluctuations in these factors that cause a negative impact on our businesscould have a material impact on our expected future cash flows.

 

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

 

At this time, we believethat we will be able to finance our current operations, planned capitalexpenditure requirements, internal growth and debt service obligations, atleast through the next twelve months, with the funds generated from ouroperations, with our existing cash and available borrowings under our seniorcredit facility. Additionally, we may obtain cash through additional equity anddebt offerings, if needed.

 

We have a senior creditfacility that consists of a term loan ($515.2 million outstanding as of June 30,2010) and a $100.0 million revolving credit facility (none outstanding as of June 30,2010). Additionally, we have $165.0 million of floating rate senior notes and$200.0 million 11.875 percent senior subordinated notes outstanding. As aresult, we are significantly leveraged.

 

On March 31, 2010, weamended our senior credit facility to, among other things, adjust the financialcovenants, including increasing maximum leverage ratios and decreasing minimuminterest coverage ratios, and adjusting the required principal payments. Theamended Credit Facility also limits purchases of accounts receivable in 2010 to$20 million and purchases in 2011 and each year thereafter to $10 million peryear. In 2010, our maximum leverage ratio covenant is 5.75 and our minimuminterest coverage ratio covenant is 1.80. We believe we will be able tomaintain compliance with such covenants in 2010.

 

We are currently incompliance with all of our debt covenants, and we believe we will be able tomaintain compliance with such covenants in 2010. However, the potentialnegative impact from certain factors including, but not limited to, thechallenging economic and business environment, our inability to reduce costs,the loss of a significant client or reduced client volumes, may impact ourability to meet our debt covenants in the future. If we were to enter into anagreement with our lenders for future covenant compliance relief, such reliefcould result in additional fees and higher interest expense.

 

Our senior credit facility,as amended, does not give us the ability to use available excess cash flow torepurchase our senior notes and senior subordinated notes. However, our seniorcredit facility, as amended, permits us to repurchase our senior notes andsenior subordinated notes out of the net cash proceeds of new equity issuances. Weare aware that our senior notes and senior subordinated notes may trade atsubstantial discounts to their face amounts. We or our stockholders mayfrom time to time seek to retire or purchase our outstanding notes through cashpurchases and/or exchanges for equity securities, in open market purchases,privately negotiated transactions or otherwise. Our stockholders whoacquire such notes may seek to contribute them to us, for retirement, inexchange for the issuance of additional equity. The amounts involved maybe material.

 

During 2009, wesignificantly reduced our purchases of accounts receivable and made a decisionto minimize further investments in the future. This decision resulted fromdeclines in liquidation rates, competition for purchased accounts receivableand the continued uncertainty of collectability. We currently expect to limitour purchases in 2010 to certain of our non-cancelable forward flowcommitments, which are estimated to be approximately $3.5 million for theremainder of 2010.

 

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*Cash Flows from OperatingActivities*.  Cashprovided by operating activities was $36.4 million for the six months ended June 30,2010, compared to $58.9 million for the six months ended June 30, 2009.The decrease was primarily attributable to lower operating results for the sixmonths ended June 30, 2010.

 

*Cash Flowsfrom Investing Activities.*  Cash provided by investing activities was$15.8 million for the six months ended June 30, 2010, compared to cashused in investing activities of $4.5 million for the six months ended June 30,2009. The increase in cash from investing activities was primarily attributableto lower purchases of accounts receivable and lower purchases of property andequipment, partially offset by lower collections of purchased accountsreceivable.

 

*Cash Flowsfrom Financing Activities.*  Cash used in financing activities was $65.0million for the six months ended June 30, 2010, compared to $49.3 millionfor the six months ended June 30, 2009. The increase in cash used infinancing activities was due primarily to $51.0 million of total repayments ofborrowings under our senior credit facility during the six months ended June 30,2010, which was funded primarily by operating cash. During the six months endedJune 30, 2009, we repaid a total of $59.0 million of borrowings under oursenior credit facility, which was funded primarily by the issuance of $40.0 millionof stock.

 

*SeniorCredit Facility*.  Our seniorcredit facility is with a syndicate of financial institutions and consists of aterm loan and a $100.0 million revolving credit facility. We are required tomake quarterly principal repayments of $1.5 million on the term loan until itsmaturity in May 2013, at which time its remaining balance outstanding isdue. We are also required to make quarterly prepayments of 75 percent of theexcess cash flow from our purchased accounts receivable, and annual prepaymentsof 75 percent or 50 percent of our excess annual cash flow, based on ourleverage ratio, less the amounts paid during the year from the purchasedaccounts receivable excess cash flow prepayments. The revolving credit facilityrequires no minimum principal payments until its maturity in November 2011.At June 30, 2010, the balance outstanding on the term loan was $515.2million and there was no outstanding balance on the revolving credit facility.The availability of the revolving credit facility is reduced by any unusedletters of credit ($11.9 million at June 30, 2010). As of June 30,2010, we had $88.1 million of remaining availability under the revolving creditfacility.

 

Allborrowings bear interest at an annual variable rate, based on either the primerate (3.25 percent at June 30, 2010), the federal funds rate (0.09 percentat June 30, 2010) or LIBOR (0.35 percent 30-day LIBOR at June 30,2010) plus an applicable margin, which is based on the type of rate and theCompany’s funded debt to earnings before interest, taxes, depreciation andamortization (“EBITDA”) ratio, as defined in the loan agreement. The Company ischarged a quarterly commitment fee on the unused portion of the revolvingcredit facility at an annual rate of 0.50 percent. The effective interest rateon the Credit Facility was approximately 9.18 percent and 9.00 percent for thethree months ended June 30, 2010 and 2009, respectively, and 9.20 percentand 7.99 percent for the six months ended June 30, 2010 and 2009,respectively. The Credit Facility also requires that the Company obtain certainlevels of interest rate protection.

 

Borrowingsunder the senior credit facility are collateralized by substantially all of ourassets. The senior credit facility contains certain financial and othercovenants such as maintaining a maximum leverage ratio and a minimum interestcoverage ratio, and includes restrictions on, among other things, acquisitions,the incurrence of additional debt, investments, investments in purchasedaccounts receivable, disposition of assets, liens and dividends and otherdistributions. If an event of default, such as failure to comply with covenantsor a change of control, and the failure to negotiate and obtain any requiredrelief from our lenders, were to occur under the senior credit facility, thelenders would be entitled to declare all amounts outstanding under the seniorcredit facility immediately due and payable and foreclose on the pledgedassets. Under these circumstances, the acceleration of our debt could have amaterial adverse effect on our business. Notwithstanding the foregoing, we mayfrom time to time seek to amend our senior credit facility or obtain otherfunding or additional financing, which may result in additional fees and higherinterest rates. Amending our senior credit facility or obtaining other fundingor additional financing prior to the expiration of the current agreement willbe essential as the remaining outstanding balance under the term loan will bedue upon the expiration of the senior credit facility in May 2013. At June 30,2010, our leverage ratio was 5.04, compared to the maximum of 5.75, and ourinterest coverage ratio was 2.00, compared to the minimum of 1.80. We were incompliance with all required financial covenants and we were not aware of anyevents of default as of June 30, 2010.

 

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

 

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

 

*Nonrecourse Credit Facility.*  We have a nonrecourse credit facility forcertain purchases of accounts receivable prior to 2009. We do not have theability to make any additional borrowings under the nonrecourse creditfacility. The financing was structured, depending on the size and nature of theportfolio to be purchased, either as a borrowing arrangement or under variousequity sharing arrangements. The lender financed non-equity borrowings withfloating interest at an annual rate equal to LIBOR (0.35 percent 30-day LIBORat June 30, 2010) plus 2.50 percent, or as negotiated. These borrowingsare nonrecourse to us and are due two years from the date of each respectiveloan, unless otherwise negotiated. As additional return on the debt financedportfolios the lender receives residual cash flows, as negotiated, which isdefined as all cash collections after servicing fees, floating rate interest,repayment of the borrowing, and the initial investment by us, includinginterest. Residual cash flow payments are accrued for as embedded derivatives.

 

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

 

Thetotal nonrecourse debt outstanding was $6.2 million as of June 30, 2010,which included $1.3 million of accrued residual interest. The effectiveinterest rate on these loans, including the residual interest component, wasapproximately 11.4 percent and 10.2 percent for the three and six months ended June 30,2010, respectively. The nonrecourse debt agreements contain certain covenantssuch as meeting minimum cumulative collection targets. As of June 30,2010, we were in compliance with all required covenants.

 

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

 

***Market Risk***

 

Weare exposed to various types of market risk in the normal course of business,including the impact of interest rate changes, foreign currency exchange ratefluctuations, changes in corporate tax rates, and inflation. We employ riskmanagement strategies that may include the use of derivatives, such as interestrate swap agreements, interest rate cap agreements, and foreign currencyforwards and options to manage these exposures. As of June 30, 2010, noneof our derivatives were accounted for as hedges. We do not enter intoderivatives for trading purposes.

 

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

 

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*InterestRate Risk. *At June 30,2010, we had $686.4 million in outstanding variable rate borrowings. A materialchange in interest rates could adversely affect our operating results and cashflows. A 25 basis-point increase in interest rates could increase our annualinterest expense by $125,000 for each $50 million of variable debt outstandingfor the entire year. Currently, weprimarily use interest rate swap agreements to limit potential losses fromadverse interest rate changes. Our interest rate swap agreements minimize theimpact of LIBOR fluctuations on the interest payments on our floating ratedebt. We are required to pay the counterparties quarterly interest payments ata weighted average fixed rate, and we receive from the counterparties variablequarterly interest payments based on LIBOR.

 

***Critical Accounting Policies and Estimates***

 

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

 

***Recently Issued Accounting Guidance***

 

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

 

**Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk**

 

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

 

**Item4.  Controls and Procedures**

 

Our management, with theparticipation of our chief executive officer and chief financial officer,conducted an evaluation of the effectiveness of our disclosure controls andprocedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e),as of June 30, 2010. Based on that evaluation, our chief executive officerand chief financial officer concluded that, as of the end of the period coveredby this Report, our disclosure controls and procedures were effective inreaching a reasonable level of assurance that the (i) information requiredto be disclosed by us in 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 theparticipation of our chief executive officer and chief financial officer, alsoconducted an evaluation of our internal control over financial reporting, asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f), to determinewhether any changes occurred during the quarter ended June 30, 2010, thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting. Based on that evaluation, there wereno such changes during the quarter ended June 30, 2010.

 

A control system, no matterhow well conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Further, thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all controls systems, noevaluation of controls can provide absolute assurance

 

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that all control issues andinstances of fraud, if any, within our company have been detected. Because ofthe inherent limitations in a cost-effective control system, misstatements dueto error or fraud may occur and not be detected.

 

**Part II.  Other Information**

 

**Item 1.    Legal Proceedings**

 

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

 

Attorneys General:

 

From time to time, the Company receives subpoenas orother similar information requests from various states’ Attorneys General,requesting information relating to the Company’s debt collection practices insuch states. The Company responds to such inquires or investigations andprovides certain information to the respective Attorneys General offices. TheCompany believes it is in compliance with the laws of the states in which itdoes business relating to debt collection practices in all material respects.However, no assurance can be given that any such inquiries or investigationswill not result in a formal investigation or an enforcement action. Any suchenforcement actions could result in fines as well as the suspension ortermination of the Company’s ability to conduct business in such states.

 

Other:

 

The Company is involved in other legal proceedings,regulatory investigations, client audits and tax examinations from time to timein the ordinary course of its business. Management believes that none of theseother legal proceedings, regulatory investigations or tax examinations willhave a materially adverse effect on the financial condition or results ofoperations of the Company.

 

**Item 1A. Risk Factors**

 

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

 

**Item 2.    Unregistered Sales ofEquity Securities and Use of Proceeds**

 

None

 

**Item 3.    Defaults Upon SeniorSecurities**

 

None

 

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

 

**Item 5.    Other Information**

 

(a)   None.

 

(b)   Not applicable

 

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**Item 6.    Exhibits**

 
| 12     | Statement  of Computation of Ratio of Earnings to Fixed Charges.                                                                                                                  |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                              |
| 31.1   | Certification  of Chief Executive Officer pursuant to Rule 15d-14(a) promulgated  under the Exchange Act.                                                               |
|   |                                                                                                                                                                              |
| 31.2   | Certification  of Chief Financial Officer pursuant to Rule 15d-14(a) promulgated  under the Exchange Act.                                                               |
|   |                                                                                                                                                                              |
| 32.1   | Certification  of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|   |                                                                                                                                                                              |
| 32.2   | Certification of the  Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**Signatures**

 

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

 
|                                        |   | NCO  Group, Inc. |
|---------------------------------------------|--------|-----------------------|
|                                        |   |                  |   |
|                                        |   |                  |   |
| Date:   August 13, 2010 |   | By:                   | /s/ Michael J. Barrist |
|                                        |   |                  | Michael  J. Barrist |
|                                        |   |                  | Chairman  of the Board, President |
|                                        |   |                  | and  Chief Executive Officer |
|                                        |   |                  | (principal  executive officer) |
|                                        |   |                  |   |
|                                        |   |                  |   |
| Date:   August 13, 2010 |   | By:                   | /s/ John R. Schwab |
|                                        |   |                  | John  R. Schwab |
|                                        |   |                  | Executive  Vice President, Finance |
|                                        |   |                  | and  Chief Financial Officer |
|                                        |   |                  | (principal  financial and accounting officer) |

 

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Exhibit Index

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                    |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                               |
| 12                   |       | Statement  of Computation of Ratio of Earnings to Fixed Charges.                                                                                                                   |
|                 |       |                                                                                                                                                                               |
| 31.1                 |       | Certification  of Chief Executive Officer pursuant to Rule 15d-14(a) promulgated  under the Exchange Act.                                                                |
|                 |       |                                                                                                                                                                               |
| 31.2                 |       | Certification  of Chief Financial Officer pursuant to Rule 15d-14(a) promulgated  under the Exchange Act.                                                                |
|                 |       |                                                                                                                                                                               |
| 32.1                 |       | Certification  of the Company’s Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|                 |       |                                                                                                                                                                               |
| 32.2                 |       | Certification  of the Company’s Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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