Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-Q**

 

**(Mark one)**

 

| **x**                                                   | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|---------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                    |                                                                                                    |
| **For the  quarterly period ended March 31, 2009** |
|                                                    |                                                                                                    |
| **or**                                                  |
|                                                    |                                                                                                    |
| **o**                                                   | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**For thetransition period from                    to              **

 

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

 

**NCOGROUP, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **DELAWARE**                                                    |   | **02-0786880**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (IRS Employer  Identification Number) |
|                                                            |   |                                  |
| **507 Prudential Road, Horsham, Pennsylvania**                  |   | **19044**                             |
| (Address of  principal executive offices)                       |   | (Zip Code)                            |

 

**215-441-3000**

(Registrant’stelephone number, including area code)

 

**NotApplicable**

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

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the 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 InteractiveDate 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 mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes o No x.

 

The number of sharesoutstanding of each of the issuer’s classes of common stock as of May 14,2009 was: 2,936,885 shares of Class A common stock, $0.01 par value and400,894 shares of Class L common stock, $0.01 par value.

 

 

 

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Table of Contents

 

**NCOGROUP, INC.**

 

**INDEX**

 
| ** **                                    | ** **                                                                                                                            | **PAGE** |
|-----------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                          |                                                                                                                                  |     |
| **PART I –  FINANCIAL INFORMATION** |                                                                                                                                  |
|                                          |                                                                                                                                  |     |
| Item 1.                                       | FINANCIAL STATEMENTS (Unaudited)                                                                                                      |     |
|                                          |                                                                                                                                  |     |
|                                          | Consolidated  Balance Sheets - March 31, 2009 and December 31, 2008                                                         | 1        |
|                                          |                                                                                                                                  |     |
|                                          | Consolidated  Statements of Operations - Three Months Ended March 31, 2009 and 2008                                              | 2        |
|                                          |                                                                                                                                  |     |
|                                          | Consolidated  Statements of Stockholders’ Equity - Year Ended December 31, 2008 and  Three Months Ended March 31, 2009 | 3        |
|                                          |                                                                                                                                  |     |
|                                          | Consolidated  Statements of Cash Flows - Three Months Ended March 31, 2009 and 2008                                              | 4        |
|                                          |                                                                                                                                  |     |
|                                          | Notes to Consolidated Financial Statements                                                                                            | 5        |
|                                          |                                                                                                                                  |     |
| Item  2.                                      | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                           | 30       |
|                                          |                                                                                                                                  |     |
| Item  3.                                      | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                           | 39       |
|                                          |                                                                                                                                  |     |
| Item  4T.                                     | CONTROLS  AND PROCEDURES                                                                                                              | 39       |
|                                          |                                                                                                                                  |     |
| **PART II – OTHER INFORMATION**     |                                                                                                                                  |
|                                          |                                                                                                                                  |     |
| Item  1.                                      | LEGAL  PROCEEDINGS                                                                                                                    | 39       |
|                                          |                                                                                                                                  |     |
| Item  1A.                                     | RISK  FACTORS                                                                                                                         | 40       |
|                                          |                                                                                                                                  |     |
| Item  2.                                      | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                                          | 40       |
|                                          |                                                                                                                                  |     |
| Item  3.                                      | DEFAULTS  UPON SENIOR SECURITIES                                                                                                      | 40       |
|                                          |                                                                                                                                  |     |
| Item  4.                                      | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                                  | 40       |
|                                          |                                                                                                                                  |     |
| Item  5.                                      | OTHER  INFORMATION                                                                                                                    | 41       |
|                                          |                                                                                                                                  |     |
| Item  6.                                      | EXHIBITS                                                                                                                              | 41       |
|                                          |                                                                                                                                  |     |
| SIGNATURES                                    |                                                                                                                                  | 42       |

 

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Table of Contents

 

**Part I.  Financial Information**

**Item 1.  Financial Statements**

**NCOGROUP, INC.**

**ConsolidatedBalance Sheets**

**(Unaudited)**

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

 
| ** **                                                                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                         | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                                                         | ** ** | ** **         | ** ** | ** **            | ** ** |
| ** **                                                                                                                         | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                    |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                         |       | $                  | 41,063     |                  | $          | 29,880 |   |
| Accounts  receivable, trade, net of allowance for doubtful accounts of $6,243 and  $5,008, respectively                            |       | 214,956            |       | 218,649               |       |
| Purchased  accounts receivable, current portion, net of allowance for impairment of  $123,801 and $123,804, respectively           |       | 66,122             |       | 70,006                |       |
| Deferred income  taxes                                                                                                             |       | 34,233             |       | 34,216                |       |
| Prepaid expenses  and other current assets                                                                                         |       | 50,437             |       | 66,595                |       |
| Total current  assets                                                                                                              |       | 406,811            |       | 419,346               |       |
|                                                                                                                               |       |               |       |                  |       |
| Funds held on  behalf of clients (note 7)                                                                                          |       |               |       |                  |       |
|                                                                                                                               |       |               |       |                  |       |
| Property and  equipment, net                                                                                                       |       | 134,996            |       | 138,272               |       |
|                                                                                                                               |       |               |       |                  |       |
| Other assets:                                                                                                                      |       |               |       |                  |       |
| Goodwill                                                                                                                           |       | 561,779            |       | 564,617               |       |
| Trade name, net  of accumulated amortization                                                                                       |       | 85,296             |       | 85,466                |       |
| Customer  relationships and other intangible assets, net of accumulated amortization                                               |       | 317,163            |       | 333,951               |       |
| Purchased  accounts receivable, net of current portion                                                                             |       | 110,992            |       | 115,653               |       |
| Other assets                                                                                                                       |       | 46,865             |       | 44,334                |       |
| Total other  assets                                                                                                                |       | 1,122,095          |       | 1,144,021             |       |
| Total assets                                                                                                                       |       | $                  | 1,663,902  |                  | $          | 1,701,639 |   |
|                                                                                                                               |       |               |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                      | ** ** | ** **         | ** ** | ** **            | ** ** |
|                                                                                                                               |       |               |       |                  |       |
| Current  liabilities:                                                                                                              |       |               |       |                  |       |
| Long-term debt,  current portion                                                                                                   |       | $                  | 26,951     |                  | $          | 30,559 |   |
| Income taxes  payable                                                                                                              |       | 2,896              |       | 3,543                 |       |
| Accounts payable                                                                                                                   |       | 15,222             |       | 18,026                |       |
| Accrued expenses                                                                                                                   |       | 121,125            |       | 128,474               |       |
| Accrued  compensation and related expenses                                                                                         |       | 50,691             |       | 46,466                |       |
| Deferred  revenue, current portion                                                                                                 |       | 38,600             |       | 40,731                |       |
| Total current  liabilities                                                                                                         |       | 255,485            |       | 267,799               |       |
|                                                                                                                               |       |               |       |                  |       |
| Funds held on  behalf of clients (note 7)                                                                                          |       |               |       |                  |       |
|                                                                                                                               |       |               |       |                  |       |
| Long-term  liabilities:                                                                                                            |       |               |       |                  |       |
| Long-term debt,  net of current portion                                                                                            |       | 988,670            |       | 1,048,517             |       |
| Deferred income  taxes                                                                                                             |       | 68,069             |       | 67,365                |       |
| Deferred  revenue, net of current portion                                                                                          |       | 5,840              |       | 5,404                 |       |
| Other long-term  liabilities                                                                                                       |       | 27,257             |       | 28,765                |       |
|                                                                                                                               |       |               |       |                  |       |
| Commitments and  contingencies (note 13)                                                                                           |       |               |       |                  |       |
|                                                                                                                               |       |               |       |                  |       |
| Stockholders’  equity:                                                                                                        |       |               |       |                  |       |
| Preferred stock,  par value $0.01 per share, 7,500 shares authorized, 2,838 and 2,573 shares  issued and outstanding, respectively |       | 29                 |       | 26                    |       |
| Class L  common stock, par value $0.01 per share, 800 shares authorized, 401 shares  issued and outstanding                   |       | 4                  |       | 4                     |       |
| Class A common  stock, par value $0.01 per share, 4,500 shares authorized, 2,937 shares  issued and outstanding               |       | 29                 |       | 29                    |       |
| Additional  paid-in capital                                                                                                        |       | 763,307            |       | 720,955               |       |
| Accumulated  other comprehensive loss                                                                                              |       | (12,574            | )          | (10,007               | )          |
| Accumulated  deficit                                                                                                               |       | (452,130           | )          | (450,021              | )          |
| Total NCO  Group, Inc. stockholders’ equity                                                                              |       | 298,665            |       | 260,986               |       |
| Noncontrolling  interests                                                                                                          |       | 19,916             |       | 22,803                |       |
| Total  stockholders’ equity                                                                                                   |       | 318,581            |       | 283,789               |       |
| Total  liabilities and stockholders’ equity                                                                                   |       | $                  | 1,663,902  |                  | $          | 1,701,639 |   |

 

See accompanyingnotes.

 

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**NCOGROUP, INC.**

**ConsolidatedStatements of Operations**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                        | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                        | ** ** | **March 31,**             | ** ** |
| ** **                                                        | ** ** | **2009**                       | ** ** | **2008** | ** ** |
|                                                              |       |                           |       |   |   |
| Revenues:                                                         |       |                           |       |   |   |
| Services                                                          |       | $                              | 376,114    |   | $ | 335,045 |   |
| Portfolio                                                         |       | 25,654                         |       | 28,700 |   |
| Portfolio sales                                                   |       | 361                            |       | 823 |   |
| Total revenues                                                    |       | 402,129                        |       | 364,568 |   |
|                                                              |       |                           |       |   |   |
| Operating costs  and expenses:                                    |       |                           |       |   |   |
| Payroll and  related expenses                                     |       | 205,765                        |       | 196,419 |   |
| Selling, general  and administrative expenses                     |       | 142,192                        |       | 128,818 |   |
| Depreciation and  amortization expense                            |       | 31,082                         |       | 27,786 |   |
| Restructuring  charges                                            |       | 443                            |       | 2,641 |   |
| Total operating  costs and expenses                               |       | 379,482                        |       | 355,664 |   |
| Income from  operations                                           |       | 22,647                         |       | 8,904 |   |
|                                                              |       |                           |       |   |   |
| Other income  (expense):                                          |       |                           |       |   |   |
| Interest and  investment income                                   |       | 342                            |       | 280 |   |
| Interest expense                                                  |       | (23,110                        | )          | (22,407 | ) |
| Other (expense)  income, net                                      |       | (3,704                         | )          | 418 |   |
| Total other  income (expense)                                     |       | (26,472                        | )          | (21,709 | ) |
| Loss before  income taxes                                         |       | (3,825                         | )          | (12,805 | ) |
|                                                              |       |                           |       |   |   |
| Income tax  benefit                                               |       | (1,146                         | )          | (3,896 | ) |
|                                                              |       |                           |       |   |   |
| Net loss                                                          |       | (2,679                         | )          | (8,909 | ) |
|                                                              |       |                           |       |   |   |
| Less: Net (loss)  income attributable to noncontrolling interests |       | (570                           | )          | 327 |   |
|                                                              |       |                           |       |   |   |
| Net loss  attributable to NCO Group, Inc.                    |       | $                              | (2,109     | ) | $ | (9,236 | ) |

 

See accompanyingnotes.

 

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**NCOGROUP, INC.**

**ConsolidatedStatements of Stockholders’ Equity**

**(Unaudited)**

**(Amountsin thousands)**

** **
| ** **                                                                        | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **     | ** ** | **Accumulated**        | ** ** | **Retained**     | ** ** | **Total**                     | ** **  | ** **         | ** ** | ** **             | ** ** | ** **             | ** **  |
|-----------------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|----------------|------------|------------------------|------------|------------------|------------|-------------------------------|-------------|--------------------|------------|------------------------|------------|------------------------|-------------|
| ** **                                                                        | ** ** | ** **    | ** ** | **Class L** | ** ** | **Class A** | ** ** | **Additional** | ** ** | **Other**              | ** ** | **Earnings**     | ** ** | **NCO Group, Inc.** | ** **  | ** **         | ** ** | **Total**              | ** ** | **Total**              | ** **  |
| ** **                                                                        | ** ** | **Preferred** | ** ** | **Common**       | ** ** | **Common**       | ** ** | **Paid-in**    | ** ** | **Comprehensive**      | ** ** | **(Accumulated** | ** ** | **Stockholders’**        | ** **  | **Noncontrolling** | ** ** | **Stockholders’** | ** ** | **Comprehensive**      | ** **  |
| ** **                                                                        | ** ** | **Stock**     | ** ** | **Stock**        | ** ** | **Stock**        | ** ** | **Capital**    | ** ** | **Income (Loss)** | ** ** | **Deficit)**     | ** ** | **Equity**                    | ** **  | **Interests**      | ** ** | **Equity**             | ** ** | **Income (Loss)** | ** **  |
| ** **                                                                        | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **     | ** ** | ** **             | ** ** | ** **       | ** ** | ** **                    | ** **  | ** **         | ** ** | ** **             | ** ** | ** **             | ** **  |
| Balance,  January 1, 2008                                                    |       | $             | 14         |             | $          | 4                |       | $              | 18         |                   | $          | 518,089          |       | $                             | 2,835       |               | $          | (112,915               | )          | $                      | 408,045     |   | $ | 48,948 |   | $ | 456,993 |   |   |   |
|                                                                              |       |          |       |             |       |             |       |           |       |                   |       |             |       |                          |        |               |       |                   |       |                   |        |
| Issuance of stock                                                                 |       | 9             |       | —           |       | 10               |       | 219,702        |       | —                 |       | —           |       | 219,721                       |        | —             |       | 219,721                |       |                   |        |
| Deemed dividend  to JPM for SST acquisition                                       |       | —        |       | —           |       | —           |       | (17,500        | )          |                   |       |             |       | (17,500                       | )           | —             |       | (17,500                | )          |                   |        |
| Preferred stock  dividends                                                        |       | 3             |       | —           |       | —           |       | (3             | )          | —                 |       | —           |       | —                        |        | —             |       | —                 |       |                   |        |
| Stock-based  compensation                                                         |       | —        |       | —           |       | 1                |       | 667            |       | —                 |       | —           |       | 668                           |        | —             |       | 668                    |       |                   |        |
| Distributions to  noncontrolling interests                                        |       | —        |       | —           |       | —           |       | —         |       | —                 |       | —           |       | —                        |        | (12,242            | )          | (12,242                | )          |                   |        |
| Investment in  subsidiary by noncontrolling interests                             |       | —        |       | —           |       | —           |       | —         |       | —                 |       | —           |       | —                        |        | 2,436              |       | 2,436                  |       |                   |        |
| Business  combinations                                                            |       | —        |       | —           |       | —           |       | —         |       | —                 |       | —           |       | —                        |        | 1,911              |       | 1,911                  |       |                   |        |
| Comprehensive  income, net of tax:                                                |       |          |       |             |       |             |       |           |       |                   |       |             |       |                          |        |               |       |                   |       |                   |        |
| Net loss                                                                          |       | —        |       | —           |       | —           |       | —         |       | —                 |       | (337,106         | )          | (337,106                      | )           | (18,250            | )          | (355,356               | )          | $                      | (355,356    | ) |
| Other  comprehensive income (loss):                                               |       |          |       |             |       |             |       |           |       |                   |       |             |       |                          |        |               |       |                   |       |                   |        |
| Foreign currency  translation adjustment                                          |       | —        |       | —           |       | —           |       | —         |       | (6,569                 | )          | —           |       | (6,569                        | )           | —             |       | (6,569                 | )          | (6,569                 | )           |
| Change in fair  value of cash flow hedges, net of taxes of $7,880                 |       | —        |       | —           |       | —           |       | —         |       | (13,818                | )          | —           |       | (13,818                       | )           | —             |       | (13,818                | )          | (13,818                | )           |
| Net gains on cash  flow hedges reclassified into earnings, net of taxes of $4,302 |       | —        |       | —           |       | —           |       | —         |       | 7,545                  |       | —           |       | 7,545                         |        | —             |       | 7,545                  |       | 7,545                  |        |
| Total  comprehensive loss                                                         |       |          |       |             |       |             |       |           |       |                   |       |             |       |                          |        |               |       |                   |       | $                      | (368,198    | ) |
|                                                                              |       |          |       |             |       |             |       |           |       |                   |       |             |       |                          |        |               |       |                   |       |                   |        |
| **Balance,  December 31, 2008**                                              | ** ** | **26**        | ** ** | **4**            | ** ** | **29**           | ** ** | **720,955**    | ** ** | **(10,007**            | **)**      | **(450,021**     | **)**      | **260,986**                   | ** **  | **22,803**         | ** ** | **283,789**            | ** ** | ** **             | ** **  |
|                                                                              |       |          |       |             |       |             |       |           |       |                   |       |             |       |                          |        |               |       |                   |       |                   |        |
| Issuance of stock                                                                 |       | 2             |       | —           |       | —           |       | 39,998         |       | —                 |       | —           |       | 40,000                        |        | —             |       | 40,000                 |       |                   |        |
| Deemed investment  by JPM for SST purchase price adjustment                       |       | —        |       | —           |       | —           |       | 2,161          |       |                   |       |             |       | 2,161                         |        | —             |       | 2,161                  |       |                   |        |
| Preferred stock  dividends                                                        |       | 1             |       | —           |       | —           |       | (1             | )          | —                 |       | —           |       | —                        |        | —             |       | —                 |       |                   |        |
| Stock-based  compensation                                                         |       | —        |       | —           |       | —           |       | 194            |       | —                 |       | —           |       | 194                           |        | —             |       | 194                    |       |                   |        |
| Distributions to  noncontrolling interests                                        |       | —        |       | —           |       | —           |       | —         |       | —                 |       | —           |       | —                        |        | (2,317             | )          | (2,317                 | )          |                   |        |
| Comprehensive  income, net of tax:                                                |       |          |       |             |       |             |       |           |       |                   |       |             |       |                          |        |               |       |                   |       |                   |        |
| Net loss                                                                          |       | —        |       | —           |       | —           |       | —         |       | —                 |       | (2,109           | )          | (2,109                        | )           | (570               | )          | (2,679                 | )          | $                      | (2,679      | ) |
| Other  comprehensive income (loss):                                               |       |          |       |             |       |             |       |           |       |                   |       |             |       |                          |        |               |       |                   |       |                   |        |
| Foreign currency  translation adjustment                                          |       | —        |       | —           |       | —           |       | —         |       | (3,157                 | )          | —           |       | (3,157                        | )           | —             |       | (3,157                 | )          | (3,157                 | )           |
| Change in fair  value of cash flow hedges, net of taxes of $410                   |       | —        |       | —           |       | —           |       | —         |       | (719                   | )          | —           |       | (719                          | )           | —             |       | (719                   | )          | (719                   | )           |
| Net gains on cash  flow hedges reclassified into earnings, net of taxes of $746   |       | —        |       | —           |       | —           |       | —         |       | 1,309                  |       | —           |       | 1,309                         |        | —             |       | 1,309                  |       | 1,309                  |        |
| Total  comprehensive loss                                                         |       |          |       |             |       |             |       |           |       |                   |       |             |       |                          |        |               |       |                   |       | $                      | (5,246      | ) |
|                                                                              |       |          |       |             |       |             |       |           |       |                   |       |             |       |                          |        |               |       |                   |       |                   |        |
| **Balance,  March 31, 2009**                                                 | ** ** | **$**         | **29**     | ** **       | **$**      | **4**            | ** ** | **$**          | **29**     | ** **             | **$**      | **763,307**      | ** ** | **$**                         | **(12,574** | **)**              | **$**      | **(452,130**           | **)**      | **$**                  | **298,665** | ** ** | **$** | **19,916** | ** ** | **$** | **318,581** | ** ** | ** ** | ** ** |

** **

See accompanyingnotes.

 

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**NCOGROUP, INC**

**ConsolidatedStatements of Cash Flows**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                                                        | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                        | ** ** | **March 31,**             | ** ** |
| ** **                                                                                        | ** ** | **2009**                       | ** ** | **2008** | ** ** |
| ** **                                                                                        | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                                            |       |                           |       |   |   |
| Net loss                                                                                          |       | $                              | (2,679     | ) | $ | (8,909 | ) |
| Adjustments to  reconcile net loss from operations to net cash provided by operating  activities: |       |                           |       |   |   |
| Depreciation and  amortization                                                                    |       | 31,082                         |       | 27,786 |   |
| Amortization of  deferred training asset                                                          |       | 681                            |       | 633 |   |
| Provision for  doubtful accounts                                                                  |       | 1,213                          |       | 831 |   |
| Impairment of  purchased accounts receivable                                                      |       | 33                             |       | 6,165 |   |
| Noncash interest                                                                                  |       | 1,220                          |       | (2 | ) |
| Net losses  (gains) on derivative instruments                                                     |       | 4,452                          |       | (395 | ) |
| Gain on sale of  purchased accounts receivable                                                    |       | (361                           | )          | (823 | ) |
| Deferred income  taxes                                                                            |       | (1,066                         | )          | (17,820 | ) |
| Other                                                                                             |       | 199                            |       | 758 |   |
| Changes in  operating assets and liabilities, net of acquisitions:                                |       |                           |       |   |   |
| Accounts  receivable, trade                                                                       |       | 2,387                          |       | 4,092 |   |
| Other assets                                                                                      |       | 17,059                         |       | 8,905 |   |
| Accounts payable  and accrued expenses                                                            |       | (12,618                        | )          | 10,990 |   |
| Income taxes  payable                                                                             |       | (622                           | )          | (2,807 | ) |
| Other long-term  liabilities                                                                      |       | (782                           | )          | 246 |   |
| Net cash  provided by operating activities                                                        |       | 40,198                         |       | 29,650 |   |
|                                                                                              |       |                           |       |   |   |
| Cash flows from  investing activities:                                                            |       |                           |       |   |   |
| Purchases of  accounts receivable                                                                 |       | (16,431                        | )          | (39,368 | ) |
| Collections  applied to principal of purchased accounts receivable                                |       | 25,124                         |       | 22,441 |   |
| Proceeds from  sales and resales of purchased accounts receivable                                 |       | 525                            |       | 860 |   |
| Purchases of  property and equipment                                                              |       | (9,793                         | )          | (7,920 | ) |
| Proceeds from  bonds and notes receivable                                                         |       | 149                            |       | 290 |   |
| Net cash paid  for acquisitions and related costs                                                 |       | (32                            | )          | (323,598 | ) |
| Net cash used in  investing activities                                                            |       | (458                           | )          | (347,295 | ) |
|                                                                                              |       |                           |       |   |   |
| Cash flows from  financing activities:                                                            |       |                           |       |   |   |
| Repayment of  notes payable                                                                       |       | (8,927                         | )          | (11,103 | ) |
| Borrowings under  notes payable                                                                   |       | —                         |       | 10,397 |   |
| Net (repayments  of) borrowings under revolving credit facility                                   |       | (38,000                        | )          | 14,000 |   |
| Repayment of  borrowings under senior term loan                                                   |       | (16,514                        | )          | (6,205 | ) |
| Borrowings under  senior term loan, net of fees                                                   |       | —                         |       | 134,135 |   |
| Payment of fees  to obtain debt                                                                   |       | (2,477                         | )          | (4,283 | ) |
| Investment in  subsidiary by noncontrolling interests                                             |       | —                         |       | 1,816 |   |
| Return of  investment in subsidiary to noncontrolling interests                                   |       | (2,317                         | )          | (3,347 | ) |
| Issuance of  stock                                                                                |       | 40,000                         |       | 210,000 |   |
| Payment of  deemed dividend to JPM                                                                |       | —                         |       | (12,157 | ) |
| Net cash (used  in) provided by financing activities                                              |       | (28,235                        | )          | 333,253 |   |
|                                                                                              |       |                           |       |   |   |
| Effect of  exchange rate on cash                                                                  |       | (322                           | )          | (336 | ) |
|                                                                                              |       |                           |       |   |   |
| Net increase in  cash and cash equivalents                                                        |       | 11,183                         |       | 15,272 |   |
|                                                                                              |       |                           |       |   |   |
| Cash and cash  equivalents at beginning of the period                                             |       | 29,880                         |       | 31,283 |   |
|                                                                                              |       |                           |       |   |   |
| Cash and cash  equivalents at end of the period                                                   |       | $                              | 41,063     |   | $ | 46,555 |   |

 

See accompanying notes.

 

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**NCO GROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

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

 

NCO Group, Inc. is a holding company and conductssubstantially all of its business operations through its subsidiaries(collectively, the “Company” or “NCO”). NCO is a leading global provider ofbusiness process outsourcing solutions, primarily focused on accountsreceivable management (“ARM”) and customer relationship management (“CRM”). NCOprovides services through over 100 offices throughout North America, Asia,Europe and Australia. The Company provides services to more than 14,000 activeclients, including many of the Fortune 500, supporting a broad spectrum of industries,including financial services, telecommunications, healthcare, retail andcommercial, education and government, utilities, education, technology andtransportation/logistics services. These clients are primarily locatedthroughout North America, Europe and Australia. The Company’s largest client isin the telecommunications sector and represented 9.1 percent of the Company’sconsolidated revenue for the three months ended March 31, 2009. TheCompany also purchases and collects past due consumer accounts receivable fromconsumer creditors such as banks, finance companies, retail merchants,utilities, healthcare companies, and other consumer-oriented companies.

 

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

 

**2.     Accounting Policies:**

 

*Principles ofConsolidation:*

 

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

 

On January 2, 2008,the Company acquired Systems & Services Technologies, Inc. (“SST”),a third-party consumer receivable servicer. Prior to the acquisition, SST was awholly owned subsidiary of JPMorgan Chase & Co. (“JPM”). JPM alsowholly owns One Equity Partners (“OEP”), which has had a controlling interestin the Company since November 15, 2006.

 

Financial AccountingStandards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 141,“Business Combinations” (“SFAS 141”) states that a “business combination”excludes transfers of net assets or exchanges of equity interests betweenentities under common control. SFAS 141 also states that transfers of netassets or exchanges of equity interests between entities under common controlshould be accounted for similar to the pooling-of-interests method (“as-ifpooling-of-interests”) in that the entity that receives the net assets or theequity interests initially recognizes the assets and liabilities transferred attheir carrying amounts in the accounts of the transferring entity at the dateof transfer. Because the Company and SST were under common control at the timeof the SST acquisition, the transfer of assets and liabilities of SST wereaccounted for at historical cost in a manner similar to a pooling of interests.For financial accounting purposes, the acquisition was viewed as a change inreporting entity and, as a result, required restatement of the Company’sfinancial statements for all periods subsequent to November 15, 2006, thedate on which common control of the Company and SST by JPM commenced.

 

The Company alsoconsiders the applicability of Financial Accounting Standards Board (“FASB”)Financial Interpretation No. (“FIN”) 46R (as revised), “Consolidation ofVariable Interest Entities, an Interpretation of ARB No. 51,” which wouldinclude any variable interest entities that are required to be consolidated bythe primary beneficiary. The primary beneficiary is the entity that holds themajority of the beneficial interests in the variable interest entity.  A variable interest entity is an entity forwhich the primary beneficiary’s interest in the entity can change with changesin factors other than the amount of investment in the entity.

 

The Company owns 50percent of entities that purchase portfolios of purchased accounts receivable,which it consolidates in accordance with FIN 46R. Based on its evaluation ofthese entities, the Company is the primary beneficiary.

 

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

 

*InterimFinancial Information:*

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim financial information. Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements. The December 31,2008 balance sheet was derived from the consolidated audited financialstatements of the Company, but does not include all disclosures required byaccounting principles generally accepted in the United States of America. Inthe opinion of management, all adjustments (consisting of only normal recurringadjustments, except as otherwise disclosed herein) considered necessary for afair presentation have been included. Because of the seasonal nature of theCompany’s business, operating results for the three-month period ended March 31,2009, are not necessarily indicative of the results that may be expected forthe year ending December 31, 2009, or for any other interim period.

 

The accompanyingunaudited consolidated financial statements should be read in conjunction withthe Company’s consolidated financial statements and footnotes thereto includedin the Company’s Annual Report on Form 10-K for the year ended December 31,2008, filed with the Securities and Exchange Commission (“SEC”).

 

*DeferredRevenue:*

 

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

 
| Balance at  December 31, 2008       |   | $      | 46,135 |   |
|------------------------------------------|--------|--------|--------|--------|
| Additions                                |   | 1,535  |   |
| Revenue  recognized                      |   | (3,225 | )      |
| Foreign currency  translation adjustment |   | (5     | )      |
| Balance at  March 31, 2009          |   | $      | 44,440 |   |

 

*Use ofEstimates:*

 

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

 

*Basisof Presentation:*

 

Effective January 1, 2009, theCompany adopted SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements - an amendment of Accounting Research Bulletin No. 51”(“SFAS 160”).  SFAS 160 amends theaccounting and reporting standards for minority interests (now referred to asnoncontrolling interests) in subsidiaries. Under SFAS 160, the Company nowreports noncontrolling interest in subsidiaries as a separate component ofequity, rather than as a liability. SFAS 160 is being applied prospectively,except for the presentation and disclosure requirements, which are applied retrospectively(note 10).

 

*Reclassifications:*

 

Certain amounts in the balance sheetas of December 31, 2008, and the statement of operations and statement ofcash flows for the three months ended March 31, 2008 have beenreclassified for comparative purposes.

 

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**3.     Restructuring Charges:**

 

The Company hasrestructuring charges, primarily recorded in conjunction with the acquisitionsof OSI and SST (note 4) and streamlining the cost structure of the Company’slegacy operations. These charges primarily related to the elimination ofcertain redundant facilities and severance costs. The Company currently expectsto pay this remaining balance through 2013.

 

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

 
| ** **                         | ** ** | **Leases** | ** ** | **Severance** | ** ** | **Total** | ** ** |
|------------------------------------|------------|------------|------------|---------------|------------|-----------|------------|
| Balance at  December 31, 2008 |       | $          | 6,682      |          | $          | 2,620     |       | $ | 9,302 |   |
| Accruals                           |       | —     |       | 443           |       | 443       |       |
| Cash payments                      |       | (1,199     | )          | (1,329        | )          | (2,528    | )          |
| Balance at  March 31, 2009    |       | $          | 5,483      |          | $          | 1,734     |       | $ | 7,217 |   |

 

**4.     Business Combinations:**

 

On February 29,2008, the Company acquired OSI, a leading provider of business processoutsourcing services, specializing primarily in accounts receivable managementservices, for $339.0 million in cash, subject to certain post-closingadjustments. The purchase price was financed in part by the issuance of 802,262shares of the Company’s Series A 14% PIK Preferred Stock, 37,738 shares ofClass L common stock and 1,012,262 shares of Class A common stock.The remainder of the purchase price was financed by borrowings of $139.0million under the Company’s amended senior credit facility (note 9). TheCompany allocated $117.0 million of the purchase price to the customerrelationships, $3.4 million to the trade names, $634,000 to the non-competeagreements, and recorded goodwill of $212.4 million, which is non-deductiblefor tax purposes, in the ARM segment. As a result of the acquisition of OSI,the Company expects to expand its current customer base and strengthen itsrelationships with certain existing customers, expand its portfolio base andreduce the cost of operations through economies of scale. Therefore, theCompany believes the allocation of a portion of the purchase price to goodwillis appropriate.

 

The following is anallocation of the purchase price to the assets acquired and liabilities assumed(amounts in thousands):

 
| Purchase price                          |   | $        | 339,011 |   |
|-----------------------------------------|--------|----------|---------|--------|
| Transaction  costs                      |   | 7,585    |    |
| Cash                                    |   | (26,069  | )       |
| Accounts  receivable                    |   | (51,193  | )       |
| Purchased  accounts receivable          |   | (4,153   | )       |
| Customer  relationships                 |   | (117,000 | )       |
| Trade names                             |   | (3,400   | )       |
| Non-compete  agreements                 |   | (634     | )       |
| Property and  equipment                 |   | (18,292  | )       |
| Other assets                            |   | (33,289  | )       |
| Current net  deferred tax assets        |   | (9,569   | )       |
| Long-term net  deferred tax liabilities |   | 14,971   |    |
| Deferred revenue                        |   | 44,809   |    |
| Accrued expenses  and other liabilities |   | 54,296   |    |
| Accrued  restructuring costs            |   | 15,323   |    |
|                                    |   |     |    |
| Goodwill                                |   | $        | 212,396 |   |

 

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**4.     Business Combinations (continued):**

 

In connection with theOSI acquisition, the Company recorded liabilities of $15.3 million for an exitplan the Company began to formulate prior to the acquisition date. Theseliabilities principally relate to facilities leases, severance and other costs.The following presents the activity in the accruals recorded for restructuringrelated expenses (amounts in thousands); the Company expects to pay theremaining balance through 2012:

 
| ** **                         | ** ** | **Leases** | ** ** | **Severance** | ** ** | **Total** | ** ** |
|------------------------------------|------------|------------|------------|---------------|------------|-----------|------------|
|                               |       |       |       |          |       |      |       |
| Balance at  December 31, 2008 |       | $          | 4,206      |          | $          | 1,199     |       | $ | 5,405 |   |
| Cash payments                      |       | (705       | )          | (673          | )          | (1,378    | )          |
| Balance at  March 31, 2009    |       | $          | 3,501      |          | $          | 526       |       | $ | 4,027 |   |

 

The following summarizesthe unaudited pro forma results of operations, assuming the OSI acquisitiondescribed above occurred as of the beginning of the period.  The unaudited pro forma information isprovided for informational purposes only. It is based on historicalinformation, and does not necessarily reflect the actual results that wouldhave occurred, nor is it indicative of future results of operations of theconsolidated entities (amounts in thousands):

 
| ** **                    | ** ** | **For the Three**       | ** ** |
|-------------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **Months Ended**        | ** ** |
| ** **                    | ** ** | **March 31, 2008** | ** ** |
| Revenue                       |       | $                       | 435,953    |   |
| Net loss  attributable to NCO |       | (13,822                 | )          |
|                               |            |                         |            |  |

 

On January 2, 2008,the Company acquired SST, a third-party consumer receivable servicer, from JPMfor $18.4 million, including certain post-closing adjustments. The purchaseprice consisted of cash consideration of $11.3 million, $3.2 million of whichwas outstanding as of March 31, 2009, and the issuance of 29,884 shares ofthe Company’s Series A 14% PIK Preferred Stock. The remaining $3.2 millionof the cash consideration was paid in May 2009. As described in note 2,since the Company and SST were under common control by JPM at the time of theSST acquisition, the transfer of assets and liabilities of SST were accountedfor at historical cost in a manner similar to a pooling of interests. The cashconsideration paid to JPM for SST and the return of $4.0 million of cash thatwas not acquired were treated as dividends to JPM.

 

**5.      Fair Value Measurement:**

 

Effective January 1,2008, the Company adopted Statement of Financial Accounting Standards No. 157,“Fair Value Measurements” (“SFAS 157”) for financial assets and financialliabilities. Among other things, SFAS 157 requires enhanced disclosures aboutassets and liabilities carried at fair value. As defined in SFAS 157, fairvalue is the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants at themeasurement date (exit price). In connection with the evaluation of SFAS 157,the Company also evaluated the provisions of SFAS No. 159, “The Fair ValueOption for Financial Assets and Financial Liabilities – Including an amendmentof FASB Statement No. 115” (“SFAS 159”). As of the January 1, 2008effective date, the Company elected not to apply SFAS 159 to any of its existingeligible assets or liabilities; therefore there was no impact on the Company’sconsolidated financial position, results of operations, or cash flows.

 

SFAS 157 requiresenhanced disclosures about assets and liabilities carried at fair value.Depending on the nature of the asset or liability, the Company uses variousvaluation techniques and assumptions when measuring fair value of its assetsand liabilities. In accordance with SFAS 157, the Company utilizes market dataor assumptions 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.

 

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**5.      Fair Value Measurement (continued):**

 

As required by SFAS 157,financial 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** | ** ** |
|-----------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
| ** **                  | ** ** | **Level 1**             | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|                        |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Assets:                     |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Forward exchange  contracts |       | $                       | —     |   | $ | 479 |   | $ | — |   | $ | 479 |   | $ | — |   | $ | 923 |   | $ | — |   | $ | 923 |   |
| Interest rate  caps         |       | —                  |       | — |   | — |   | — |   | — |   | 1 |   | — |   | 1 |   |
|                        |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate  swaps        |       | —                  |       | 12,253 |   | — |   | 12,253 |   | — |   | 13,180 |   | — |   | 13,180 |   |
| Forward exchange  contracts |       | —                  |       | 10,874 |   | — |   | 10,874 |   | — |   | 11,360 |   | — |   | 11,360 |   |
| Embedded  derivatives       |       | —                  |       | — |   | 3,164 |   | 3,164 |   | — |   | — |   | 3,742 |   | 3,742 |   |
|                        |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net liabilities             |       | $                       | —     |   | $ | 22,648 |   | $ | 3,164 |   | $ | 25,812 |   | $ | — |   | $ | 23,616 |   | $ | 3,742 |   | $ | 27,358 |   |

 

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

 

The contingent paymentprovision embedded in the Company’s nonrecourse credit facility related topurchased accounts receivable are embedded derivatives. The Company valuesthese embedded derivatives using similar current period purchased accountsreceivable portfolio purchases’ underlying yields and cash flow changes.  Inputs used to value these embeddedderivatives are considered Level 3 measurements since they are unobservable.Changes in the fair market value of the embedded derivatives are recorded ininterest expense on the statement of operations.

 

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

 

| ** **                      | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **March 31,**             | ** ** |
| ** **                      | ** ** | **2009**                       | ** ** | **2008** | ** ** |
| Balance at  beginning of period |       | $                              | 3,742      |   | $ | 9,647 |   |
| Accrued interest  additions     |       | 272                            |       | 652 |   |
| Interest  payments              |       | (575                           | )          | (914 | ) |
| Change in fair  value           |       | (275                           | )          | (1,522 | ) |
| Balance at end  of period       |       | $                              | 3,164      |   | $ | 7,863 |   |

 

For purposes of valuationadjustments to its interest rate swap derivative positions under SFAS 157, theCompany has evaluated liquidity premiums that may be demanded by marketparticipants, as well as the credit risk of its counterparties and its owncredit. The Company has considered factors such as the likelihood of default byitself and counterparties, its net exposures and remaining maturities indetermining the appropriate fair value adjustment to record. For the threemonths ended March 31, 2009, the Company increased the interest rate swapliability by $753,000 resulting in a loss of $480,000, net of taxes, inaccumulated other comprehensive income (loss) for these valuation adjustments.These valuation adjustments were not significant for the three months ended March 31,2008.

 

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**6.     Purchased Accounts Receivable:**

 

PortfolioManagement and the U.K. and Australian divisions of ARM purchase defaultedconsumer accounts receivable at a discount from the contractual principalbalance. As of March 31, 2009, the carrying value of Portfolio Management’sand ARM’s purchased accounts receivable were $173.4 million and $3.7 million,respectively. The total outstanding balance due, representing the originalundiscounted contractual amount less collections since acquisition, was $52.4billion at March 31, 2009 and December 31, 2008.

 

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

 
| ** **                                                           | ** ** | **For the Three  Months Ended  March 31, 2009** | ** ** | **For the  Year Ended  December 31, 2008** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|
|                                                                 |       |                                                 |       |                                            |       |
| Balance at  beginning of period                                      |       | $                                                    | 185,659    |                                            | $          | 245,585 |   |
| Purchases:                                                           |       |                                                 |       |                                            |       |
| Cash purchases                                                       |       | 16,431                                               |       | 126,547                                         |       |
| Portfolios  acquired in business combinations                        |       | —                                               |       | 3,630                                           |       |
| Collections                                                          |       | (50,346                                              | )          | (205,024                                        | )          |
| Revenue  recognized                                                  |       | 25,222                                               |       | 115,699                                         |       |
| Proceeds from  portfolio sales and resales applied to carrying value |       | (164                                                 | )          | (1,755                                          | )          |
| Allowance for  impairment                                            |       | (33                                                  | )          | (98,892                                         | )          |
| Other                                                                |       | 345                                                  |       | (131                                            | )          |
|                                                                 |       |                                                 |       |                                            |       |
| Balance at end  of period                                            |       | $                                                    | 177,114    |                                            | $          | 185,659 |   |
|                                                                 |       |                                                 |       |                                            |       |
| Purchased  accounts receivables, current portion                     |       | $                                                    | 66,122     |                                            | $          | 70,006 |   |
| Purchased  accounts receivables, net of current portion              |       | 110,992                                              |       | 115,653                                         |       |
|                                                                 |       | $                                                    | 177,114    |                                            | $          | 185,659 |   |

 

In the ordinary course ofpurchasing portfolios of accounts receivable, Portfolio Management may sellaccounts from an acquired portfolio shortly after they were purchased. Theproceeds from these resales are essentially equal to, and applied against, thecarrying value of the accounts. Therefore, there is no gain recorded on theseresales. For the three months ended March 31, 2009 and 2008, there were noproceeds from portfolio resales.

 

Portfolio Managementsells portfolios of accounts receivable based on a low probability of paymentunder the Company’s collection platform and other criteria. Proceeds from salesabove the remaining carrying value are recorded as revenue. The followingsummarizes sales proceeds, carrying value and revenue recorded (amounts inthousands):

 

| ** **               | ** ** | **For the Three Months Ended** | ** ** |
|--------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **March 31,**             | ** ** |
| ** **               | ** ** | **2009**                       | ** ** | **2008** | ** ** |
| Proceeds from  sales     |       | $                              | 525        |   | $ | 860 |   |
| Less carrying  value     |       | 164                            |       | 37 |   |
| Portfolio sales  revenue |       | $                              | 361        |   | $ | 823 |   |

 

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

 

The following presentsthe change in the allowance for impairment of purchased accounts receivableaccounted for under SOP 03-3 (amounts in thousands):

 
| ** **                      | ** ** | **For the Three  Months Ended  March 31, 2009** | ** ** | **For the  Year Ended  December 31, 2008** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|
|                            |       |                                                 |       |                                            |       |
| Balance at  beginning of period |       | $                                                    | 123,804    |                                            | $          | 24,962 |   |
| Additions                       |       | 2,790                                                |       | 99,593                                          |       |
| Recoveries                      |       | (2,757                                               | )          | (701                                            | )          |
| Other                           |       | (36                                                  | )          | (50                                             | )          |
| Balance at end of  period       |       | $                                                    | 123,801    |                                            | $          | 123,804 |   |

 

Accretable yieldrepresents the excess of the cash flows expected to be collected during thelife of the portfolio over the initial investment in the portfolio. Thefollowing presents the change in accretable yield (amounts in thousands):

 
| ** **                                     | ** ** | **For the Three Months Ended** | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|
| ** **                                     | ** ** | **March 31,**             | ** ** |
| ** **                                     | ** ** | **2009**                       | ** ** | **2008** | ** ** |
| Balance at  beginning of period                |       | $                              | 167,411    |   | $ | 366,584 |   |
| Additions                                      |       | 19,300                         |       | 50,785 |   |
| Revenue  recognition                           |       | (25,222                        | )          | (34,572 | ) |
| Reclassifications  to nonaccretable difference |       | (7,339                         | )          | (22,412 | ) |
| Foreign currency  translation adjustment       |       | 46                             |       | (148 | ) |
| Balance at end  of period                      |       | $                              | 154,196    |   | $ | 360,237 |   |

 

During the three monthsended March 31, 2009 and 2008, the Company purchased accounts receivablewith a cost of $16.4 million and $39.4 million, respectively, that hadcontractually required payments receivable at the date of acquisition of $1.2billion and $1.4 billion, respectively, and expected cash flows at the date ofacquisition of $35.7 million and $85.9 million, respectively.

 

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

 

In the course of theCompany’s subsidiaries’ regular business activities as a provider of accountsreceivable management services, the Company receives clients’ funds arisingfrom the collection of accounts placed with the Company. These funds are placedin segregated cash accounts and are generally remitted to clients within 30days. Funds held on behalf of clients of $92.7 million and $77.1 million at March 31,2009 and December 31, 2008, respectively, have been shown net of theiroffsetting liability for financial statement presentation.

 

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

 

SFAS No. 142, “Goodwilland Other Intangible Assets” requires goodwill to be allocated and tested atthe reporting unit level. Goodwill is tested for impairment each year duringthe fourth quarter, and between annual tests if an event occurs orcircumstances change that would more likely than not reduce the fair value of areporting unit below its carrying amount. No event occurred or circumstanceschanged since the last annual test that would more likely than not reduce thefair value of a reporting unit below its carrying value. However, if theCompany continues to experience adverse effects of the challenging economic andbusiness environment, including changes in financial projections, the Companymay have to recognize an impairment of all or some portion of itsgoodwill.  The Company’s reporting unitsare ARM, CRM and Portfolio Management. The Company’s reporting units had thefollowing goodwill (amounts in thousands):

 
| ** **                         | ** ** | **ARM** | ** ** | **CRM** | ** ** | **Total** | ** ** |
|------------------------------------|------------|---------|------------|---------|------------|-----------|------------|
| Balance at  December 31, 2008 |       | $       | 482,849    |    | $          | 81,768    |       | $ | 564,617 |   |
| OSI acquisition                    |       | (1,358  | )          | —  |       | (1,358    | )          |
| Other                              |       | (1,480  | )          | —  |       | (1,480    | )          |
| Balance at  March 31, 2009    |       | $       | 480,011    |    | $          | 81,768    |       | $ | 561,779 |   |

 

The decrease in ARM’sgoodwill balance from December 31, 2008 to March 31, 2009, wasprimarily due to the finalization of the allocation of the fair market value ofthe acquired assets and liabilities related to the OSI acquisition.

 

Trade name includes theNCO trade name, which is an indefinite-lived intangible asset and therefore isnot subject to amortization.  At March 31,2009, the balance of the NCO trade name was $82.6 million.

 

In connection with theOSI acquisition, the Company allocated $3.4 million of the purchase price tothe fair value of certain trade names acquired in the OSI acquisition, whichare subject to amortization. At March 31, 2009, accumulated amortizationof the OSI trade names was $737,000.

 

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

** **
| ** **              | ** ** | **March 31, 2009**    | ** ** | **December 31, 2008**    | ** ** |
|-------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Customer  relationships |       | $                          | 450,827    |                          | $          | 135,978 |   | $ | 450,827 |   | $ | 119,409 |   |
| Non-compete  agreements |       | 4,006                      |       | 1,692                         |       | 4,006 |   | 1,473 |   |
| Total                   |       | $                          | 454,833    |                          | $          | 137,670 |   | $ | 454,833 |   | $ | 120,882 |   |

 

The Company recordedamortization expense for all other intangible assets of $16.9 million and $13.9million during the three months ended March 31, 2009 and 2008,respectively. The following represents the Company’s expected amortizationexpense from these other intangible assets over the next five years (amounts inthousands):

 

| **For the Years Ended  December 31,** | ** ** | **Estimated  Amortization Expense** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|
|                                       |       |                                |       |
| 2009                                       |       | $                                   | 67,577     |   |
| 2010                                       |       | 66,437                              |       |
| 2011                                       |       | 66,074                              |       |
| 2012                                       |       | 61,895                              |       |
| 2013                                       |       | 55,560                              |       |
|                                            |            |                                     |            |  |

 

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**9.     Long-Term Debt:**

 

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

 
| ** **                        | ** ** | **March 31, 2009** | ** **    | **December 31, 2008** | ** ** |
|-----------------------------------|------------|-------------------------|---------------|----------------------------|------------|
|                              |       |                    |          |                       |       |
| Senior term loan                  |       | $                       | 572,091       |                       | $          | 588,605 |   |
| Senior revolving  credit facility |       | 43,500                  |          | 81,500                     |       |
| Senior  subordinated notes        |       | 200,000                 |          | 200,000                    |       |
| Senior notes                      |       | 165,000                 |          | 165,000                    |       |
| Nonrecourse  credit facility      |       | 28,502                  |          | 37,244                     |       |
| Capital leases                    |       | 5,130                   |          | 5,232                      |       |
| Other                             |       | 1,398                   |          | 1,495                      |       |
| Less current portion              |       | (26,951                 | )             | (30,559                    | )          |
|                              |       | $                       |  988,670 |                       | $          | 1,048,517 |   |

 

*Senior Credit Facility:*

 

The Company has a seniorcredit facility (“Credit Facility”) with a syndicate of financial institutionsthat consists of a term loan ($572.1 million outstanding at March 31, 2009)and a $100.0 million revolving credit facility. The Company is required to makequarterly principal repayments of $1.5 million on the term loan until itsmaturity in May 2013, at which time its remaining balance outstanding isdue. The Company is also required to make annual prepayments of 50 percent, 25percent or zero percent of its excess annual cash flow, based on its leverageratio. The revolving credit facility requires no minimum principal paymentsuntil its maturity in November 2011. The availability of the revolvingcredit facility is reduced by any unused letters of credit ($15.4 million at March 31,2009). As of March 31, 2009, the Company had $41.1 million of remainingavailability under the revolving credit facility.

 

On March 25, 2009,the Company amended the Credit Facility to, among other things: (i) adjustthe financial covenants, including increasing maximum leverage ratios,decreasing minimum interest coverage ratios, and increasing maximum capitalexpenditure limitations; (ii) increase the margin applicable to Base Rateborrowings and LIBOR borrowings by 0.75 percent; (iii) create a minimumLIBOR of 2.50 percent; (iv) create a minimum Base Rate of LIBOR plus 1.00percent; (v) increase the letter-of-credit subfacility to $30.0 million; (vi) permitthe Company under certain circumstances to increase the size of its revolvingcredit facility by up to $50.0 million in the aggregate; and (vii) limitthe Company’s ability to invest in purchased accounts receivable under certaincircumstances.

 

Subsequent to theamendment, all borrowings bear interest at an annual rate equal to either, atthe option of the Company, (i) the higher of the prime rate (3.25 percentat March 31, 2009), the federal funds rate (0.16 percent at March 31,2009) plus 0.50 percent, or LIBOR plus 1.00 percent, plus a margin of 2.25percent to 2.75 percent in the case of the revolving credit facility and 3.75percent to 4.00 percent in the case of the term loan, based on the Company’sfunded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”)ratio, as defined; or (ii) LIBOR (0.50 percent 30-day LIBOR at March 31,2009) but in no event less than 2.50 percent plus a margin of 3.25 percent to3.75 percent in the case of the revolving credit facility, and 4.75 percent to5.00 percent in the case of the term loan, based on the Company’s funded debtto EBITDA ratio, as defined. The Company is charged a quarterly commitment feeon the unused portion of the revolving credit facility at an annual rate of 0.50percent. The effective interest rate on the Credit Facility was approximately7.03 percent and 8.13 percent for the three months ended March 31, 2009and 2008, respectively. The Credit Facility also requires that the Companyobtain interest rate protection for a period of three years in a notionalamount not to be less than 50 percent of the aggregate principal amount of theterm loan facility.

 

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

 

*Senior Credit Facility (continued):*

 

Borrowings under theCredit Facility are collateralized by substantially all of the Company’sassets. The Credit Facility contains certain financial and other covenants suchas maintaining a maximum leverage ratio and a minimum interest coverage ratio,and includes restrictions on, among other things, acquisitions, the incurrenceof additional debt, investments, investments in purchased accounts receivable, dispositionof assets, liens and dividends and other distributions. If an event of default,such as failure to comply with covenants or change of control, were to occurunder the Credit Facility, the lenders would be entitled to declare all amountsoutstanding under it immediately due and payable and foreclose on the pledgedassets. The Company was in compliance with all required financial covenants andwas not aware of any events of default as of March 31, 2009.

 

*Senior Notes and Senior Subordinated Notes:*

 

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

 

The Senior Notes aresenior unsecured obligations and are senior in right of payment to all existingand future senior subordinated indebtedness, including the Senior SubordinatedNotes, and all future subordinated indebtedness. The Senior Notes bear interestat an annual rate equal to LIBOR plus 4.875 percent, reset quarterly. Theeffective interest rate of the Senior Notes was approximately 6.60 percent and8.85 percent for the three months ended March 31, 2009 and 2008,respectively. The Company may redeem the Senior Notes, in whole or in part, atany time at varying redemption prices depending on the redemption date, plusaccrued and unpaid interest.

 

The Senior SubordinatedNotes are unsecured senior subordinated obligations and are subordinated inright of payment to all existing and future senior indebtedness, including theSenior Notes and borrowings under the Credit Facility. The Company may redeemthe Senior Subordinated Notes, in whole or in part, at any time on or after November 15,2010 at varying redemption prices depending on the redemption date, plusaccrued and unpaid interest. The Company also may redeem some or all of theSenior Subordinated Notes at any time prior to November 15, 2010, at aredemption price equal to 100 percent of the principal amount of the respectiveNotes to be redeemed, plus accrued and unpaid interest and an additionalpremium. Finally, subject to certain conditions, the Company may redeem up to35 percent of the aggregate principal amount of the Senior Subordinated Notesat any time prior to November 15, 2009 with the net proceeds of a sale ofits capital stock at a redemption price equal to 100 percent of the principalamount of the respective Notes to be redeemed, plus accrued and unpaid interestand an additional premium.

 

The indentures governingthe Notes contain a number of covenants that limit the Company’s and itsrestricted subsidiaries’ ability, among other things, to: incur additionalindebtedness and issue certain preferred stock, pay certain dividends, acquireshares of capital stock, make payments on subordinated debt or makeinvestments, place limitations on distributions from restricted subsidiaries,issue or sell capital stock of restricted subsidiaries, guarantee indebtedness,sell or exchange assets, enter into transactions with affiliates, createcertain liens, engage in unrelated businesses, and consolidate, merge ortransfer all or substantially all of the Company’s assets and the assets of itssubsidiaries on a consolidated basis. In addition, upon a change of control,the Company is required to offer to repurchase all of the Notes then outstanding,at a purchase price equal to 101 percent of their principal amount, plus anyaccrued interest to the date of repurchase.

 

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

 

*Nonrecourse Credit Facility:*

 

The Company has anonrecourse credit facility and an exclusivity agreement (collectively the “NonrecourseAgreement”) that provides that all purchases of accounts receivable by theCompany with a purchase price in excess of $1.0 million are first offered tothe lender for financing at its discretion. If the lender chooses toparticipate in the financing of a portfolio of accounts receivable, thefinancing may be structured, depending on the size and nature of the portfolioto be purchased, either as a borrowing arrangement or under various equitysharing arrangements. The lender will finance non-equity borrowings withfloating interest at an annual rate equal to LIBOR (0.50 percent 30-day LIBORat March 31, 2009) plus 2.50 percent, or as negotiated. These borrowingsare nonrecourse to the Company and are due two years from the date of eachrespective loan, unless otherwise negotiated. As additional return on the debtfinanced portfolios the lender receives residual cash flows, as negotiated,which is defined as all cash collections after servicing fees, floating rateinterest, repayment of the borrowing, and the initial investment by theCompany, including interest. Residual cash flow payments are accrued for asembedded derivatives under FAS 133. The Company may terminate the exclusivityagreement for a cost of $250,000 for each month remaining under the term of theagreement.

 

Borrowings under theNonrecourse Agreement are nonrecourse to the Company, except for the assetswithin the entities established in connection with the financing agreement. TheNonrecourse Agreement contains a collections performance requirement, amongother covenants, that, if not met, provides for cross-collateralization withany other portfolios financed through the Nonrecourse Agreement, in addition toother remedies.

 

Total debt outstandingunder this facility was $28.5 million and $37.2 million as of March 31,2009 and December 31, 2008, respectively, which included $3.2 million and$3.7 million, respectively, of accrued residual interest. The effectiveinterest rate on these loans, including the residual interest component, wasapproximately 9.1 percent and 10.5 percent for the three months ended March 31,2009 and 2008, respectively. The nonrecourse credit facility contains certaincovenants such as meeting minimum cumulative collection targets. As of March 31,2009, the Company was in compliance with all required covenants.

 

The exclusivity agreementto the Nonrecourse Agreement expires on June 30, 2009. The Company hasbegun to discuss future lending facilities for the purchases of accountsreceivable with its existing lender and other third-party lenders. If theCompany is unable to enter into a new nonrecourse credit facility, the Companymay have to use available cash or borrowings under its revolving creditfacility to fund purchases of accounts receivable.

 

**10.  Stockholders’ Equity:**

 

*PreferredStock and Common Stock:*

 

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

 

Series A is entitledto a quarterly “paid-in-kind” dividend at an annual rate of 14 percent and Series B-1is entitled to a quarterly “paid-in-kind” dividend at an annual rate of 19percent. On February 28, 2009 and 2008, 87,211 shares and 49,108 shares,respectively, of Series A were issued for the Series A “paid-in-kind”dividends and on February 28, 2009, 1,713 shares of Series B-1 wereissued for the Series B-1 “paid in-kind” dividends.

 

In February 2009,the Company issued 7,400 shares of Series A Preferred Stock to JPM asadditional consideration for the acquisition of SST (note 4).

 

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

 

*PreferredStock and Common Stock (continued):*

 

On March 25, 2009, in connection with the amendment of the Company’sCredit Facility (note9), the Company sold 147,447.3 shares of its Series B-1 Preferred Stockand 20,973.7 shares of its Series B-2 Preferred Stock to One EquityPartners, Michael J. Barrist and certain members of executive management, andother co-investors for an aggregate purchase price of $40.0 million. Theproceeds were used to pay down $15.0 million of term loan borrowings, and theremainder, net of expenses, of $22.5 million was used to repay borrowings underthe revolving credit facility.

 

*NoncontrollingInterests:*

 

Prior year amountsrelated to noncontrolling interests have been reclassified to conform to thecurrent year presentation as required by SFAS 160. Net income (loss)attributable to noncontrolling interests is shown separately from net income(loss) in the consolidated statements of operations. This reclassification hasno effect on the Company’s previously reported financial position or results ofoperations. Refer to note 2 for additional information on the adoption of SFAS160.

 

In accordance withthe provisions of SFAS 160, losses are attributed to noncontrolling interestseven if they exceed the noncontrolling interests’ equity. If the Company hadnot applied the provisions of the SFAS 160, net income attributable to NCOwould have been $501,000 lower for the three months ended March 31, 2009.

 

**11.  Derivative Financial Instruments:**

 

The Company enters intoforward exchange contracts to minimize the impact of currency fluctuations ontransactions and cash flows. These contracts may be designated as cash flowhedges. The Company had forward exchange contracts for the purchase of 612.8million Philippine pesos and 93.0 million Canadian dollars outstanding at March 31,2009, which mature throughout the remainder of 2009.

 

The Company has interestrate swap agreements to minimize the impact of LIBOR fluctuations on interestpayments on the Company’s floating rate debt. The interest rate swaps may bedesignated as cash flow hedges. The interest rate swaps cover an aggregatenotional amount of $348.9 million. The Company is required to pay thecounterparties quarterly interest payments at a weighted average fixed rateranging from 3.41 to 4.89 percent, and receives from the counterpartiesvariable quarterly interest payments based on LIBOR. The net interest paid orreceived is included in interest expense. On March 25, 2009, the Companyamended its senior credit facility, which amendment included a minimum LIBOR of2.50 percent (note 9). 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, future changes in thefair market value of these interest rate swaps will be recorded in interestexpense.

 

The Company’s nonrecoursecredit facility relating to purchased accounts receivable contains contingentpayments that are accounted for as embedded derivatives.

 

The Company enters intointerest rate cap contracts to minimize the impact of LIBOR fluctuations ontransactions and cash flows. The Company had interest rate caps covering anaggregate notional amount of $57.0 million at March 31, 2009, with aweighted average LIBOR cap rate of 6.00 percent.

 

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

 

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

 
| ** **                                            | ** ** | **March 31, 2009**     | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | **Balance Sheet  Location** | ** ** | **Fair  Value**            | ** ** | **Balance Sheet  Location** | ** ** | **Fair  Value** | ** ** |
| Derivatives  designated as hedges:                    |       |                        |       |                       |       |   |   |   |   |
| *Liability  derivatives*                              |       |                        |       |                       |       |   |   |   |   |
| Interest rate  swap agreements                        |       |                        |       |                       |       | Accrued expenses |   | $ | 13,180 |   |
| Total  derivatives designated as hedges               |       |                        |       |                       |       |   |   | $ | 13,180 |   |
|                                                  |       |                        |       |                       |       |   |   |   |   |
| Derivatives not designated as hedges:                 |       |                        |       |                       |       |   |   |   |   |
| *Asset derivatives*                                   |       |                        |       |                       |       |   |   |   |   |
| Forward exchange  contracts                           |       | Other current assets        |       | $                          | 479        |   | Other current assets |   | $ | 923 |   |
| Interest rate  caps                                   |       | Other current assets        |       | —                     |       | Other current assets |   | 1 |   |
| Total asset  derivatives not designated as hedges     |       |                        |       | $                          | 479        |   |   |   | $ | 924 |   |
|                                                  |       |                        |       |                       |       |   |   |   |   |
| *Liability  derivatives*                              |       |                        |       |                       |       |   |   |   |   |
| Interest rate  swap agreements                        |       | Accrued expenses            |       | $                          | 12,253     |   |   |   |   |   |
| Forward exchange  contracts                           |       | Accrued expenses            |       | 10,874                     |       | Accrued expenses |   | $ | 11,360 |   |
| Embedded  derivatives                                 |       | Long-term debt              |       | 3,164                      |       | Long-term debt |   | 3,742 |   |
| Total liability  derivatives not designated as hedges |       |                        |       | $                          | 26,291     |   |   |   | $ | 15,102 |   |

 

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

 
| ** **                                                                                | ** ** | ** **                                                             | ** ** | **For the Three Months Ended March 31,**                  | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | ** **                                                             | ** ** | **2009**                                                       | ** ** | **2008** | ** ** |
| ** **                                                                                | ** ** | **Location of  Gain (Loss)  Reclassified  into  Earnings**             | ** ** | **Amount of  Gain (Loss)  Recognized  in OCI (net  of taxes)** | ** ** | **Amount of  Gain (Loss)  Reclassified  into  Earnings** | ** ** | **Amount of  Gain (Loss)  Recognized  in OCI (net  of taxes)** | ** ** | **Amount of  Gain (Loss)  Reclassified  into  Earnings** | ** ** |
| Derivatives  designated as hedges:                                                        |       |                                                                   |       |                                                           |       |   |   |   |   |   |   |
| Interest rate swap agreements (prior to de-designation  as hedges on March 25, 2009) |       | Interest  expense                                                      |       | $                                                              | (719       | ) | $ | (2,056 | ) | $ | (5,694 | ) | $ | (335 | ) |
| Forward exchange contracts                                                                |       | Payroll and related expenses and selling, general  and admin. expenses |       | —                                                         |       | — |   | (1,667 | ) | 26 |   |
| Total derivatives designated as hedges                                                    |       |                                                                   |       | $                                                              | (719       | ) | $ | (2,056 | ) | $ | (7,361 | ) | $ | (309 | ) |

 
| ** **                                  | ** ** | ** **                  | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|------------------------------------------------|------------|
| ** **                                  | ** ** | ** **                  | ** ** | **2009**                                       | ** ** | **2008** | ** ** |
| ** **                                  | ** ** | ** **                  | ** ** | **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)      |       | $                                              | (3,423     | ) | $ | — |   |
| Embedded  derivatives                       |       | Interest expense            |       | (275                                           | )          | (1,522 | ) |
| Interest rate  caps                         |       | Other income (expense)      |       | (23                                            | )          | 59 |   |
| Total  derivatives not designated as hedges |       |                        |       | $                                              | (3,721     | ) | $ | (1,463 | ) |

 

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**12.  Supplemental Cash Flow Information:**

 

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

 
| ** **                                      | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **March 31,**             | ** ** |
| ** **                                      | ** ** | **2009**                       | ** ** | **2008** | ** ** |
| Noncash  investing and financing activities:    |       |                           |       |   |   |
| Fair value of  assets acquired                  |       | $                              | —     |   | $ | 154,114 |   |
| Liabilities  assumed from acquisitions          |       | —                         |       | 154,588 |   |
| Issuance of  stock to JPM                       |       | 1,758                          |       | — |   |
| Adjustments to  acquired assets and liabilities |       | 1,378                          |       | — |   |
|                                                 |            |                                |            |  |  |  |  |

 

**13.  Commitments and Contingencies:**

 

*Purchase Commitments:*

 

TheCompany enters into noncancelable agreements with various telecommunicationscompanies, a foreign labor subcontractor in India and other vendors thatrequire minimum purchase commitments. These agreements expire between 2009 and2011. The following represents the future minimum payments, by year and in theaggregate, under noncancelable purchase commitments (amounts in thousands):

 

| 2009   |   | $      | 33,439       |   |
|--------|--------|--------|--------------|--------|
| 2010   |   | 29,898 |         |
| 2011   |   | 15,156 |         |
|   |   | $      |  78,493 |   |

 

TheCompany incurred $16.5 million and $16.1 million of expense in connection withthese purchase commitments for the three months ended March 31, 2009 and 2008, respectively.

 

*Forward-Flow Agreements:*

 

TheCompany has several fixed price agreements, or forward-flows, that obligate theCompany to purchase, on a monthly basis, portfolios of charged-off accountsreceivable meeting certain criteria. The forward flow agreements expire betweenMay 2009 and August 2012, and the terms of the agreements vary; somemay be terminated by the seller with either 30, 60 or 90 day written notice.The following represents the future forward-flow commitments by year (amounts inthousands):

 

| 2009   |   | $      | 31,860       |   |
|--------|--------|--------|--------------|--------|
| 2010   |   | 12,525 |         |
| 2011   |   | 2,980  |         |
| 2012   |   | 1,060  |         |
|   |   | $      |  48,425 |   |

 

*Litigation and Investigations:*

 

TheCompany is party, from time to time, to various legal proceedings, regulatoryinvestigations and tax examinations incidental to its business. The Companycontinually monitors these legal proceedings, regulatory investigations and taxexaminations to determine the impact and any required accruals.

 

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

 

*Litigation and Investigations (continued):*

 

FortWashington Flood:

 

In June 2001, thefirst floor of the Company’s Fort Washington, Pennsylvania, headquarters wasseverely damaged by a flood caused by remnants of Tropical Storm Allison. TheCompany subsequently decided to relocate its corporate headquarters to Horsham,Pennsylvania. The Company filed a lawsuit on August 14, 2001 in the Courtof Common Pleas, Montgomery County, Pennsylvania (Civil Action No. 01-15576)against the current landlord and the former landlord of the Fort Washingtonfacilities to terminate the leases and to obtain other relief. The landlord andthe former landlord filed counter-claims against the Company. The Companymaintains a reserve that it believes is adequate to address its exposure tothis matter and plans to continue to contest this matter.

 

U.S.Department of Justice:

 

On February 24, 2006,the U.S. Department of Justice alleged certain civil damages of approximately$5.0 million. The alleged damages relate to a matter the Company reported tofederal authorities and the client in 2003 involving three employees whoengaged in unauthorized student loan consolidations in connection with a clientcontract. The responsible employees were terminated at that time in 2003. TheCompany does not agree with the allegations regarding damages and has and willcontinue to engage in discussions with the Department of Justice in an effortto amicably resolve the matter. The Company expects that actual damagesincurred as a result of this incident, if any, will be covered by insurance.

 

TaxMatters:

 

In2004, the Company received notice of a proposed reassessment from a foreigntaxing authority relating to certain matters occurring from 1998 through 2001regarding one of its subsidiaries. In September 2006, the Company receivedthe formal notice of reassessment in the amount of $13.5 million including interestand penalties, converted as of March 31, 2009 ($14.6 million converted asof December 31, 2006), and in December 2006 the Company paid adeposit of $8.5 million. The Company maintains a reserve and believes it isadequate to address its exposure to this matter.

 

TheCompany is under audit by the State of Texas for alleged improper collection ofstate sales tax on collection services. Under Texas law, both client and debtorneed to be within the state to create a taxable transaction. The State of Texasissued an initial assessment, which was subsequently reduced to approximately$3.5 million after working with its clients, and was paid in March 2008.

 

AttorneysGeneral:

 

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

 

Other:

 

TheCompany is involved in other legal proceedings, regulatory investigations andtax examinations from time to time in the ordinary course of its business.Management believes that none of these other legal proceedings, regulatoryinvestigations or tax examinations will have a materially adverse effect on thefinancial condition or results of operations of the Company.

 

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**14.  Segment Reporting:**

 

As of March 31,2009, the Company’s business consisted of three operating divisions: ARM, CRMand Portfolio Management. The accounting policies of the segments are the sameas those described in note 2, “Accounting Policies.”

 

ARM provides accountsreceivable management services to consumer and commercial accounts for allmarket sectors including financial services, healthcare, retail and commercial,telecommunications, utilities, education, and government. ARM serves clients ofall sizes in local, regional and national markets in North America, Europe andAustralia through offices in North America, Asia, Europe and Australia. Inaddition to traditional accounts receivable collections, these services includedeveloping the client relationship beyond bad debt recovery and delinquencymanagement, and delivering cost-effective accounts receivable solutions to allmarket sectors. ARM had total assets, net of any intercompany balances, of $1.2billion at March 31, 2009 and December 31, 2008. ARM also provides accountsreceivable management services to Portfolio Management. ARM recorded revenue of$17.7 million and $22.9 million for intercompany services to PortfolioManagement for the three months ended March 31, 2009 and 2008,respectively.

 

The CRM division providescustomer relationship management services to clients in North America throughoffices in North America and Asia. CRM had total assets, net of anyintercompany balances, of $271.6 million and $283.3 million at March 31,2009 and December 31, 2008, respectively. CRM also provides certainservices to ARM. CRM recorded revenue of $964,000 and $197,000 for intercompanyservices to ARM for the three months ended March 31, 2009 and 2008,respectively.

 

Portfolio Managementpurchases and manages defaulted consumer accounts receivable from consumercreditors such as banks, finance companies, retail merchants, utilities,healthcare companies and other consumer oriented companies. PortfolioManagement had total assets, net of any intercompany balances, of $190.0 millionand $197.9 million at March 31, 2009 and December 31, 2008,respectively.

 

The following tablesrepresent the revenue, payroll and related expenses, selling, general, andadministrative expenses, restructuring charges and income from operations beforedepreciation and amortization for each segment:

** **
| ** **                                                   | ** ** | **For the Three Months Ended March 31, 2009** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                   | ** ** | **(amounts in thousands)**                         | ** ** |
| ** **                                                   | ** ** | ** **                                         | ** ** | ** ** | ** ** | **Portfolio** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                   | ** ** | **ARM**                                            | ** ** | **CRM** | ** ** | **Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenue                                                      |       | $                                                  | 311,281    |   | $ | 89,094 |   | $ | 20,389 |   | $ | (18,635 | ) | $ | 402,129 |   |
| Payroll and  related expenses                                |       | 143,763                                            |       | 61,478 |   | 1,488 |   | (964 | ) | 205,765 |   |
| Selling, general  and admin. expenses                        |       | 125,641                                            |       | 15,997 |   | 18,225 |   | (17,671 | ) | 142,192 |   |
| Restructuring  charges                                       |       | 239                                                |       | 178 |   | 26 |   | — |   | 443 |   |
| Income from  operations before depreciation and amortization |       | $                                                  | 41,638     |   | $ | 11,441 |   | $ | 650 |   | $ | — |   | $ | 53,729 |   |
| Purchases of  property and equipment                         |       | $                                                  | 5,483      |   | $ | 4,310 |   | $ | — |   | $ | — |   | $ | 9,793 |   |

 

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

** **
| ** **                                                   | ** ** | **For the Three Months Ended March 31, 2008** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                   | ** ** | **(amounts in thousands)**                         | ** ** |
| ** **                                                   | ** ** | ** **                                         | ** ** | ** ** | ** ** | **Portfolio** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                   | ** ** | **ARM**                                            | ** ** | **CRM** | ** ** | **Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenue                                                      |       | $                                                  | 273,191    |   | $ | 85,749 |   | $ | 28,700 |   | $ | (23,072 | ) | $ | 364,568 |   |
| Payroll and  related expenses                                |       | 130,342                                            |       | 64,181 |   | 2,093 |   | (197 | ) | 196,419 |   |
| Selling, general  and admin. expenses                        |       | 113,004                                            |       | 15,033 |   | 23,656 |   | (22,875 | ) | 128,818 |   |
| Restructuring  charges                                       |       | 2,524                                              |       | 117 |   | — |   | — |   | 2,641 |   |
| Income from  operations before depreciation and amortization |       | $                                                  | 27,321     |   | $ | 6,418 |   | $ | 2,951 |   | $ | — |   | $ | 36,690 |   |
| Purchases of  property and equipment                         |       | $                                                  | 4,037      |   | $ | 3,883 |   | $ | — |   | $ | — |   | $ | 7,920 |   |

 

**15.  Related Party Transactions:**

 

The Company has agreed topay OEP a management fee of $3.0 million per year, plus reimbursement ofexpenses, for management, advice and related services. During the three monthsended March 31, 2009, the Company incurred $750,000, relating to suchmanagement fees, which were included in selling, general and administrativeexpenses.

 

OEP is managed by OEPHolding Corporation, a wholly owned indirect subsidiary of JPM, and JPM is aclient of the Company. For the three months ended March 31, 2009 and 2008,the Company received fees for providing services to JPM of $3.4 million and$2.8 million, respectively. At March 31, 2009 and December 31, 2008,the Company had accounts receivable of $2,100 and $9,000, respectively, duefrom JPM. Additionally, affiliates of Citigroup are investors of the Company,and Citigroup is a client of the Company. For the three months ended March 31,2009 and 2008, the Company received fees for providing services to Citigroup of$15.4 million and $9.6 million, respectively. At March 31, 2009 and December 31,2008, the Company had accounts receivable of $2.6 million and $3.3 million,respectively, due from Citigroup.

 

On January 2, 2008,the Company acquired SST, a third-party consumer receivable servicer. Prior tothe acquisition, SST was a wholly owned subsidiary JPM. JPM also wholly ownsOEP, which has had a controlling interest in the Company since November 15,2006 (note 4).

 

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

 

**16.  Recently Issued and Proposed AccountingPronouncements:**

 

*FASB Statement of FinancialAccounting Standards No. 141 (revised 2007), “Business Combinations”:*

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS141(R)”), which replaces FASB SFAS No. 141, “Business Combinations” (“SFAS141”). While SFAS 141(R) retains the fundamental requirements of SFAS 141to use the purchase method for acquisitions, it broadens the scope to applythis method to all transactions in which one entity obtains control over one ormore other businesses. Among other things, SFAS 141(R) requires thatacquired businesses be recognized at their fair values at the date ofacquisition, acquisition-related costs to be recognized separately from theacquisition, contingent assets and liabilities to be recognized at fair valueat the date of acquisition and restructuring costs of the acquirer to berecognized separately from the acquisition. The Company adopted SFAS 141 (R) onJanuary 1, 2009 and it did not have a material impact on its financialcondition or results of operations.

 

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**16.  Recently Issued and Proposed AccountingPronouncements (continued):**

 

*FASB Statement of FinancialAccounting Standards No. 161, “Disclosures about Derivative Instrumentsand Hedging Activities — an amendment of FASB Statement No. 133”:*

 

In March 2008, theFASB issued SFAS No. 161, “Disclosures about Derivative Instruments andHedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”).This statement requires enhanced disclosures for derivative instruments andhedging activities that include how and why an entity uses derivatives, howthese instruments and the related hedged items are accounted for under SFAS 133and related interpretations, and how derivative instruments and related hedgeditems affect the entity’s financial position, results of operations and cashflows. The Company adopted SFAS 161 on January 1, 2009 and included the requireddisclosures in note 11.

 

*FASB Staff Position FAS 142-3, “**Determination of the Useful Life of Intangible Assets”:*

 

In April 2008, theFASB issued Staff Position 142-3, “Determination of the Useful Life ofIntangible Assets,” (“FSP 142-3”). FSP 142-3 amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under SFAS No. 142, “Goodwilland Other Intangible Assets”.  TheCompany adopted FSP 142-3 on January 1, 2009 and it did not have amaterial impact on its financial condition or results of operations.

 

*FASB Staff Position FAS 157-4, “Determining Fair Value When the Volume andLevel of Activity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly”:*

 

In April 2009, theFASB issued Staff Position FAS 157-4, “Determining Fair Value When the Volumeand Level of Activity for the Asset or Liability Have Significantly Decreasedand Identifying Transactions That Are Not Orderly,” (“FSP 157-4”). FSP 157-4provides additional guidance for determining fair value in accordance with SFAS157, emphasizing that even if the volume and level of activity for the asset orliability have significantly decreased, the fair value measurement remains thesame. FSP 157-4 also provides guidance for identifying circumstances whichindicate that a transaction is not orderly. FSP 157-4 is effective for the Company for the interim reporting periodended June 30, 2009, and it is not expected to have a material impact onits financial condition or results of operations.

 

*FASB Staff Position FAS 115-2 andFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”:*

 

In April 2009, theFASB issued Staff Position FAS 115-2 and FAS 124-2, “Recognition andPresentation of Other-Than-Temporary Impairments,” (“FSP 115-2”). FSP 115-2amends the other-than-temporary impairment guidance for debt securities bychanging the method of determining when impairment exists and the amount of animpairment charge recorded in earnings. FSP 115-2 is effective for the Company for the interim reporting periodended June 30, 2009, and it is not expected to have a material impact onits financial condition or results of operations.

 

*FASB Staff Position FAS 107-1 andAPB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”:*

 

In April 2009, theFASB issued Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures aboutFair Value of Financial Instruments”,” (“FSP 107-1”). FSP 107-1 requiresdisclosures about fair value of financial instruments for interim reportingperiods of publically traded companies, as is currently required in annualfinancial statements.  FSP 107-1 iseffective for the Company for the interim reporting period ended June 30,2009, and it is not expected to have a material impact on its financialcondition or results of operations.

 

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**17.  Subsidiary Guarantor Financial Information:**

 

The Notes are fully andunconditionally guaranteed, jointly and severally, by certain domestic whollyowned subsidiaries of the Company (collectively, the “Guarantors”).Non-guarantors consist of all non-domestic subsidiaries, certain subsidiariesengaged in financing the purchase of delinquent accounts receivable portfolios,portfolio joint ventures (which are engaged in portfolio financingtransactions) and certain immaterial subsidiaries (collectively, the “Non-Guarantors”).The following tables present the consolidating financial information for theCompany (Parent), the Guarantors and the Non-Guarantors, together witheliminations, as of and for the periods indicated.

 

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

 

**NCOGROUP, INC.**

**ConsolidatingBalance Sheet**

**March 31,2009**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                                           | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current assets:                                                                      |       |       |       |           |       |               |       |             |       |             |       |
| Cash and cash  equivalents                                                           |       | $          | —     |           | $          | 21,161             |       | $                | 19,902     |             | $          | — |   | $ | 41,063 |   |
| Accounts  receivable, trade, net of allowance for doubtful accounts                  |       | —     |       | 196,982        |       | 17,974             |       | —           |       | 214,956          |       |
| Purchased  accounts receivable, current portion                                      |       | —     |       | 25,862         |       | 40,260             |       | —           |       | 66,122           |       |
| Deferred income  taxes                                                               |       | 4,058      |       | 29,926         |       | 249                |       | —           |       | 34,233           |       |
| Prepaid expenses  and other current assets                                           |       | 1,598      |       | 37,507         |       | 11,332             |       | —           |       | 50,437           |       |
| Total current  assets                                                                |       | 5,656      |       | 311,438        |       | 89,717             |       | —           |       | 406,811          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Property and  equipment, net                                                         |       | —     |       | 99,727         |       | 35,269             |       | —           |       | 134,996          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Other assets:                                                                        |       |       |       |           |       |               |       |             |       |             |       |
| Goodwill                                                                             |       | —     |       | 498,912        |       | 62,867             |       | —           |       | 561,779          |       |
| Trade name, net  of accumulated amortization                                         |       | —     |       | 82,449         |       | 2,847              |       | —           |       | 85,296           |       |
| Customer  relationships and other intangible assets, net of accumulated amortization |       | —     |       | 293,996        |       | 23,167             |       | —           |       | 317,163          |       |
| Purchased  accounts receivable, net of current portion                               |       | —     |       | 50,290         |       | 60,702             |       | —           |       | 110,992          |       |
| Investment in  subsidiaries                                                          |       | 768,354    |       | 17,980         |       | —             |       | (786,334         | )          | —           |       |
| Other assets                                                                         |       | 15,254     |       | 54,432         |       | (22,821            | )          | —           |       | 46,865           |       |
| Total other  assets                                                                  |       | 783,608    |       | 998,059        |       | 126,762            |       | (786,334         | )          | 1,122,095        |       |
| Total assets                                                                         |       | $          | 789,264    |           | $          | 1,409,224          |       | $                | 251,748    |             | $          | (786,334 | ) | $ | 1,663,902 |   |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                       | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Current  liabilities:                                                                |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt,  current portion                                                     |       | $          | 6,054      |           | $          | 578                |       | $                | 20,319     |             | $          | — |   | $ | 26,951 |   |
| Intercompany  (receivable) loan                                                      |       | (74,679    | )          | (31,807        | )          | 106,486            |       | —           |       | —           |       |
| Income taxes  payable                                                                |       | —     |       | —         |       | 2,896              |       | —           |       | 2,896            |       |
| Accounts payable                                                                     |       | 750        |       | 13,559         |       | 913                |       | —           |       | 15,222           |       |
| Accrued expenses                                                                     |       | 37,659     |       | 75,498         |       | 7,968              |       | —           |       | 121,125          |       |
| Accrued  compensation and related expenses                                           |       | —     |       | 38,901         |       | 11,790             |       | —           |       | 50,691           |       |
| Deferred  revenue, current portion                                                   |       | —     |       | 38,260         |       | 340                |       | —           |       | 38,600           |       |
| Total current  liabilities                                                           |       | (30,216    | )          | 134,989        |       | 150,712            |       | —           |       | 255,485          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Long-term  liabilities:                                                              |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt,  net of current portion                                              |       | 590,133    |       | 389,767        |       | 8,770              |       | —           |       | 988,670          |       |
| Deferred income  taxes                                                               |       | (70,660    | )          | 131,972        |       | 6,757              |       | —           |       | 68,069           |       |
| Deferred  revenue, net of current portion                                            |       | —     |       | 5,781          |       | 59                 |       | —           |       | 5,840            |       |
| Other long-term  liabilities                                                         |       | 1,342      |       | 16,932         |       | 8,983              |       | —           |       | 27,257           |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Stockholders’  equity:                                                          |       |       |       |           |       |               |       |             |       |             |       |
| Total NCO  Group, Inc. stockholders’ equity                                |       | 298,665    |       | 729,783        |       | 56,551             |       | (786,334         | )          | 298,665          |       |
| Noncontrolling  interests                                                            |       | —     |       | —         |       | 19,916             |       | —           |       | 19,916           |       |
| Total  stockholders’ equity                                                     |       | 298,665    |       | 729,783        |       | 76,467             |       | (786,334         | )          | 318,581          |       |
| Total  liabilities and stockholders’ equity                                     |       | $          | 789,264    |           | $          | 1,409,224          |       | $                | 251,748    |             | $          | (786,334 | ) | $ | 1,663,902 |   |

 

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

 

**NCOGROUP, INC.**

**ConsolidatingBalance Sheet**

**December 31,2008**

**(Amountsin thousands)**

 
| ** **                                                                           | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current assets:                                                                      |       |       |       |           |       |               |       |             |       |             |       |
| Cash and cash  equivalents                                                           |       | $          | —     |           | $          | 15,334             |       | $                | 14,546     |             | $          | — |   | $ | 29,880 |   |
| Accounts  receivable, trade, net of allowance for doubtful accounts                  |       | —     |       | 210,520        |       | 8,129              |       | —           |       | 218,649          |       |
| Purchased  accounts receivable, current portion                                      |       | —     |       | 19,191         |       | 50,815             |       | —           |       | 70,006           |       |
| Deferred income  taxes                                                               |       | 4,057      |       | 29,908         |       | 251                |       | —           |       | 34,216           |       |
| Prepaid expenses  and other current assets                                           |       | 2,027      |       | 51,082         |       | 13,486             |       | —           |       | 66,595           |       |
| Total current  assets                                                                |       | 6,084      |       | 326,035        |       | 87,227             |       | —           |       | 419,346          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Property and  equipment, net                                                         |       | —     |       | 101,453        |       | 36,819             |       | —           |       | 138,272          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Other assets:                                                                        |       |       |       |           |       |               |       |             |       |             |       |
| Goodwill                                                                             |       | —     |       | 500,272        |       | 64,345             |       | —           |       | 564,617          |       |
| Trade name, net  of accumulated amortization                                         |       | —     |       | 82,619         |       | 2,847              |       | —           |       | 85,466           |       |
| Customer  relationships and other intangible assets, net of accumulated amortization |       | —     |       | 311,056        |       | 22,895             |       | —           |       | 333,951          |       |
| Purchased  accounts receivable, net of current portion                               |       | —     |       | 46,401         |       | 69,252             |       | —           |       | 115,653          |       |
| Investment in  subsidiaries                                                          |       | 828,883    |       | 24,771         |       | —             |       | (853,654         | )          | —           |       |
| Other assets                                                                         |       | 15,002     |       | 51,715         |       | (22,383            | )          | —           |       | 44,334           |       |
| Total other  assets                                                                  |       | 843,885    |       | 1,016,834      |       | 136,956            |       | (853,654         | )          | 1,144,021        |       |
| Total assets                                                                         |       | $          | 849,969    |           | $          | 1,444,322          |       | $                | 261,002    |             | $          | (853,654 | ) | $ | 1,701,639 |   |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                       | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Current  liabilities:                                                                |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt,  current portion                                                     |       | $          | 6,054      |           | $          | 594                |       | $                | 23,911     |             | $          | — |   | $ | 30,559 |   |
| Intercompany  (receivable) loan                                                      |       | (30,025    | )          | 10,812         |       | 98,188             |       | (78,975          | )          | —           |       |
| Income taxes  payable                                                                |       | —     |       | —         |       | 3,543              |       | —           |       | 3,543            |       |
| Accounts payable                                                                     |       | —     |       | 26,927         |       | (8,901             | )          | —           |       | 18,026           |       |
| Accrued expenses                                                                     |       | 30,440     |       | 89,444         |       | 8,590              |       | —           |       | 128,474          |       |
| Accrued  compensation and related expenses                                           |       | —     |       | 34,173         |       | 12,293             |       | —           |       | 46,466           |       |
| Deferred revenue,  current portion                                                   |       | —     |       | 40,392         |       | 339                |       | —           |       | 40,731           |       |
| Total current  liabilities                                                           |       | 6,469      |       | 202,342        |       | 137,963            |       | (78,975          | )          | 267,799          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Long-term  liabilities:                                                              |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt,  net of current portion                                              |       | 644,646    |       | 389,902        |       | 13,969             |       | —           |       | 1,048,517        |       |
| Deferred income  taxes                                                               |       | (63,432    | )          | 119,135        |       | 11,662             |       | —           |       | 67,365           |       |
| Deferred  revenue, net of current portion                                            |       | —     |       | 5,349          |       | 55                 |       | —           |       | 5,404            |       |
| Other long-term  liabilities                                                         |       | 1,300      |       | 16,863         |       | 10,602             |       | —           |       | 28,765           |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Stockholders’  equity:                                                          |       |       |       |           |       |               |       |             |       |             |       |
| Total NCO  Group, Inc. stockholders’ equity                                |       | 260,986    |       | 710,731        |       | 63,948             |       | (774,679         | )          | 260,986          |       |
| Noncontrolling  interests                                                            |       | —     |       | —         |       | 22,803             |       | —           |       | 22,803           |       |
| Total  stockholders’ equity                                                     |       | 260,986    |       | 710,731        |       | 86,751             |       | (774,679         | )          | 283,789          |       |
| Total  liabilities and stockholders’ equity                                     |       | $          | 849,969    |           | $          | 1,444,322          |       | $                | 261,002    |             | $          | (853,654 | ) | $ | 1,701,639 |   |

 

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

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

**For theThree Months Ended March 31, 2009**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                        | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                              |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                         |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                          |       | $          | —     |           | $          | 387,412            |       | $                | 60,604     |             | $          | (71,902 | ) | $ | 376,114 |   |
| Portfolio                                                         |       | —     |       | 11,640         |       | 14,014             |       | —           |       | 25,654           |       |
| Portfolio sales                                                   |       | —     |       | 83             |       | 278                |       | —           |       | 361              |       |
| Total revenues                                                    |       | —     |       | 399,135        |       | 74,896             |       | (71,902          | )          | 402,129          |       |
|                                                              |       |       |       |           |       |               |       |             |       |             |       |
| Operating costs  and expenses:                                    |       |       |       |           |       |               |       |             |       |             |       |
| Payroll and  related expenses                                     |       | 5          |       | 211,332        |       | 45,522             |       | (51,094          | )          | 205,765          |       |
| Selling, general  and administrative expenses                     |       | 1,084      |       | 133,686        |       | 28,230             |       | (20,808          | )          | 142,192          |       |
| Depreciation and  amortization expense                            |       | —     |       | 23,843         |       | 7,239              |       | —           |       | 31,082           |       |
| Restructuring  charges                                            |       | —     |       | 226            |       | 217                |       | —           |       | 443              |       |
| Total operating  costs and expenses                               |       | 1,089      |       | 369,087        |       | 81,208             |       | (71,902          | )          | 379,482          |       |
| (Loss) income  from operations                                    |       | (1,089     | )          | 30,048         |       | (6,312             | )          | —           |       | 22,647           |       |
|                                                              |       |       |       |           |       |               |       |             |       |             |       |
| Other income  (expense):                                          |       |       |       |           |       |               |       |             |       |             |       |
| Interest and  investment income                                   |       | (3,401     | )          | 3,766          |       | (23                | )          | —           |       | 342              |       |
| Interest expense                                                  |       | (15,956    | )          | (6,851         | )          | (303               | )          | —           |       | (23,110          | )          |
| Interest  (expense) income to affiliate                           |       | (666       | )          | 2,040          |       | (1,374             | )          | —           |       | —           |       |
| Subsidiary  income (loss)                                         |       | 10,995     |       | (4,572         | )          | —             |       | (6,423           | )          | —           |       |
| Other income  (expense), net                                      |       | —     |       | (3,704         | )          | —             |       | —           |       | (3,704           | )          |
|                                                              |       | (9,028     | )          | (9,321         | )          | (1,700             | )          | (6,423           | )          | (26,472          | )          |
| (Loss) income  before income taxes                                |       | (10,117    | )          | 20,727         |       | (8,012             | )          | (6,423           | )          | (3,825           | )          |
|                                                              |       |       |       |           |       |               |       |             |       |             |       |
| Income tax  (benefit) expense                                     |       | (8,008     | )          | 9,002          |       | (2,140             | )          | —           |       | (1,146           | )          |
|                                                              |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss)  income                                                |       | (2,109     | )          | 11,725         |       | (5,872             | )          | (6,423           | )          | (2,679           | )          |
|                                                              |       |       |       |           |       |               |       |             |       |             |       |
| Less: Net income  (loss) attributable to noncontrolling interests |       | —     |       | —         |       | (570               | )          | —           |       | (570             | )          |
|                                                              |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss)  income attributable to NCO Group, Inc.           |       | $          | (2,109     | )              | $          | 11,725             |       | $                | (5,302     | )                | $          | (6,423 | ) | $ | (2,109 | ) |

 

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

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

**For theThree Months Ended March 31, 2008**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                 | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                  |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                   |       | $          | —     |           | $          | 336,596            |       | $                | 85,563     |             | $          | (87,114 | ) | $ | 335,045 |   |
| Portfolio                                                  |       | —     |       | 8,942          |       | 19,758             |       | —           |       | 28,700           |       |
| Portfolio sales                                            |       | —     |       | 158            |       | 665                |       | —           |       | 823              |       |
| Total revenues                                             |       | —     |       | 345,696        |       | 105,986            |       | (87,114          | )          | 364,568          |       |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Operating costs  and expenses:                             |       |       |       |           |       |               |       |             |       |             |       |
| Payroll and  related expenses                              |       | 4          |       | 199,511        |       | 59,438             |       | (62,534          | )          | 196,419          |       |
| Selling, general  and administrative expenses              |       | 1,086      |       | 114,960        |       | 37,352             |       | (24,580          | )          | 128,818          |       |
| Depreciation and  amortization expense                     |       | —     |       | 20,436         |       | 7,350              |       | —           |       | 27,786           |       |
| Restructuring  charges                                     |       | —     |       | 1,932          |       | 709                |       | —           |       | 2,641            |       |
| Total operating  costs and expenses                        |       | 1,090      |       | 336,839        |       | 104,849            |       | (87,114          | )          | 355,664          |       |
| (Loss) income  from operations                             |       | (1,090     | )          | 8,857          |       | 1,137              |       | —           |       | 8,904            |       |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Other income  (expense):                                   |       |       |       |           |       |               |       |             |       |             |       |
| Interest and  investment income                            |       | (94        | )          | 295            |       | 79                 |       | —           |       | 280              |       |
| Interest expense                                           |       | (16,232    | )          | (6,097         | )          | (78                | )          | —           |       | (22,407          | )          |
| Interest  (expense) income to affiliate                    |       | (886       | )          | 2,497          |       | (1,611             | )          | —           |       | —           |       |
| Subsidiary  income (loss)                                  |       | 2,167      |       | (628           | )          | —             |       | (1,539           | )          | —           |       |
| Other income  (expense), net                               |       | —     |       | 418            |       | —             |       | —           |       | 418              |       |
|                                                       |       | (15,045    | )          | (3,515         | )          | (1,610             | )          | (1,539           | )          | (21,709          | )          |
| (Loss) income  before income taxes                         |       | (16,135    | )          | 5,342          |       | (473               | )          | (1,539           | )          | (12,805          | )          |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Income tax  (benefit) expense                              |       | (6,899     | )          | 2,982          |       | 21                 |       | —           |       | (3,896           | )          |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss)  income                                         |       | (9,236     | )          | 2,360          |       | (494               | )          | (1,539           | )          | (8,909           | )          |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Less: Net income  attributable to noncontrolling interests |       | —     |       | —         |       | 327                |       | —           |       | 327              |       |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss)  income attributable to NCO Group, Inc.    |       | $          | (9,236     | )              | $          | 2,360              |       | $                | (821       | )                | $          | (1,539 | ) | $ | (9,236 | ) |

 

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

 

**NCOGROUP, INC**

**ConsolidatingStatement of Cash Flows**

**For theThree Months Ended March 31, 2009**

**(Unaudited)**

**(Amountsin thousands)**

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

 

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

 

**NCOGROUP, INC**

**ConsolidatingStatement of Cash Flows**

**For theThree Months Ended March 31, 2008**

**(Unaudited)**

**(Amountsin thousands)**

** **
| ** **                                                         | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** |
| Net cash (used  in) provided by operating activities               |       | $          | (19,469    | )              | $          | 46,889             |       | $                | 2,230      |   | $ | 29,650 |   |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from  investing activities:                             |       |       |       |           |       |               |       |             |       |
| Purchases of  accounts receivable                                  |       | —     |       | (10,369        | )          | (28,999            | )          | (39,368          | )          |
| Collections  applied to principal of purchased accounts receivable |       | —     |       | (1,279         | )          | 23,720             |       | 22,441           |       |
| Proceeds from  sales and resales of purchased accounts receivable  |       | —     |       | 165            |       | 695                |       | 860              |       |
| Purchases of  property and equipment                               |       | —     |       | (10,510        | )          | 2,590              |       | (7,920           | )          |
| Proceeds from  bonds and notes receivable                          |       | —     |       | 290            |       | —             |       | 290              |       |
| Net cash paid  for acquisitions and related costs                  |       | —     |       | (323,880       | )          | 282                |       | (323,598         | )          |
| Net cash used in  investing activities                             |       | —     |       | (345,583       | )          | (1,712             | )          | (347,295         | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from  financing activities:                             |       |       |       |           |       |               |       |             |       |
| Repayment of  notes payable                                        |       | —     |       | (9             | )          | (11,094            | )          | (11,103          | )          |
| Borrowings under  notes payable                                    |       | —     |       | —         |       | 10,397             |       | 10,397           |       |
| Net borrowings  under revolving credit facility                    |       | 14,000     |       | —         |       | —             |       | 14,000           |       |
| Repayment of  borrowings under senior term loan                    |       | —     |       | (6,205         | )          | —             |       | (6,205           | )          |
| Borrowings under  senior term loan, net of fees                    |       | —     |       | 134,135        |       | —             |       | 134,135          |       |
| Borrowings under  (repayments of) intercompany notes payable       |       | (192,025   | )          | 183,919        |       | 8,106              |       | —           |       |
| Payment of fees  to obtain debt                                    |       | —     |       | (4,283         | )          | —             |       | (4,283           | )          |
| Investment in  subsidiary by noncontrolling interests              |       | —     |       |           |       | 1,816              |       | 1,816            |       |
| Return of  investment in subsidiary to noncontrolling interests    |       | —     |       | —         |       | (3,347             | )          | (3,347           | )          |
| Issuance of  stock                                                 |       | 210,000    |       | —         |       | —             |       | 210,000          |       |
| Payment of deemed  dividend to JPM                                 |       | (12,157    | )          | —         |       | —             |       | (12,157          | )          |
| Net cash  provided by financing activities                         |       | 19,818     |       | 307,557        |       | 5,878              |       | 333,253          |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Effect of  exchange rate on cash                                   |       | (349       | )          | —         |       | 13                 |       | (336             | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Net increase in  cash and cash equivalents                         |       | —     |       | 8,863          |       | 6,409              |       | 15,272           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash  equivalents at beginning of the period              |       | —     |       | 17,755         |       | 13,528             |       | 31,283           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash  equivalents at end of the period                    |       | $          | —     |           | $          | 26,618             |       | $                | 19,937     |   | $ | 46,555 |   |

 

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

 

***Forward-LookingStatements***

 

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

 

·                  the Company’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;

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

·                  expectedincreases in operating efficiencies;

·                  anticipated trendsin the business process outsourcing industry, referred to as BPO;

·                  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 pronouncements; and

·                  statements as totrends 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 similarexpressions are typically used to identify forward-looking statements. Thesestatements are based on assumptions and assessments made by the Company’smanagement in light of their experience and their perception of historicaltrends, current conditions, expected future developments and other factors theybelieve to be appropriate. Forward-looking statements are not guarantees of theCompany’s future performance and are subject to risks and uncertainties and maybe affected by various factors that may cause actual results, developments andbusiness decisions to differ materially from those in the forward-lookingstatements. Some of the factors that may cause actual results, developments andbusiness decisions to differ materially from those contemplated by suchforward-looking statements include:

 

·                  risks related tothe instability in the financial markets;

·                  risks related toadverse capital and credit market conditions;

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

·                  risks related tothe domestic and international economies;

·                  risks related toderivative transactions;

·                  risks related tothe Company’s ability to grow internally;

·                  risks related tothe Company’s ability to compete;

·                  risks related tothe Company’s substantial indebtedness and its ability to service such debt;

·                  risks related tothe Company’s ability to meet liquidity needs;

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

·                  risks associatedwith 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 related tothe timing of contracts;

·                  risks related topurchased accounts receivable;

·                  risks related topossible impairment of goodwill and other intangible assets;

·                  the Company’sdependence on senior management;

·                  risks related tosecurity and privacy breaches;

·                  risks related tounion organizing efforts at the Company’s facilities;

 

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·                  risks associatedwith technology;

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

·                  risks related tolitigation, regulatory investigations and tax examinations;

·                  risks related topast or possible future terrorist attacks;

·                  risks related tonatural disasters or the threat or outbreak of war or hostilities;

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

·                  risks related tothe Company’s international operations;

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

·                  risks related tocurrency fluctuations;

·                  risks related toreliance on independent telecommunications service providers;

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

·                  risks related topotential consumer resistance to outbound services;

·                  risks related tothe possible loss of key clients; and

·                  risks related tochanges in government regulations affecting the teleservices andtelecommunications industries.

 

The Company can give noassurance that any of the events anticipated by the forward-looking statementswill occur or, if any of them does, what impact they will have on our resultsof operations and financial condition. The Company disclaims any intent orobligation to publicly update or revise any forward-looking statements,regardless of whether new information becomes available, future developmentsoccur or otherwise. For additional information concerning the risks that affectus, see “Part II. Other Information - Item 1A. Risk Factors” of thisReport on Form 10-Q.

 

# ***Overview***

# *** ***

We are a holding companyand conduct substantially all of our business operations through oursubsidiaries. We are an international provider of business process outsourcingservices, referred to as BPO, primarily focused on accounts receivable management,referred to as ARM, and customer relationship management, referred to as CRM,serving a wide range of clients in North America and abroad through our globalnetwork of over 100 offices. We also purchase and collect past due consumeraccounts receivable from consumer creditors such as banks, finance companies,retail merchants, utilities, healthcare companies, and other consumer-orientedcompanies.

 

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

 

Changes to the economicconditions in the U.S., either positive or negative, could have a significantimpact on our business, including, but not limited to:

 

·                  fluctuationsin the volume of placements of accounts and the collectability of thoseaccounts for our ARM contingency fee based services;

·                  volumefluctuations in our ARM fixed fee based services;

·                  volumefluctuations in our CRM services; and,

·                  variabilityin the collectability of existing portfolios and the ability to purchaseportfolios at acceptable prices for our Portfolio Management business.

 

We have grown rapidly,through both acquisitions as well as internal growth. On January 2, 2008,we acquired Systems & Services Technologies, Inc., referred to asSST, a third-party consumer receivable servicer, for $18.4 million. On February 29,2008, we acquired Outsourcing Solutions Inc., referred to as OSI, a leadingprovider of 

 

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business processoutsourcing services, specializing primarily in accounts receivable managementservices, for $339.0 million.

 

Prior to the acquisitionof SST, on January 2, 2008, SST was a wholly owned subsidiary of JPMorganChase & Co., referred to as JPM. JPM also wholly owns One EquityPartners, referred to as OEP, which has had a controlling interest in us since November 15,2006. Financial Accounting Standards Board, referred to as FASB, Statement ofFinancial Accounting Standards No. 141, “Business Combinations,” referredto as SFAS 141, states that a “business combination” excludes transfers of netassets or exchanges of equity interests between entities under common control.SFAS 141 also states that transfers of net assets or exchanges of equityinterests between entities under common control should be accounted for similarto the pooling-of-interests method (“as-if pooling-of-interests”) in that theentity that receives the net assets or the equity interests initiallyrecognizes the assets and liabilities transferred at their carrying amounts inthe accounts of the transferring entity at the date of transfer. Because NCOand SST were under common control at the time of the SST acquisition, thetransfer of assets and liabilities of SST was accounted for at historical costin a manner similar to a pooling of interests.

 

We operate our businessin three segments: ARM, CRM and Portfolio Management.

 

***ThreeMonths Ended March 31, 2009 Compared to Three Months Ended March 31,2008***

 

*Revenue.* Revenue increased $37.6 million, or 10.3 percent, to $402.1 million forthe three months ended March 31, 2009, from $364.5 million for the threemonths ended March 31, 2008. For the three months ended March 31,2009, ARM, CRM, Portfolio Management accounted for $311.3 million, $89.1million and $20.4 million of revenue, respectively. Included in ARM’s revenuewas $17.7 million of intercompany revenue from Portfolio Management andincluded in CRM’s revenue was $964,000 of intercompany revenue from ARM, whichwas eliminated upon consolidation. For the three months ended March 31,2008, these divisions accounted for $273.2 million, $85.7 million and $28.7million of revenue, respectively. Included in ARM’s revenue was $22.9 millionof intercompany revenue from Portfolio Management and included in CRM’s revenuewas $197,000 of intercompany revenue from ARM, which was eliminated uponconsolidation.

 

ARM’s revenue increased $38.1million, or 13.9 percent, to $311.3 million for the three months ended March 31,2009, from $273.2 million for the three months ended March 31, 2008. Theincrease in ARM’s revenue was primarily attributable to a full quarter ofrevenue from the acquisition of OSI on February 29, 2008 as well asincreased volume from new and existing clients in both first party (earlystage) and contingent collections, partially offset by lower than expectedoverall collections and a $5.2 million decrease in fees from collectionservices performed for Portfolio Management.

 

Revenue for the CRM division increased$3.4 million, or 4.0 percent, to $89.1 million for the three months ended March 31,2009, from $85.7 million for the three months ended March 31, 2008. Theincrease in CRM’s revenue was primarily due to increased client volume relatedto the implementation of new contracts during 2008, partially offset by lowervolumes from certain existing clients due to the impact of the economy.

 

Portfolio Management’srevenue decreased $8.3 million, or 28.9 percent, to $20.4 million for the threemonths ended March 31, 2009, from $28.7 million for the three months endedMarch 31, 2008. Portfolio Management’s collections, excluding allportfolio sales, decreased $9.4 million, or 17.7 percent, to $43.8 million forthe three months ended March 31, 2009, from $53.2 million for the threemonths ended March 31, 2008. Portfolio Management’s revenue represented44.4 percent of collections for the three months ended March 31, 2009 ascompared to 51.6 percent of collections for the three months ended March 31,2008, excluding all portfolio sales. Such decreases were attributable to theeffect of the weaker collection environment during 2008 and continuing into2009. Revenue for the three months ended March 31, 2009 included a $93,000recovery of impairment charges previously recorded for a valuation allowanceagainst the carrying value of the portfolios, compared to an impairment of $6.2million for the three months ended March 31, 2008. Portfolio sales for thethree months ended March 31, 2009 were $361,000 compared to $823,000 forthe three months ended March 31, 2008.

 

*Payroll and relatedexpenses.*  Payroll and related expenses increased $9.4million to $205.8 million for the three months ended March 31, 2009, from$196.4 million for the three months ended March 31, 2008, but decreased asa percentage of revenue to 51.2 percent from 53.9 percent. The decrease inpayroll and related expenses as a 

 

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percentage of revenue was primarily attributable to thedeployment of additional staff in off-shore locations where labor costs arelower, as well as the impact of the integration efforts following theacquisition of OSI on February 29, 2008.

 

ARM’s payroll and related expensesincreased $13.5 million to $143.8 million for the three months ended March 31,2009, from $130.3 million for the three months ended March 31, 2008, butdecreased as a percentage of revenue to 46.2 percent from 47.7 percent. ARM’spayroll and related expenses decreased as a percentage of revenue primarily dueto the integration efforts following the acquisition of OSI on February 29,2008, as well as the deployment of additional staff in off-shore locationswhere labor costs are lower. Included in ARM’s payroll and related expenses forthe three months ended March 31, 2009 and 2008, was $964,000 and $197,000,respectively, of intercompany expense to CRM, for services provided to ARM.

 

CRM’s payroll and related expenses decreased $2.7million to $61.5 million for the three months ended March 31, 2009, from$64.2 million for the three months ended March 31, 2008, and decreased asa percentage of revenue to 69.0 percent from 74.8 percent. The decrease as apercentage of revenue was primarily a result of our continuing deployment ofadditional staff in off-shore locations where labor costs are lower.

 

Portfolio Management’s payroll and related expensesdecreased $600,000 to $1.5 million for the three months ended March 31,2009, from $2.1 million for the three months ended March 31, 2008.Portfolio Management outsources all of its collection services to ARM and,therefore, has a relatively small fixed payroll cost structure.

 

*Selling, generaland administrative expenses.*  Selling,general and administrative expenses increased $13.4 million to $142.2 millionfor the three months ended March 31, 2009, from $128.8 million for thethree months ended March 31, 2008, and increased slightly as a percentageof revenue to 35.4 percent from 35.3 percent.

 

ARM’s selling, general and administrative expensesincreased $12.6 million to $125.6 million for the three months ended March 31,2009, from $113.0 million for the three months ended March 31, 2008, butdecreased as a percentage of revenue to 40.3 percent from 41.4 percent. Thedecrease in ARM’s selling, general and administrative expenses as a percentageof revenue was primarily attributable to integration efforts following the OSIacquisition and leveraging our infrastructure over the larger revenue base.

 

CRM’s selling, general and administrative expensesincreased $1.0 million to $16.0 million for the three months ended March 31,2009, from $15.0 million for the three months ended March 31, 2008, andincreased slightly as a percentage of revenue to 18.0 percent from 17.5percent. The increase in CRM’s selling, general and administrative expenses asa percentage of revenue was primarily attributable to ramping up capacity dueto increasing client volumes, in advance of the offsetting revenue generation.

 

Portfolio Management’s selling, general andadministrative expenses decreased $5.5 million to $18.2 million for the threemonths ended March 31, 2009, from $23.7 million for the three months endedMarch 31, 2008, but increased as a percentage of revenue, excludingportfolio sales revenue and net impairment charges, to 91.4 percent from 69.5percent. The decrease in Portfolio Management’s selling, general andadministrative expenses resulted from a $5.2 million decrease in fees forcollection services provided by ARM. The increase as a percentage of revenuewas primarily due to the decrease in revenue due to lower collections. Includedin Portfolio Management’s selling, general and administrative expenses for thethree months ended March 31, 2009 and 2008, was $17.7 million and $22.9million, respectively, of intercompany expense to ARM, for services provided toPortfolio Management.

 

*Restructuringcharge. *During the three months ended March 31,2009, we incurred restructuring charges of $443,000 related to therestructuring of our legacy operations to streamline our cost structure, inconjunction with the OSI acquisition. The charges consisted primarily ofseverance costs. This compares to $2.6 million of restructuring charges for thethree months ended March 31, 2008.

 

*Depreciation and amortization.*  Depreciation and amortization increased to$31.1 million for the three months ended March 31, 2009, from $27.8million for the three months ended March 31, 2008. The increase wasprimarily attributable to amortization of the customer relationships resultingfrom the OSI acquisition.

 

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*Other income(expense).*  Interest expense increased slightly to $23.1million for the three months ended March 31, 2009, from $22.4 million forthe three months ended March 31, 2008. The increase was attributable toadditional borrowings under the senior credit facility primarily to fund aportion of the acquisition of OSI, partially offset by lower interest rates.Other income (expense), net for the three months ended March 31, 2009 and2008 included approximately $3.4 million of net losses and $176,000 of netgains, respectively, resulting from the settlement of certain foreign exchangecontracts.

 

*Incometax (benefit) expense*. For the three months ended March 31, 2009, the effective income taxrate decreased slightly to 30.0 percent from 30.4 percent for the three monthsended March 31, 2008.

 

***Liquidity and Capital Resources***

 

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

 

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

 

The capital and credit markets have recentlyexperienced significant volatility and if this continues, it is possible thatour ability to access the capital and credit markets may be limited. Currently,our senior notes and senior subordinated notes are assigned ratings by certainrating agencies. Changes in our business environment, operating results, cashflows, or financial position could impact the ratings assigned by these ratingagencies. Such significant volatility could also significantly affect the costsof borrowing, which could have a material impact on our financial condition andresults of operations. We are currently in compliance with all of our debtcovenants, but the future impact on the Company’s operations and financialprojections from the challenging economic and business environment may impactour ability to meet our debt covenants in the future.

 

In 2008, our nonrecourse lender significantlycurtailed their participation in our purchased accounts receivable business. Wefunded our purchases with available cash and borrowings under our revolvingcredit facility. In addition, acquisitions of businesses and earn-out paymentson previously acquired businesses were a significant use of cash andavailability on the revolving credit facility in 2008. We had $41.1 millionavailable for borrowing under our revolving credit facility at March 31,2009.

 

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

 

We have a senior credit facility, referred to as theCredit Facility, that consists of a term loan ($572.1 million outstanding as ofMarch 31, 2009) and a $100.0 million revolving credit facility ($43.5million outstanding as of March 31, 2009). Additionally, we have $165.0million of floating rate senior notes and $200.0 million 11.875 percent seniorsubordinated notes outstanding. As a result, we are significantly leveraged.

 

Due to the expected impact of the deterioratingeconomic conditions on our 2009 financial results, as well as financialcovenant ratio adjustments required under the Credit Facility in 2009,management became uncertain of its ability to remain in compliance with thefinancial covenants throughout 2009. Therefore, on March 25, 2009, weamended the Credit Facility to, among other things: (i) adjust the financialcovenants, including increasing maximum leverage ratios, decreasing minimuminterest coverage ratios, and increasing maximum capital expenditures; (ii) increasethe margin applicable to Base Rate (defined as the higher of the prime rate orthe federal funds rate) borrowings and LIBOR borrowings by 0.75 percent; (iii) createa minimum LIBOR of 2.50 percent; (iv) create a minimum Base Rate of LIBORplus 1.00 percent; (v) increase the letter-of-credit subfacility to $30.0 

 

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million; (vi) permit us under certaincircumstances to increase the size of our revolving credit facility by up to$50.0 million in the aggregate; and (vii) limit our ability to invest inpurchased accounts receivable under certain circumstances.

 

The amendment to the Credit Facility also permits usto repurchase our senior notes and senior subordinated notes out of the netcash proceeds of new equity issuances. We are aware that our senior notesand senior subordinated notes are currently trading at a substantial discountto their face amounts. We or our stockholders may from time to time seekto retire or purchase our outstanding notes through cash purchases and/orexchanges for equity securities, in open market purchases, privately negotiatedtransactions or otherwise. Our stockholders who acquire such notes mayseek to contribute them to us, for retirement, in exchange for the issuance ofadditional equity. The amounts involved may be material.

 

In February 2009, we issued 7,400 shares of Series APreferred Stock for merger consideration in connection with the acquisition ofSST.

 

On March 25, 2009, in connection with theamendment discussed above, we privately placed 147,447.3 shares of our Series B-1Preferred Stock and 20,973.7 shares of our Series B-2 Preferred Stock toOne Equity Partners, Michael J. Barrist and certain members of executivemanagement, and other co-investors for an aggregate purchase price of $40.0million. The proceeds were used to pay down $15.0 million of term loanborrowings, and the remainder, net of expenses, of $22.5 million was used torepay borrowings under our revolving credit facility.

 

The exclusivity agreement with our nonrecourse lenderexpires on June 30, 2009. We have begun to discuss future lendingfacilities for the purchase of accounts receivable with the existing lender andother third-party lenders. If we are unable to enter into a new nonrecoursecredit facility, we may have to use available cash or borrowings under ourrevolving credit facility to fund purchases of accounts receivable.

 

*Cash Flows from Operating Activities*.  Cash provided by operating activities was$40.2 million for the three months ended March 31, 2009, compared to $29.7million for the three months ended March 31, 2008. The increase in cashprovided by operating activities was primarily attributable to a decrease indeferred income taxes of $1.1 million for the three months ended March 31,2009 compared to a decrease of $17.8 million in the prior year period, as wellas a decrease in other assets of $17.1 million for the three months ended March 31,2009 compared to a decrease of $8.9 million in the prior year period. Theseitems were offset in part by an increase in accounts payable and accruedexpenses of $12.6 million for the three months ended March 31, 2009compared to a decrease of $11.0 million in the prior year period.

 

*Cash Flows from InvestingActivities.*  Cash usedin investing activities was $458,000 for the three months ended March 31,2009, compared to $347.3 million for the three months ended March 31,2008. The decrease in cash used in investing activities was primarilyattributable to net cash paid for acquisitions and related costs of $323.6million during the three months ended March 31, 2008, primarily incurredin connection with the acquisition of OSI on February 29, 2008.

 

*Cash Flows from FinancingActivities.*  Cash usedin financing activities was $28.2 million for the three months ended March 31,2009, compared to cash provided by financing activities of $333.3 million forthe three months ended March 31, 2008. The cash used in financingactivities was due primarily to the repayments of borrowings under our Credit Facilitytotaling $54.5 million, offset in part by proceeds from the issuance of $40.0million of stock that was used to fund the repayments, as well as repayments ofnonrecourse notes payable.

 

*Senior Credit Facility*.We have a senior credit facility (“Credit Facility”) with a syndicate offinancial institutions that consists of a term loan and a $100.0 millionrevolving credit facility. We are 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. We are also required tomake annual prepayments of 50 percent, 25 percent or zero percent of its excessannual cash flow, based on our leverage ratio. The revolving credit facilityrequires no minimum principal payments until its maturity in November 2011.At March 31, 2009, the balance outstanding on the term loan was $572.1million and the balance outstanding on the revolving credit facility was $43.5million. The availability of the revolving credit facility is reduced by anyunused letters of credit ($15.4 million at March 31, 2009). As of March 31,2009, we had $41.1 million of remaining availability under the revolving creditfacility.

 

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Borrowings under theCredit Facility are collateralized by substantially all of our assets. TheCredit Facility contains certain financial and other covenants such as maintaininga maximum leverage ratio and a minimum interest coverage ratio, and includesrestrictions on, among other things, acquisitions, the incurrence of additionaldebt, investments, investments in purchased accounts receivable, disposition ofassets, liens and dividends and other distributions. If an event of default,such as failure to comply with covenants or change of control, were to occurunder the Credit Facility, the lenders would be entitled to declare all amountsoutstanding under it immediately due and payable and foreclose on the pledgedassets. We were in compliance with all required financial covenants and we werenot aware of any events of default as of March 31, 2009.

 

*SeniorNotes 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 areunsecured senior obligations and are senior in right of payment to all existingand future senior subordinated indebtedness, including the Senior SubordinatedNotes, and all future subordinated indebtedness. The Senior Notes bear interestat an annual rate equal to LIBOR plus 4.875 percent, reset quarterly. We mayredeem the Senior Notes, in whole or in part, at any time at varying redemptionprices depending on the redemption date, plus accrued and unpaid interest.

 

The Senior SubordinatedNotes are unsecured senior subordinated obligations and are subordinated inright of payment to all existing and future senior indebtedness, including theSenior Notes and borrowings under the Credit Facility. We may redeem the SeniorSubordinated Notes, in whole or in part, at any time on or after November 15,2010 at varying redemption prices depending on the redemption date, plusaccrued and unpaid interest. We also may redeem some or all of the SeniorSubordinated Notes at any time prior to November 15, 2010, at a redemptionprice equal to 100 percent of the principal amount of the respective Notes tobe redeemed, plus accrued and unpaid interest and an additional premium.Finally, subject to certain conditions, we may redeem up to 35 percent of theaggregate principal amount of the Senior Subordinated Notes at any time priorto November 15, 2009 with the net proceeds of a sale of our capital stockat a redemption price equal to 100 percent of the principal amount of therespective Notes to be redeemed, plus accrued and unpaid interest and anadditional premium.

 

The indentures governingthe Notes contain a number of covenants that limit our and our restrictedsubsidiaries’ ability, among other things, to: incur additional indebtednessand issue certain preferred stock, pay certain dividends, acquire shares ofcapital stock, make payments on subordinated debt or make investments, placelimitations on distributions from restricted subsidiaries, issue or sell stockof restricted subsidiaries, guarantee indebtedness, sell or exchange assets,enter into transactions with affiliates, create certain liens, engage in unrelatedbusinesses, and consolidate, merge or transfer all or substantially all of ourassets and the assets of our subsidiaries on a consolidated basis. In addition,upon a change of control, we are required to offer to repurchase all of theNotes then outstanding, at a purchase price equal to 101 percent of theirprincipal amount, plus any accrued interest to the date of repurchase.

 

Upon certain events ofdefault, the trustee or the holders of at least 25 percent in the aggregateprincipal amount of the notes, then outstanding, may, and the trustee at therequest of the holders will, declare the principal of, premium, if any, andaccrued interest on the notes to be immediately due and payable. In the event acourt enters a decree or order for relief against us in an involuntary caseunder any applicable bankruptcy, insolvency or other similar law now orhereafter in effect, the court appoints a receiver, liquidator, assignee,custodian, trustee, sequestrator or similar official or for all or substantiallyall of our property and assets or the winding up or liquidation of our affairsand, in each case, such decree or order remains unstayed and in effect for aperiod of 60 consecutive days, the principal of, premium, if any, and accruedinterest on the notes then outstanding will automatically become and beimmediately due and payable. Additionally, if we or any subsidiary guarantorcommence a voluntary case under any applicable bankruptcy, insolvency or othersimilar law now or hereafter in effect, or consent to the entry of an order forrelief in an involuntary case under any such law, consent to the appointment ofor taking possession by a receiver, liquidator, assignee, custodian, trustee,sequestrator or similar official or for all or substantially all of ourproperty and assets or substantially all of the property and assets of asignificant subsidiary (as defined in the 

 

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indentures) or effect anygeneral assignment for the benefit of creditors, the principal of, premium, ifany, and accrued interest on the notes then outstanding will automaticallybecome and be immediately due and payable.

 

*NonrecourseCredit Facility.*  Wehave a nonrecourse credit facility and an exclusivity agreement, collectivelyreferred to as the Nonrecourse Agreement. The Nonrecourse Agreement providesthat all purchases of accounts receivable by us with a purchase price in excessof $1.0 million are first offered to the lender for financing at itsdiscretion. If the lender chooses to participate in the financing of aportfolio of accounts receivable, the financing may be structured, depending onthe size and nature of the portfolio to be purchased, either as a borrowingarrangement or under various equity sharing arrangements. The lender willfinance non-equity borrowings with floating interest at an annual rate equal toLIBOR plus 2.50 percent, or as negotiated. These borrowings are nonrecourse tous 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 our initial investment, including interest. We may terminate theNonrecourse Agreement for a cost of $250,000 for each month remaining under theNonrecourse Agreement from the date of termination until June 30, 2009,when the Nonrecourse Agreement expires. Total debt outstanding under thisfacility as of March 31, 2009 was $28.5 million, including $3.2 million ofaccrued residual interest. As of March 31, 2009, we were in compliance withall required covenants.

 

Borrowings under theNonrecourse Agreement are nonrecourse to us, except for the assets within theentities established in connection with the financing agreement. TheNonrecourse Agreement contains a collections performance requirement, amongother covenants, that, if not met, provides for cross-collateralization withany other portfolios financed through the agreement, in addition to otherremedies.

 

The exclusivity agreementto the Nonrecourse Agreement expires on June 30, 2009. We have begun todiscuss future lending facilities for the purchase of accounts receivable withthe existing lender and other third-party lenders. If we are unable to enterinto a new nonrecourse credit facility, we may have to use available cash or borrowingsunder our revolving credit facility to fund purchases of accounts receivable.

 

*ContractualObligations.* There have been no material changes, outside theordinary course of our business, to our contractual obligations as of December 31,2008 as reported in our Annual Report on Form 10-K for the year ended December 31,2008.

 

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***Market Risk***

 

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

 

*Foreign Currency Risk.* Foreign currency exposures arise fromtransactions denominated in a currency other than the functional currency andfrom foreign denominated revenue and profit translated into U.S. dollars. Theprimary currencies to which we are exposed include the Canadian dollar, thePhilippine peso, the British pound and the Australian dollar. Due to the sizeof the Canadian and Philippine operations, we currently use forward exchangecontracts to limit potential losses in earnings or cash flows from adverseforeign currency exchange rate movements. These contracts are entered into toprotect against the risk that the eventual cash flows resulting from suchcontracts will be adversely affected by changes in exchange rates. Ourobjective is to maintain economically balanced currency risk managementstrategies that provide adequate downside protection. During the three monthsended March 31, 2009, we continued to see volatility of the U.S. dollar,primarily as it relates to the Canadian dollar and the Philippine peso. We believethis trend may continue, and if so, it could have a negative impact on ourfuture results of operations.

 

*Interest Rate Risk. *At March 31, 2009, wehad $809.1 million in outstanding variable rate borrowings. A material changein interest rates could adversely affect our operating results and cash flows.A 25 basis-point increase in interest rates could increase our annual interestexpense by $125,000 for each $50 million of variable debt outstanding for theentire year. We currently use interest rate swap agreements and interest ratecap agreements in a effort to limit potential losses from adverse interest ratechanges.

 

***CriticalAccounting Policies and Estimates***

* *

*General.* The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand the accompanying notes. Actual results could differ from those estimates.We believe the following accounting policies and estimates are the mostcritical and could have the most impact on our results of operations: goodwill,other intangible assets and purchase accounting, revenue recognition forpurchased accounts receivable, income taxes, and allowance for doubtfulaccounts. These are described in note 2 to our 2008 financial statementsincluded in our Annual Report on Form 10-K for the year ended December 31,2008. During the three months ended March 31, 2009, we did not make any materialchanges to our estimates or methods by which estimates are derived with regardto our critical accounting policies.

 

***Recently Issued Accounting Pronouncements***

 

For a discussion ofrecently issued accounting pronouncements, see note 16 in our Notes toConsolidated Financial Statements included in this Form 10-Q.

 

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**Item 3.        Quantitative and Qualitative Disclosures about Market Risk**

 

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

 

**Item 4T.****     Controls and Procedures**

##  

Our management, with the participation of our chiefexecutive officer and chief financial officer, conducted an evaluation of theeffectiveness of our disclosure controls and procedures, as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e), as of March 31, 2009. Basedon that evaluation, our chief executive officer and chief financial officerconcluded that, as of the end of the period covered by this Report, ourdisclosure controls and procedures were effective in reaching a reasonablelevel of assurance that the (i) information required to be disclosed by usin the reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms and (ii) informationrequired to be disclosed by us in the reports that we file or submit under theExchange Act is accumulated and communicated to our management including ourprincipal executive and principal financial officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding requireddisclosure.

 

Our management, with the participation of our chiefexecutive officer and chief financial officer, also conducted an evaluation ofour internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and15d-15(f), to determine whether any changes occurred during the quarter ended March 31,2009, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting. Based on thatevaluation, there were no such changes during the quarter ended March 31,2009.

 

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

 

**Part II.       Other Information**

 

**Item 1.        Legal Proceedings**

 

TheCompany is party, from time to time, to various legal proceedings, regulatoryinvestigations and tax examinations incidental to its business. The Companycontinually monitors these legal proceedings, regulatory investigations and taxexaminations to determine the impact and any required accruals.

 

FortWashington Flood:

 

In June 2001, thefirst floor of the Company’s Fort Washington, Pennsylvania, headquarters wasseverely damaged by a flood caused by remnants of Tropical Storm Allison. TheCompany subsequently decided to relocate its corporate headquarters to Horsham,Pennsylvania. The Company filed a lawsuit on August 14, 2001 in the Courtof Common Pleas, Montgomery County, Pennsylvania (Civil Action No. 01-15576)against the current landlord and the former landlord of the Fort Washingtonfacilities to terminate the leases and to obtain other relief. The landlord andthe former landlord filed counter-claims against the Company. The Companymaintains a reserve that it believes is adequate to address its exposure tothis matter and plans to continue to contest this matter.

 

U.S.Department of Justice:

 

On February 24,2006, the U.S. Department of Justice alleged certain civil damages ofapproximately $5.0 million. The alleged damages relate to a matter the Companyreported to federal authorities and the client in 2003 involving threeemployees who engaged in unauthorized student loan consolidations in connectionwith a client contract. The responsible employees were terminated at that timein 2003. The Company does not agree with the allegations regarding damages andhas and will continue to engage in discussions with the Department of Justicein an effort to 

 

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amicably resolve thematter. The Company expects that actual damages incurred as a result of thisincident, if any, will be covered by insurance.

 

TaxMatters:

 

In2004, the Company received notice of a proposed reassessment from a foreigntaxing authority relating to certain matters occurring from 1998 through 2001regarding one of its subsidiaries. In September 2006, the Company receivedthe formal notice of reassessment in the amount of $13.5 million includinginterest and penalties, converted as of March 31, 2009 ($14.6 million convertedas of December 31, 2006), and in December 2006 the Company paid adeposit of $8.5 million. The Company maintains a reserve and believes it isadequate to address its exposure to this matter.

 

TheCompany is under audit by the State of Texas for alleged improper collection ofstate sales tax on collection services. Under Texas law, both client and debtorneed to be within the state to create a taxable transaction. The State of Texasissued an initial assessment, which was subsequently reduced to approximately$3.5 million after working with its clients, and was paid in March 2008.

 

AttorneysGeneral:

 

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

 

Other:

 

TheCompany is involved in other legal proceedings, regulatory investigations andtax examinations from time to time in the ordinary course of its business.Management believes that none of these other legal proceedings, regulatoryinvestigations or tax examinations will have a materially adverse effect on thefinancial condition or results of operations of the Company.

 

**Item 1A.     Risk Factors**

 

Inaddition to the other information set forth in this Quarterly Report on Form 10-Q,you should carefully consider the factors discussed in Part I, “Item1A. Risk Factors” in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2008, referred toas the “2008 Form 10-K” in this filing, which could materially affect ourbusiness, financial condition or future results. The risk factors in our 2008 Form 10-Khave not materially changed. The risks described in our 2008 Form 10-K arenot the only risks we face. Additional risks and uncertainties not currentlyknown to us or that we currently deem to be immaterial also may materiallyadversely affect our business, financial condition and/or operating results.

 

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

 

Previously reported

 

**Item 3.        Defaults Upon Senior Securities**

 

None

 

**Item 4.        Submission of Matters to a Vote of Security Holders**

 

None

 

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**Item 5.        Other Information**

 

(a)               None

 

(b)              Not applicable

 

**Item 6.        Exhibits**

 
| 10.1   |   | Second Amendment to  Credit Agreement dates as of March 25, 2009 by and among the Company,  NCO Financial Systems, Inc., certain guarantors under the Credit  Agreement, Citizens Bank of Pennsylvania as the administrative agent,  Citizens Bank of Pennsylvania as sole issuing bank and certain lenders  (incorporated by reference to Exhibits filed with NCO Group, Inc.’s  Current Report on Form 8-K filed on March 26, 2009 (file no.  333-150885). |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 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.                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 99.1   |   | Form of Stock  Subscription Agreement (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Current Report on Form 8-K filed on March 26,  2009 (file no. 333-150885).                                                                                                                                                                                                                                                                             |

 

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**Signatures**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                          |   | NCO Group, Inc. |
|-------------------------------|--------|----------------------|
|                          |   |                 |   |
|                          |   |                 |   |
| Date:  May 15, 2009 |   | By:                  | /s/ Michael J.  Barrist |
|                          |   |                 | Michael J. Barrist |
|                          |   |                 | Chairman of the Board,  President |
|                          |   |                 | and Chief Executive  Officer |
|                          |   |                 | (principal executive  officer) |
|                          |   |                 |   |
|                          |   |                 |   |
| Date:  May 15, 2009 |   | By:                  | /s/ John R.  Schwab |
|                          |   |                 | John R. Schwab |
|                          |   |                 | Executive Vice  President, Finance |
|                          |   |                 | and Chief Financial  Officer |
|                          |   |                 | (principal financial  and accounting officer) |

 

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Exhibit Index

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.1                 |       | Second Amendment to  Credit Agreement dates as of March 25, 2009 by and among the Company,  NCO Financial Systems, Inc., certain guarantors under the Credit  Agreement, Citizens Bank of Pennsylvania as the administrative agent,  Citizens Bank of Pennsylvania as sole issuing bank and certain lenders  (incorporated by reference to Exhibits filed with NCO Group, Inc.’s  Current Report on Form 8-K filed on March 26, 2009 (file no.  333-150885). |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 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.                                                                                                                                                                                                                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 99.1                 |       | Form of Stock  Subscription Agreement (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Current Report on Form 8-K filed on March 26,  2009 (file no. 333-150885).                                                                                                                                                                                                                                                                             |

 

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