Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-Q**

 

**(Markone)**

 
| **x**                                                                                                                                                                                                                      | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                 |
| **For the  quarterly period ended September 30, 2009**                                                                                                                                                                |
| ** **                                                                                                                                                                                                                 |
| **or**                                                                                                                                                                                                                     |
| ** **                                                                                                                                                                                                                 |
| **o**                                                                                                                                                                                                                      | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
| ** **                                                                                                                                                                                                                 |
| **For the  transition 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) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **507  Prudential Road, Horsham, Pennsylvania**                 | ** ** | **19044**                             |
| (Address of  principal executive offices)                       |       | (Zip Code)                            |

 

**215-441-3000**

(Registrant’stelephone number, including area code)

 

**NotApplicable**

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

 

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

 

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

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. 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 ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

The number ofshares outstanding of each of the issuer’s classes of common stock as of November 12,2009 was: 2,960,847 shares of Class A common stock, $0.01 par value and399,814 shares of Class L common stock, $0.01 par value.

 

 

 

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**NCOGROUP, INC.**

 

**INDEX**

 
| ** **                                    | ** **                                                                                             | **PAGE** |
|-----------------------------------------------|--------------------------------------------------------------------------------------------------------|----------|
|                                          |                                                                                                   |     |
| **PART I  — FINANCIAL INFORMATION** |                                                                                                   |
|                                          |                                                                                                   |     |
| Item 1.                                       | FINANCIAL STATEMENTS (Unaudited)                                                                       |     |
|                                          |                                                                                                   |     |
|                                          | Consolidated  Balance Sheets - September 30, 2009 and December 31, 2008                      | 1        |
|                                          |                                                                                                   |     |
|                                          | Consolidated  Statements of Operations - Three and Nine Months Ended September 30,  2009 and 2008 | 2        |
|                                          |                                                                                                   |     |
|                                          | Consolidated  Statements of Cash Flows - Nine Months Ended September 30, 2009 and 2008            | 3        |
|                                          |                                                                                                   |     |
|                                          | Notes to Consolidated Financial Statements                                                             | 4        |
|                                          |                                                                                                   |     |
| Item 2.                                       | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS            | 34       |
|                                          |                                                                                                   |     |
| Item 3.                                       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                            | 44       |
|                                          |                                                                                                   |     |
| Item 4T.                                      | CONTROLS AND  PROCEDURES                                                                               | 44       |
|                                          |                                                                                                   |     |
| **PART II — OTHER  INFORMATION**    |                                                                                                   |
|                                          |                                                                                                   |     |
| Item 1.                                       | LEGAL PROCEEDINGS                                                                                      | 44       |
|                                          |                                                                                                   |     |
| Item 1A.                                      | RISK FACTORS                                                                                           | 45       |
|                                          |                                                                                                   |     |
| Item 2.                                       | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                           | 45       |
|                                          |                                                                                                   |     |
| Item 3.                                       | DEFAULTS  UPON SENIOR SECURITIES                                                                       | 45       |
|                                          |                                                                                                   |     |
| Item 4.                                       | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                   | 46       |
|                                          |                                                                                                   |     |
| Item 5.                                       | OTHER INFORMATION                                                                                      | 46       |
|                                          |                                                                                                   |     |
| Item 6.                                       | EXHIBITS                                                                                               | 46       |
|                                          |                                                                                                   |     |
| SIGNATURES                                    | 47                                                                                                     |

 

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**Part I.  Financial Information**

**Item1.  Financial Statements**

**NCOGROUP, INC.**

**Consolidated Balance Sheets**

**(Unaudited)**

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

** **
| ** **                                                                                                                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                   | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                                                                   | ** ** | ** **             | ** ** | ** **            | ** ** |
|                                                                                                                                         |       |                   |       |                  |       |
| Current  assets:                                                                                                                             |       |                   |       |                  |       |
| Cash  and cash equivalents                                                                                                                   |       | $                      | 50,438     |                  | $          | 29,880 |   |
| Accounts  receivable, trade, net of allowance for doubtful accounts of $5,850 and  $5,008, respectively                                      |       | 193,471                |       | 210,043               |       |
| Purchased  accounts receivable, current portion, net of allowance for impairment of  $139,062 and $123,804, respectively                     |       | 55,194                 |       | 70,006                |       |
| Deferred  income taxes                                                                                                                       |       | 31,796                 |       | 34,216                |       |
| Prepaid  expenses and other current assets                                                                                                   |       | 54,774                 |       | 63,197                |       |
| Assets  held for sale, current portion                                                                                                       |       | 9,444                  |       | 12,004                |       |
| Total  current assets                                                                                                                        |       | 395,117                |       | 419,346               |       |
|                                                                                                                                         |       |                   |       |                  |       |
| Funds  held on behalf of clients (note 9)                                                                                                    |       |                   |       |                  |       |
|                                                                                                                                         |       |                   |       |                  |       |
| Property  and equipment, net                                                                                                                 |       | 127,673                |       | 137,896               |       |
|                                                                                                                                         |       |                   |       |                  |       |
| Other  assets:                                                                                                                               |       |                   |       |                  |       |
| Goodwill                                                                                                                                     |       | 561,688                |       | 564,617               |       |
| Trade  name, net of accumulated amortization                                                                                                 |       | 84,956                 |       | 85,466                |       |
| Customer  relationships and other intangible assets,net of accumulated amortization                                                          |       | 280,727                |       | 327,633               |       |
| Purchased  accounts receivable, net of current portion                                                                                       |       | 99,374                 |       | 115,653               |       |
| Other  assets                                                                                                                                |       | 44,501                 |       | 44,264                |       |
| Assets  held for sale, net of current portion                                                                                                |       | 6,047                  |       | 6,764                 |       |
| Total  other assets                                                                                                                          |       | 1,077,293              |       | 1,144,397             |       |
| Total  assets                                                                                                                                |       | $                      | 1,600,083  |                  | $          | 1,701,639 |   |
|                                                                                                                                         |       |                   |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                               | ** ** | ** **             | ** ** | ** **            | ** ** |
|                                                                                                                                         |       |                   |       |                  |       |
| Current  liabilities:                                                                                                                        |       |                   |       |                  |       |
| Long-term  debt, current portion                                                                                                             |       | $                      | 20,817     |                  | $          | 30,559 |   |
| Income  taxes payable                                                                                                                        |       | 681                    |       | 3,543                 |       |
| Accounts  payable                                                                                                                            |       | 17,350                 |       | 18,018                |       |
| Accrued  expenses                                                                                                                            |       | 109,434                |       | 127,722               |       |
| Accrued  compensation and related expenses                                                                                                   |       | 47,633                 |       | 46,252                |       |
| Deferred  revenue, current portion                                                                                                           |       | 37,286                 |       | 40,731                |       |
| Liabilities  held for sale, current portion                                                                                                  |       | 2,458                  |       | 974                   |       |
| Total  current liabilities                                                                                                                   |       | 235,659                |       | 267,799               |       |
|                                                                                                                                         |       |                   |       |                  |       |
| Funds  held on behalf of clients (note 9)                                                                                                    |       |                   |       |                  |       |
|                                                                                                                                         |       |                   |       |                  |       |
| Long-term  liabilities:                                                                                                                      |       |                   |       |                  |       |
| Long-term  debt, net of current portion                                                                                                      |       | 972,831                |       | 1,048,517             |       |
| Deferred  income taxes                                                                                                                       |       | 59,560                 |       | 60,407                |       |
| Deferred  revenue, net of current portion                                                                                                    |       | 4,051                  |       | 5,285                 |       |
| Other  long-term liabilities                                                                                                                 |       | 33,576                 |       | 32,534                |       |
| Liabilities  held for sale, net of current portion                                                                                           |       | 4,217                  |       | 3,308                 |       |
|                                                                                                                                         |       |                   |       |                  |       |
| Commitments  and contingencies (note 17)                                                                                                     |       |                   |       |                  |       |
|                                                                                                                                         |       |                   |       |                  |       |
| Stockholders’  equity:                                                                                                                  |       |                   |       |                  |       |
| Preferred  stock, par value $0.01 per share, 7,500 shares authorized, 3,044 and 2,573  shares issued and outstanding, respectively           |       | 30                     |       | 26                    |       |
| Class L  common stock, par value $0.01 per share, 800 shares authorized,400 and 401 shares issued and  outstanding, respectively        |       | 4                      |       | 4                     |       |
| Class A  common stock, par value $0.01 per share, 4,500 shares authorized, 2,961 and  2,937 shares issued and outstanding, respectively |       | 30                     |       | 29                    |       |
| Additional  paid-in capital                                                                                                                  |       | 763,633                |       | 720,955               |       |
| Accumulated  other comprehensive loss                                                                                                        |       | (5,246                 | )          | (10,007               | )          |
| Accumulated  deficit                                                                                                                         |       | (481,950               | )          | (450,021              | )          |
| Total  NCO Group, Inc. stockholders’ equity                                                                                        |       | 276,501                |       | 260,986               |       |
| Noncontrolling  interests                                                                                                                    |       | 13,688                 |       | 22,803                |       |
| Total  stockholders’ equity                                                                                                             |       | 290,189                |       | 283,789               |       |
| Total  liabilities and stockholders’ equity                                                                                             |       | $                      | 1,600,083  |                  | $          | 1,701,639 |   |

 

See accompanyingnotes.

 

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**NCOGROUP, INC.**

**Consolidated Statements of Operations**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                               | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|----------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                               | ** ** | **September 30,**         | ** ** | **September 30,**        | ** ** |
| ** **                                               | ** ** | **2009**                       | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                     |       |                           |       |                          |       |   |   |   |   |
| Revenues:                                                |       |                           |       |                          |       |   |   |   |   |
| Services                                                 |       | $                              | 373,948    |                          | $          | 382,781 |   | $ | 1,111,830 |   | $ | 1,114,379 |   |
| Portfolio                                                |       | (278                           | )          | (2,484                        | )          | 42,227 |   | 33,730 |   |
| Portfolio  sales                                         |       | —                         |       | 759                           |       | 361 |   | 2,499 |   |
| Total  revenues                                          |       | 373,670                        |       | 381,056                       |       | 1,154,418 |   | 1,150,608 |   |
|                                                     |       |                           |       |                          |       |   |   |   |   |
| Operating  costs and expenses:                           |       |                           |       |                          |       |   |   |   |   |
| Payroll  and related expenses                            |       | 188,631                        |       | 218,313                       |       | 592,318 |   | 638,626 |   |
| Selling,  general and administrative expenses            |       | 156,167                        |       | 147,046                       |       | 436,001 |   | 423,483 |   |
| Depreciation  and amortization expense                   |       | 29,251                         |       | 31,970                        |       | 90,952 |   | 91,903 |   |
| Restructuring  charges                                   |       | 1,466                          |       | 3,382                         |       | 3,246 |   | 10,250 |   |
| Total  operating costs and expenses                      |       | 375,515                        |       | 400,711                       |       | 1,122,517 |   | 1,164,262 |   |
| (Loss)  income from operations                           |       | (1,845                         | )          | (19,655                       | )          | 31,901 |   | (13,654 | ) |
|                                                     |       |                           |       |                          |       |   |   |   |   |
| Other  income (expense):                                 |       |                           |       |                          |       |   |   |   |   |
| Interest  and investment income                          |       | 461                            |       | 256                           |       | 1,397 |   | 1,075 |   |
| Interest  expense                                        |       | (27,196                        | )          | (24,982                       | )          | (76,980 | ) | (70,392 | ) |
| Other  income (expense), net                             |       | 3,925                          |       | (1,891                        | )          | 7,087 |   | (2,052 | ) |
| Total  other income (expense)                            |       | (22,810                        | )          | (26,617                       | )          | (68,496 | ) | (71,369 | ) |
| Loss  before income taxes                                |       | (24,655                        | )          | (46,272                       | )          | (36,595 | ) | (85,023 | ) |
|                                                     |       |                           |       |                          |       |   |   |   |   |
| Income  tax expense (benefit)                            |       | 2,628                          |       | (14,171                       | )          | (1,056 | ) | (26,174 | ) |
|                                                     |       |                           |       |                          |       |   |   |   |   |
| Net  loss                                                |       | (27,283                        | )          | (32,101                       | )          | (35,539 | ) | (58,849 | ) |
|                                                     |       |                           |       |                          |       |   |   |   |   |
| Less:  Net loss attributable to noncontrolling interests |       | (2,679                         | )          | (5,623                        | )          | (3,610 | ) | (8,384 | ) |
|                                                     |       |                           |       |                          |       |   |   |   |   |
| Net  loss attributable to NCO Group, Inc.           |       | $                              | (24,604    | )                             | $          | (26,478 | ) | $ | (31,929 | ) | $ | (50,465 | ) |

 

See accompanyingnotes.

 

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**NCOGROUP, INC**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

**(Amountsin thousands)**

** **
| ** **                                                                                                   | ** ** | **For the Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                   | ** ** | **September 30,**        | ** ** |
| ** **                                                                                                   | ** ** | **2009**                      | ** ** | **2008** | ** ** |
| ** **                                                                                                   | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Cash  flows from operating activities:                                                                       |       |                          |       |   |   |
| Net  loss                                                                                                    |       | $                             | (35,539    | ) | $ | (58,849 | ) |
| Adjustments  to reconcile net loss from continuing operations to net cash provided by  operating activities: |       |                          |       |   |   |
| Depreciation  and amortization                                                                               |       | 90,952                        |       | 91,903 |   |
| Amortization  of deferred training asset                                                                     |       | 1,728                         |       | 2,088 |   |
| Provision  for doubtful accounts                                                                             |       | 2,583                         |       | 2,145 |   |
| Impairment  of purchased accounts receivable                                                                 |       | 15,125                        |       | 63,169 |   |
| Noncash  interest                                                                                            |       | 5,422                         |       | 606 |   |
| Net  (gains) losses on derivative instruments                                                                |       | (573                          | )          | 392 |   |
| Gain  on sale of purchased accounts receivable                                                               |       | (361                          | )          | (2,499 | ) |
| Deferred  income taxes                                                                                       |       | (4,511                        | )          | (27,787 | ) |
| Other                                                                                                        |       | 418                           |       | 1,352 |   |
| Changes  in operating assets and liabilities, net of acquisitions:                                           |       |                          |       |   |   |
| Accounts  receivable, trade                                                                                  |       | 28,272                        |       | 18,939 |   |
| Other  assets                                                                                                |       | 12,371                        |       | 2,719 |   |
| Accounts  payable and accrued expenses                                                                       |       | (17,768                       | )          | 4,404 |   |
| Income  taxes payable                                                                                        |       | (2,634                        | )          | (3,812 | ) |
| Other  long-term liabilities                                                                                 |       | (1,548                        | )          | (957 | ) |
| Net  cash provided by operating activities                                                                   |       | 93,937                        |       | 93,813 |   |
|                                                                                                         |       |                          |       |   |   |
| Cash  flows from investing activities:                                                                       |       |                          |       |   |   |
| Purchases  of accounts receivable                                                                            |       | (47,935                       | )          | (107,795 | ) |
| Collections  applied to principal of purchased accounts receivable                                           |       | 65,454                        |       | 68,351 |   |
| Proceeds  from sales and resales of purchased accounts receivable                                            |       | 525                           |       | 2,832 |   |
| Purchases  of property and equipment                                                                         |       | (26,279                       | )          | (31,539 | ) |
| Proceeds  from bonds and notes receivable                                                                    |       | 121                           |       | 928 |   |
| Net  cash paid for acquisitions and related costs                                                            |       | (4,029                        | )          | (339,299 | ) |
| Net  cash used in investing activities                                                                       |       | (12,143                       | )          | (406,522 | ) |
|                                                                                                         |       |                          |       |   |   |
| Cash  flows from financing activities:                                                                       |       |                          |       |   |   |
| Repayment  of notes payable                                                                                  |       | (19,397                       | )          | (28,351 | ) |
| Borrowings  under notes payable                                                                              |       | —                        |       | 17,046 |   |
| Net  (repayments of) borrowings under revolving credit facility                                              |       | (47,000                       | )          | 24,500 |   |
| Repayment  of borrowings under senior term loan                                                              |       | (19,541                       | )          | (9,232 | ) |
| Borrowings  under senior term loan, net of fees                                                              |       | —                        |       | 134,135 |   |
| Payment  of fees to obtain debt                                                                              |       | (2,477                        | )          | (4,317 | ) |
| Investment  in subsidiary by noncontrolling interests                                                        |       | —                        |       | 2,436 |   |
| Return  of investment in subsidiary to noncontrolling interests                                              |       | (5,784                        | )          | (9,234 | ) |
| Issuance  of stock, net                                                                                      |       | 39,667                        |       | 209,719 |   |
| Payment  of deemed dividend to JPM                                                                           |       | (8,049                        | )          | (12,157 | ) |
| Net  cash (used in) provided by financing activities                                                         |       | (62,581                       | )          | 324,545 |   |
|                                                                                                         |       |                          |       |   |   |
| Effect  of exchange rate on cash                                                                             |       | 1,345                         |       | (1,789 | ) |
|                                                                                                         |       |                          |       |   |   |
| Net  increase in cash and cash equivalents                                                                   |       | 20,558                        |       | 10,047 |   |
|                                                                                                         |       |                          |       |   |   |
| Cash  and cash equivalents at beginning of the period                                                        |       | 29,880                        |       | 31,283 |   |
|                                                                                                         |       |                          |       |   |   |
| Cash  and cash equivalents at end of the period                                                              |       | $                             | 50,438     |   | $ | 41,330 |   |

 

See accompanyingnotes.

 

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**NCO GROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

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

 

NCO Group, Inc. is a holding company and conductssubstantially all of its business operations through its subsidiaries(collectively, the “Company” or “NCO”). NCO is an international provider ofbusiness process outsourcing solutions, primarily focused on accountsreceivable management (“ARM”) and customer relationship management (“CRM”). NCOprovides services through over 100 offices throughout North America, Asia,Europe and Australia. The Company provides services to more than 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 9.0 percent of the Company’sconsolidated revenue for the nine months ended September 30, 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 wasan indirect wholly owned subsidiary of JPMorgan Chase & Co. (“JPM”).JPM also indirectly wholly owns One Equity Partners (“OEP”), which has had acontrolling interest in the Company since November 15, 2006.

 

Financial AccountingStandards Board (“FASB”) authoritative guidance for business combinationsstates that a “business combination” excludes transfers of net assets orexchanges of equity interests between entities under common control. Transfersof net assets or exchanges of equity interests between entities under commoncontrol should 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 whether any of its investments represent variable interest entitiesthat are required to be consolidated by the primary beneficiary. The primarybeneficiary is the entity that holds the majority of the beneficial interestsin the variable interest entity.  Avariable interest entity is an entity for which the primary beneficiary’sinterest in the entity can change with changes in factors other than the amountof investment in the entity.

 

The Company owns 50 percentof entities that purchase portfolios of purchased accounts receivable, which itconsolidates. Based on its evaluation of these entities, the Company is theprimary 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 annual 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 and nine-monthperiods ended September 30, 2009, are not necessarily indicative of theresults that may be expected for the year ending December 31, 2009, or forany other interim period.

 

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

 

*Use ofEstimates:*

 

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

 

*Basisof Presentation:*

 

Effective January 1, 2009, theCompany adopted the authoritative guidance for consolidation, which amends theaccounting and reporting standards for minority interests (now referred to asnoncontrolling interests) in subsidiaries. The Company now reportsnoncontrolling interest in subsidiaries as a separate component of equity,rather than as a liability. The adoption of the authoritative guidance is beingapplied prospectively, except for the presentation and disclosure requirements,which are applied retrospectively (note 13).

 

*Reclassifications:*

 

Certain amounts in the balance sheetas of December 31, 2008, and the statement of cash flows for the ninemonths ended September 30, 2008 have been reclassified for comparativepurposes.

 

**3.    Restructuring Charges:**

 

The Company hasrestructuring charges, primarily recorded in conjunction with the acquisitions ofOutsourcing Solutions, Inc. (“OSI”) and SST (note 4) and streamlining thecost structure of the Company’s legacy operations. These charges primarilyrelated to the elimination of certain redundant facilities and severance costs.The Company currently expects to 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                            |       | 440        |       | 2,806         |       | 3,246     |       |
| Cash  payments                      |       | (2,653     | )          | (3,432        | )          | (6,085    | )          |
| Balance  at September 30, 2009 |       | $          | 4,469      |          | $          | 1,994     |       | $ | 6,463 |   |

 

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**4.     Business Combinations:**

 

Effective August 31,2009, the Company acquired TSYS Total Debt Management, Inc. (“TDM”), aprovider of accounts receivable management specialty solutions, for $4.5million in cash, subject to certain post-closing adjustments, which included$1.3 million of acquired cash. The Company allocated $694,000 of the purchaseprice to the customer relationships and recorded goodwill of $848,000. Duringthe three months ended September 30, 2009, the Company incurred acquisitioncosts of $154,000, which were recorded in selling, general and administrativeexpenses on the statement of operations. The TDM acquisition was recorded inthe ARM segment.

 

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 the settlement of $10.0million held in escrow. The purchase price was financed in part by the issuanceof 802,262 shares of the Company’s Series A 14% PIK Preferred Stock,37,738 shares of Class L common stock and 1,012,262 shares of Class Acommon stock. The remainder of the purchase price was financed by borrowings of$139.0 million under the Company’s amended senior credit facility (note 11).The Company 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-deductible fortax purposes, in the ARM segment.

 

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                      |       | (1,891     | )          | (1,179        | )          | (3,070    | )          |
| Balance  at September 30, 2009 |       | $          | 2,315      |          | $          | 20        |       | $ | 2,335 |   |

 

The following summarizesthe unaudited pro forma results of operations, assuming the OSI acquisitiondescribed above occurred as of the beginning of the period. The unaudited proforma information presented does not include the TDM acquisition because it wasnot considered a significant business combination. The unaudited pro formainformation is provided for informational purposes only. It is based onhistorical information, and does not necessarily reflect the actual resultsthat would have occurred, nor is it indicative of future results of operationsof the consolidated entities (amounts in thousands):

 
| ** **                    | ** ** | **For the Nine**            | ** ** |
|-------------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **Months Ended**            | ** ** |
| ** **                    | ** ** | **September 30, 2008** | ** ** |
| Revenue                       |       | $                           | 1,221,993  |   |
| Net  loss attributable to NCO |       | (55,031                     | )          |
|                               |            |                             |            |  |

 

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 and the issuance of29,884 shares of the Company’s Series A 14% PIK Preferred Stock. Asdescribed in note 2, since the Company and SST were under common control by JPMat the time of the SST acquisition, the transfer of assets and liabilities ofSST were accounted for at historical cost in a manner similar to a pooling ofinterests. The cash consideration paid to JPM for SST and the return of $4.0million of cash that was not acquired were treated as dividends to JPM.

 

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**5.      Assets Held for Sale:**

 

During the fourth quarterof 2009, the Company sold certain assets and liabilities, from the ARM segment,for approximately $20.0 million in cash, subject to certain post-closingadjustments.  Proceeds from the sale, netof expenses, of approximately $18.3 million were used to pay down the Company’ssenior term loan. The following presents the carrying amount of the assets andliabilities sold, which are presented as held for sale on the accompanyingbalance sheet (amounts in thousands):

 
| ** **                                 | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
|                                       |       |                        |       |                       |       |
| Accounts  receivable, trade, net           |       | $                           | 6,799      |                       | $          | 8,606 |   |
| Prepaid  expenses and other current assets |       | 2,645                       |       | 3,398                      |       |
| Total  current assets                      |       | $                           | 9,444      |                       | $          | 12,004 |   |
|                                       |       |                        |       |                       |       |   |   |
| Property  and equipment, net               |       | $                           | 230        |                       | $          | 376 |   |
| Intangible  assets, net                    |       | 5,806                       |       | 6,318                      |       |
| Other  assets                              |       | 11                          |       | 70                         |       |
| Total  non-current assets                  |       | $                           | 6,047      |                       | $          | 6,764 |   |
|                                       |       |                        |       |                       |       |
| Accounts  payable and accrued expenses     |       | $                           | 2,458      |                       | $          | 974 |   |
| Total  current liabilities                 |       | $                           | 2,458      |                       | $          | 974 |   |
|                                       |       |                        |       |                       |       |   |   |
| Other  long-term liabilities               |       | $                           | 4,217      |                       | $          | 3,308 |   |
| Total  long-term liabilities               |       | $                           | 4,217      |                       | $          | 3,308 |   |

 

In connection with thesale, the Company entered into a ten-year servicing arrangement with the buyer,which will create significant continuing cash flows for the disposed entity.Therefore, the sale did not meet the requirements for “discontinued operations”treatment in the statement of operations.

 

For the three monthsended September 30, 2009 and 2008, the disposed entity recorded revenue of$4.0 million and $3.8 million, respectively, for services provided to theCompany. For the nine months ended September 30, 2009 and 2008, thedisposed entity recorded revenue of $12.4 million and $8.7 million,respectively, for these services. These amounts have been eliminated inconsolidation.

 

**6.      Deferred Revenue:**

 

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

 
| Balance  at December 31, 2008       |   | $       | 46,016 |   |
|------------------------------------------|--------|---------|--------|--------|
| Additions                                |   | 27,434  |   |
| Revenue  recognized                      |   | (32,205 | )      |
| Foreign  currency translation adjustment |   | 92      |   |
| Balance  at September 30, 2009      |   | $       | 41,337 |   |

 

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**7.      Fair Value Measurement:**

 

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

 

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

 
| ** **                  | ** ** | **At Fair Value as of**     | ** ** |
|-----------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
| ** **                  | ** ** | **Level 1**            | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets:                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Forward  exchange contracts |       | $                           | —     |   | $ | 897 |   | $ | — |   | $ | 897 |   | $ | — |   | $ | 923 |   | $ | — |   | $ | 923 |   |
| Interest  rate caps         |       | —                      |       | — |   | — |   | — |   | — |   | 1 |   | — |   | 1 |   |
|                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  rate swaps        |       | —                      |       | 10,808 |   | — |   | 10,808 |   | — |   | 13,180 |   | — |   | 13,180 |   |
| Forward  exchange contracts |       | —                      |       | — |   | — |   | — |   | — |   | 11,360 |   | — |   | 11,360 |   |
| Embedded  derivatives       |       | —                      |       | — |   | 3,156 |   | 3,156 |   | — |   | — |   | 4,457 |   | 4,457 |   |
|                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  liabilities            |       | $                           | —     |   | $ | 9,911 |   | $ | 3,156 |   | $ | 13,067 |   | $ | — |   | $ | 23,616 |   | $ | 4,457 |   | $ | 28,073 |   |

 

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

 

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

 

Embedded derivativesinclude the contingent payment provision embedded in the Company’s nonrecoursecredit facility related to purchased accounts receivable and the sellers’participation in collections that are in excess of minimum targets for certainportfolios of purchased accounts receivable. The Company values these embeddedderivatives based on the present value of expected cash flows. Inputs used tovalue these embedded derivatives are considered Level 3 measurements since theyare unobservable. Changes in the fair market value of the embedded derivativesare recorded in interest expense on the statement of operations.

 

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

 

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

 
| ** **                      | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|---------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                      | ** ** | **September 30,**         | ** ** | **September 30,**        | ** ** |
| ** **                      | ** ** | **2009**                       | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Balance  at beginning of period |       | $                              | 3,332      |                          | $          | 5,951 |   | $ | 4,457 |   | $ | 9,773 |   |
| Additions                       |       | 237                            |       | 1,222                         |       | 1,271 |   | 2,383 |   |
| Payments                        |       | (510                           | )          | (935                          | )          | (1,655 | ) | (2,382 | ) |
| Changes  in fair value          |       | 97                             |       | (551                          | )          | (917 | ) | (4,087 | ) |
| Balance  at end of period       |       | $                              | 3,156      |                          | $          | 5,687 |   | $ | 3,156 |   | $ | 5,687 |   |

 

**8.     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 September 30, 2009, the carrying value of PortfolioManagement’s and ARM’s purchased accounts receivable were $147.4 million and$7.2 million, respectively. The total outstanding balance due, representing theoriginal undiscounted contractual amount less collections since acquisition,was $54.7 billion and $52.4 billion at September 30, 2009 and December 31,2008, respectively.

 

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

 
| ** **                                                           | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                           | ** ** | **September 30,**         | ** ** | **September 30,**        | ** ** |
| ** **                                                           | ** ** | **2009**                       | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Balance  at beginning of period                                      |       | $                              | 172,274    |                          | $          | 247,413 |   | $ | 185,659 |   | $ | 245,585 |   |
| Purchases:                                                           |       |                           |       |                          |       |   |   |   |   |
| Cash  purchases                                                      |       | 14,981                         |       | 33,906                        |       | 47,935 |   | 107,795 |   |
| Portfolios  acquired in business combinations                        |       | —                         |       | —                        |       | — |   | 3,548 |   |
| Collections                                                          |       | (31,919                        | )          | (52,086                       | )          | (121,511 | ) | (164,471 | ) |
| Revenue  recognized                                                  |       | 13,118                         |       | 29,519                        |       | 56,057 |   | 96,120 |   |
| Proceeds  from portfolio sales and resales applied to carrying value |       | —                         |       | (188                          | )          | (164 | ) | (333 | ) |
| Allowance  for impairment                                            |       | (13,784                        | )          | (32,395                       | )          | (15,125 | ) | (63,169 | ) |
| Other                                                                |       | (102                           | )          | (1,343                        | )          | 1,717 |   | (249 | ) |
| Balance  at end of period                                            |       | $                              | 154,568    |                          | $          | 224,826 |   | $ | 154,568 |   | $ | 224,826 |   |

 

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** | ** ** | **For the Nine Months Ended** | ** ** |
|--------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **               | ** ** | **September 30,**         | ** ** | **September 30,**        | ** ** |
| ** **               | ** ** | **2009**                       | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Proceeds  from sales     |       | $                              | —     |                          | $          | 947 |   | $ | 525 |   | $ | 2,832 |   |
| Less  carrying value     |       | —                         |       | 188                           |       | 164 |   | 333 |   |
| Portfolio  sales revenue |       | $                              | —     |                          | $          | 759 |   | $ | 361 |   | $ | 2,499 |   |

 

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

 

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

 
| ** **                      | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|---------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                      | ** ** | **September 30,**         | ** ** | **September 30,**        | ** ** |
| ** **                      | ** ** | **2009**                       | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Balance  at beginning of period |       | $                              | 125,229    |                          | $          | 55,736 |   | $ | 123,804 |   | $ | 24,962 |   |
| Additions                       |       | 14,330                         |       | 32,743                        |       | 19,985 |   | 63,853 |   |
| Recoveries                      |       | (546                           | )          | (348                          | )          | (4,860 | ) | (684 | ) |
| Other                           |       | 49                             |       | (229                          | )          | 133 |   | (229 | ) |
| Balance  at end of period       |       | $                              | 139,062    |                          | $          | 87,902 |   | $ | 139,062 |   | $ | 87,902 |   |

 

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** | ** ** | **For the Nine Months Ended** | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                     | ** ** | **September 30,**         | ** ** | **September 30,**        | ** ** |
| ** **                                     | ** ** | **2009**                       | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Balance  at beginning of period                |       | $                              | 160,275    |                          | $          | 326,527 |   | $ | 167,411 |   | $ | 366,584 |   |
| Additions                                      |       | 12,242                         |       | 24,240                        |       | 50,605 |   | 107,983 |   |
| Revenue  recognition                           |       | (13,118                        | )          | (29,519                       | )          | (56,057 | ) | (96,120 | ) |
| Reclassifications  to nonaccretable difference |       | (29,176                        | )          | (71,205                       | )          | (31,396 | ) | (128,175 | ) |
| Foreign  currency translation adjustment       |       | (41                            | )          | 1,014                         |       | (381 | ) | 785 |   |
| Balance  at end of period                      |       | $                              | 130,182    |                          | $          | 251,057 |   | $ | 130,182 |   | $ | 251,057 |   |

 

During the three monthsended September 30, 2009 and 2008, the Company purchased accountsreceivable with a cost of $15.0 million and $33.9 million, respectively, thathad contractually required payments receivable at the date of acquisition of$573.0 million and $1.1 billion, respectively, and expected cash flows at thedate of acquisition of $27.2 million and $58.4 million, respectively. Duringthe nine months ended September 30, 2009 and 2008, the Company purchasedaccounts receivable with a cost of $47.9 million and $107.8 million,respectively, that had contractually required payments receivable at the dateof acquisition of $2.4 billion and $3.5 billion, respectively, and expectedcash flows at the date of acquisition of $98.5 million and $211.8 million,respectively.

 

**9.     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 $83.3 million and $77.1 million at September 30,2009 and December 31, 2008, respectively, have been shown net of theiroffsetting liability for financial statement presentation.

 

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

 

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

 
| ** **                              | ** ** | **ARM** | ** ** | **CRM** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------|------------|---------|------------|-----------|------------|
| Balance  at December 31, 2008      |       | $       | 482,849    |    | $          | 81,768    |       | $ | 564,617 |   |
| OSI  acquisition                        |       | (1,358  | )          | —  |       | (1,358    | )          |
| TDM  acquisition                        |       | 848     |       | —  |       | 848       |       |
| Foreign  currency translation and other |       | (2,419  | )          | —  |       | (2,419    | )          |
| Balance  at September 30, 2009     |       | $       | 479,920    |    | $          | 81,768    |       | $ | 561,688 |   |

 

Trade names includes theNCO trade name, which is an indefinite-lived intangible asset and therefore isnot subject to amortization.  Similar togoodwill, the NCO trade name is reviewed at least annually for impairment. At September 30,2009, 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 not considered to have indefinite lives and are therefore subject toamortization. At September 30, 2009, accumulated amortization of the OSItrade names was $1.1 million.

 

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

** **
| ** **              | ** ** | **September 30, 2009** | ** ** | **December 31, 2008**    | ** ** |
|-------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Customer  relationships |       | $                           | 446,179    |                          | $          | 167,325 |   | $ | 443,655 |   | $ | 118,555 |   |
| Non-compete  agreements |       | 4,006                       |       | 2,133                         |       | 4,006 |   | 1,473 |   |
| Total                   |       | $                           | 450,185    |                          | $          | 169,458 |   | $ | 447,661 |   | $ | 120,028 |   |

 

The Company recordedamortization expense for all other intangible assets of $16.8 million and $17.0million during the three months ended September 30, 2009 and 2008,respectively, and $51.4 million and $47.9 million during the nine months ended September 30,2009 and 2008, respectively. The following represents the Company’s expectedamortization expense from these other intangible assets over the next five years(amounts in thousands):

 
| **For the Years Ended   December 31,** | ** ** | **Estimated  Amortization Expense** | ** ** |
|---------------------------------------------|------------|-------------------------------------|------------|
| 2009                                        |       | $                                   | 66,970     |   |
| 2010                                        |       | 65,831                              |       |
| 2011                                        |       | 65,467                              |       |
| 2012                                        |       | 61,239                              |       |
| 2013                                        |       | 54,709                              |       |
|                                             |            |                                     |            |  |

 

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**11.  Long-Term Debt:**

 

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

 
| ** **                        | ** ** | **September 30, 2009** | ** **    | **December 31, 2008** | ** ** |
|-----------------------------------|------------|-----------------------------|---------------|----------------------------|------------|
| Senior  term loan                 |       | $                           | 569,064       |                       | $          | 588,605 |   |
| Senior  revolving credit facility |       | 34,500                      |          | 81,500                     |       |
| Senior  subordinated notes        |       | 200,000                     |          | 200,000                    |       |
| Senior  notes                     |       | 165,000                     |          | 165,000                    |       |
| Nonrecourse  credit facility      |       | 18,516                      |          | 37,244                     |       |
| Capital  leases                   |       | 4,793                       |          | 5,232                      |       |
| Other                             |       | 1,775                       |          | 1,495                      |       |
| Less  current portion             |       | (20,817                     | )             | (30,559                    | )          |
|                              |       | $                           |  972,831 |                       | $          | 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 ($569.1 million outstanding at September 30,2009) and a $100.0 million revolving credit facility. The Company is requiredto make quarterly principal repayments of $1.5 million on the term loan untilits maturity in May 2013, at which time its remaining balance outstandingis due. The Company is also required to make annual prepayments of 50 percent,25 percent or zero percent of its excess annual cash flow, based on itsleverage ratio. The revolving credit facility requires no minimum principalpayments until its maturity in November 2011. The availability of therevolving credit facility is reduced by any unused letters of credit ($15.7million at September 30, 2009). As of September 30, 2009, the Companyhad $49.8 million of remaining availability under the revolving creditfacility.

 

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 the amendment,all borrowings bear interest at an annual rate equal to either, at the optionof the Company, (i) the higher of the prime rate (3.25 percent at September 30,2009), the federal funds rate (0.07 percent at September 30, 2009) plus0.50 percent, or LIBOR (0.25 percent 30-day LIBOR at September 30, 2009)plus 1.00 percent, plus a margin of 2.25 percent to 2.75 percent in the case ofthe revolving credit facility and 3.75 percent to 4.00 percent in the case ofthe term loan, based on the Company’s funded debt to earnings before interest,taxes, depreciation and amortization (“EBITDA”) ratio, as defined; or (ii) LIBOR,but in no event less than 2.50 percent, plus a margin of 3.25 percent to 3.75percent in the case of the revolving credit facility and 4.75 percent to 5.00percent in the case of the term loan, based on the Company’s funded debt toEBITDA ratio, as defined. The Company is charged a quarterly commitment fee onthe unused portion of the revolving credit facility at an annual rate of 0.50percent. The effective interest rate on the Credit Facility was approximately9.32 percent and 7.69 percent for the three months ended September 30,2009 and 2008, respectively, and 8.42 percent and 7.66 percent for the ninemonths ended September 30, 2009 and 2008, respectively. The CreditFacility also requires that the Company obtain certain levels of interest rateprotection.

 

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**11.  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 September 30, 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,jointly and severally, on a senior basis with respect to the Senior Notes andon a senior subordinated basis with respect to the Senior Subordinated Notes,in each case by all of the Company’s existing and future domestic restrictedsubsidiaries (other than certain subsidiaries and joint ventures engaged infinancing the purchase of delinquent accounts receivable portfolios and certainimmaterial subsidiaries).

 

The Senior Notes aresenior unsecured obligations and are senior in right of payment to all existingand future senior subordinated indebtedness, including the Senior SubordinatedNotes, and all future subordinated indebtedness. The Senior Notes bear interestat an annual rate equal to LIBOR plus 4.875 percent, reset quarterly. Theeffective interest rate of the Senior Notes was approximately 5.54 percent and7.62 percent for the three months ended September 30, 2009 and 2008,respectively, and 6.02 percent and 8.07 percent for the nine months ended September 30,2009 and 2008, respectively. The Company may redeem the Senior Notes, in wholeor in part, at any time at varying redemption prices depending on theredemption date, plus accrued and unpaid interest.

 

*Nonrecourse Credit Facility:*

 

The Company’s nonrecoursecredit facility and exclusivity agreement (collectively the “NonrecourseAgreement”) provided that all purchases of accounts receivable by the Companywith a purchase price in excess of $1.0 million were first offered to thelender for financing at its discretion. If the lender chose to participate inthe financing of a portfolio of accounts receivable, the financing wasstructured, depending on the size and nature of the portfolio to be purchased,either as a borrowing arrangement or under various equity sharing arrangements.The lender financed non-equity borrowings with floating interest at an annualrate equal to LIBOR (0.25 percent 30-day LIBOR at September 30, 2009) plus2.50 percent, or as negotiated. These borrowings are nonrecourse to the Companyand are due two years from the date of each respective loan, unless otherwisenegotiated. As additional return on the debt financed portfolios the lenderreceives residual cash flows, as negotiated, which is defined as all cashcollections after servicing fees, floating rate interest, repayment of theborrowing, and the initial investment by the Company, including interest.Residual cash flow payments are accrued for as embedded derivatives.

 

The exclusivity agreementto the Nonrecourse Agreement expired on June 30, 2009. As a result, theCompany is no longer required to offer all purchases with a purchase price inexcess of $1.0 million to the lender for financing. The borrowings outstandingunder the nonrecourse credit facility were not affected and remain subject tothe terms discussed above. The Company is currently discussing future lendingfacilities for purchases of accounts receivable with its existing lender andother third-party lenders. The Company may have to use available cash orborrowings under its revolving credit facility to fund purchases of accounts receivable,which may limit the amount of portfolios the Company is able to purchase andlimit borrowings for other uses.

 

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.

 

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

 

*Nonrecourse Credit Facility (continued):*

 

Total debt outstandingunder this facility was $18.5 million and $37.2 million as of September 30,2009 and December 31, 2008, respectively, which included $2.4 million and$3.7 million, respectively, of accrued residual interest. The effectiveinterest rate on these loans, including the residual interest component, wasapproximately 8.7 percent and 11.2 percent for the three months ended September 30,2009 and 2008, respectively, and 11.0 percent and 10.4 percent for the ninemonths ended September 30, 2009 and 2008, respectively. The nonrecoursecredit facility contains certain covenants such as meeting minimum cumulativecollection targets. As of September 30, 2009, the Company was incompliance with all required covenants.

 

**12.**** ****Income Taxes:**

 

The Companyrecorded income tax expense (benefit) of $2.6 million and $(14.2) million forthe three months ended September 30, 2009 and 2008, respectively, and$(1.1) million and $(26.2) million for the nine months ended September 30,2009 and 2008, respectively. The Company’s income tax expense (benefit) differsfrom the amount of income tax determined by applying the statutory U.S. federalincome tax rate to pre-tax income (loss) primarily as a result of income taxexpense to be paid in state and foreign jurisdictions and the recognition of avaluation allowance on certain domestic net deferred tax assets.

 

The Companyincreased its valuation allowance by $15.4 million to $46.8 million as of September 30,2009 from $31.4 million as of December 31, 2008, primarily as a result offederal and certain state deferred tax assets exceeding deferred tax liabilities(after consideration for any net deferred tax liabilities associated withnon-amortizable assets such as goodwill and certain trade names) as of September 30,2009. As a result of cumulative losses incurred by the Company since 2007, avaluation allowance was established due to the uncertainty that federal andcertain state deferred tax assets would be realized in future years. Thevaluation allowance as of September 30, 2009 includes $2.1 millionrecorded in connection with the acquisition of TDM.

 

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

 

TheCompany received notice of a reassessment from a foreign taxing authorityrelating to certain matters occurring from 1998 through 2001 regarding one ofits subsidiaries in the amount of $15.7 million including interest andpenalties. In order to pursue an appeal of the reassessment, the Company paid adeposit of $8.5 million in December 2008. In October 2009, the Company entered into asettlement agreement regarding the reassessment, and expects to receive arefund of approximately $3.0 million. As a result of the settlement in October 2009,management will adjust its reserve during the fourth quarter of 2009.

 

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**13.**** ****Stockholders’ Equity:**

 

*PreferredStock and Common Stock:*

 

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

 

Series A is entitledto a quarterly “paid-in-kind” dividend at an annual rate of 14 percent and Series B-1is entitled to a quarterly “paid-in-kind” dividend at an annual rate of 19percent. The following presents the Series A and Series B-1 sharesissued for the “paid-in-kind” dividends during the nine months ended September 30,2009 and 2008:

 
| ** **      | ** ** | **August 31,** | ** ** | **May 31,** | ** ** | **February 28,** | ** ** |
|-----------------|------------|---------------------|------------|------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2009**            | ** ** | **2008**         | ** ** | **2009**              | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Series A   |       | 95,935              |       | 83,159           |       | 92,665                |       | 80,879 |   | 87,211 |   | 49,108 |   |
| Series B-1 |       | 9,503               |       | —           |       | 7,176                 |       | — |   | 1,713 |   | — |   |

 

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).

 

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

 

*NoncontrollingInterests:*

 

Prior periodamounts related to noncontrolling interests have been reclassified to conformto the current period presentation. Net income (loss) attributable tononcontrolling interests is shown separately from net income (loss) in theconsolidated statements of operations. This reclassification has no effect onthe Company’s previously reported financial position or results of operations.Refer to note 2 for additional information.

 

Losses areattributed to noncontrolling interests even if they exceed the noncontrollinginterests’ equity. If the Company had not attributed such losses tononcontrolling interests, net loss attributable to NCO Group, Inc. would have increasedby $447,000 and $1.6 million for the three and nine months ended September 30,2009, respectively.

 

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

 

*NoncontrollingInterests (continued):*

 

The following tablesummarizes the activity in stockholders’ equity attributable to NCO Group, Inc.and noncontrolling interests (amounts in thousands):

 
| ** **                                                  | ** ** | **NCO Group, Inc.  Stockholders’  Equity** | ** ** | **Noncontrolling  Interests** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------|------------|---------------------------------------|------------|
|                                                        |       |                                                 |       |                          |       |                                  |       |
| Balance  at December 31, 2008                          |       | $                                                    | 260,986    |                          | $          | 22,803                                |       | $ | 283,789 |   |
| Issuance  of stock                                          |       | 39,665                                               |       | —                        |       | 39,665                                |       |
| Deemed  investment by JPM for SST purchase price adjustment |       | 2,161                                                |       | —                        |       | 2,161                                 |       |
| Stock-based  compensation                                   |       | 857                                                  |       | —                        |       | 857                                   |       |
| Distributions  to noncontrolling interests                  |       | —                                               |       | (5,505                        | )          | (5,505                                | )          |
| Net  loss                                                   |       | (31,929                                              | )          | (3,610                        | )          | (35,539                               | )          |
| Accumulated  other comprehensive income                     |       | 4,761                                                |       | —                        |       | 4,761                                 |       |
| Balance  at September 30, 2009                         |       | $                                                    | 276,501    |                          | $          | 13,688                                |       | $ | 290,189 |   |

 

*ComprehensiveIncome (Loss):*

 

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

 
| ** **                                                             | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                             | ** ** | **September 30,**         | ** ** | **September 30,**        | ** ** |
| ** **                                                             | ** ** | **2009**                       | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  loss attributable to NCO Group, Inc.                         |       | $                              | (24,604    | )                             | $          | (26,478 | ) | $ | (31,929 | ) | $ | (50,465 | ) |
| Foreign  currency translation adjustments                              |       | 282                            |       | (3,183                        | )          | 1,178 |   | (3,611 | ) |
| Change  in fair value of cash flow hedges, net of tax                  |       | —                         |       | (2,195                        | )          | (719 | ) | (3,966 | ) |
| Net  losses on cash flow hedges reclassified into earnings, net of tax |       | 1,501                          |       | 1,554                         |       | 4,302 |   | 2,511 |   |
| Comprehensive  loss - NCO Group, Inc.                             |       | (22,821                        | )          | (30,302                       | )          | (27,168 | ) | (55,531 | ) |
| Net  loss attributable to noncontrolling interests                     |       | (2,679                         | )          | (5,623                        | )          | (3,610 | ) | (8,384 | ) |
| Total  comprehensive loss                                              |       | $                              | (25,500    | )                             | $          | (35,925 | ) | $ | (30,778 | ) | $ | (63,915 | ) |

 

**14.**** ****Derivative Financial Instruments:**

 

The Company enters intoforward exchange contracts to minimize the impact of currency fluctuations ontransactions and cash flows. These contracts may be designated as cash flowhedges. The Company had forward exchange contracts for the purchase of 31.0million Canadian dollars outstanding at September 30, 2009, which maturethroughout the remainder of 2009.

 

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

 

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 $334.0 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 11). This amendment caused the existing interest rate swapsto become ineffective and, as of March 25, 2009, these interest rate swapswere not accounted for as cash flow hedges. Accordingly, the fair market valueof the interest rate swaps at March 25, 2009 is being amortized tointerest expense, using the effective interest rate method, over the remaininglives of the interest rate swap agreements, and future changes in the fairmarket value of these interest rate swaps after March 25, 2009 arerecorded in interest expense.

 

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

 

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 September 30, 2009, with aweighted average LIBOR cap rate of 6.00 percent.

 

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

 
| ** **                                            | ** ** | **September 30, 2009**          | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | **Balance Sheet  Location**          | ** ** | **Fair   Value**           | ** ** | **Balance Sheet   Location** | ** ** | **Fair   Value** | ** ** |
| Derivatives  designated as hedges:                    |       |                                 |       |                       |       |   |   |   |   |
| *Liability derivatives*                               |       |                                 |       |                       |       |   |   |   |   |
| Interest  rate swaps                                  |       |                                 |       |                       |       | Accrued expenses |   | $ | 13,180 |   |
| Total  derivatives designated as hedges               |       |                                 |       |                       |       |   |   | $ | 13,180 |   |
|                                                  |       |                                 |       |                       |       |   |   |   |   |
| Derivatives  not designated as hedges:                |       |                                 |       |                       |       |   |   |   |   |
| *Asset derivatives*                                   |       |                                 |       |                       |       |   |   |   |   |
| Forward  exchange contracts                           |       | Other current assets                 |       | $                          | 897        |   | Other current assets |   | $ | 923 |   |
| Interest  rate caps                                   |       |                                 |       |                       |       | Other current assets |   | 1 |   |
| Total  asset derivatives not designated as hedges     |       |                                 |       | $                          | 897        |   |   |   | $ | 924 |   |
|                                                  |       |                                 |       |                       |       |   |   |   |   |
| *Liability derivatives*                               |       |                                 |       |                       |       |   |   |   |   |
| Interest  rate swaps                                  |       | Accrued expenses                     |       | $                          | 10,808     |   |   |   |   |   |
| Forward  exchange contracts                           |       |                                 |       |                       |       | Accrued expenses |   | $ | 11,360 |   |
| Embedded  derivatives                                 |       | Long-term debt and  accrued expenses |       | 3,156                      |       | Long-term debt and  accrued expenses |   | 4,457 |   |
| Total  liability derivatives not designated as hedges |       |                                 |       | $                          | 13,964     |   |   |   | $ | 15,817 |   |

 

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

 

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

 
| ** **                                          | ** ** | ** **                                                              | ** ** | **For the Three Months Ended September 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                          | ** ** | ** **                                                              | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| ** **                                          | ** ** | ** **                                                              | ** ** | **Amount of**                                     | ** ** | **Amount of** | ** ** | **Amount of** | ** ** | **Amount of** | ** ** |
| ** **                                          | ** ** | **Location of**                                                         | ** ** | **Gain (Loss)**                                   | ** ** | **Gain (Loss)** | ** ** | **Gain (Loss)** | ** ** | **Gain (Loss)** | ** ** |
| ** **                                          | ** ** | **Gain (Loss)**                                                         | ** ** | **Recognized**                                    | ** ** | **Reclassified** | ** ** | **Recognized** | ** ** | **Reclassified** | ** ** |
| ** **                                          | ** ** | **Reclassified**                                                        | ** ** | **in OCI (net**                                   | ** ** | **into** | ** ** | **in OCI (net** | ** ** | **into** | ** ** |
| ** **                                          | ** ** | **into Earnings**                                                       | ** ** | **of taxes)**                                     | ** ** | **Earnings** | ** ** | **of taxes)** | ** ** | **Earnings** | ** ** |
| Derivatives  designated as hedges:                  |       |                                                                    |       |                                              |       |   |   |   |   |   |   |
| Interest  rate swaps (prior to March 25, 2009) |       | Interest expense                                                        |       | $                                                 | —     |   | $ | — |   | $ | (1,682 | ) | $ | (1,357 | ) |
|                                                |       |                                                                    |       |                                              |       |   |   |   |   |   |   |
| Forward  exchange contracts                         |       | Payroll and  related expenses, and selling, general and admin. expenses |       | —                                            |       | — |   | (513 | ) | (763 | ) |
| Total  derivatives designated as hedges             |       |                                                                    |       | $                                                 | —     |   | $ | — |   | $ | (2,195 | ) | $ | (2,120 | ) |

 
| ** **                                          | ** ** | ** **                                                              | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | ** **                                                              | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                          | ** ** | ** **                                                              | ** ** | **Amount of**                                    | ** ** | **Amount of** | ** ** | **Amount of** | ** ** | **Amount of** | ** ** |
| ** **                                          | ** ** | **Location of**                                                         | ** ** | **Gain (Loss)**                                  | ** ** | **Gain (Loss)** | ** ** | **Gain (Loss)** | ** ** | **Gain (Loss)** | ** ** |
| ** **                                          | ** ** | **Gain (Loss)**                                                         | ** ** | **Recognized**                                   | ** ** | **Reclassified** | ** ** | **Recognized** | ** ** | **Reclassified** | ** ** |
| ** **                                          | ** ** | **Reclassified**                                                        | ** ** | **in OCI (net**                                  | ** ** | **into** | ** ** | **in OCI (net** | ** ** | **into** | ** ** |
| ** **                                          | ** ** | **into Earnings**                                                       | ** ** | **of taxes)**                                    | ** ** | **Earnings** | ** ** | **of taxes)** | ** ** | **Earnings** | ** ** |
| Derivatives  designated as hedges:                  |       |                                                                    |       |                                             |       |   |   |   |   |   |   |
| Interest  rate swaps (prior to March 25, 2009) |       | Interest expense                                                        |       | $                                                | (719       | ) | $ | (2,056 | ) | $ | (1,729 | ) | $ | (2,836 | ) |
|                                                |       |                                                                    |       |                                             |       |   |   |   |   |   |   |
| Forward  exchange contracts                         |       | Payroll and  related expenses, and selling, general and admin. expenses |       | —                                           |       | — |   | (2,237 | ) | (1,027 | ) |
| Total  derivatives designated as hedges             |       |                                                                    |       | $                                                | (719       | ) | $ | (2,056 | ) | $ | (3,966 | ) | $ | (3,863 | ) |

 

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

 
| ** **                                       | ** ** | ** **                  | ** ** | **For the Three Months Ended September 30,** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|---------------------------------------------------|------------|
| ** **                                       | ** ** | ** **                  | ** ** | **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)      |       | $                                                 | 3,912      |   | $ | — |   |
| Interest  rate swaps (after March 25, 2009) |       | Interest expense            |       | (5,142                                            | )          | — |   |
| Embedded  derivatives                            |       | Interest expense            |       | (97                                               | )          | 551 |   |
| Interest  rate caps                              |       | Other income (expense)      |       | (7                                                | )          | (50 | ) |
| Total  derivatives not designated as hedges      |       |                        |       | $                                                 | (1,334     | ) | $ | 501 |   |

** **
| ** **                                       | ** ** | ** **                  | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | ** **                  | ** ** | **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)      |       | $                                                | 6,695      |   | $ | — |   |
| Interest  rate swaps (after March 25, 2009) |       | Interest expense            |       | (9,058                                           | )          | — |   |
| Embedded  derivatives                            |       | Interest expense            |       | 917                                              |       | 4,087 |   |
| Interest  rate caps                              |       | Other income (expense)      |       | (37                                              | )          | (41 | ) |
| Total  derivatives not designated as hedges      |       |                        |       | $                                                | (1,483     | ) | $ | 4,046 |   |

 

**15.**** ****Fair Value of Financial Instruments:**

 

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

 

*Cash and Cash Equivalents, Trade Accounts Receivable, andAccounts Payable:*

 

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

 

###### *Purchased AccountsReceivable:*

###### * *

The Company recordspurchased accounts receivable at cost, which is discounted from the contractualreceivable balance. The carrying value of purchased accounts receivable, whichis estimated based upon future cash flows, approximates fair value at September 30,2009 and December 31, 2008.

 

*Notes Receivable:*

 

The Company had notesreceivable of $10.2 million and $8.4 million as of September 30, 2009 and December 31,2008, respectively. The carrying amounts reported in the balance sheets,included in current and long-term other assets, approximated market rates fornotes with similar terms and maturities, and, accordingly, the carrying amountsapproximated fair value. The Company continually evaluates the collectabilityof these notes.

 

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**15.**** ****Fair Value of Financial Instruments (continued):**

 

*Long-Term Debt:*

 

The following presentsthe carrying values and the estimated fair values of the Company’s long-termdebt at September 30, 2009 (amounts in thousands):

 
| ** **                        | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
|-----------------------------------|------------|--------------------|------------|----------------|------------|
| Senior  term loan                 |       | $                  | 569,064    |           | $          | 591,202 |   |
| Senior  revolving credit facility |       | 34,500             |       | 34,486         |       |
| Senior  subordinated notes        |       | 200,000            |       | 124,000        |       |
| Senior  notes                     |       | 165,000            |       | 124,575        |       |
| Nonrecourse  credit facility      |       | 18,517             |       | 18,517         |       |
|                                   |            |                    |            |                |            |  |  |

 

The fair values of theCompany’s senior term loan and senior revolving credit facility were based onmarket interest rates for debt with similar terms and maturities. The fairvalues of the Company’s Senior Notes and Senior Subordinated Notes were basedon their approximate trading prices at September 30, 2009.

 

**16.**** ****Supplemental Cash Flow Information:**

 

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

 
| ** **                                        | ** ** | **For the Nine Months Ended** | ** ** |
|---------------------------------------------------|------------|-------------------------------|------------|
| ** **                                        | ** ** | **September 30,**        | ** ** |
| ** **                                        | ** ** | **2009**                      | ** ** | **2008** | ** ** |
| Noncash  investing and financing activities:      |       |                          |       |   |   |
| Fair  value of assets acquired                    |       | $                             | 15,585     |   | $ | 143,960 |   |
| Liabilities  assumed from acquisitions            |       | 13,062                        |       | 136,916 |   |
| Issuance  of stock to JPM for the SST acquisition |       | 1,758                         |       | — |   |
| Adjustments  to acquired assets and liabilities   |       | 1,378                         |       | 979 |   |
|                                                   |            |                               |            |  |  |  |  |

 

**17.**** ****Commitments and Contingencies:**

 

*Purchase Commitments:*

 

TheCompany enters into noncancelable agreements with various telecommunicationscompanies, a labor subcontractor in India and other vendors that requireminimum purchase commitments. These agreements expire between 2009 and 2012.The following represents the future minimum payments, by year and in theaggregate, under noncancelable purchase commitments (amounts in thousands):

 
| 2009   |   | $      |  34,675 |   |
|--------|--------|--------|--------------|--------|
| 2010   |   | 32,141 |         |
| 2011   |   | 19,427 |         |
| 2012   |   | 1,620  |         |
|   |   | $      |  87,863 |   |

 

TheCompany incurred $18.1 million and $12.6 million of expense in connection withthese purchase commitments for the three months ended September 30, 2009 and 2008, respectively, and $53.0 million and$40.5 million for the nine months ended September 30, 2009 and 2008,respectively.

 

20

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

 

*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 betweenJuly 2009 and March 2014, and the terms of the agreements vary; somemay be terminated by the seller or by the Company, with either 30, 60 or 90 daywritten notice. The following represents the future forward-flow commitments byyear (amounts in thousands):

 
| 2009                |   | $     | 5,820  |   |
|---------------------|--------|-------|--------|--------|
| 2010                |   | 7,248 |   |
| 2011                |   | 2,400 |   |
| 2012                |   | 1,120 |   |
| 2013 and thereafter |   | 100   |   |
|                |   | $     | 16,688 |   |

 

*Litigation and Investigations:*

 

TheCompany is party, from time to time, to various legal proceedings, regulatoryinvestigations, client audits and tax examinations incidental to its business.The Company continually monitors these legal proceedings, regulatoryinvestigations, client audits and tax examinations to determine the impact andany required accruals.

 

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 amicably resolve the matter. The Company expects that actualdamages incurred as a result of this incident, if any, will be covered byinsurance.

 

AttorneysGeneral:

 

Fromtime to time, the Company receives subpoenas or other similar informationrequests from various states’ Attorneys General, requesting informationrelating to the Company’s debt collection practices in such states. The Companyresponds to such inquires or investigations and provides certain information tothe respective Attorneys General offices. The Company believes it is incompliance with the laws of the states in which it does business relating todebt collection practices in all material respects. However, no assurance canbe given 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.

 

21

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

 

*Litigation and Investigations (continued):*

 

Other:

 

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

 

**18.**** ****Segment Reporting:**

 

As of September 30,2009, the Company’s business consisted of three operating segments: ARM, CRMand Portfolio Management. The accounting policies of the segments are the sameas those described in note 2, “Accounting Policies.”

 

ARM provides accountsreceivable management services to consumer and commercial accounts for allmarket sectors including financial services, healthcare, retail and commercial,telecommunications, utilities, education, and government. ARM serves clients ofall sizes in local, regional and national markets in North America, Europe andAustralia through offices in North America, Asia, Europe and Australia. Inaddition to traditional accounts receivable collections, these services includedeveloping the client relationship beyond bad debt recovery and delinquencymanagement, and delivering cost-effective accounts receivable solutions to allmarket sectors. ARM also provides accounts receivable management services toPortfolio Management. ARM recorded revenue of $13.7 million and $20.3 millionfor intercompany services to Portfolio Management for the three months ended September 30,2009 and 2008, respectively, and $47.7 million and $65.9 million for the ninemonths ended September 30, 2009 and 2008, respectively.

 

CRM provides customerrelationship management services to clients in North America through offices inNorth America and Asia. CRM also provides certain services to ARM. CRM recordedrevenue of $7.0 million and $929,000 for intercompany services to ARM for thethree months ended September 30, 2009 and 2008, respectively, and $12.0million and $1.8 million for these services for the nine months ended September 30,2009 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’s revenue was impacted by impairment charges recorded for avaluation allowance against the carrying value of portfolios of $13.8 millionand $32.4 million for the three months ended September 30, 2009 and 2008,respectively, and $15.1 million and $63.2 million for the nine months ended September 30,2009 and 2008, respectively.

 

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

 
| ** **            | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------|------------|-----------------------------|------------|----------------------------|------------|
| ARM                   |       | $                           | 1,173,289  |                       | $          | 1,220,399 |   |
| CRM                   |       | 263,254                     |       | 283,328                    |       |
| Portfolio  Management |       | 163,540                     |       | 197,912                    |       |
| Total  assets         |       | $                           | 1,600,083  |                       | $          | 1,701,639 |   |

 

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

 

The following tablespresent the revenue, payroll and related expenses, selling, general, andadministrative expenses, restructuring charges and income from operationsbefore depreciation and amortization for each segment:

** **
| ** **                                                          | ** ** | **For the Three Months Ended September 30, 2009** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                          | ** ** | **(amounts in thousands)**                             | ** ** |
| ** **                                                          | ** ** | ** **                                             | ** ** | ** ** | ** ** | **Portfolio** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **ARM**                                                | ** ** | **CRM** | ** ** | **Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenue                                                             |       | $                                                      | 306,918    |   | $ | 85,125 |   | $ | 2,310 |   | $ | (20,683 | ) | $ | 373,670 |   |
| Payroll  and related expenses                                       |       | 134,730                                                |       | 60,149 |   | 776 |   | (7,024 | ) | 188,631 |   |
| Selling,  general and admin. expenses                               |       | 138,198                                                |       | 17,287 |   | 14,341 |   | (13,659 | ) | 156,167 |   |
| Restructuring  charges                                              |       | 1,134                                                  |       | 197 |   | 135 |   | — |   | 1,466 |   |
| Income  (loss) from operations before depreciation and amortization |       | $                                                      | 32,856     |   | $ | 7,492 |   | $ | (12,942 | ) | $ | — |   | $ | 27,406 |   |

** **
| ** **                                                          | ** ** | **For the Three Months Ended September 30, 2008** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                          | ** ** | **(amounts in thousands)**                             | ** ** |
| ** **                                                          | ** ** | ** **                                             | ** ** | ** ** | ** ** | **Portfolio** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **ARM**                                                | ** ** | **CRM** | ** ** | **Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenue                                                             |       | $                                                      | 315,012    |   | $ | 91,671 |   | $ | (4,365 | ) | $ | (21,262 | ) | $ | 381,056 |   |
| Payroll  and related expenses                                       |       | 152,428                                                |       | 64,865 |   | 1,949 |   | (929 | ) | 218,313 |   |
| Selling,  general and admin. expenses                               |       | 130,461                                                |       | 15,795 |   | 21,123 |   | (20,333 | ) | 147,046 |   |
| Restructuring  charges                                              |       | 3,016                                                  |       | 366 |   | — |   | — |   | 3,382 |   |
| Income  (loss) from operations before depreciation and amortization |       | $                                                      | 29,107     |   | $ | 10,645 |   | $ | (27,437 | ) | $ | — |   | $ | 12,315 |   |

** **
| ** **                                                          | ** ** | **For the Nine Months Ended September 30, 2009** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                          | ** ** | **(amounts in thousands)**                            | ** ** |
| ** **                                                          | ** ** | ** **                                            | ** ** | ** ** | ** ** | **Portfolio** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **ARM**                                               | ** ** | **CRM** | ** ** | **Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenue                                                             |       | $                                                     | 914,409    |   | $ | 259,458 |   | $ | 40,256 |   | $ | (59,705 | ) | $ | 1,154,418 |   |
| Payroll  and related expenses                                       |       | 417,829                                               |       | 182,724 |   | 3,816 |   | (12,051 | ) | 592,318 |   |
| Selling,  general and admin. expenses                               |       | 384,673                                               |       | 49,574 |   | 49,408 |   | (47,654 | ) | 436,001 |   |
| Restructuring  charges                                              |       | 2,706                                                 |       | 379 |   | 161 |   | — |   | 3,246 |   |
| Income  (loss) from operations before depreciation and amortization |       | $                                                     | 109,201    |   | $ | 26,781 |   | $ | (13,129 | ) | $ | — |   | $ | 122,853 |   |
| Purchases  of property and equipment                                |       | $                                                     | 14,603     |   | $ | 11,676 |   | $ | — |   | $ | — |   | $ | 26,279 |   |

 

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

** **
| ** **                                                          | ** ** | **For the Nine Months Ended September 30, 2008** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                          | ** ** | **(amounts in thousands)**                            | ** ** |
| ** **                                                          | ** ** | ** **                                            | ** ** | ** ** | ** ** | **Portfolio** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **ARM**                                               | ** ** | **CRM** | ** ** | **Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenue                                                             |       | $                                                     | 922,990    |   | $ | 262,188 |   | $ | 33,139 |   | $ | (67,709 | ) | $ | 1,150,608 |   |
| Payroll  and related expenses                                       |       | 443,217                                               |       | 191,219 |   | 6,022 |   | (1,832 | ) | 638,626 |   |
| Selling,  general and admin. expenses                               |       | 375,082                                               |       | 45,825 |   | 68,453 |   | (65,877 | ) | 423,483 |   |
| Restructuring  charges                                              |       | 7,428                                                 |       | 2,822 |   | — |   | — |   | 10,250 |   |
| Income  (loss) from operations before depreciation and amortization |       | $                                                     | 97,263     |   | $ | 22,322 |   | $ | (41,336 | ) | $ | — |   | $ | 78,249 |   |
| Purchases  of property and equipment                                |       | $                                                     | 15,052     |   | $ | 16,487 |   | $ | — |   | $ | — |   | $ | 31,539 |   |

 

**19.**** ****Related Party Transactions:**

 

The Company pays OEP amanagement fee of $3.0 million per year, plus reimbursement of expenses, formanagement, advice and related services. During the three and nine months endedSeptember 30, 2009, the Company incurred $750,000 and $2.3 million,respectively, relating to such management fees, which were included in selling,general and administrative expenses.

 

OEP is an indirect whollyowned subsidiary of JPM, and JPM is a client of the Company. For the three andnine months ended September 30, 2009, the Company received fees forproviding services to JPM of $3.2 million and $10.0 million, respectively.  At September 30, 2009, the Company hadno accounts receivable due from JPM. At December 31, 2008, the Company hadaccounts receivable of $9,000 due from JPM. Additionally, affiliates ofCitigroup are investors of the Company, and Citigroup is a client of theCompany. For the three and nine months ended September 30, 2009, theCompany received fees for providing services to Citigroup of $12.9 million and$42.1 million, respectively. At September 30, 2009 and December 31,2008, the Company had accounts receivable of $2.3 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 an indirect wholly owned subsidiary JPM. JPM alsoindirectly wholly owns OEP, which has had a controlling interest in the Companysince November 15, 2006 (note 4).

 

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

 

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**20.**** ****Recently Issued and Proposed Accounting Guidance:**

 

In June 2009, theFASB established the FASB Accounting Standards Codification (the “Codification”)as the source of authoritative U.S. generally accepted accounting principles (“GAAP”)recognized by the FASB for nongovernmental entities, which supersedes allexisting non-SEC accounting and reporting standards. SEC registrants must stillcomply with rules and interpretive releases of the SEC. The FASB finalizedthe Codification effective for periods ending on or after September 15,2009; therefore, the Company adopted the authoritative guidance establishingthe Codification for the interim reporting period ending September 30,2009, and it did not have a material impact on its financial condition orresults of operations.

 

In June 2009, theFASB issued authoritative guidance for transfers of financial assets. Thisguidance removes the concept of qualifying special-purpose entities andeliminates the exception from applying guidance related to consolidating ofvariable interest entities to qualifying special-purpose entities. Thisguidance requires additional disclosures in order to provide greatertransparency about transfers of financial assets and a transferor’s continuinginvolvement with transferred financial assets. This guidance is effective forthe Company on January 1, 2010. The Company is currently reviewing theguidance to assess the impact of adoption.

 

In June 2009, theFASB issued amended guidance for consolidation of variable interest entities.This guidance amends previous guidance to require companies to perform ananalysis to determine if their variable interest gives them a controllingfinancial interest in the variable interest entity, and requires ongoingreassessments of who is the primary beneficiary of a variable interest entity.This guidance also requires enhanced disclosures of information aboutinvolvement in a variable interest entity. This guidance is effective for theCompany on January 1, 2010. The Company is currently reviewing thestandard to assess the impact of adoption.

 

**21.**** ****Subsequent Events:**

 

Subsequent events havebeen evaluated through November 13, 2009, which is the date the financialstatements were issued.

 

**22.**** ****Subsidiary Guarantor Financial Information:**

 

The Notes are fully andunconditionally guaranteed, jointly and severally, by certain domestic 100percent owned 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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**22.  Subsidiary Guarantor Financial Information(continued):**

 

**NCOGROUP, INC.**

**ConsolidatingBalance Sheet**

**September 30,2009**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                                           | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current  assets:                                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Cash  and cash equivalents                                                           |       | $          | —     |           | $          | 28,104             |       | $                | 22,334     |             | $          | — |   | $ | 50,438 |   |
| Accounts  receivable, trade, net of allowance for doubtful accounts                  |       | —     |       | 170,566        |       | 22,905             |       | —           |       | 193,471          |       |
| Purchased  accounts receivable, current portion                                      |       | —     |       | 24,418         |       | 30,776             |       | —           |       | 55,194           |       |
| Deferred  income taxes                                                               |       | 1,316      |       | 29,987         |       | 493                |       | —           |       | 31,796           |       |
| Prepaid  expenses and other current assets                                           |       | 2,007      |       | 25,016         |       | 27,751             |       | —           |       | 54,774           |       |
| Assets  held for sale, current portion                                               |       | —     |       | 9,418          |       | 26                 |       | —           |       | 9,444            |       |
| Total  current assets                                                                |       | 3,323      |       | 287,509        |       | 104,285            |       | —           |       | 395,117          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Property  and equipment, net                                                         |       | —     |       | 92,420         |       | 35,253             |       | —           |       | 127,673          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Other  assets:                                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Goodwill                                                                             |       | —     |       | 499,762        |       | 61,926             |       | —           |       | 561,688          |       |
| Trade  name, net of accumulated amortization                                         |       | —     |       | 82,109         |       | 2,847              |       | —           |       | 84,956           |       |
| Customer  relationships and other intangible assets, net of accumulated amortization |       | —     |       | 259,503        |       | 21,224             |       | —           |       | 280,727          |       |
| Purchased  accounts receivable, net of current portion                               |       | —     |       | 56,983         |       | 42,391             |       | —           |       | 99,374           |       |
| Investment  in subsidiaries                                                          |       | 758,443    |       | 23,088         |       | —             |       | (781,531         | )          | —           |       |
| Other  assets                                                                        |       | 13,928     |       | 52,323         |       | (21,750            | )          | —           |       | 44,501           |       |
| Assets  held for sale, net of current portion                                        |       | —     |       | 5,955          |       | 92                 |       | —           |       | 6,047            |       |
| Total  other assets                                                                  |       | 772,371    |       | 979,723        |       | 106,730            |       | (781,531         | )          | 1,077,293        |       |
| Total  assets                                                                        |       | $          | 775,694    |           | $          | 1,359,652          |       | $                | 246,268    |             | $          | (781,531 | ) | $ | 1,600,083 |   |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                        | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Current  liabilities:                                                                |       |       |       |           |       |               |       |             |       |             |       |
| Long-term  debt, current portion                                                     |       | $          | 6,054      |           | $          | 567                |       | $                | 14,196     |             | $          | — |   | $ | 20,817 |   |
| Intercompany  (receivable) payable                                                   |       | (38,327    | )          | (75,818        | )          | 114,145            |       | —           |       | —           |       |
| Income  taxes payable                                                                |       | —     |       | —         |       | 681                |       | —           |       | 681              |       |
| Accounts  payable                                                                    |       | 750        |       | 15,537         |       | 1,063              |       | —           |       | 17,350           |       |
| Accrued  expenses                                                                    |       | 22,476     |       | 64,228         |       | 22,730             |       | —           |       | 109,434          |       |
| Accrued  compensation and related expenses                                           |       | —     |       | 35,251         |       | 12,382             |       | —           |       | 47,633           |       |
| Deferred  revenue, current portion                                                   |       | —     |       | 36,716         |       | 570                |       | —           |       | 37,286           |       |
| Liabilities  held for sale, current portion                                          |       | —     |       | 2,432          |       | 26                 |       | —           |       | 2,458            |       |
| Total  current liabilities                                                           |       | (9,047     | )          | 78,913         |       | 165,793            |       | —           |       | 235,659          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Long-term  liabilities:                                                              |       |       |       |           |       |               |       |             |       |             |       |
| Long-term  debt, net of current portion                                              |       | 578,106    |       | 388,507        |       | 6,218              |       | —           |       | 972,831          |       |
| Deferred  income taxes                                                               |       | (73,640    | )          | 127,877        |       | 5,323              |       | —           |       | 59,560           |       |
| Deferred  revenue, net of current portion                                            |       | —     |       | 4,051          |       | —             |       | —           |       | 4,051            |       |
| Other  long-term liabilities                                                         |       | 3,774      |       | 18,451         |       | 11,351             |       | —           |       | 33,576           |       |
| Liabilities  held for sale, net of current portion                                   |       | —     |       | 4,148          |       | 69                 |       | —           |       | 4,217            |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Stockholders’  equity:                                                          |       |       |       |           |       |               |       |             |       |             |       |
| Total  NCO Group, Inc. stockholders’ equity                                |       | 276,501    |       | 737,705        |       | 43,826             |       | (781,531         | )          | 276,501          |       |
| Noncontrolling  interests                                                            |       | —     |       | —         |       | 13,688             |       | —           |       | 13,688           |       |
| Total  stockholders’ equity                                                     |       | 276,501    |       | 737,705        |       | 57,514             |       | (781,531         | )          | 290,189          |       |
| Total  liabilities and stockholders’ equity                                     |       | $          | 775,694    |           | $          | 1,359,652          |       | $                | 246,268    |             | $          | (781,531 | ) | $ | 1,600,083 |   |

 

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

 

**NCOGROUP, INC.**

**ConsolidatingBalance Sheet**

**December 31,2008**

**(Unaudited)**

**(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                  |       | —     |       | 202,011        |       | 8,032              |       | —           |       | 210,043          |       |
| 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      |       | 47,721         |       | 13,449             |       | —           |       | 63,197           |       |
| Assets  held for sale, current portion                                               |       | —     |       | 11,869         |       | 135                |       | —           |       | 12,004           |       |
| Total  current assets                                                                |       | 6,084      |       | 326,034        |       | 87,228             |       | —           |       | 419,346          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Property  and equipment, net                                                         |       | —     |       | 101,077        |       | 36,819             |       | —           |       | 137,896          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| 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 |       | —     |       | 304,738        |       | 22,895             |       | —           |       | 327,633          |       |
| 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     |       | 51,698         |       | (22,436            | )          | —           |       | 44,264           |       |
| Assets  held for sale, net of current portion                                        |       | —     |       | 6,711          |       | 53                 |       | —           |       | 6,764            |       |
| Total  other assets                                                                  |       | 843,885    |       | 1,017,210      |       | 136,956            |       | (853,654         | )          | 1,144,397        |       |
| Total  assets                                                                        |       | $          | 849,969    |           | $          | 1,444,321          |       | $                | 261,003    |             | $          | (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) payable                                                   |       | (30,025    | )          | 10,812         |       | 98,188             |       | (78,975          | )          | —           |       |
| Income  taxes payable                                                                |       | —     |       | —         |       | 3,543              |       | —           |       | 3,543            |       |
| Accounts  payable                                                                    |       | —     |       | 26,927         |       | (8,909             | )          | —           |       | 18,018           |       |
| Accrued  expenses                                                                    |       | 30,440     |       | 88,702         |       | 8,580              |       | —           |       | 127,722          |       |
| Accrued  compensation and related expenses                                           |       | —     |       | 33,959         |       | 12,293             |       | —           |       | 46,252           |       |
| Deferred  revenue, current portion                                                   |       | —     |       | 40,392         |       | 339                |       | —           |       | 40,731           |       |
| Liabilities  held for sale, current portion                                          |       | —     |       | 955            |       | 19                 |       | —           |       | 974              |       |
| Total  current liabilities                                                           |       | 6,469      |       | 202,341        |       | 137,964            |       | (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                                                               |       | (64,958    | )          | 113,703        |       | 11,662             |       | —           |       | 60,407           |       |
| Deferred  revenue, net of current portion                                            |       | —     |       | 5,285          |       | —             |       | —           |       | 5,285            |       |
| Other  long-term liabilities                                                         |       | 2,826      |       | 19,106         |       | 10,602             |       | —           |       | 32,534           |       |
| Liabilities  held for sale, net of current portion                                   |       | —     |       | 3,253          |       | 55                 |       | —           |       | 3,308            |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| 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    |           | $          | 1,444,321          |       | $                | 261,003    |             | $          | (853,654 | ) | $ | 1,701,639 |   |

 

27

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Table of Contents

 

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

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

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

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                               | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                 |       | $          | —     |           | $          | 365,846            |       | $                | 81,355     |             | $          | (73,253 | ) | $ | 373,948 |   |
| Portfolio                                                |       | —     |       | 3,064          |       | (3,342             | )          | —           |       | (278             | )          |
| Portfolio  sales                                         |       | —     |       | —         |       | —             |       | —           |       | —           |       |
| Total  revenues                                          |       | —     |       | 368,910        |       | 78,013             |       | (73,253          | )          | 373,670          |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Operating  costs and expenses:                           |       |       |       |           |       |               |       |             |       |             |       |
| Payroll  and related expenses                            |       | 4          |       | 197,827        |       | 46,641             |       | (55,841          | )          | 188,631          |       |
| Selling,  general and administrative expenses            |       | 1,132      |       | 143,021        |       | 29,426             |       | (17,412          | )          | 156,167          |       |
| Depreciation  and amortization expense                   |       | —     |       | 22,695         |       | 6,556              |       | —           |       | 29,251           |       |
| Restructuring  charges                                   |       | —     |       | 539            |       | 927                |       | —           |       | 1,466            |       |
| Total  operating costs and expenses                      |       | 1,136      |       | 364,082        |       | 83,550             |       | (73,253          | )          | 375,515          |       |
| (Loss)  income from operations                           |       | (1,136     | )          | 4,828          |       | (5,537             | )          | —           |       | (1,845           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Other  income (expense):                                 |       |       |       |           |       |               |       |             |       |             |       |
| Interest  and investment income                          |       | 7          |       | 177            |       | 277                |       | —           |       | 461              |       |
| Interest  expense                                        |       | (18,651    | )          | (8,180         | )          | (365               | )          | —           |       | (27,196          | )          |
| Interest  (expense) income to affiliate                  |       | (1,824     | )          | 3,772          |       | (1,948             | )          | —           |       | —           |       |
| Subsidiary  (loss) income                                |       | (2,340     | )          | (3,296         | )          | —             |       | 5,636            |       | —           |       |
| Other  income, net                                       |       | 3,912      |       | 13             |       | —             |       | —           |       | 3,925            |       |
|                                                     |       | (18,896    | )          | (7,514         | )          | (2,036             | )          | 5,636            |       | (22,810          | )          |
| (Loss)  income before income taxes                       |       | (20,032    | )          | (2,686         | )          | (7,573             | )          | 5,636            |       | (24,655          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Income  tax expense (benefit)                            |       | 4,572      |       | (1,069         | )          | (875               | )          | —           |       | 2,628            |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income                                       |       | (24,604    | )          | (1,617         | )          | (6,698             | )          | 5,636            |       | (27,283          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Less:  Net loss attributable to noncontrolling interests |       | —     |       | —         |       | (2,679             | )          | —           |       | (2,679           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income attributable to NCO Group, Inc.  |       | $          | (24,604    | )              | $          | (1,617             | )          | $                | (4,019     | )                | $          | 5,636 |   | $ | (24,604 | ) |

 

28

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Table of Contents

 

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

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

**Forthe Three Months Ended September 30, 2008**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                               | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                 |       | $          | —     |           | $          | 371,274            |       | $                | 96,080     |             | $          | (84,573 | ) | $ | 382,781 |   |
| Portfolio                                                |       | —     |       | 7,186          |       | (9,670             | )          | —           |       | (2,484           | )          |
| Portfolio  sales                                         |       | —     |       | 121            |       | 638                |       | —           |       | 759              |       |
| Total  revenues                                          |       | —     |       | 378,581        |       | 87,048             |       | (84,573          | )          | 381,056          |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Operating  costs and expenses:                           |       |       |       |           |       |               |       |             |       |             |       |
| Payroll  and related expenses                            |       | 4          |       | 222,533        |       | 56,422             |       | (60,646          | )          | 218,313          |       |
| Selling,  general and administrative expenses            |       | 1,120      |       | 134,347        |       | 35,506             |       | (23,927          | )          | 147,046          |       |
| Depreciation  and amortization expense                   |       | —     |       | 24,945         |       | 7,025              |       | —           |       | 31,970           |       |
| Restructuring  charges                                   |       | —     |       | 681            |       | 2,701              |       | —           |       | 3,382            |       |
| Total  operating costs and expenses                      |       | 1,124      |       | 382,506        |       | 101,654            |       | (84,573          | )          | 400,711          |       |
| (Loss)  income from operations                           |       | (1,124     | )          | (3,925         | )          | (14,606            | )          | —           |       | (19,655          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Other  income (expense):                                 |       |       |       |           |       |               |       |             |       |             |       |
| Interest  and investment income                          |       | 177        |       | 535            |       | (456               | )          | —           |       | 256              |       |
| Interest  expense                                        |       | (16,252    | )          | (7,873         | )          | (857               | )          | —           |       | (24,982          | )          |
| Interest  (expense) income to affiliate                  |       | (646       | )          | 2,386          |       | (1,740             | )          | —           |       | —           |       |
| Subsidiary  (loss) income                                |       | (15,523    | )          | (6,679         | )          | —             |       | 22,202           |       | —           |       |
| Other  expense, net                                      |       | —     |       | (1,891         | )          | —             |       | —           |       | (1,891           | )          |
|                                                     |       | (32,244    | )          | (13,522        | )          | (3,053             | )          | 22,202           |       | (26,617          | )          |
| (Loss)  income before income taxes                       |       | (33,368    | )          | (17,447        | )          | (17,659            | )          | 22,202           |       | (46,272          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Income  tax benefit                                      |       | (6,890     | )          | (1,890         | )          | (5,391             | )          | —           |       | (14,171          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income                                       |       | (26,478    | )          | (15,557        | )          | (12,268            | )          | 22,202           |       | (32,101          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Less:  Net loss attributable to noncontrolling interests |       | —     |       | —         |       | (5,623             | )          | —           |       | (5,623           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income attributable to NCO Group, Inc.  |       | $          | (26,478    | )              | $          | (15,557            | )          | $                | (6,645     | )                | $          | 22,202 |   | $ | (26,478 | ) |

 

29

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Table of Contents

 

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

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

**Forthe Nine Months Ended September 30, 2009**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                               | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                 |       | $          | —     |           | $          | 1,114,936          |       | $                | 216,876    |             | $          | (219,982 | ) | $ | 1,111,830 |   |
| Portfolio                                                |       | —     |       | 23,420         |       | 18,807             |       | —           |       | 42,227           |       |
| Portfolio  sales                                         |       | —     |       | 83             |       | 278                |       | —           |       | 361              |       |
| Total  revenues                                          |       | —     |       | 1,138,439      |       | 235,961            |       | (219,982         | )          | 1,154,418        |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Operating  costs and expenses:                           |       |       |       |           |       |               |       |             |       |             |       |
| Payroll  and related expenses                            |       | 12         |       | 615,408        |       | 139,172            |       | (162,274         | )          | 592,318          |       |
| Selling,  general and administrative expenses            |       | 3,312      |       | 401,037        |       | 89,360             |       | (57,708          | )          | 436,001          |       |
| Depreciation  and amortization expense                   |       | —     |       | 69,547         |       | 21,405             |       | —           |       | 90,952           |       |
| Restructuring  charges                                   |       | —     |       | 2,113          |       | 1,133              |       | —           |       | 3,246            |       |
| Total  operating costs and expenses                      |       | 3,324      |       | 1,088,105      |       | 251,070            |       | (219,982         | )          | 1,122,517        |       |
| (Loss)  income from operations                           |       | (3,324     | )          | 50,334         |       | (15,109            | )          | —           |       | 31,901           |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Other  income (expense):                                 |       |       |       |           |       |               |       |             |       |             |       |
| Interest  and investment income                          |       | 37         |       | 941            |       | 419                |       | —           |       | 1,397            |       |
| Interest  expense                                        |       | (52,058    | )          | (23,400        | )          | (1,522             | )          | —           |       | (76,980          | )          |
| Interest  (expense) income to affiliate                  |       | (3,491     | )          | 8,236          |       | (4,745             | )          | —           |       | —           |       |
| Subsidiary  income (loss)                                |       | 12,486     |       | (10,823        | )          | —             |       | (1,663           | )          | —           |       |
| Other  income, net                                       |       | 6,695      |       | 392            |       | —             |       | —           |       | 7,087            |       |
|                                                     |       | (36,331    | )          | (24,654        | )          | (5,848             | )          | (1,663           | )          | (68,496          | )          |
| (Loss)  income before income taxes                       |       | (39,655    | )          | 25,680         |       | (20,957            | )          | (1,663           | )          | (36,595          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Income  tax (benefit) expense                            |       | (7,726     | )          | 11,285         |       | (4,615             | )          | —           |       | (1,056           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income                                       |       | (31,929    | )          | 14,395         |       | (16,342            | )          | (1,663           | )          | (35,539          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Less:  Net loss attributable to noncontrolling interests |       | —     |       | —         |       | (3,610             | )          | —           |       | (3,610           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income attributable to NCO Group, Inc.  |       | $          | (31,929    | )              | $          | 14,395             |       | $                | (12,732    | )                | $          | (1,663 | ) | $ | (31,929 | ) |

 

30

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Table of Contents

 

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

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

**Forthe Nine Months Ended September 30, 2008**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                               | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                 |       | $          | —     |           | $          | 1,107,384          |       | $                | 271,740    |             | $          | (264,745 | ) | $ | 1,114,379 |   |
| Portfolio                                                |       | —     |       | 24,821         |       | 8,909              |       | —           |       | 33,730           |       |
| Portfolio  sales                                         |       | —     |       | 439            |       | 2,060              |       | —           |       | 2,499            |       |
| Total  revenues                                          |       | —     |       | 1,132,644      |       | 282,709            |       | (264,745         | )          | 1,150,608        |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Operating  costs and expenses:                           |       |       |       |           |       |               |       |             |       |             |       |
| Payroll  and related expenses                            |       | 11         |       | 652,415        |       | 175,835            |       | (189,635         | )          | 638,626          |       |
| Selling,  general and administrative expenses            |       | 3,222      |       | 386,854        |       | 108,517            |       | (75,110          | )          | 423,483          |       |
| Depreciation  and amortization expense                   |       | —     |       | 69,674         |       | 22,229             |       | —           |       | 91,903           |       |
| Restructuring  charges                                   |       | —     |       | 4,316          |       | 5,934              |       | —           |       | 10,250           |       |
| Total  operating costs and expenses                      |       | 3,233      |       | 1,113,259      |       | 312,515            |       | (264,745         | )          | 1,164,262        |       |
| (Loss)  income from operations                           |       | (3,233     | )          | 19,385         |       | (29,806            | )          | —           |       | (13,654          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Other  income (expense):                                 |       |       |       |           |       |               |       |             |       |             |       |
| Interest  and investment income                          |       | 146        |       | 1,066          |       | (137               | )          | —           |       | 1,075            |       |
| Interest  expense                                        |       | (48,304    | )          | (21,753        | )          | (335               | )          | —           |       | (70,392          | )          |
| Interest  (expense) income to affiliate                  |       | (1,956     | )          | 6,982          |       | (5,026             | )          | —           |       | —           |       |
| Subsidiary  (loss) income                                |       | (17,409    | )          | (17,962        | )          | —             |       | 35,371           |       | —           |       |
| Other  expense, net                                      |       | —     |       | (2,052         | )          | —             |       | —           |       | (2,052           | )          |
|                                                     |       | (67,523    | )          | (33,719        | )          | (5,498             | )          | 35,371           |       | (71,369          | )          |
| (Loss)  income before income taxes                       |       | (70,756    | )          | (14,334        | )          | (35,304            | )          | 35,371           |       | (85,023          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Income  tax (benefit) expense                            |       | (20,291    | )          | 3,125          |       | (9,008             | )          | —           |       | (26,174          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income                                       |       | (50,465    | )          | (17,459        | )          | (26,296            | )          | 35,371           |       | (58,849          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Less:  Net loss attributable to noncontrolling interests |       | —     |       | —         |       | (8,384             | )          | —           |       | (8,384           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income attributable to NCO Group, Inc.  |       | $          | (50,465    | )              | $          | (17,459            | )          | $                | (17,912    | )                | $          | 35,371 |   | $ | (50,465 | ) |

 

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

 

**NCOGROUP, INC**

**ConsolidatingStatement of Cash Flows**

**Forthe Nine Months Ended September 30, 2009**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                         | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** |
| Net  cash (used in) provided by operating activities               |       | $          | (29,306    | )              | $          | 128,399            |       | $                | (5,156     | ) | $ | 93,937 |   |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  flows from investing activities:                             |       |       |       |           |       |               |       |             |       |
| Purchases  of accounts receivable                                  |       | —     |       | (44,049        | )          | (3,886             | )          | (47,935          | )          |
| Collections  applied to principal of purchased accounts receivable |       | —     |       | 23,990         |       | 41,464             |       | 65,454           |       |
| Proceeds  from sales and resales of purchased accounts receivable  |       | —     |       | 124            |       | 401                |       | 525              |       |
| Purchases  of property and equipment                               |       | —     |       | (18,658        | )          | (7,621             | )          | (26,279          | )          |
| Proceeds  from bonds and notes receivable                          |       | —     |       | 121            |       | —             |       | 121              |       |
| Net cash  paid for acquisitions and related costs                  |       | —     |       | (3,377         | )          | (652               | )          | (4,029           | )          |
| Net  cash (used in) provided by investing activities               |       | —     |       | (41,849        | )          | 29,706             |       | (12,143          | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  flows from financing activities:                             |       |       |       |           |       |               |       |             |       |
| Repayment  of notes payable                                        |       | —     |       | (294           | )          | (19,103            | )          | (19,397          | )          |
| Net  repayments of revolving credit facility                       |       | (47,000    | )          | —         |       | —             |       | (47,000          | )          |
| Repayment  of borrowings under senior term loan                    |       | (19,541    | )          | —         |       | —             |       | (19,541          | )          |
| Borrowings  under (repayments of) intercompany notes payable       |       | 66,706     |       | (73,486        | )          | 6,780              |       | —           |       |
| Payment  of fees to obtain debt                                    |       | (2,477     | )          | —         |       | —             |       | (2,477           | )          |
| Return  of investment in subsidiary to noncontrolling interests    |       | —     |       | —         |       | (5,784             | )          | (5,784           | )          |
| Issuance  of stock, net                                            |       | 39,667     |       | —         |       | —             |       | 39,667           |       |
| Payment  of deemed dividend to JPM                                 |       | (8,049     | )          | —         |       | —             |       | (8,049           | )          |
| Net  cash provided by (used in) financing activities               |       | 29,306     |       | (73,780        | )          | (18,107            | )          | (62,581          | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Effect  of exchange rate on cash                                   |       | —     |       | —         |       | 1,345              |       | 1,345            |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Net  increase in cash and cash equivalents                         |       | —     |       | 12,770         |       | 7,788              |       | 20,558           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  and cash equivalents at beginning of the period              |       | —     |       | 15,334         |       | 14,546             |       | 29,880           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  and cash equivalents at end of the period                    |       | $          | —     |           | $          | 28,104             |       | $                | 22,334     |   | $ | 50,438 |   |

 

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

 

**NCOGROUP, INC**

**ConsolidatingStatement of Cash Flows**

**Forthe Nine Months Ended September 30, 2008**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                         | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** |
| Net  cash (used in) provided by operating activities               |       | $          | (27,198    | )              | $          | 72,806             |       | $                | 48,205     |   | $ | 93,813 |   |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  flows from investing activities:                             |       |       |       |           |       |               |       |             |       |
| Purchases  of accounts receivable                                  |       | —     |       | (54,654        | )          | (53,141            | )          | (107,795         | )          |
| Collections  applied to principal of purchased accounts receivable |       | —     |       | 1,156          |       | 67,195             |       | 68,351           |       |
| Proceeds  from sales and resales of purchased accounts receivable  |       | —     |       | 531            |       | 2,301              |       | 2,832            |       |
| Purchases  of property and equipment                               |       | —     |       | (28,074        | )          | (3,465             | )          | (31,539          | )          |
| Proceeds  from bonds and notes receivable                          |       | —     |       | 928            |       | —             |       | 928              |       |
| Net  cash paid for acquisitions and related costs                  |       | —     |       | (322,517       | )          | (16,782            | )          | (339,299         | )          |
| Net  cash used in investing activities                             |       | —     |       | (402,630       | )          | (3,892             | )          | (406,522         | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  flows from financing activities:                             |       |       |       |           |       |               |       |             |       |
| Repayment  of notes payable                                        |       | —     |       | (161           | )          | (28,190            | )          | (28,351          | )          |
| Borrowings  under notes payable                                    |       | —     |       | —         |       | 17,046             |       | 17,046           |       |
| Net  borrowings under revolving credit facility                    |       | 24,500     |       | —         |       | —             |       | 24,500           |       |
| Repayment  of borrowings under senior term loan                    |       | —     |       | (9,232         | )          | —             |       | (9,232           | )          |
| Borrowings  under senior term loan, net of fees                    |       | —     |       | 134,135        |       | —             |       | 134,135          |       |
| Borrowings  under (repayments of) intercompany notes payable       |       | (191,013   | )          | 213,777        |       | (22,764            | )          | —           |       |
| Payment  of fees to obtain debt                                    |       | (10        | )          | (4,307         | )          | —             |       | (4,317           | )          |
| Investment  in subsidiary by noncontrolling interests              |       | —     |       | —         |       | 2,436              |       | 2,436            |       |
| Return  of investment in subsidiary to noncontrolling interests    |       | —     |       | —         |       | (9,234             | )          | (9,234           | )          |
| Issuance  of stock, net                                            |       | 209,719    |       | —         |       | —             |       | 209,719          |       |
| Payment  of deemed dividend to JPM                                 |       | (12,157    | )          | —         |       | —             |       | (12,157          | )          |
| Net  cash provided by (used in) financing activities               |       | 31,039     |       | 334,212        |       | (40,706            | )          | 324,545          |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Effect  of exchange rate on cash                                   |       | (3,841     | )          | —         |       | 2,052              |       | (1,789           | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Net  increase in cash and cash equivalents                         |       | —     |       | 4,388          |       | 5,659              |       | 10,047           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  and cash equivalents at beginning of the period              |       | —     |       | 17,755         |       | 13,528             |       | 31,283           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  and cash equivalents at end of the period                    |       | $          | —     |           | $          | 22,143             |       | $                | 19,187     |   | $ | 41,330 |   |

 

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**Item 2.****   ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

***Forward-LookingStatements***

 

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

 

·      the Company’s expected future results of operations;

·      economic conditions;

·      the Company’s business and growth strategy;

·      fluctuations in quarterly operating results;

·      the integration of acquisitions;

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

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

·      expected increases in operating efficiencies;

·      anticipated trends in the business process outsourcingindustry, referred to as BPO;

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

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

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

·      the effects of changes in accounting guidance; and

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

 

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

 

·      risks related to the instability in the financialmarkets;

·      risks related to adverse capital and credit marketconditions;

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

·      risks related to the domestic and internationaleconomies;

·      risks related to derivative transactions;

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

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

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

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

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

·      risks associated with growth and acquisitions;

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

·      fluctuations in quarterly operating results;

·      risks related to the timing of contracts;

·      risks related to purchased accounts receivable;

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

·      the Company’s dependence on senior management;

·      risks related to security and privacy breaches;

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

 

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·      risks associated with technology;

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

·      risks related to litigation, regulatory investigationsand tax examinations;

·      risks related to past or possible future terroristattacks;

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

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

·      risks related to the Company’s internationaloperations;

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

·      risks related to currency fluctuations;

·      risks related to reliance on independenttelecommunications service providers;

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

·      risks related to potential consumer resistance to outboundservices;

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

·      risks related to changes in government regulationsaffecting the teleservices and telecommunications industries.

 

The Company cangive no assurance that any of the events anticipated by the forward-lookingstatements will occur or, if any of them does, what impact they will have onour results of operations and financial condition. The Company disclaims anyintent or obligation to publicly update or revise any forward-looking statements,regardless of whether new information becomes available, future developmentsoccur or otherwise. For additional information concerning the risks that affectus, see our Form 10-K for the year ended December 31, 2008 and “Part II.Other Information - Item 1A. Risk Factors” of this Report on Form 10-Q.

 

# ***Overview***

# *** ***

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

 

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

 

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

 

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

·      volume fluctuations in our ARM fixed feebased services;

·      volume fluctuations in our CRM services;and,

·      variability in the collectability ofexisting portfolios and the ability to purchase portfolios at acceptable pricesfor our Portfolio Management business.

 

We have grownrapidly, through both acquisitions as well as internal growth. Effective August 31,2009, we acquired TSYS Total Debt Management, Inc., referred to as TDM, aprovider of specialty accounts receivable management services, forapproximately $4.5 million subject to certain post-closing adjustments. On February 29,2008, we acquired Outsourcing Solutions Inc., referred to as OSI, a leadingprovider of business process outsourcing

 

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services,specializing primarily in accounts receivable management services, forapproximately $339.0 million subject to the settlement of $10.0 million held inescrow. On January 2, 2008, we acquired Systems & ServicesTechnologies, Inc., referred to as SST, a third-party consumer receivableservicer, for $18.4 million.

 

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

 

***ThreeMonths Ended September 30, 2009 Compared to Three Months Ended September 30,2008***

 

*Revenue.*  Revenue decreased $7.4 million, or 1.9percent, to $373.7 million for the three months ended September 30, 2009,from $381.1 million for the three months ended September 30, 2008. For thethree months ended September 30, 2009, ARM, CRM, Portfolio Managementaccounted for $306.9 million, $85.1 million and $2.3 million of revenue,respectively. Included in ARM’s revenue was $13.6 million of intercompanyrevenue from Portfolio Management and included in CRM’s revenue was $7.0million of intercompany revenue from ARM, which were eliminated uponconsolidation. For the three months ended September 30, 2008, thesedivisions accounted for $315.0 million, $91.7 million and $(4.4) million ofrevenue, respectively. Included in ARM’s revenue was $20.3 million ofintercompany revenue from Portfolio Management and included in CRM’s revenuewas $929,000 of intercompany revenue from ARM, which were eliminated uponconsolidation.

 

ARM’s revenue decreased $8.1 million,or 2.6 percent, to $306.9 million for the three months ended September 30,2009, from $315.0 million for the three months ended September 30, 2008.The decrease in ARM’s revenue was primarily attributable to a $6.7 milliondecrease in fees from collection services performed for Portfolio Management,and lower than expected overall collections, partially offset by increasedvolume from new and existing clients in both first-party (early stage) andcontingent collections.

 

CRM’s revenue decreased $6.6 million,or 7.2 percent, to $85.1 million for the three months ended September 30,2009, from $91.7 million for the three months ended September 30, 2008.The decrease in CRM’s revenue was primarily due to lower volumes from certainexisting clients attributable to the impact of the economy on the clients’business, partially offset by increased client volume related to theimplementation of new contracts during 2008 and 2009.

 

Portfolio Management’srevenue improved by $6.7 million, or 152.3 percent, to $2.3 million for thethree months ended September 30, 2009, from $(4.4) million for the threemonths ended September 30, 2008. Portfolio Management’s collections,excluding all portfolio sales, decreased $14.6 million, or 30.2 percent, to $33.8million for the three months ended September 30, 2009, from $48.4 millionfor the three months ended September 30, 2008. Revenue for the threemonths ended September 30, 2009, included a $13.9 million impairmentcharge recorded for a valuation allowance against the carrying value of theportfolios, compared to an impairment of $32.2 million for the three monthsended September 30, 2008. Excluding the effect of the impairment charges,as well as portfolio sales, Portfolio Management’s revenue represented 47.0 percentof collections for the three months ended September 30, 2009, as comparedto 55.0 percent of collections for the three months ended September 30,2008. The remaining decrease in revenue and collections was attributable to lowerportfolio purchases and the effect of the weaker collection environment duringthe later half of 2008 and 2009. There was no revenue from portfolio sales forthe three months ended September 30, 2009, compared to $759,000 for thethree months ended September 30, 2008.

 

*Payroll and relatedexpenses.*  Payroll andrelated expenses decreased $29.7 million to $188.6 million for the three monthsended September 30, 2009, from $218.3 million for the three months ended September 30,2008, and decreased as a percentage of revenue to 50.5 percent from 57.3percent.

 

ARM’s payroll and related expenses decreased$17.7 million to $134.7 million for the three months ended September 30,2009, from $152.4 million for the three months ended September 30, 2008, anddecreased as a percentage of revenue to 43.9 percent from 48.4 percent. ARM’s payrolland related expenses decreased as a percentage of revenue primarily due to theintegration efforts following the acquisition of OSI on February 29, 2008,as well as the deployment of additional staff in off-shore locations wherelabor costs are lower. Included in ARM’s payroll and related expenses for thethree months ended September 30, 2009 and 2008, was $7.0 million and $929,000,respectively, of intercompany expense from CRM, for services provided to ARM.

 

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CRM’s payroll and related expenses decreased $4.8 millionto $60.1 million for the three months ended September 30, 2009, from $64.9million for the three months ended September 30, 2008, and decreased slightlyas a percentage of revenue to 70.6 percent from 70.8 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 expenses decreased$1.2 million to $776,000 for the three months ended September 30, 2009,from $1.9 million for the three months ended September 30, 2008. PortfolioManagement outsources all of its collection services to ARM and, therefore, hasa relatively small fixed payroll cost structure.

 

*Selling, generaland administrative expenses.* Selling, general and administrative expenses increased $9.2 million to $156.2million for the three months ended September 30, 2009, from $147.0 millionfor the three months ended September 30, 2008, and increased as apercentage of revenue to 41.8 percent from 38.6 percent.

 

ARM’s selling, general and administrative expenses increased$7.7 million to $138.2 million for the three months ended September 30,2009, from $130.5 million for the three months ended September 30, 2008, andincreased as a percentage of revenue to 45.0 percent from 41.4 percent. The increasein ARM’s selling, general and administrative expenses as a percentage ofrevenue was primarily attributable to approximately $20.0 million of reimbursableexpenses from TDM, which were also included in revenue. Excluding thereimbursable expenses from TDM, selling, general and administrative expenses asa percentage of revenue remained consistent with the prior period as a resultof the effective management of expenses in line with the lower revenue.

 

CRM’s selling, general and administrative expensesincreased $1.5 million to $17.3 million for the three months ended September 30,2009, from $15.8 million for the three months ended September 30, 2008, andincreased as a percentage of revenue to 20.3 percent from 17.2 percent. The increasein CRM’s selling, general and administrative expenses as a percentage ofrevenue was primarily attributable to increasing capacity due to anticipatedhigher client volumes, in advance of the offsetting revenue generation.

 

Portfolio Management’s selling, general andadministrative expenses decreased $6.8 million to $14.3 million for the threemonths ended September 30, 2009, from $21.1 million for the three monthsended September 30, 2008, but increased as a percentage of revenue, excludingportfolio sales revenue and net impairment charges, to 88.2 percent from 77.5percent. The decrease in Portfolio Management’s selling, general andadministrative expenses resulted from a $6.7 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 September 30, 2009 and 2008, was $13.7 million and $20.3million, respectively, of intercompany expense from ARM, for services providedto Portfolio Management.

 

*Restructuringcharge. *During the threemonths ended September 30, 2009, we incurred restructuring charges of $1.5million related to the restructuring of our legacy operations to streamline ourcost structure. The charges consisted primarily of severance costs. Thiscompares to $3.4 million of restructuring charges for the three months ended  September 30, 2008.

 

*Depreciation and amortization.* Depreciation and amortization decreased to $29.3 million for the threemonths ended September 30, 2009, from $32.0 million for the three monthsended September 30, 2008. The decrease was primarily attributable to lowerdepreciation resulting from a lower level of property and equipment.

 

*Other income(expense).*  Interestexpense increased to $27.2 million for the three months ended September 30,2009, from $25.0 million for the three months ended September 30, 2008. Theincrease was primarily attributable to higher interest rates under our amended seniorcredit facility, partially offset by lower outstanding debt under our seniorcredit facility. Interest expense for the three months ended September 30,2009 and 2008 included $5.2 million of losses and $551,000 of gains,respectively, from interest rate swap agreements and embedded derivatives. Otherincome (expense), net for the three months ended September 30, 2009 and 2008included approximately $3.9 million of net gains and $1.9 million of net losses,respectively, resulting from foreign exchange contracts.

 

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*Incometax (benefit) expense*.  For the three months ended September 30,2009, the effective income tax rate decreased to (10.7) percent from 30.6percent for the three months ended September 30, 2008 due primarily to therecognition of a valuation allowance on certain domestic net deferred taxassets.

 

***Nine MonthsEnded September 30, 2009 Compared to Nine Months Ended September 30,2008***

 

*Revenue.*  Revenue remained unchanged at $1.2 billion forthe nine months ended September 30, 2009, compared to the nine monthsended September 30, 2008. For the nine months ended September 30,2009, ARM, CRM, Portfolio Management accounted for $914.4 million, $259.5million and $40.3 million of revenue, respectively. Included in ARM’s revenue was$47.7 million of intercompany revenue from Portfolio Management and included inCRM’s revenue was $12.0 million of intercompany revenue from ARM, which were eliminatedupon consolidation. For the nine months ended September 30, 2008, thesedivisions accounted for $923.0 million, $262.2 million and $33.1 million ofrevenue, respectively. Included in ARM’s revenue was $65.9 million ofintercompany revenue from Portfolio Management and included in CRM’s revenuewas $1.9 million of intercompany revenue from ARM, which were eliminated uponconsolidation.

 

ARM’s revenue decreased $8.6 million,or 0.9 percent, to $914.4 million for the nine months ended September 30,2009, from $923.0 million for the nine months ended September 30, 2008.The decrease in ARM’s revenue was primarily attributable to an $18.2 milliondecrease in fees from collection services performed for Portfolio Managementand lower than expected overall collections, partially offset by increasedvolume from new and existing clients in both first-party (early stage) andcontingent collections.

 

CRM’s revenue decreased $2.7 million,or 1.0 percent, to $259.5 million for the nine months ended September 30,2009, from $262.2 million for the nine months ended September 30, 2008.The decrease in CRM’s revenue was primarily due to lower volumes from certainexisting clients attributable to the impact of the economy on the clients’business, partially offset by increased client volumes related to theimplementation of new contracts during 2008 and 2009.

 

Portfolio Management’srevenue increased $7.2 million, or 21.8 percent, to $40.3 million for the nine monthsended September 30, 2009, from $33.1 million for the nine months ended September 30,2008. Portfolio Management’s collections, excluding all portfolio sales,decreased $40.9 million, or 26.0 percent, to $116.5 million for the nine monthsended September 30, 2009, from $157.4 million for the nine months ended September 30,2008. Revenue for the nine months ended September 30, 2009, included a$15.3 million impairment charge recorded for a valuation allowance against thecarrying value of the portfolios, compared to an impairment of $63.0 millionfor the nine months ended September 30, 2008. Excluding the effect of theimpairment charges, as well as portfolio sales, portfolio Management’s revenuerepresented 46.3 percent of collections for the nine months ended September 30,2009 as compared to 59.0 percent of collections for the nine months ended September 30,2008. The remaining decrease in revenue and collections was attributable to lowerportfolio purchases and the affect of the weaker collection environment duringthe latter half of 2008 and 2009. Portfolio sales revenue for the nine monthsended September 30, 2009 was $361,000, compared to $2.5 million for the ninemonths ended September 30, 2008.

 

*Payroll and relatedexpenses.*  Payroll andrelated expenses decreased $46.3 million to $592.3 million for the nine monthsended September 30, 2009, from $638.6 million for the nine months ended September 30,2008, and decreased as a percentage of revenue to 51.3 percent from 55.5percent.

 

ARM’s payroll and related expenses decreased$25.4 million to $417.8 million for the nine months ended September 30,2009, from $443.2 million for the nine months ended September 30, 2008, anddecreased as a percentage of revenue to 45.7 percent from 48.0 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 nine months ended September 30, 2009 and 2008, was $12.0 million and $1.8million, respectively, of intercompany expense from CRM, for services providedto ARM.

 

CRM’s payroll and related expenses decreased $8.5million to $182.7 million for the nine months ended September 30, 2009,from $191.2 million for the nine months ended September 30, 2008, anddecreased as a 

 

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percentage of revenue to 70.4 percent from 72.9percent. The decrease as a percentage of revenue was primarily a result of ourcontinuing deployment of additional staff in off-shore locations where laborcosts are lower.

 

Portfolio Management’s payroll and related expensesdecreased $2.2 million to $3.8 million for the nine months ended September 30,2009, from $6.0 million for the nine months ended September 30, 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 $12.5 million to$436.0 million for the nine months ended September 30, 2009, from $423.5million for the nine months ended September 30, 2008, and increased as apercentage of revenue to 37.8 percent from 36.8 percent.

 

ARM’s selling, general and administrative expensesincreased $9.6 million to $384.7 million for the nine months ended September 30,2009, from $375.1 million for the nine months ended September 30, 2008, andincreased as a percentage of revenue to 42.1 percent from 40.6 percent. Theincrease in ARM’s selling, general and administrative expenses as a percentageof revenue was primarily attributable to approximately $20.0 million ofreimbursable expenses from TDM, which were also included in revenue. Excludingthe reimbursable expenses from TDM, selling, general and administrativeexpenses as a percentage of revenue remained consistent with the prior periodas a result of the effective management of expenses in line with the lower revenueas well as integration efforts following the OSI acquisition.

 

CRM’s selling, general and administrative expensesincreased $3.8 million to $49.6 million for the nine months ended September 30,2009, from $45.8 million for the nine months ended September 30, 2008, andincreased as a percentage of revenue to 19.1 percent from 17.5 percent. Theincrease in CRM’s selling, general and administrative expenses as a percentageof revenue was primarily attributable to increasing capacity due to anticipatedhigher client volumes, in advance of the offsetting revenue generation.

 

Portfolio Management’s selling, general andadministrative expenses decreased $19.1 million to $49.4 million for the nine monthsended September 30, 2009, from $68.5 million for the nine months ended September 30,2008, but increased as a percentage of revenue, excluding portfolio salesrevenue and net impairment charges, to 89.5 percent from 73.0 percent. Thedecrease in Portfolio Management’s selling, general and administrative expensesresulted from an $18.2 million decrease in fees for collection servicesprovided by ARM. The increase as a percentage of revenue was primarily due tothe decrease in revenue due to lower collections. Included in PortfolioManagement’s selling, general and administrative expenses for the nine monthsended September 30, 2009 and 2008, was $47.7 million and $65.9 million,respectively, of intercompany expense from ARM, for services provided toPortfolio Management.

 

*Restructuringcharge. *During the nine monthsended September 30, 2009, we incurred restructuring charges of $3.2million related to the restructuring of our legacy operations to streamline ourcost structure. The charges consisted primarily of severance costs. Thiscompares to $10.3 million of restructuring charges for the nine months ended September 30,2008.

 

*Depreciation and amortization.* Depreciation and amortization decreased slightly to $91.0 million forthe nine months ended September 30, 2009, from $91.9 million for the nine monthsended September 30, 2008.

 

*Other income(expense).*  Interestexpense increased to $77.0 million for the nine months ended September 30,2009, from $70.4 million for the nine months ended September 30, 2008. Theincrease was attributable to additional borrowings under the senior creditfacility primarily to fund a portion of the acquisition of OSI and higherinterest rates under our amended senior credit facility. Interest expense forthe nine months ended September 30, 2009 and 2008 included $10.2 millionof losses and $4.1 million of gains, respectively, from interest rate swapagreements and embedded derivatives. Other income (expense), net for the nine monthsended September 30, 2009 and 2008 included approximately $6.7 million ofnet gains and $2.2 million of net losses, respectively, resulting from foreignexchange contracts.

 

*Incometax (benefit) expense*.  For the nine months ended September 30,2009, the effective income tax rate decreased to 2.9 percent from 30.8 percent forthe nine months ended September 30, 2008 due primarily to the recognition ofa valuation allowance on certain domestic net deferred tax assets.

 

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***Liquidity and Capital Resources***

 

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

 

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

 

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

 

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

 

We have a senior credit facility, referred to as theCredit Facility, that consists of a term loan ($569.1 million outstanding as ofSeptember 30, 2009) and a $100.0 million revolving credit facility ($34.5million outstanding as of September 30, 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 thefinancial covenants, including increasing maximum leverage ratios, decreasingminimum interest 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 $30.0million; (vi) permit us under certain circumstances to increase the sizeof our revolving credit facility by up to $50.0 million in the aggregate; and (vii) limitour ability to invest in purchased accounts receivable under certaincircumstances.

 

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. Our senior notes and seniorsubordinated notes are currently trading at a substantial discount to theirface amounts. We or our stockholders may from time to time seek to retireor purchase our outstanding notes through cash purchases and/or exchanges forequity securities, in open market purchases, privately negotiated transactionsor otherwise. Our stockholders who acquire such notes may seek tocontribute 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 the amendmentdiscussed 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 

 

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price of $40.0 million. The proceeds were used to paydown $15.0 million of term loan borrowings, and the remainder, net of expenses,of $22.5 million was used to repay borrowings under our revolving creditfacility.

 

The exclusivity agreement with our nonrecourse lenderexpired on June 30, 2009. We are currently discussing future lendingfacilities for purchases of accounts receivable with the existing lender andother third-party lenders. We may have to use available cash or borrowingsunder our revolving credit facility to fund purchases of accounts receivable ifwe are unable to replace this agreement, which may limit the amount ofportfolios we are able to purchase and limit borrowings for other uses.

 

*Cash Flows from Operating Activities*. Cash provided by operating activities was $93.9 million for the nine monthsended September 30, 2009, compared to $93.8 million for the nine monthsended September 30, 2008. A decrease in accounts payable and accruedexpenses of $17.8 million for the nine months ended September 30, 2009,compared to an increase of $4.4 million in the prior year period, was primarilydue to changes in the fair value of derivative instruments. This decrease wasoffset by a decrease in accounts receivable, trade of $28.3 million for the ninemonths ended September 30, 2009 compared to a decrease of $18.9 million inthe prior year period and a decrease in other assets of $12.4 million, comparedto a decrease of $2.7 million in the prior year period.

 

*Cash Flows from InvestingActivities.*  Cash used in investing activities was $12.1 millionfor the nine months ended September 30, 2009, compared to $406.5 millionfor the nine months ended September 30, 2008. The decrease in cash used ininvesting activities was primarily attributable to net cash paid foracquisitions and related costs of $339.3 million during the nine months ended September 30,2008, primarily incurred in connection with the acquisition of OSI on February 29,2008, as well as lower purchases of accounts receivable.

 

*Cash Flows from FinancingActivities.*  Cash used in financing activities was $62.6 millionfor the nine months ended September 30, 2009, compared to cash provided byfinancing activities of $324.5 million for the nine months ended September 30,2008. The cash used in financing activities was due primarily to the repaymentsof borrowings under our Credit Facility totaling $66.5 million and higher netrepayments of nonrecourse notes payable, offset in part by net proceeds fromthe issuance of $39.7 million of stock that was used to fund the repayments.Cash provided by financing activities in the prior year period consistedprimarily of additional senior term loan borrowings of $134.1 million and theissuance of $210.0 million of stock, both of which were used primarily to fundthe OSI acquisition.

 

*Senior Credit Facility*.  Our Credit Facility is with a syndicate offinancial institutions and 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 September 30, 2009, the balance outstanding on the term loan was $569.1million and the balance outstanding on the revolving credit facility was $34.5million. The availability of the revolving credit facility is reduced by anyunused letters of credit ($15.7 million at September 30, 2009). As of September 30,2009, we had $49.8 million of remaining availability under the revolving creditfacility.

 

Borrowings under theCredit Facility are collateralized by substantially all of our assets. TheCredit Facility contains certain financial and other covenants such asmaintaining a maximum leverage ratio and a minimum interest coverage ratio, andincludes restrictions on, among other things, acquisitions, the incurrence 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 September 30, 2009.

 

*SeniorNotes and Senior Subordinated Notes.*  We have $165.0million of floating rate senior notes due 2013, referred to as the SeniorNotes, and $200.0 million of 11.875 percent senior subordinated notes due 2014,referred to as the Senior Subordinated Notes, collectively referred to as theNotes. The Notes are guaranteed, jointly and severally, on a senior basis withrespect to the Senior Notes and on a senior subordinated basis with respect tothe Senior Subordinated Notes, in each case by all of our existing and futuredomestic restricted subsidiaries (other than 

 

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certain subsidiaries andjoint ventures engaged in financing the purchase of delinquent accountsreceivable portfolios and certain immaterial subsidiaries).

 

The Senior Notes are unsecuredsenior obligations and are senior in right of payment to all existing andfuture 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 orsubstantially all of our property and assets or the winding up or liquidationof our affairs and, in each case, such decree or order remains unstayed and ineffect for a period of 60 consecutive days, the principal of, premium, if any,and accrued interest on the notes then outstanding will automatically becomeand be immediately due and payable. Additionally, if we or any subsidiaryguarantor commence a voluntary case under any applicable bankruptcy, insolvencyor other similar law now or hereafter in effect, or consent to the entry of anorder for relief in an involuntary case under any such law, consent to theappointment of or taking possession by a receiver, liquidator, assignee,custodian, trustee, sequestrator or similar official or for all orsubstantially all of our property and assets or substantially all of theproperty and assets of a significant subsidiary (as defined in the indentures)or effect any general assignment for the benefit of creditors, the principalof, premium, if any, and accrued interest on the notes then outstanding willautomatically become and be immediately due and payable.

 

*NonrecourseCredit Facility.*  We had a nonrecourse credit facility and anexclusivity agreement, collectively referred to as the Nonrecourse Agreement.The Nonrecourse Agreement provides that all purchases of accounts receivable byus with a purchase price in excess of $1.0 million were first offered to thelender for financing at its discretion. If the lender chose to participate inthe financing of a portfolio of accounts receivable, the financing was structured,depending on the size and nature of the portfolio to be purchased, either as aborrowing arrangement or under various equity sharing arrangements. The lenderfinanced non-equity borrowings with floating interest at an annual rate equalto LIBOR plus 2.50 percent, or as negotiated. These borrowings are nonrecourseto us 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. Total 

 

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debt outstanding underthis facility as of September 30, 2009 was $18.5 million, including $2.4million of accrued residual interest. As of September 30, 2009, we were incompliance with all required covenants.

 

The exclusivity agreementto the Nonrecourse Agreement expired on June 30, 2009. The borrowingsoutstanding under the nonrecourse credit facility were not affected and remainsubject to the terms discussed above. We are currently discussing futurelending facilities for purchases of accounts receivable with our existinglender and other third-party lenders. We may have to use available cash orborrowings under our revolving credit facility to fund purchases of accountsreceivable if we are unable to replace this agreement, which may limit theamount of portfolios we are able to purchase and limit borrowings for otheruses.

 

Borrowings under the NonrecourseAgreement are nonrecourse to us, except for the assets within the entitiesestablished in connection with the financing agreement. The Nonrecourse Agreementcontains a collections performance requirement, among other covenants, that, ifnot met, provides for cross-collateralization with any other portfoliosfinanced through the agreement, in addition to other remedies.

 

*ContractualObligations.* Therehave been no material changes, outside the ordinary course of our business, toour contractual obligations as of December 31, 2008 as reported in our AnnualReport on Form 10-K for the year ended December 31, 2008.

 

***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.* Foreigncurrency exposures arise from transactions denominated in a currency other thanthe functional currency and from foreign denominated revenue and profittranslated into U.S. dollars. The primary currencies to which we are exposedinclude the Canadian dollar, the Philippine peso, the British pound and theAustralian dollar. Due to the size of the Canadian and Philippine operations,we currently use forward exchange contracts to limit potential losses inearnings or cash flows from adverse foreign currency exchange rate movements. Thesecontracts are entered into to protect against the risk that the eventual cashflows resulting from such contracts will be adversely affected by changes inexchange rates. Our objective is to maintain economically balanced currencyrisk management strategies that provide adequate downside protection. Duringthe nine months ended September 30, 2009, we continued to see volatilityof the U.S. dollar, primarily as it relates to the Canadian dollar and thePhilippine peso. We believe this trend may continue, and if so, it could have anegative impact on our future results of operations.

 

*Interest Rate Risk. *At September 30, 2009, we had $787.1 million inoutstanding variable rate borrowings. A material change in interest rates couldadversely affect our operating results and cash flows. A 25 basis-pointincrease in interest rates could increase our annual interest expense by$125,000 for each $50 million of variable debt outstanding for the entire year.We currently use interest rate swap agreements and interest rate cap agreementsin a effort to limit potential losses from adverse interest rate changes.

 

***CriticalAccounting Policies and Estimates***

* *

*General.* The preparation of consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and the accompanying notes.Actual results could differ from those estimates. We believe the followingaccounting policies and estimates are the most critical and could have the mostimpact on our results of operations: goodwill, other intangible assets andpurchase accounting, revenue recognition for purchased accounts receivable,income taxes, and allowance for doubtful accounts. These are described in note2 to our 2008 financial statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2008. During the nine months ended September 30,2009, we did not make any material changes to our estimates or methods by whichestimates are derived with regard to our critical accounting policies.

 

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***Recently Issued Accounting Guidance***

 

For a discussion ofrecently issued accounting guidance, see note 20 in our Notes to ConsolidatedFinancial Statements included in this Form 10-Q.

 

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

 

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

 

## **Item4T.  Controls and Procedures**

##  

Our management, with the participation of our chiefexecutive officer and chief financial officer, conducted an evaluation of theeffectiveness of our disclosure controls and procedures, as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e), as of September 30, 2009.Based on that evaluation, our chief executive officer and chief financialofficer concluded 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 September 30,2009, 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 September 30,2009.

 

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, client audits and tax examinations incidental to its business.The Company continually monitors these legal proceedings, regulatoryinvestigations and tax examinations to determine the impact and any requiredaccruals.

 

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.

 

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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 amicably resolve the matter. The Company expects that actualdamages incurred as a result of this incident, if any, will be covered byinsurance.

 

TaxMatters:

 

TheCompany received notice of a reassessment from a foreign taxing authorityrelating to certain matters occurring from 1998 through 2001 regarding one ofits subsidiaries in the amount of $15.7 million including interest andpenalties. In order to pursue an appeal of the reassessment, the Company paid adeposit of $8.5 million in December 2008. In October 2009, the Company entered into asettlement agreement regarding the reassessment, and expects to receive arefund of approximately $3.0 million. As a result of the settlement in October 2009,management will adjust its reserve during the fourth quarter of 2009.

 

AttorneysGeneral:

 

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

 

Other:

 

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

 

**Item 1A.********Risk Factors**

 

Inaddition to the other information set forth in this Quarterly Report on Form 10-Q,you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008, referred to as the “2008 Form 10-K”in this filing, which could materially affect our business, financial conditionor future results. The risk factors in our 2008 Form 10-K have notmaterially changed. The risks described in our 2008 Form 10-K are not theonly risks we face. Additional risks and uncertainties not currently known tous or that we currently deem to be immaterial also may materially adverselyaffect our business, financial condition and/or operating results.

 

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

 

None

 

**Item 3.****   ****Defaults Upon Senior Securities**

 

None

 

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

 

TheAnnual Meeting of Stockholders of the Company was held on July 28, 2009.At the Annual Meeting, the stockholders elected Austin A. Adams, Michael J. Barrist, Henry H. Briance,David M. Cohen, Colin M. Farmer, Edward A. Kangas and Leo J. Pound as directors to serve for a term of one year.Each director received 2,832,408 “FOR” votes and there were no votes againstany of the directors.

 

**Item 5.****   ****Other Information**

 

(a)   None

 

(b)   Not applicable

 

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

 

12            Statement of Computation of Ratio of Earnings to FixedCharges.

 

31.1         Certification of Chief Executive Officer pursuant to Rule 15d-14(a) promulgatedunder the Exchange Act.

 

31.2         Certification of Chief Financial Officer pursuant to Rule 15d-14(a) promulgatedunder the Exchange Act.

 

32.1         Certification of the Company’s ChiefExecutive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2         Certification of the Company’s ChiefFinancial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

 

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**Signatures**

 

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

 
|   |                    | NCO Group, Inc. |
|--------|-------------------------|----------------------|
|   |                    |                 |   |
|   |                    |                 |   |
| Date:  | November 13,  2009 |                 | By: | /s/ Michael J.  Barrist |
|   |                    |                 |   | Michael J. Barrist |
|   |                    |                 |   | Chairman of the Board,  President |
|   |                    |                 |   | and Chief Executive  Officer |
|   |                    |                 |   | (principal executive  officer) |
|   |                    |                 |   |
|   |                    |                 |   |
| Date:  | November 13,  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**                                                                                                                                                                   |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                              |
| 12                   |       | Statement of  Computation of Ratio of Earnings to Fixed Charges.                                                                                                                  |
|                 |       |                                                                                                                                                                              |
| 31.1                 |       | Certification of Chief  Executive Officer pursuant to Rule 15d-14(a) promulgated under the  Exchange Act.                                                               |
|                 |       |                                                                                                                                                                              |
| 31.2                 |       | Certification of Chief  Financial Officer pursuant to Rule 15d-14(a) promulgated under the  Exchange Act.                                                               |
|                 |       |                                                                                                                                                                              |
| 32.1                 |       | Certification of the  Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|                 |       |                                                                                                                                                                              |
| 32.2                 |       | Certification of the  Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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