Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-Q**

 

**(Mark one)**

 
| **x**                                                                                                                                                                                                                                                                                     | ** ** | **Quarterly report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                |
| **For the  quarterly period ended June 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**

 

**NCO GROUP, 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 check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas 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 checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o  No x

 

The number ofshares outstanding of each of the issuer’s classes of common stock as of  August 13, 2009 was: 2,960,847 shares ofClass A common stock, $0.01 par value and 399,814 shares of Class Lcommon stock, $0.01 par value.

 

 

 

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Table ofContents

 

**NCOGROUP, INC.**

 

**INDEX**

 
| ** **                                    | ** **                                                                                                                         | ** ** | **PAGE** |
|-----------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                          |                                                                                                                               |       |
| **PART I  — FINANCIAL INFORMATION** |                                                                                                                               |       |
|                                          |                                                                                                                               |       |
| Item 1.                                       | FINANCIAL STATEMENTS (Unaudited)                                                                                                   |       |     |
|                                          |                                                                                                                               |       |     |
|                                          | Consolidated  Balance Sheets - June 30, 2009 and December 31, 2008                                                       |       | 1        |
|                                          |                                                                                                                               |       |     |
|                                          | Consolidated  Statements of Operations - Three and Six Months Ended June 30, 2009 and  2008                                   |       | 2        |
|                                          |                                                                                                                               |       |     |
|                                          | Consolidated  Statements of Stockholders’ Equity - Year Ended December 31, 2008 and  Six Months Ended June 30, 2009 |       | 3        |
|                                          |                                                                                                                               |       |     |
|                                          | Consolidated  Statements of Cash Flows - Six Months Ended June 30, 2009 and 2008                                              |       | 4        |
|                                          |                                                                                                                               |       |
|                                          | Notes to Consolidated Financial Statements                                                                                         |       | 5        |
|                                          |                                                                                                                               |       |
| 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                                                                                                                  |       | 45       |
|                                          |                                                                                                                               |       |
| Item 1A.                                      | RISK FACTORS                                                                                                                       |       | 46       |
|                                          |                                                                                                                               |       |
| Item 2.                                       | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                                       |       | 46       |
|                                          |                                                                                                                               |       |
| Item 3.                                       | DEFAULTS UPON  SENIOR SECURITIES                                                                                                   |       | 46       |
|                                          |                                                                                                                               |       |
| 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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Tableof Contents

 

**Part I.  Financial Information**

**Item1.  Financial Statements**

** **

**NCOGROUP, INC.**

**Consolidated Balance Sheets**

**(Unaudited)**

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

 
| ** **                                                                                                                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                   | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                                                                   | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                                                   | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current  assets:                                                                                                                             |       |              |       |                  |       |
| Cash  and cash equivalents                                                                                                                   |       | $                 | 35,449     |                  | $          | 29,880 |   |
| Accounts  receivable, trade, net of allowance for doubtful accounts of $6,429 and  $5,008, respectively                                      |       | 201,014           |       | 218,649               |       |
| Purchased  accounts receivable, current portion, net of allowance for impairment of  $125,229 and $123,804, respectively                     |       | 61,553            |       | 70,006                |       |
| Deferred  income taxes                                                                                                                       |       | 34,354            |       | 34,216                |       |
| Prepaid  expenses and other current assets                                                                                                   |       | 68,087            |       | 66,595                |       |
| Total  current assets                                                                                                                        |       | 400,457           |       | 419,346               |       |
|                                                                                                                                         |       |              |       |                  |       |
| Funds  held on behalf of clients (note 7)                                                                                                    |       |              |       |                  |       |
|                                                                                                                                         |       |              |       |                  |       |
| Property  and equipment, net                                                                                                                 |       | 130,166           |       | 138,272               |       |
|                                                                                                                                         |       |              |       |                  |       |
| Other  assets:                                                                                                                               |       |              |       |                  |       |
| Goodwill                                                                                                                                     |       | 560,825           |       | 564,617               |       |
| Trade  name, net of accumulated amortization                                                                                                 |       | 85,126            |       | 85,466                |       |
| Customer  relationships and other intangible assets,net of accumulated amortization                                                          |       | 301,987           |       | 333,951               |       |
| Purchased  accounts receivable, net of current portion                                                                                       |       | 110,721           |       | 115,653               |       |
| Other  assets                                                                                                                                |       | 45,971            |       | 44,334                |       |
| Total  other assets                                                                                                                          |       | 1,104,630         |       | 1,144,021             |       |
| Total  assets                                                                                                                                |       | $                 | 1,635,253  |                  | $          | 1,701,639 |   |
|                                                                                                                                         |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                               | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                                                                                                                         |       |              |       |                  |       |
| Current  liabilities:                                                                                                                        |       |              |       |                  |       |
| Long-term  debt, current portion                                                                                                             |       | $                 | 23,967     |                  | $          | 30,559 |   |
| Income  taxes payable                                                                                                                        |       | 1,326             |       | 3,543                 |       |
| Accounts  payable                                                                                                                            |       | 24,359            |       | 18,026                |       |
| Accrued  expenses                                                                                                                            |       | 104,517           |       | 128,474               |       |
| Accrued  compensation and related expenses                                                                                                   |       | 45,550            |       | 46,466                |       |
| Deferred  revenue, current portion                                                                                                           |       | 37,453            |       | 40,731                |       |
| Total  current liabilities                                                                                                                   |       | 237,172           |       | 267,799               |       |
|                                                                                                                                         |       |              |       |                  |       |
| Funds  held on behalf of clients (note 7)                                                                                                    |       |              |       |                  |       |
|                                                                                                                                         |       |              |       |                  |       |
| Long-term  liabilities:                                                                                                                      |       |              |       |                  |       |
| Long-term  debt, net of current portion                                                                                                      |       | 981,198           |       | 1,048,517             |       |
| Deferred  income taxes                                                                                                                       |       | 61,763            |       | 63,596                |       |
| Deferred  revenue, net of current portion                                                                                                    |       | 5,573             |       | 5,404                 |       |
| Other  long-term liabilities                                                                                                                 |       | 32,864            |       | 32,534                |       |
|                                                                                                                                         |       |              |       |                  |       |
| Commitments  and contingencies (note 14)                                                                                                     |       |              |       |                  |       |
|                                                                                                                                         |       |              |       |                  |       |
| Stockholders’  equity:                                                                                                                  |       |              |       |                  |       |
| Preferred  stock, par value $0.01 per share, 7,500 shares authorized, 2,938 and 2,573  shares issued and outstanding, respectively           |       | 29                |       | 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                                                                                                                  |       | 763,410           |       | 720,955               |       |
| Accumulated  other comprehensive loss                                                                                                        |       | (7,029            | )          | (10,007               | )          |
| Accumulated  deficit                                                                                                                         |       | (457,346          | )          | (450,021              | )          |
| Total  NCO Group, Inc. stockholders’ equity                                                                                        |       | 299,098           |       | 260,986               |       |
| Noncontrolling  interests                                                                                                                    |       | 17,585            |       | 22,803                |       |
| Total  stockholders’ equity                                                                                                             |       | 316,683           |       | 283,789               |       |
| Total  liabilities and stockholders’ equity                                                                                             |       | $                 | 1,635,253  |                  | $          | 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 Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                               | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| ** **                                               | ** ** | **2009**                       | ** ** | **2008**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                     |       |                           |       |                         |       |   |   |   |   |
| Revenues:                                                |       |                           |       |                         |       |   |   |   |   |
| Services                                                 |       | $                              | 361,768    |                         | $          | 396,553 |   | $ | 737,882 |   | $ | 731,598 |   |
| Portfolio                                                |       | 16,851                         |       | 7,514                        |       | 42,505 |   | 36,214 |   |
| Portfolio  sales                                         |       | —                         |       | 917                          |       | 361 |   | 1,740 |   |
|                                                     |       |                           |       |                         |       |   |   |   |   |
| Total  revenues                                          |       | 378,619                        |       | 404,984                      |       | 780,748 |   | 769,552 |   |
|                                                     |       |                           |       |                         |       |   |   |   |   |
| Operating  costs and expenses:                           |       |                           |       |                         |       |   |   |   |   |
| Payroll  and related expenses                            |       | 197,922                        |       | 223,894                      |       | 403,687 |   | 420,313 |   |
| Selling,  general and administrative expenses            |       | 137,642                        |       | 147,619                      |       | 279,834 |   | 276,437 |   |
| Depreciation  and amortization expense                   |       | 30,619                         |       | 32,147                       |       | 61,701 |   | 59,933 |   |
| Restructuring  charges                                   |       | 1,337                          |       | 4,227                        |       | 1,780 |   | 6,868 |   |
| Total  operating costs and expenses                      |       | 367,520                        |       | 407,887                      |       | 747,002 |   | 763,551 |   |
|                                                     |       |                           |       |                         |       |   |   |   |   |
| Income  (loss) from operations                           |       | 11,099                         |       | (2,903                       | )          | 33,746 |   | 6,001 |   |
|                                                     |       |                           |       |                         |       |   |   |   |   |
| Other  income (expense):                                 |       |                           |       |                         |       |   |   |   |   |
| Interest  and investment income                          |       | 594                            |       | 539                          |       | 936 |   | 819 |   |
| Interest  expense                                        |       | (26,674                        | )          | (23,003                      | )          | (49,784 | ) | (45,410 | ) |
| Other  income (expense), net                             |       | 6,866                          |       | (579                         | )          | 3,162 |   | (161 | ) |
| Total  other income (expense)                            |       | (19,214                        | )          | (23,043                      | )          | (45,686 | ) | (44,752 | ) |
| Loss  before income taxes                                |       | (8,115                         | )          | (25,946                      | )          | (11,940 | ) | (38,751 | ) |
|                                                     |       |                           |       |                         |       |   |   |   |   |
| Income  tax benefit                                      |       | (2,538                         | )          | (8,107                       | )          | (3,684 | ) | (12,003 | ) |
|                                                     |       |                           |       |                         |       |   |   |   |   |
| Net  loss                                                |       | (5,577                         | )          | (17,839                      | )          | (8,256 | ) | (26,748 | ) |
|                                                     |       |                           |       |                         |       |   |   |   |   |
| Less:  Net loss attributable to noncontrolling interests |       | (361                           | )          | (3,088                       | )          | (931 | ) | (2,761 | ) |
|                                                     |       |                           |       |                         |       |   |   |   |   |
| Net  loss attributable to NCO Group, Inc.           |       | $                              | (5,216     | )                            | $          | (14,751 | ) | $ | (7,325 | ) | $ | (23,987 | ) |

 

See accompanyingnotes.

 

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**NCOGROUP, INC.**

**Consolidated Statements ofStockholders’ Equity**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                                         | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **     | ** ** | **Accumulated**    | ** ** | **Retained**     | ** ** | **Total**                 | ** ** | ** **         | ** ** | ** **             | ** ** | ** **         | ** **  |
|------------------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|----------------|------------|--------------------|------------|------------------|------------|---------------------------|------------|--------------------|------------|------------------------|------------|--------------------|-------------|
| ** **                                                                         | ** ** | ** **    | ** ** | **Class L** | ** ** | **Class A** | ** ** | **Additional** | ** ** | **Other**          | ** ** | **Earnings**     | ** ** | **NCO  Group, Inc.** | ** ** | ** **         | ** ** | **Total**              | ** ** | **Total**          | ** **  |
| ** **                                                                         | ** ** | **Preferred** | ** ** | **Common**       | ** ** | **Common**       | ** ** | **Paid-in**    | ** ** | **Comprehensive**  | ** ** | **(Accumulated** | ** ** | **Stockholders’**    | ** ** | **Noncontrolling** | ** ** | **Stockholders’** | ** ** | **Comprehensive**  | ** **  |
| ** **                                                                         | ** ** | **Stock**     | ** ** | **Stock**        | ** ** | **Stock**        | ** ** | **Capital**    | ** ** | **Income  (Loss)** | ** ** | **Deficit)**     | ** ** | **Equity**                | ** ** | **Interests**      | ** ** | **Equity**             | ** ** | **Income  (Loss)** | ** **  |
| ** **                                                                         | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **                | ** ** | ** **         | ** ** | ** **             | ** ** | ** **         | ** **  |
| Balance,  January 1, 2008                                                     |       | $             | 14         |             | $          | 4                |       | $              | 18         |               | $          | 518,089          |       | $                         | 2,835      |               | $          | (112,915               | )          | $                  | 408,045     |   | $ | 48,948 |   | $ | 456,993 |   |   |   |
|                                                                               |       |          |       |             |       |             |       |           |       |               |       |             |       |                      |       |               |       |                   |       |               |        |
| Issuance  of stock                                                                 |       | 9             |       | —           |       | 10               |       | 219,702        |       | —             |       | —           |       | 219,721                   |       | —             |       | 219,721                |       |               |        |
| Deemed  dividend to JPM for SST acquisition                                        |       | —        |       | —           |       | —           |       | (17,500        | )          | —             |       | —           |       | (17,500                   | )          | —             |       | (17,500                | )          |               |        |
| Preferred  stock dividends                                                         |       | 3             |       | —           |       | —           |       | (3             | )          | —             |       | —           |       | —                    |       | —             |       | —                 |       |               |        |
| Stock-based  compensation                                                          |       | —        |       | —           |       | 1                |       | 667            |       | —             |       | —           |       | 668                       |       | —             |       | 668                    |       |               |        |
| Distributions  to noncontrolling interests                                         |       | —        |       | —           |       | —           |       | —         |       | —             |       | —           |       | —                    |       | (12,242            | )          | (12,242                | )          |               |        |
| Investment  in subsidiary by noncontrolling interests                              |       | —        |       | —           |       | —           |       | —         |       | —             |       | —           |       | —                    |       | 2,436              |       | 2,436                  |       |               |        |
| Business  combinations                                                             |       | —        |       | —           |       | —           |       | —         |       | —             |       | —           |       | —                    |       | 1,911              |       | 1,911                  |       |               |        |
| Comprehensive  income, net of tax:                                                 |       |          |       |             |       |             |       |           |       |               |       |             |       |                      |       |               |       |                   |       |               |        |
| Net  loss                                                                          |       | —        |       | —           |       | —           |       | —         |       | —             |       | (337,106         | )          | (337,106                  | )          | (18,250            | )          | (355,356               | )          | $                  | (355,356    | ) |
| Other  comprehensive income (loss):                                                |       |          |       |             |       |             |       |           |       |               |       |             |       |                      |       |               |       |                   |       |               |        |
| Foreign  currency translation adjustment                                           |       | —        |       | —           |       | —           |       | —         |       | (6,569             | )          | —           |       | (6,569                    | )          | —             |       | (6,569                 | )          | (6,569             | )           |
| Change  in fair value of cash flow hedges, net of taxes of $7,880                  |       | —        |       | —           |       | —           |       | —         |       | (13,818            | )          | —           |       | (13,818                   | )          | —             |       | (13,818                | )          | (13,818            | )           |
| Net  losses on cash flow hedges reclassified into earnings, net of taxes of $4,302 |       | —        |       | —           |       | —           |       | —         |       | 7,545              |       | —           |       | 7,545                     |       | —             |       | 7,545                  |       | 7,545              |        |
| Total  comprehensive loss                                                          |       |          |       |             |       |             |       |           |       |               |       |             |       |                      |       |               |       |                   |       | $                  | (368,198    | ) |
|                                                                               |       |          |       |             |       |             |       |           |       |               |       |             |       |                      |       |               |       |                   |       |               |        |
| **Balance, December 31, 2008**                                                | ** ** | **26**        | ** ** | **4**            | ** ** | **29**           | ** ** | **720,955**    | ** ** | **(10,007**        | **)**      | **(450,021**     | **)**      | **260,986**               | ** ** | **22,803**         | ** ** | **283,789**            | ** ** | ** **         | ** **  |
|                                                                               |       |          |       |             |       |             |       |           |       |               |       |             |       |                      |       |               |       |                   |       |               |        |
| Issuance  of stock, net                                                            |       | 1             |       | —           |       | —           |       | 39,664         |       | —             |       | —           |       | 39,665                    |       | —             |       | 39,665                 |       |               |        |
| Deemed  investment by JPM for SST purchase price adjustment                        |       | —        |       | —           |       | —           |       | 2,161          |       | —             |       | —           |       | 2,161                     |       | —             |       | 2,161                  |       |               |        |
| Preferred  stock dividends                                                         |       | 2             |       | —           |       | —           |       | (2             | )          | —             |       | —           |       | —                    |       | —             |       | —                 |       |               |        |
| Stock-based  compensation                                                          |       | —        |       | —           |       | 1                |       | 632            |       | —             |       | —           |       | 633                       |       | —             |       | 633                    |       |               |        |
| Distributions  to noncontrolling interests                                         |       | —        |       | —           |       | —           |       | —         |       | —             |       | —           |       | —                    |       | (4,287             | )          | (4,287                 | )          |               |        |
| Comprehensive  income, net of tax:                                                 |       |          |       |             |       |             |       |           |       |               |       |             |       |                      |       |               |       |                   |       |               |        |
| Net  loss                                                                          |       | —        |       | —           |       | —           |       | —         |       | —             |       | (7,325           | )          | (7,325                    | )          | (931               | )          | (8,256                 | )          | $                  | (8,256      | ) |
| Other  comprehensive income (loss):                                                |       |          |       |             |       |             |       |           |       |               |       |             |       |                      |       |               |       |                   |       |               |        |
| Foreign  currency translation adjustment                                           |       | —        |       | —           |       | —           |       | —         |       | 896                |       | —           |       | 896                       |       | —             |       | 896                    |       | 896                |        |
| Change  in fair value of cash flow hedges, net of taxes of $410                    |       | —        |       | —           |       | —           |       | —         |       | (719               | )          | —           |       | (719                      | )          | —             |       | (719                   | )          | (719               | )           |
| Net  losses on cash flow hedges reclassified into earnings, net of taxes of $1,597 |       | —        |       | —           |       | —           |       | —         |       | 2,801              |       | —           |       | 2,801                     |       | —             |       | 2,801                  |       | 2,801              |        |
| Total  comprehensive loss                                                          |       |          |       |             |       |             |       |           |       |               |       |             |       |                      |       |               |       |                   |       | $                  | (5,278      | ) |
|                                                                               |       |          |       |             |       |             |       |           |       |               |       |             |       |                      |       |               |       |                   |       |               |        |
| **Balance, June 30, 2009**                                                    | ** ** | **$**         | **29**     | ** **       | **$**      | **4**            | ** ** | **$**          | **30**     | ** **         | **$**      | **763,410**      | ** ** | **$**                     | **(7,029** | **)**              | **$**      | **(457,346**           | **)**      | **$**              | **299,098** | ** ** | **$** | **17,585** | ** ** | **$** | **316,683** | ** ** | ** ** | ** ** |

 

See accompanyingnotes.

 

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**NCOGROUP, INC**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                                                        | ** ** | **For the Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                        | ** ** | **June 30,**            | ** ** |
| ** **                                                                                        | ** ** | **2009**                     | ** ** | **2008** | ** ** |
| ** **                                                                                        | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Cash  flows from operating activities:                                                            |       |                         |       |   |   |
| Net  loss                                                                                         |       | $                            | (8,256     | ) | $ | (26,748 | ) |
| Adjustments  to reconcile net loss from operations to net cash provided by operating  activities: |       |                         |       |   |   |
| Depreciation  and amortization                                                                    |       | 61,701                       |       | 59,933 |   |
| Amortization  of deferred training asset                                                          |       | 1,275                        |       | 1,350 |   |
| Provision  for doubtful accounts                                                                  |       | 2,154                        |       | 1,060 |   |
| Impairment  of purchased accounts receivable                                                      |       | 1,341                        |       | 30,774 |   |
| Noncash  interest                                                                                 |       | 4,214                        |       | (468 | ) |
| Net  gains on derivative instruments                                                              |       | (195                         | )          | (273 | ) |
| Gain  on sale of purchased accounts receivable                                                    |       | (361                         | )          | (1,740 | ) |
| Deferred  income taxes                                                                            |       | (5,744                       | )          | (13,465 | ) |
| Other                                                                                             |       | 653                          |       | 1,144 |   |
| Changes  in operating assets and liabilities, net of acquisitions:                                |       |                         |       |   |   |
| Accounts  receivable, trade                                                                       |       | 16,423                       |       | 20,870 |   |
| Other  assets                                                                                     |       | 215                          |       | 2,540 |   |
| Accounts  payable and accrued expenses                                                            |       | (10,937                      | )          | 162 |   |
| Income  taxes payable                                                                             |       | (2,177                       | )          | (4,901 | ) |
| Other  long-term liabilities                                                                      |       | (1,373                       | )          | (1,926 | ) |
| Net  cash provided by operating activities                                                        |       | 58,933                       |       | 68,312 |   |
|                                                                                              |       |                         |       |   |   |
| Cash  flows from investing activities:                                                            |       |                         |       |   |   |
| Purchases  of accounts receivable                                                                 |       | (32,954                      | )          | (73,889 | ) |
| Collections  applied to principal of purchased accounts receivable                                |       | 46,653                       |       | 45,784 |   |
| Proceeds  from sales and resales of purchased accounts receivable                                 |       | 525                          |       | 1,885 |   |
| Purchases  of property and equipment                                                              |       | (18,055                      | )          | (18,310 | ) |
| Proceeds  from bonds and notes receivable                                                         |       | 149                          |       | 418 |   |
| Net  cash paid for acquisitions and related costs                                                 |       | (780                         | )          | (325,463 | ) |
| Net  cash used in investing activities                                                            |       | (4,462                       | )          | (369,575 | ) |
|                                                                                              |       |                         |       |   |   |
| Cash  flows from financing activities:                                                            |       |                         |       |   |   |
| Repayment  of notes payable                                                                       |       | (15,148                      | )          | (19,760 | ) |
| Borrowings  under notes payable                                                                   |       | —                       |       | 13,306 |   |
| Net  (repayments of) borrowings under revolving credit facility                                   |       | (41,000                      | )          | 9,000 |   |
| Repayment  of borrowings under senior term loan                                                   |       | (18,027                      | )          | (7,718 | ) |
| 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                                             |       | —                       |       | 2,191 |   |
| Return  of investment in subsidiary to noncontrolling interests                                   |       | (4,287                       | )          | (5,631 | ) |
| 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                                              |       | (49,321                      | )          | 318,768 |   |
|                                                                                              |       |                         |       |   |   |
| Effect  of exchange rate on cash                                                                  |       | 419                          |       | (372 | ) |
|                                                                                              |       |                         |       |   |   |
| Net  increase in cash and cash equivalents                                                        |       | 5,569                        |       | 17,133 |   |
|                                                                                              |       |                         |       |   |   |
| Cash  and cash equivalents at beginning of the period                                             |       | 29,880                       |       | 31,283 |   |
|                                                                                              |       |                         |       |   |   |
| Cash  and cash equivalents at end of the period                                                   |       | $                            | 35,449     |   | $ | 48,416 |   |

 

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 a leading global provider ofbusiness process outsourcing solutions, primarily focused on accountsreceivable management (“ARM”) and customer relationship management (“CRM”). NCOprovides services through over 100 offices throughout North America, Asia,Europe and Australia. The Company provides services to more than 14,000 activeclients, including many of the Fortune 500, supporting a broad spectrum of industries,including financial services, telecommunications, healthcare, retail andcommercial, education and government, utilities, education, technology andtransportation/logistics services. These clients are primarily locatedthroughout North America, Europe and Australia. The Company’s largest client isin the telecommunications sector and represented 9.1 percent of the Company’sconsolidated revenue for the six months ended June 30, 2009. The Companyalso purchases and collects past due consumer accounts receivable from consumercreditors 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”) Statement of Financial Accounting Standards (“SFAS”) No. 141,“Business Combinations” (“SFAS 141”) states that a “business combination”excludes transfers of net assets or exchanges of equity interests betweenentities under common control. SFAS 141 also states that transfers of netassets or exchanges of equity interests between entities under common controlshould be accounted for similar to the pooling-of-interests method (“as-ifpooling-of-interests”) in that the entity that receives the net assets or theequity interests initially recognizes the assets and liabilities transferred attheir carrying amounts in the accounts of the transferring entity at the dateof transfer. Because the Company and SST were under common control at the timeof the SST acquisition, the transfer of assets and liabilities of SST wereaccounted for at historical cost in a manner similar to a pooling of interests.For financial accounting purposes, the acquisition was viewed as a change inreporting entity and, as a result, required restatement of the Company’sfinancial statements for all periods subsequent to November 15, 2006, thedate on which common control of the Company and SST by JPM commenced.

 

The Company alsoconsiders the applicability of FASB Financial Interpretation No. (“FIN”)46R (as revised), “Consolidation of Variable Interest Entities, an Interpretationof ARB No. 51,” (“FIN 46R”) which would include any variable interestentities that are required to be consolidated by the primary beneficiary. Theprimary beneficiary is the entity that holds the majority of the beneficialinterests in the variable interest entity. A variable interest entity is an entity for which the primarybeneficiary’s interest in the entity can change with changes in factors otherthan the amount of investment in the entity.

 

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

 

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

 

*InterimFinancial Information:*

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim financial information. Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements. The December 31,2008 balance sheet was derived from the consolidated audited financialstatements of the Company, but does not include all disclosures required byaccounting principles generally accepted in the United States of America. Inthe opinion of management, all adjustments (consisting of only normal recurringadjustments, except as otherwise disclosed herein) considered necessary for afair presentation have been included. Because of the seasonal nature of theCompany’s business, operating results for the three-month and six-month periodsended June 30, 2009, are not necessarily indicative of the results thatmay be expected for the year ending December 31, 2009, or for any otherinterim 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”).

 

*DeferredRevenue:*

 

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

 
| Balance  at December 31, 2008       |   | $      | 46,135 |   |
|------------------------------------------|--------|--------|--------|--------|
| Additions                                |   | 3,085  |   |
| Revenue  recognized                      |   | (6,256 | )      |
| Foreign  currency translation adjustment |   | 62     |   |
| Balance  at June 30, 2009           |   | $      | 43,026 |   |

 

*Use ofEstimates:*

 

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

 

*Basisof Presentation:*

 

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

 

*Reclassifications:*

 

Certain amounts in the balance sheetas of December 31, 2008, and the statement of operations for the three andsix months ended June 30, 2008, and statement of cash flows for the sixmonths ended June 30, 2008 have been reclassified for comparativepurposes.

 

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

 

The Company hasrestructuring charges, primarily recorded in conjunction with the acquisitionsof Outsourcing 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                           |       | 156        |       | 1,624         |       | 1,780     |       |
| Cash  payments                     |       | (2,061     | )          | (1,992        | )          | (4,053    | )          |
| Balance  at June 30, 2009     |       | $          | 4,777      |          | $          | 2,252     |       | $ | 7,029 |   |

 

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

 

On February 29,2008, the Company acquired OSI, a leading provider of business processoutsourcing services, specializing primarily in accounts receivable managementservices, for $339.0 million in cash, subject to certain post-closingadjustments. The purchase price was financed in part by the issuance of 802,262shares of the Company’s Series A 14% PIK Preferred Stock, 37,738 shares ofClass L common stock and 1,012,262 shares of Class A common stock.The remainder of the purchase price was financed by borrowings of $139.0million under the Company’s amended senior credit facility (note 9). TheCompany allocated $117.0 million of the purchase price to the customerrelationships, $3.4 million to the trade names, $634,000 to the non-competeagreements, and recorded goodwill of $212.4 million, which is non-deductiblefor tax purposes, in the ARM segment.

 

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                     |       | (1,328     | )          | (1,094        | )          | (2,422    | )          |
| Balance  at June 30, 2009     |       | $          | 2,878      |          | $          | 105       |       | $ | 2,983 |   |

 

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

 
| ** **                    | ** ** | **For the Six**        | ** ** |
|-------------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **Months Ended**       | ** ** |
| ** **                    | ** ** | **June 30, 2008** | ** ** |
| Revenue                       |       | $                      | 840,937    |   |
| Net  loss attributable to NCO |       | (28,543                | )          |
|                               |            |                        |            |  |

 

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.****                ****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** | ** ** |
|-----------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | **June 30, 2009**  | ** ** | **December 31, 2008** | ** ** |
| ** **                  | ** ** | **Level 1**             | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|                        |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Assets:                     |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Forward  exchange contracts |       | $                       | —     |   | $ | 243 |   | $ | — |   | $ | 243 |   | $ | — |   | $ | 923 |   | $ | — |   | $ | 923 |   |
| Interest  rate caps         |       | —                  |       | — |   | — |   | — |   | — |   | 1 |   | — |   | 1 |   |
|                        |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  rate swaps        |       | —                  |       | 11,109 |   | — |   | 11,109 |   | — |   | 13,180 |   | — |   | 13,180 |   |
| Forward  exchange contracts |       | —                  |       | 2,974 |   | — |   | 2,974 |   | — |   | 11,360 |   | — |   | 11,360 |   |
| Embedded  derivatives       |       | —                  |       | — |   | 2,703 |   | 2,703 |   | — |   | — |   | 3,742 |   | 3,742 |   |
|                        |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  liabilities            |       | $                       | —     |   | $ | 13,840 |   | $ | 2,703 |   | $ | 16,543 |   | $ | — |   | $ | 23,616 |   | $ | 3,742 |   | $ | 27,358 |   |

 

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

 

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

 

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**5.****                ****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 Six Months Ended** | ** ** |
|---------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                      | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| ** **                      | ** ** | **2009**                       | ** ** | **2008**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| Balance  at beginning of period |       | $                              | 3,164      |                         | $          | 7,863 |   | $ | 3,742 |   | $ | 9,647 |   |
| Accrued  interest additions     |       | 226                            |       | 484                          |       | 498 |   | 1,136 |   |
| Interest  payments              |       | (562                           | )          | (518                         | )          | (1,137 | ) | (1,432 | ) |
| Change  in fair value           |       | (125                           | )          | (2,055                       | )          | (400 | ) | (3,577 | ) |
| Balance  at end of period       |       | $                              | 2,703      |                         | $          | 5,774 |   | $ | 2,703 |   | $ | 5,774 |   |

 

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 the appropriatefair value adjustment to record.

 

**6.****             ****Purchased Accounts Receivable:**

 

PortfolioManagement and the U.K. and Australian divisions of ARM purchase defaultedconsumer accounts receivable at a discount from the contractual principalbalance. As of June 30, 2009, the carrying value of Portfolio Management’sand ARM’s purchased accounts receivable were $168.0 million and $4.3 million,respectively. The total outstanding balance due, representing the originalundiscounted contractual amount less collections since acquisition, was $52.4billion at June 30, 2009 and December 31, 2008.

 

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

 
| ** **                                                           | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                           | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| ** **                                                           | ** ** | **2009**                       | ** ** | **2008**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| Balance  at beginning of period                                      |       | $                              | 177,114    |                         | $          | 260,885 |   | $ | 185,659 |   | $ | 245,585 |   |
| Purchases:                                                           |       |                           |       |                         |       |   |   |   |   |
| Cash  purchases                                                      |       | 16,523                         |       | 34,521                       |       | 32,954 |   | 73,889 |   |
| Portfolios  acquired in business combinations                        |       | —                         |       | —                       |       | — |   | 4,076 |   |
| Collections                                                          |       | (39,246                        | )          | (55,372                      | )          | (89,592 | ) | (112,385 | ) |
| Revenue  recognized                                                  |       | 17,717                         |       | 32,029                       |       | 42,939 |   | 66,601 |   |
| Proceeds  from portfolio sales and resales applied to carrying value |       | —                         |       | (108                         | )          | (164 | ) | (145 | ) |
| Allowance  for impairment                                            |       | (1,308                         | )          | (24,609                      | )          | (1,341 | ) | (30,774 | ) |
| Other                                                                |       | 1,474                          |       | 67                           |       | 1,819 |   | 566 |   |
| Balance  at end of period                                            |       | $                              | 172,274    |                         | $          | 247,413 |   | $ | 172,274 |   | $ | 247,413 |   |

 

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

 

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 Six Months Ended** | ** ** |
|--------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| ** **               | ** ** | **2009**                       | ** ** | **2008**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| Proceeds  from sales     |       | $                              | —     |                         | $          | 1,025 |   | $ | 525 |   | $ | 1,885 |   |
| Less  carrying value     |       | —                         |       | 108                          |       | 164 |   | 145 |   |
| Portfolio  sales revenue |       | $                              | —     |                         | $          | 917 |   | $ | 361 |   | $ | 1,740 |   |

 

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

 
| ** **                      | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|---------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                      | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| ** **                      | ** ** | **2009**                       | ** ** | **2008**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| Balance  at beginning of period |       | $                              | 123,801    |                         | $          | 31,127 |   | $ | 123,804 |   | $ | 24,962 |   |
| Additions                       |       | 2,865                          |       | 24,751                       |       | 5,655 |   | 31,110 |   |
| Recoveries                      |       | (1,557                         | )          | (142                         | )          | (4,314 | ) | (336 | ) |
| Other                           |       | 120                            |       | —                       |       | 84 |   | — |   |
| Balance  at end of period       |       | $                              | 125,229    |                         | $          | 55,736 |   | $ | 125,229 |   | $ | 55,736 |   |

 

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 Six Months Ended** | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                            | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| ** **                                            | ** ** | **2009**                       | ** ** | **2008**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| Balance  at beginning of period                       |       | $                              | 154,196    |                         | $          | 360,237 |   | $ | 167,411 |   | $ | 366,584 |   |
| Additions                                             |       | 19,063                         |       | 32,958                       |       | 38,363 |   | 83,743 |   |
| Revenue  recognition                                  |       | (17,717                        | )          | (32,029                      | )          | (42,939 | ) | (66,601 | ) |
| Reclassifications  from (to) nonaccretable difference |       | 5,119                          |       | (34,558                      | )          | (2,220 | ) | (56,970 | ) |
| Foreign  currency translation adjustment              |       | (386                           | )          | (81                          | )          | (340 | ) | (229 | ) |
| Balance  at end of period                             |       | $                              | 160,275    |                         | $          | 326,527 |   | $ | 160,275 |   | $ | 326,527 |   |

 

During the three monthsended June 30, 2009 and 2008, the Company purchased accounts receivablewith a cost of $16.5 million and $34.5 million, respectively, that hadcontractually required payments receivable at the date of acquisition of $671.5million and $1.1 billion, respectively, and expected cash flows at the date ofacquisition of $35.6 million and $67.5 million, respectively. During the sixmonths ended June 30, 2009 and 2008, the Company purchased accountsreceivable with a cost of $32.9 million and $73.9 million, respectively, thathad contractually required payments receivable at the date of acquisition of$1.8 billion and $2.5 billion, respectively, and expected cash flows at thedate of acquisition of $71.3 million and $153.4 million, respectively.

 

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

 

In the course of theCompany’s subsidiaries’ regular business activities as a provider of accountsreceivable management services, the Company receives clients’ funds arisingfrom the collection of accounts placed with the Company. These funds are placedin segregated cash accounts and are generally remitted to clients within 30days. Funds held on behalf of clients of $79.6 million and $77.1 million at June 30,2009 and December 31, 2008, respectively, have been shown net of theiroffsetting liability for financial statement presentation.

 

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

 

SFAS No. 142, “Goodwilland Other Intangible Assets” requires goodwill to be allocated and tested atthe reporting unit level. Goodwill is tested for impairment each year duringthe fourth quarter, and between annual tests if an event occurs orcircumstances change during the six months ended June 30, 2009 that wouldmore likely than not reduce the fair value of a reporting unit below itscarrying amount. No event occurred or circumstances changed since the lastannual test that would more likely than not reduce the fair value of areporting unit below its carrying value. However, if the Company continues toexperience adverse effects of the challenging economic and businessenvironment, including changes in financial projections, the Company may haveto recognize an impairment of all or some portion of its goodwill.  The Company’s reporting units are ARM, CRMand Portfolio Management. The Company’s reporting units had the followinggoodwill (amounts in thousands):

 
| ** **                         | ** ** | **ARM** | ** ** | **CRM** | ** ** | **Total** | ** ** |
|------------------------------------|------------|---------|------------|---------|------------|-----------|------------|
| Balance  at December 31, 2008 |       | $       | 482,849    |    | $          | 81,768    |       | $ | 564,617 |   |
| OSI  acquisition                   |       | (1,358  | )          | —  |       | (1,358    | )          |
| Other                              |       | (2,434  | )          | —  |       | (2,434    | )          |
| Balance  at June 30, 2009     |       | $       | 479,057    |    | $          | 81,768    |       | $ | 560,825 |   |

 

The decrease in ARM’sgoodwill balance from December 31, 2008 to June 30, 2009, wasprimarily due to the finalization of the allocation of the fair market value ofthe acquired assets and liabilities related to the OSI acquisition, certain othersmall acquisitions and changes in the exchange rates used for foreign currencytranslation.

 

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 June 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 subject to amortization. At June 30, 2009, accumulated amortization ofthe OSI trade names was $907,000.

 

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

** **
| ** **              | ** ** | **June 30, 2009**     | ** ** | **December 31, 2008**    | ** ** |
|-------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Customer  relationships |       | $                          | 452,657    |                          | $          | 152,763 |   | $ | 450,827 |   | $ | 119,409 |   |
| Non-compete  agreements |       | 4,006                      |       | 1,913                         |       | 4,006 |   | 1,473 |   |
| Total                   |       | $                          | 456,663    |                          | $          | 154,676 |   | $ | 454,833 |   | $ | 120,882 |   |

 

The Company recordedamortization expense for all other intangible assets of $17.7 million and $17.0million during the three months ended June 30, 2009 and 2008,respectively, and $34.6 million and $30.9 million during the six months ended June 30,2009 and 2008, respectively. The following represents the Company’s expectedamortization expense from these other intangible assets over the next fiveyears (amounts in thousands):

 
| **For the Years Ended  December 31,** | ** ** | **Estimated  Amortization Expense** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------|------------|
| 2009                                                      |       | $                                        | 67,943     |   |
| 2010                                                      |       | 66,803                                   |       |
| 2011                                                      |       | 66,440                                   |       |
| 2012                                                      |       | 62,212                                   |       |
| 2013                                                      |       | 55,681                                   |       |
|                                                           |            |                                          |            |  |

 

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**9.****             ****Long-Term Debt:**

 

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

 
| ** **                        | ** ** | **June 30, 2009** | ** **    | **December 31, 2008** | ** ** |
|-----------------------------------|------------|------------------------|---------------|----------------------------|------------|
|                              |       |                   |          |                       |       |
| Senior  term loan                 |       | $                      | 570,578       |                       | $          | 588,605 |   |
| Senior  revolving credit facility |       | 40,500                 |          | 81,500                     |       |
| Senior  subordinated notes        |       | 200,000                |          | 200,000                    |       |
| Senior  notes                     |       | 165,000                |          | 165,000                    |       |
| Nonrecourse  credit facility      |       | 22,603                 |          | 37,244                     |       |
| Capital  leases                   |       | 5,015                  |          | 5,232                      |       |
| Other                             |       | 1,469                  |          | 1,495                      |       |
| Less  current portion             |       | (23,967                | )             | (30,559                    | )          |
|                              |       | $                      |  981,198 |                       | $          | 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 ($570.6 million outstanding at June 30, 2009)and a $100.0 million revolving credit facility. The Company is required to makequarterly principal repayments of $1.5 million on the term loan until itsmaturity in May 2013, at which time its remaining balance outstanding isdue. The Company is also required to make annual prepayments of 50 percent, 25percent or zero percent of its excess annual cash flow, based on its leverageratio. The revolving credit facility requires no minimum principal paymentsuntil its maturity in November 2011. The availability of the revolvingcredit facility is reduced by any unused letters of credit ($19.6 million at June 30,2009). As of June 30, 2009, the Company had $39.9 million of remainingavailability under the revolving credit facility.

 

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

 

Subsequent to theamendment, all borrowings bear interest at an annual rate equal to either, atthe option of the Company, (i) the higher of the prime rate (3.25 percentat June 30, 2009), the federal funds rate (0.22 percent at June 30,2009) plus 0.50 percent, or LIBOR (0.31 percent 30-day LIBOR at June 30,2009) plus 1.00 percent, plus a margin of 2.25 percent to 2.75 percent in thecase of the revolving credit facility and 3.75 percent to 4.00 percent in thecase of the term loan, based on the Company’s funded debt to earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”) ratio, as defined; or(ii) LIBOR, but in no event less than 2.50 percent, plus a margin of 3.25percent to 3.75 percent in the case of the revolving credit facility and 4.75percent to 5.00 percent in the case of the term loan, based on the Company’sfunded debt to EBITDA ratio, as defined. The Company is charged a quarterlycommitment fee on the unused portion of the revolving credit facility at anannual rate of 0.50 percent. The effective interest rate on the Credit Facilitywas approximately 9.00 percent and 7.56 percent for the three months ended June 30,2009 and 2008, respectively, and 7.99 percent and 7.64 percent for the sixmonths ended June 30, 2009 and 2008, respectively. The Credit Facilityalso requires that the Company obtain certain levels of interest rateprotection.

 

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

 

*Senior CreditFacility (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 June 30, 2009.

 

*Senior Notes andSenior 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 5.93 percent and7.74 percent for the three months ended June 30, 2009 and 2008,respectively, and 6.26 percent and 8.30 percent for the six months ended June 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.

 

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

 

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

 

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** **

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

 

*Nonrecourse CreditFacility:*

 

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 (0.31 percent 30-day LIBOR at June 30, 2009) plus 2.50percent, or as negotiated. These borrowings are nonrecourse to the Company andare 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 accountsreceivable, which may limit the amount of portfolios the Company is able topurchase and limit 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.

 

Total debt outstandingunder this facility was $22.6 million and $37.2 million as of June 30,2009 and December 31, 2008, respectively, which included $2.7 million and$3.7 million, respectively, of accrued residual interest. The effectiveinterest rate on these loans, including the residual interest component, wasapproximately 8.3 percent and 9.5 percent for the three months ended June 30,2009 and 2008, respectively, and 9.9 percent and 10.0 percent for the sixmonths ended June 30, 2009 and 2008, respectively. The nonrecourse creditfacility contains certain covenants such as meeting minimum cumulativecollection targets. As of June 30, 2009, the Company was in compliancewith all required covenants.

 

**10.****      ****Stockholders’ Equity:**

 

*PreferredStock and Common Stock:*

 

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

 

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

 

| ** **      | ** ** | **May 31,** | ** ** | **February 28,** | ** ** |
|-----------------|------------|------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2009**         | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Series A   |       | 92,665           |       | 80,879                |       | 87,211 |   | 49,108 |   |
| Series B-1 |       | 7,176            |       | —                |       | 1,713 |   | — |   |

 

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

 

*PreferredStock and Common Stock (continued):*

 

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).

 

OnMarch 25, 2009, in connection with the amendment of the Company’s Credit Facility (note 9), the Companysold 147,447 shares of its Series B-1 Preferred Stock and 20,973 shares ofits Series B-2 Preferred Stock to One Equity Partners, Michael J. Barristand certain members of executive management, and other co-investors for anaggregate purchase price of $40.0 million. The proceeds were 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 the revolving credit facility.

 

*NoncontrollingInterests:*

 

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

 

In accordance with theprovisions of SFAS 160, losses are attributed to noncontrolling interests evenif they exceed the noncontrolling interests’ equity. If the Company had notapplied the provisions of the SFAS 160, net income attributable to NCO wouldhave been $688,000 and $1.2 million lower for the three and six months ended June 30,2009, respectively.

 

*ComprehensiveIncome:*

 

Comprehensive income(loss) for the three and six months ended June 30, 2009 and 2008 was asfollows (amounts in thousands):

 
| ** **                                                             | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                             | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| ** **                                                             | ** ** | **2009**                       | ** ** | **2008**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  loss attributable to NCO Group, Inc.                         |       | $                              | (5,216     | )                            | $          | (14,751 | ) | $ | (7,325 | ) | $ | (23,987 | ) |
| Foreign  currency translation adjustments                              |       | 4,053                          |       | 144                          |       | 896 |   | (427 | ) |
| Change  in fair value of cash flow hedges, net of tax                  |       | —                         |       | 5,297                        |       | (719 | ) | (1,946 | ) |
| Net  losses on cash flow hedges reclassified into earnings, net of tax |       | 1,492                          |       | 1,050                        |       | 2,801 |   | 1,133 |   |
| Comprehensive  income (loss) - NCO Group, Inc.                    |       | 329                            |       | (8,260                       | )          | (4,347 | ) | (25,227 | ) |
| Net  loss attributable to noncontrolling interests                     |       | (361                           | )          | (3,088                       | )          | (931 | ) | (2,761 | ) |
| Total  comprehensive loss                                              |       | $                              | (32        | )                            | $          | (11,348 | ) | $ | (5,278 | ) | $ | (27,988 | ) |

 

**11.****      ****Derivative Financial Instruments:**

 

The Company enters intoforward exchange contracts to minimize the impact of currency fluctuations ontransactions and cash flows. These contracts may be designated as cash flowhedges. The Company had forward exchange contracts for the purchase of 201.0million Philippine pesos and 62.0 million Canadian dollars outstanding at June 30,2009, which mature throughout the remainder of 2009.

 

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**11.****      ****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 $341.9 million. The Company is required to pay thecounterparties quarterly interest payments at a weighted average fixed rateranging from 3.41 to 4.89 percent, and receives from the counterpartiesvariable quarterly interest payments based on LIBOR. The net interest paid orreceived is included in interest expense. On March 25, 2009, the Companyamended its senior credit facility, which amendment included a minimum LIBOR of2.50 percent (note 9). This amendment caused the existing interest rate swapsto become ineffective and, as of March 25, 2009, these interest rate swapswere not accounted for as cash flow hedges. Accordingly, 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’s nonrecoursecredit facility relating to purchased accounts receivable contains contingentpayments that are accounted for as embedded derivatives.

 

The Company enters intointerest rate cap contracts to minimize the impact of LIBOR fluctuations ontransactions and cash flows. The Company had interest rate caps covering anaggregate notional amount of $57.0 million at June 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):

 
| ** **                                            | ** ** | **June 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        |       | $                          | 243        |   | Other current assets |   | $ | 923 |   |
| Interest  rate caps                                   |       |                        |       |                       |       | Other current assets |   | 1 |   |
| Total  asset derivatives not designated as hedges     |       |                        |       | $                          | 243        |   |   |   | $ | 924 |   |
|                                                  |       |                        |       |                       |       |   |   |   |   |
| *Liability derivatives*                               |       |                        |       |                       |       |   |   |   |   |
| Interest  rate swaps                                  |       | Accrued expenses            |       | $                          | 11,109     |   |   |   |   |   |
| Forward  exchange contracts                           |       | Accrued expenses            |       | 2,974                      |       | Accrued expenses |   | $ | 11,360 |   |
| Embedded  derivatives                                 |       | Long-term debt              |       | 2,703                      |       | Long-term debt |   | 3,742 |   |
| Total  liability derivatives not designated as hedges |       |                        |       | $                          | 16,786     |   |   |   | $ | 15,102 |   |

 

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

 

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

 
| ** **                                          | ** ** | ** **                                                              | ** ** | **For the Three Months Ended June 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                                                        |       | $                                            | —     |   | $ | — |   | $ | 5,647 |   | $ | (1,144 | ) |
|                                                |       |                                                                    |       |                                         |       |   |   |   |   |   |   |
| Forward  exchange contracts                         |       | Payroll and related  expenses, and selling, general and admin. expenses |       | —                                       |       | — |   | (350 | ) | (291 | ) |
| Total  derivatives designated as hedges             |       |                                                                    |       | $                                            | —     |   | $ | — |   | $ | 5,297 |   | $ | (1,435 | ) |

 
| ** **                                          | ** ** | ** **                                                              | ** ** | **For the Six Months Ended June 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 | ) | $ | (47 | ) | $ | (1,479 | ) |
|                                                |       |                                                                    |       |                                       |       |   |   |   |   |   |   |
| Forward  exchange contracts                         |       | Payroll and  related expenses, and selling, general and admin. expenses |       | —                                     |       | — |   | (1,899 | ) | (264 | ) |
| Total  derivatives designated as hedges             |       |                                                                    |       | $                                          | (719       | ) | $ | (2,056 | ) | $ | (1,946 | ) | $ | (1,743 | ) |

 

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

 
| ** **                                       | ** ** | ** **                  | ** ** | **For the Three Months Ended June 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)      |       | $                                            | 6,206      |   | $ | — |   |
| Interest  rate swaps (after March 25, 2009) |       | Interest expense            |       | (3,916                                       | )          | — |   |
| Embedded  derivatives                            |       | Interest expense            |       | (125                                         | )          | (2,055 | ) |
| Interest  rate caps                              |       | Other income (expense)      |       | (7                                           | )          | (50 | ) |
| Total  derivatives not designated as hedges      |       |                        |       | $                                            | 2,158      |   | $ | (2,105 | ) |

** **
| ** **                                       | ** ** | ** **                  | ** ** | **For the Six Months Ended June 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)      |       | $                                          | 2,783      |   | $ | — |   |
| Interest  rate swaps (after March 25, 2009) |       | Interest expense            |       | (3,916                                     | )          | — |   |
| Embedded  derivatives                            |       | Interest expense            |       | (400                                       | )          | (3,577 | ) |
| Interest  rate caps                              |       | Other income (expense)      |       | (30                                        | )          | 9 |   |
| Total  derivatives not designated as hedges      |       |                        |       | $                                          | (1,563     | ) | $ | (3,568 | ) |

 

**12.****      ****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 sheets approximates fairvalue because of the short maturity of these instruments.

 

###### *Purchased Accounts Receivable:*

###### * *

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

 

*Notes Receivable:*

 

The Company had notesreceivable of $10.2 million and $8.4 million as of June 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.

 

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

 

*Long-Term Debt:*

 

The following presents the carrying values and the estimated fairvalues of the Company’s long-term debt at June 30, 2009 (amounts inthousands):

 

| ** **                        | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
|-----------------------------------|------------|--------------------|------------|----------------|------------|
| Senior  term loan                 |       | $                  | 570,578    |           | $          | 570,578 |   |
| Senior  revolving credit facility |       | 40,500             |       | 39,409         |       |
| Senior  subordinated notes        |       | 200,000            |       | 105,000        |       |
| Senior  notes                     |       | 165,000            |       | 106,425        |       |
| Nonrecourse  credit facility      |       | 22,603             |       | 22,603         |       |
|                                   |            |                    |            |                |            |  |  |

 

The fair values of the Company’s senior term loan and senior revolvingcredit facility were based on market interest rates for debt with similar termsand maturities. The fair values of the Company’s Senior Notes and SeniorSubordinated Notes were based on their trading prices at June 30, 2009.

 

**13.****      ****Supplemental Cash Flow Information:**

 

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

 

| ** **                                      | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **June 30,**            | ** ** |
| ** **                                      | ** ** | **2009**                     | ** ** | **2008** | ** ** |
| Noncash  investing and financing activities:    |       |                         |       |   |   |
| Fair  value of assets acquired                  |       | $                            | 1,450      |   | $ | 154,114 |   |
| Liabilities  assumed from acquisitions          |       | 625                          |       | 154,588 |   |
| Issuance  of stock to JPM                       |       | 1,758                        |       | — |   |
| Adjustments  to acquired assets and liabilities |       | 1,378                        |       | — |   |
|                                                 |            |                              |            |  |  |  |  |

 

**14.****      ****Commitments and Contingencies:**

 

*Purchase Commitments:*

 

TheCompany enters into noncancelable agreements with various telecommunicationscompanies, a foreign labor subcontractor in India and other vendors thatrequire minimum purchase commitments. These agreements expire between 2009 and2012. The following represents the future minimum payments, by year and in theaggregate, under noncancelable purchase commitments (amounts in thousands):

 

| 2009   |   | $      | 34,427 |   |
|--------|--------|--------|--------|--------|
| 2010   |   | 31,436 |   |
| 2011   |   | 19,427 |   |
| 2012   |   | 1,620  |   |
|   |   | $      | 86,910 |   |

 

TheCompany incurred $18.4 million and $11.8 million of expense in connection withthese purchase commitments for the three months ended June 30, 2009 and 2008, respectively, and $34.9 million and $27.9 million for the sixmonths ended June 30, 2009 and 2008, respectively.

 

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**14.****      ****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 accounts receivablemeeting certain criteria. The forward flow agreements expire between July 2009and August 2012, and the terms of the agreements vary; some may beterminated 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   |   | $      | 19,570 |   |
|--------|--------|--------|--------|--------|
| 2010   |   | 13,745 |   |
| 2011   |   | 3,460  |   |
| 2012   |   | 1,080  |   |
|   |   | $      | 37,855 |   |

 

*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 by insurance.

 

TaxMatters:

 

In2004, the Company received notice of a proposed reassessment from a foreigntaxing authority relating to certain matters occurring from 1998 through 2001regarding one of its subsidiaries. In September 2006, the Company receivedthe formal notice of reassessment in the amount of $14.7 million includinginterest and penalties, converted as of June 30, 2009 ($14.6 millionconverted as of December 31, 2006), and in December 2006 the Companypaid a deposit of $8.5 million. The Company maintains a reserve and believes itis adequate to address its exposure to this matter.

 

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

 

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

 

*Litigation and Investigations (continued):*

 

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, client audits or tax examinations will have amaterially adverse effect on the financial condition or results of operationsof the Company.

 

**15.  Segment Reporting:**

 

As of June 30, 2009,the Company’s business consisted of three operating divisions: ARM, CRM andPortfolio Management. The accounting policies of the segments are the same asthose described in note 2, “Accounting Policies.”

 

ARM provides accountsreceivable management services to consumer and commercial accounts for allmarket sectors including financial services, healthcare, retail and commercial,telecommunications, utilities, education, and government. ARM serves clients ofall sizes in local, regional and national markets in North America, Europe andAustralia through offices in North America, Asia, Europe and Australia. Inaddition to traditional accounts receivable collections, these services includedeveloping the client relationship beyond bad debt recovery and delinquencymanagement, and delivering cost-effective accounts receivable solutions to allmarket sectors. ARM had total assets, net of any intercompany balances, of $1.2billion at June 30, 2009 and December 31, 2008. ARM also providesaccounts receivable management services to Portfolio Management. ARM recordedrevenue of $16.3 million and $22.7 million for intercompany services toPortfolio Management for the three months ended June 30, 2009 and 2008,respectively, and $34.0 million and $45.5 million for the six months ended June 30,2009 and 2008, respectively.

 

The CRM division providescustomer relationship management services to clients in North America throughoffices in North America and Asia. CRM had total assets, net of anyintercompany balances, of $268.6 million and $283.3 million at June 30,2009 and December 31, 2008, respectively. CRM also provides certainservices to ARM. CRM recorded revenue of $4.1 million and $705,000 forintercompany services to ARM for the three months ended June 30, 2009 and2008, respectively, and $5.0 million and $902,000 for these services for thesix months ended June 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 had total assets, net of any intercompany balances, of $182.8million and $197.9 million at June 30, 2009 and December 31, 2008,respectively. Portfolio Management’s revenue was impacted by impairment chargesrecorded for a valuation allowance against the carrying value of portfolios of$1.4 million and $24.6 million for the three months ended June 30, 2009and 2008, respectively, and $1.3 million and $30.8 million for the six monthsended June 30, 2009 and 2008, respectively.

 

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

 

The following tablesrepresent 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 June 30, 2009** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                   | ** ** | **(amounts in thousands)**                        | ** ** |
| ** **                                                   | ** ** | ** **                                        | ** ** | ** ** | ** ** | **Portfolio** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                   | ** ** | **ARM**                                           | ** ** | **CRM** | ** ** | **Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenue                                                      |       | $                                                 | 296,211    |   | $ | 85,239 |   | $ | 17,556 |   | $ | (20,387 | ) | $ | 378,619 |   |
| Payroll  and related expenses                                |       | 139,336                                           |       | 61,097 |   | 1,551 |   | (4,062 | ) | 197,922 |   |
| Selling,  general and admin. expenses                        |       | 120,834                                           |       | 16,291 |   | 16,842 |   | (16,325 | ) | 137,642 |   |
| Restructuring  charges                                       |       | 1,333                                             |       | 4 |   | — |   | — |   | 1,337 |   |
| Income  from operations before depreciation and amortization |       | $                                                 | 34,708     |   | $ | 7,847 |   | $ | (837 | ) | $ | — |   | $ | 41,718 |   |

** **
| ** **                                                   | ** ** | **For the Three Months Ended June 30, 2008** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                   | ** ** | **(amounts in thousands)**                        | ** ** |
| ** **                                                   | ** ** | ** **                                        | ** ** | ** ** | ** ** | **Portfolio** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                   | ** ** | **ARM**                                           | ** ** | **CRM** | ** ** | **Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenue                                                      |       | $                                                 | 334,788    |   | $ | 84,768 |   | $ | 8,803 |   | $ | (23,375 | ) | $ | 404,984 |   |
| Payroll  and related expenses                                |       | 160,446                                           |       | 62,173 |   | 1,980 |   | (705 | ) | 223,894 |   |
| Selling,  general and admin. expenses                        |       | 131,619                                           |       | 14,997 |   | 23,673 |   | (22,670 | ) | 147,619 |   |
| Restructuring  charges                                       |       | 1,888                                             |       | 2,339 |   | — |   | — |   | 4,227 |   |
| Income  from operations before depreciation and amortization |       | $                                                 | 40,835     |   | $ | 5,259 |   | $ | (16,850 | ) | $ | — |   | $ | 29,244 |   |

** **
| ** **                                                   | ** ** | **For the Six Months Ended June 30, 2009** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                   | ** ** | **(amounts in thousands)**                      | ** ** |
| ** **                                                   | ** ** | ** **                                      | ** ** | ** ** | ** ** | **Portfolio** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                   | ** ** | **ARM**                                         | ** ** | **CRM** | ** ** | **Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenue                                                      |       | $                                               | 607,492    |   | $ | 174,333 |   | $ | 37,945 |   | $ | (39,022 | ) | $ | 780,748 |   |
| Payroll  and related expenses                                |       | 283,099                                         |       | 122,575 |   | 3,039 |   | (5,026 | ) | 403,687 |   |
| Selling,  general and admin. expenses                        |       | 246,475                                         |       | 32,288 |   | 35,067 |   | (33,996 | ) | 279,834 |   |
| Restructuring  charges                                       |       | 1,572                                           |       | 182 |   | 26 |   | — |   | 1,780 |   |
| Income  from operations before depreciation and amortization |       | $                                               | 76,346     |   | $ | 19,288 |   | $ | (187 | ) | $ | — |   | $ | 95,447 |   |
| Purchases  of property and equipment                    |       | $                                               | 8,819      |   | $ | 9,236 |   | $ | — |   | $ | — |   | $ | 18,055 |   |

 

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

** **
| ** **                                                   | ** ** | **For the Six Months Ended June 30, 2008** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                   | ** ** | **(amounts in thousands)**                      | ** ** |
| ** **                                                   | ** ** | ** **                                      | ** ** | ** ** | ** ** | **Portfolio** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                   | ** ** | **ARM**                                         | ** ** | **CRM** | ** ** | **Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenue                                                      |       | $                                               | 607,979    |   | $ | 170,517 |   | $ | 37,503 |   | $ | (46,447 | ) | $ | 769,552 |   |
| Payroll  and related expenses                                |       | 290,788                                         |       | 126,354 |   | 4,073 |   | (902 | ) | 420,313 |   |
| Selling,  general and admin. expenses              |       | 244,623                                         |       | 30,030 |   | 47,329 |   | (45,545 | ) | 276,437 |   |
| Restructuring  charges                                       |       | 4,412                                           |       | 2,456 |   | — |   | — |   | 6,868 |   |
| Income  from operations before depreciation and amortization |       | $                                               | 68,156     |   | $ | 11,677 |   | $ | (13,899 | ) | $ | — |   | $ | 65,934 |   |
| Purchases  of property and equipment                    |       | $                                               | 7,087      |   | $ | 11,223 |   | $ | — |   | $ | — |   | $ | 18,310 |   |

 

**16.  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 six months ended June 30,2009, the Company incurred $750,000 and $1.5 million, respectively, relating tosuch management fees, which were included in selling, general and administrativeexpenses.

 

OEP is an indirect whollyowned subsidiary of JPM, and JPM is a client of the Company. For the three andsix months ended June 30, 2009, the Company received fees for providingservices to JPM of $3.4 million and $6.8 million, respectively.  At June 30, 2009, the Company had noaccounts 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 six months ended June 30, 2009, the Companyreceived fees for providing services to Citigroup of $13.8 million and $29.2million, respectively. At June 30, 2009 and December 31, 2008, theCompany had accounts receivable of $2.1 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.

 

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

 

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

 

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

 

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

 

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

 

In April 2009, theFASB issued Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures aboutFair Value of Financial Instruments”,” (“FSP 107-1”). FSP 107-1 requiresdisclosures about fair value of financial instruments for interim reportingperiods of publically traded companies, as is currently required in annualfinancial statements. The Company adopted FSP 107-1 for the interim reportingperiod ended June 30, 2009 and included the required disclosures in note12.

 

*FASB Statement of FinancialAccounting Standards No. 165, “Subsequent Events”:*

 

In May 2009, theFASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). This statementis applicable to accounting and disclosure of subsequent events that are notaddressed by other authoritative accounting literature. SFAS 165 establishesgeneral standards for accounting and disclosure of events or transactions thatoccur after the balance sheet date but before financial statements are issuedor available to be issued, and creates new terminology for subsequent events aseither “recognized” or “nonrecognized”. SFAS 165 also requires the disclosureof the date through which subsequent events have been evaluated and whetherthat date is the date the financial statements were issued or available to beissued. The Company adopted SFAS 165 for the interim reporting period ended June 30,2009 and included the required disclosures in note 18.

 

*FASB Statement of FinancialAccounting Standards No. 166, “Accounting for Transfers of FinancialAssets — an amendment of FASB Statement No. 140”:*

 

In June 2009, theFASB issued SFAS No. 166, “Accountingfor Transfers of Financial Assets — an amendment of FASB Statement No. 140”(“SFAS 166”). This statement removes the concept of qualifying special-purposeentities from SFAS 140 and eliminates the exception from applying FIN 46(R) toqualifying special-purpose entities. SFAS 166 requires additional disclosuresin order to provide greater transparency about transfers of financial assetsand a transferor’s continuing involvement with transferred financial assets.SFAS 166 is effective for the Company on January 1, 2010. The Company iscurrently reviewing the standard to assess the impact of adoption.

 

*FASB Statement of FinancialAccounting Standards No. 167, “Consolidation of Variable InterestEntities, an amendment to FIN 46(R)”:*

 

In June 2009, theFASB issued SFAS No. 167, “Consolidation of Variable Interest Entities, anamendment to FIN 46(R)” (“SFAS 167”). This statement amends FIN 46(R) torequire companies to perform an analysis to determine if their variableinterest gives them a controlling financial interest the variable interestentity, and requires ongoing reassessments of who is the primary beneficiary ofa variable interest entity. SFAS 167 also requires enhanced disclosures ofinformation about involvement in a variable interest entity. SFAS 167 iseffective for the Company on January 1, 2010. The Company is currentlyreviewing the standard to assess the impact of adoption.

 

*FASB Statement of FinancialAccounting Standards No. 168, “The FASB Accounting Standards Codificationand the Hierarchy of Generally Accepted Accounting Principles — a replacementof FASB Statement No. 162”:*

 

In June 2009, theFASB issued SFAS No. 168, “TheFASB Accounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles — a replacement of FASB Statement No. 162” (“SFAS168”). This statement establishes the FASB Accounting Standards Codification asthe 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. SFAS 168 iseffective for the Company for the interim reporting period ending September 30,2009, and it will not have a material impact on its financial condition orresults of operations.

 

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**18.  Subsequent Events:**

 

Subsequent events havebeen evaluated through August 14, 2009, which is the date the financialstatements were issued.

 

The Company has enteredinto a letter of intent, subject to certain contingencies, to sell certainassets and liabilities for approximately $24.5 million. The sale is currentlyexpected to close in the third quarter of 2009. The following presents the carryingamount of the assets and liabilities to be sold (amounts in thousands):

 

| ** **                                 | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| Accounts  receivable, trade                |       | $                      | 7,820      |                       | $          | 8,737 |   |
| Prepaid  expenses and other current assets |       | 3,257                  | ** ** | 3,398                      | ** ** |
| Property  and equipment                    |       | 208                    | ** ** | 376                        | ** ** |
| Intangible  assets                         |       | 8,126                  | ** ** | 8,917                      | ** ** |
| Other  assets                              |       | 12                     | ** ** | 70                         | ** ** |
| Total  assets                              |       | $                      | 19,423     | ** **                 | $          | 21,498 | ** ** |
|                                       |       |                   | ** ** |                       | ** ** |
| Accounts  payable and accrued expenses     |       | $                      | 4,051      | ** **                 | $          | 1,076 | ** ** |
| Other  long-term liabilities               |       | 3,007                  | ** ** | 3,189                      | ** ** |
| Total  liabilities                         |       | $                      | 7,058      | ** **                 | $          | 4,265 | ** ** |

 

**19.  Subsidiary Guarantor Financial Information:**

 

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

 

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

 

**NCOGROUP, INC.**

**ConsolidatingBalance Sheet**

**June 30,2009**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                                           | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Current  assets:                                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Cash  and cash equivalents                                                           |       | $          | —     |           | $          | 16,597             |       | $                | 18,852     |             | $          | — |   | $ | 35,449 |   |
| Accounts  receivable, trade, net of allowance for doubtful accounts             |       | —     |       | 179,710        |       | 21,304             |       | —           |       | 201,014          |       |
| Purchased  accounts receivable, current portion                                      |       | —     |       | 24,982         |       | 36,571             |       | —           |       | 61,553           |       |
| Deferred  income taxes                                                               |       | 4,058      |       | 29,926         |       | 370                |       | —           |       | 34,354           |       |
| Prepaid  expenses and other current assets                                           |       | 1,329      |       | 36,914         |       | 29,844             |       | —           |       | 68,087           |       |
| Total  current assets                                                                |       | 5,387      |       | 288,129        |       | 106,941            |       | —           |       | 400,457          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Property  and equipment, net                                                         |       | —     |       | 93,411         |       | 36,755             |       | —           |       | 130,166          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Other  assets:                                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Goodwill                                                                             |       | —     |       | 498,913        |       | 61,912             |       | —           |       | 560,825          |       |
| Trade  name, net of accumulated amortization                                         |       | —     |       | 82,279         |       | 2,847              |       | —           |       | 85,126           |       |
| Customer  relationships and other intangible assets, net of accumulated amortization |       | —     |       | 279,178        |       | 22,809             |       | —           |       | 301,987          |       |
| Purchased  accounts receivable, net of current portion                               |       | —     |       | 57,044         |       | 53,677             |       | —           |       | 110,721          |       |
| Investment  in subsidiaries                                                          |       | 758,422    |       | 28,776         |       | —             |       | (787,198         | )          | —           |       |
| Other  assets                                                                        |       | 14,616     |       | 53,218         |       | (21,863            | )          | —           |       | 45,971           |       |
| Total  other assets                                                                  |       | 773,038    |       | 999,408        |       | 119,382            |       | (787,198         | )          | 1,104,630        |       |
| Total  assets                                                                        |       | $          | 778,425    |           | $          | 1,380,948          |       | $                | 263,078    |             | $          | (787,198 | ) | $ | 1,635,253 |   |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                        | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Current  liabilities:                                                                |       |       |       |           |       |               |       |             |       |             |       |
| Long-term  debt, current portion                                                     |       | $          | 6,054      |           | $          | 584                |       | $                | 17,329     |             | $          | — |   | $ | 23,967 |   |
| Intercompany  (receivable) payable                                                   |       | (60,645    | )          | (56,131        | )          | 116,776            |       | —           |       | —           |       |
| Income  taxes payable                                                                |       | —     |       | —         |       | 1,326              |       | —           |       | 1,326            |       |
| Accounts  payable                                                                    |       | 750        |       | 22,153         |       | 1,456              |       | —           |       | 24,359           |       |
| Accrued  expenses                                                                    |       | 19,991     |       | 62,284         |       | 22,242             |       | —           |       | 104,517          |       |
| Accrued  compensation and related expenses                                           |       | —     |       | 32,383         |       | 13,167             |       | —           |       | 45,550           |       |
| Deferred  revenue, current portion                                                   |       | —     |       | 37,059         |       | 394                |       | —           |       | 37,453           |       |
| Total  current liabilities                                                           |       | (33,850    | )          | 98,332         |       | 172,690            |       | —           |       | 237,172          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Long-term  liabilities:                                                              |       |       |       |           |       |               |       |             |       |             |       |
| Long-term  debt, net of current portion                                              |       | 585,617    |       | 389,526        |       | 6,055              |       | —           |       | 981,198          |       |
| Deferred  income taxes                                                               |       | (76,115    | )          | 132,400        |       | 5,478              |       | —           |       | 61,763           |       |
| Deferred  revenue, net of current portion                                            |       | —     |       | 5,509          |       | 64                 |       | —           |       | 5,573            |       |
| Other  long-term liabilities                                                         |       | 3,675      |       | 18,219         |       | 10,970             |       | —           |       | 32,864           |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Stockholders’  equity:                                                          |       |       |       |           |       |               |       |             |       |             |       |
| Total  NCO Group, Inc. stockholders’ equity                                |       | 299,098    |       | 736,962        |       | 50,236             |       | (787,198         | )          | 299,098          |       |
| Noncontrolling  interests                                                            |       | —     |       | —         |       | 17,585             |       | —           |       | 17,585           |       |
| Total  stockholders’ equity                                                     |       | 299,098    |       | 736,962        |       | 67,821             |       | (787,198         | )          | 316,683          |       |
| Total  liabilities and stockholders’ equity                                     |       | $          | 778,425    |           | $          | 1,380,948          |       | $                | 263,078    |             | $          | (787,198 | ) | $ | 1,635,253 |   |

 

26

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Tableof Contents

 

**19.  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                  |       | —     |       | 210,520        |       | 8,129              |       | —           |       | 218,649          |       |
| Purchased accounts receivable, current portion                                       |       | —     |       | 19,191         |       | 50,815             |       | —           |       | 70,006           |       |
| Deferred income taxes                                                                |       | 4,057      |       | 29,908         |       | 251                |       | —           |       | 34,216           |       |
| Prepaid expenses and other current assets                                            |       | 2,027      |       | 51,082         |       | 13,486             |       | —           |       | 66,595           |       |
| Total current assets                                                                 |       | 6,084      |       | 326,035        |       | 87,227             |       | —           |       | 419,346          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Property and equipment, net                                                          |       | —     |       | 101,453        |       | 36,819             |       | —           |       | 138,272          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Other assets:                                                                        |       |       |       |           |       |               |       |             |       |             |       |
| Goodwill                                                                             |       | —     |       | 500,272        |       | 64,345             |       | —           |       | 564,617          |       |
| Trade name, net of accumulated amortization                                          |       | —     |       | 82,619         |       | 2,847              |       | —           |       | 85,466           |       |
| Customer relationships and other intangible assets, net  of accumulated amortization |       | —     |       | 311,056        |       | 22,895             |       | —           |       | 333,951          |       |
| Purchased accounts receivable, net of current  portion                               |       | —     |       | 46,401         |       | 69,252             |       | —           |       | 115,653          |       |
| Investment in subsidiaries                                                           |       | 828,883    |       | 24,771         |       | —             |       | (853,654         | )          | —           |       |
| Other assets                                                                         |       | 15,002     |       | 51,715         |       | (22,383            | )          | —           |       | 44,334           |       |
| Total other assets                                                                   |       | 843,885    |       | 1,016,834      |       | 136,956            |       | (853,654         | )          | 1,144,021        |       |
| Total assets                                                                         |       | $          | 849,969    |           | $          | 1,444,322          |       | $                | 261,002    |             | $          | (853,654 | ) | $ | 1,701,639 |   |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                       | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Current liabilities:                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt, current portion                                                      |       | $          | 6,054      |           | $          | 594                |       | $                | 23,911     |             | $          | — |   | $ | 30,559 |   |
| Intercompany (receivable) payable                                                    |       | (30,025    | )          | 10,812         |       | 98,188             |       | (78,975          | )          | —           |       |
| Income taxes payable                                                                 |       | —     |       | —         |       | 3,543              |       | —           |       | 3,543            |       |
| Accounts payable                                                                     |       | —     |       | 26,927         |       | (8,901             | )          | —           |       | 18,026           |       |
| Accrued expenses                                                                     |       | 30,440     |       | 89,444         |       | 8,590              |       | —           |       | 128,474          |       |
| Accrued compensation and related expenses                                            |       | —     |       | 34,173         |       | 12,293             |       | —           |       | 46,466           |       |
| Deferred revenue, current portion                                                    |       | —     |       | 40,392         |       | 339                |       | —           |       | 40,731           |       |
| Total current liabilities                                                            |       | 6,469      |       | 202,342        |       | 137,963            |       | (78,975          | )          | 267,799          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Long-term liabilities:                                                               |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt, net of current portion                                               |       | 644,646    |       | 389,902        |       | 13,969             |       | —           |       | 1,048,517        |       |
| Deferred income taxes                                                                |       | (64,958    | )          | 116,892        |       | 11,662             |       | —           |       | 63,596           |       |
| Deferred revenue, net of current portion                                             |       | —     |       | 5,349          |       | 55                 |       | —           |       | 5,404            |       |
| Other long-term liabilities                                                          |       | 2,826      |       | 19,106         |       | 10,602             |       | —           |       | 32,534           |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Stockholders’ equity:                                                           |       |       |       |           |       |               |       |             |       |             |       |
| Total NCO Group, Inc. stockholders’ equity                                 |       | 260,986    |       | 710,731        |       | 63,948             |       | (774,679         | )          | 260,986          |       |
| Noncontrolling interests                                                             |       | —     |       | —         |       | 22,803             |       | —           |       | 22,803           |       |
| Total stockholders’ equity                                                      |       | 260,986    |       | 710,731        |       | 86,751             |       | (774,679         | )          | 283,789          |       |
| Total liabilities and stockholders’ equity                                      |       | $          | 849,969    |           | $          | 1,444,322          |       | $                | 261,002    |             | $          | (853,654 | ) | $ | 1,701,639 |   |

 

27

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Table of Contents

 

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

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

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

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                               | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                 |       | $          | —     |           | $          | 361,678            |       | $                | 74,917     |             | $          | (74,827 | ) | $ | 361,768 |   |
| Portfolio                                                |       | —     |       | 8,716          |       | 8,135              |       | —           |       | 16,851           |       |
| Portfolio  sales                                         |       | —     |       | —         |       | —             |       | —           |       | —           |       |
| Total  revenues                                          |       | —     |       | 370,394        |       | 83,052             |       | (74,827          | )          | 378,619          |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Operating  costs and expenses:                           |       |       |       |           |       |               |       |             |       |             |       |
| Payroll  and related expenses                            |       | 3          |       | 206,249        |       | 47,009             |       | (55,339          | )          | 197,922          |       |
| Selling,  general and administrative expenses            |       | 1,096      |       | 124,330        |       | 31,704             |       | (19,488          | )          | 137,642          |       |
| Depreciation  and amortization expense                   |       | —     |       | 23,009         |       | 7,610              |       | —           |       | 30,619           |       |
| Restructuring  charges                                   |       | —     |       | 1,348          |       | (11                | )          | —           |       | 1,337            |       |
| Total  operating costs and expenses                      |       | 1,099      |       | 354,936        |       | 86,312             |       | (74,827          | )          | 367,520          |       |
| (Loss)  income from operations                           |       | (1,099     | )          | 15,458         |       | (3,260             | )          | —           |       | 11,099           |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Other  income (expense):                                 |       |       |       |           |       |               |       |             |       |             |       |
| Interest  and investment income                          |       | 8          |       | 421            |       | 165                |       | —           |       | 594              |       |
| Interest  expense                                        |       | (17,451    | )          | (8,369         | )          | (854               | )          | —           |       | (26,674          | )          |
| Interest  (expense) income to affiliate                  |       | (1,001     | )          | 2,424          |       | (1,423             | )          | —           |       | —           |       |
| Subsidiary  income (loss)                                |       | 3,831      |       | (2,829         | )          | —             |       | (1,002           | )          | —           |       |
| Other  income, net                                       |       | 6,206      |       | 660            |       | —             |       | —           |       | 6,866            |       |
|                                                     |       | (8,407     | )          | (7,693         | )          | (2,112             | )          | (1,002           | )          | (19,214          | )          |
| (Loss)  income before income taxes                       |       | (9,506     | )          | 7,765          |       | (5,372             | )          | (1,002           | )          | (8,115           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Income  tax (benefit) expense                            |       | (4,290     | )          | 3,352          |       | (1,600             | )          | —           |       | (2,538           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income                                       |       | (5,216     | )          | 4,413          |       | (3,772             | )          | (1,002           | )          | (5,577           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Less:  Net loss attributable to noncontrolling interests |       | —     |       | —         |       | (361               | )          | —           |       | (361             | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income attributable to NCO Group, Inc.  |       | $          | (5,216     | )              | $          | 4,413              |       | $                | (3,411     | )                | $          | (1,002 | ) | $ | (5,216 | ) |

 

28

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Tableof Contents

 

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

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

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

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                               | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                 |       | $          | —     |           | $          | 399,514            |       | $                | 90,097     |             | $          | (93,058 | ) | $ | 396,553 |   |
| Portfolio                                                |       | —     |       | 8,693          |       | (1,179             | )          | —           |       | 7,514            |       |
| Portfolio  sales                                         |       | —     |       | 160            |       | 757                |       | —           |       | 917              |       |
| Total  revenues                                          |       | —     |       | 408,367        |       | 89,675             |       | (93,058          | )          | 404,984          |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Operating  costs and expenses:                           |       |       |       |           |       |               |       |             |       |             |       |
| Payroll  and related expenses                            |       | 3          |       | 230,371        |       | 59,975             |       | (66,455          | )          | 223,894          |       |
| Selling,  general and administrative expenses            |       | 1,016      |       | 137,547        |       | 35,659             |       | (26,603          | )          | 147,619          |       |
| Depreciation  and amortization expense                   |       | —     |       | 24,293         |       | 7,854              |       | —           |       | 32,147           |       |
| Restructuring  charges                                   |       | —     |       | 1,703          |       | 2,524              |       | —           |       | 4,227            |       |
| Total  operating costs and expenses                      |       | 1,019      |       | 393,914        |       | 106,012            |       | (93,058          | )          | 407,887          |       |
| (Loss)  income from operations                           |       | (1,019     | )          | 14,453         |       | (16,337            | )          | —           |       | (2,903           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Other  income (expense):                                 |       |       |       |           |       |               |       |             |       |             |       |
| Interest  and investment income                          |       | 63         |       | 236            |       | 240                |       | —           |       | 539              |       |
| Interest  (expense) income                               |       | (15,820    | )          | (7,783         | )          | 600                |       | —           |       | (23,003          | )          |
| Interest  (expense) income to affiliate                  |       | (424       | )          | 2,099          |       | (1,675             | )          | —           |       | —           |       |
| Subsidiary  (loss) income                                |       | (4,053     | )          | (10,655        | )          | —             |       | 14,708           |       | —           |       |
| Other  income (expense), net                             |       | —     |       | (579           | )          | —             |       | —           |       | (579             | )          |
|                                                     |       | (20,234    | )          | (16,682        | )          | (835               | )          | 14,708           |       | (23,043          | )          |
| (Loss)  income before income taxes                       |       | (21,253    | )          | (2,229         | )          | (17,172            | )          | 14,708           |       | (25,946          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Income  tax (benefit) expense                            |       | (6,502     | )          | 2,033          |       | (3,638             | )          | —           |       | (8,107           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income                                       |       | (14,751    | )          | (4,262         | )          | (13,534            | )          | 14,708           |       | (17,839          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Less:  Net loss attributable to noncontrolling interests |       | —     |       | —         |       | (3,088             | )          | —           |       | (3,088           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income attributable to NCO Group, Inc.  |       | $          | (14,751    | )              | $          | (4,262             | )          | $                | (10,446    | )                | $          | 14,708 |   | $ | (14,751 | ) |

 

29

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Table of Contents

 

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

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

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

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                               | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                 |       | $          | —     |           | $          | 749,090            |       | $                | 135,521    |             | $          | (146,729 | ) | $ | 737,882 |   |
| Portfolio                                                |       | —     |       | 20,356         |       | 22,149             |       | —           |       | 42,505           |       |
| Portfolio  sales                                         |       | —     |       | 83             |       | 278                |       | —           |       | 361              |       |
| Total  revenues                                          |       | —     |       | 769,529        |       | 157,948            |       | (146,729         | )          | 780,748          |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Operating  costs and expenses:                           |       |       |       |           |       |               |       |             |       |             |       |
| Payroll  and related expenses                            |       | 8          |       | 417,581        |       | 92,531             |       | (106,433         | )          | 403,687          |       |
| Selling,  general and administrative expenses            |       | 2,180      |       | 258,016        |       | 59,934             |       | (40,296          | )          | 279,834          |       |
| Depreciation  and amortization expense                   |       | —     |       | 46,852         |       | 14,849             |       | —           |       | 61,701           |       |
| Restructuring  charges                                   |       | —     |       | 1,574          |       | 206                |       | —           |       | 1,780            |       |
| Total  operating costs and expenses                      |       | 2,188      |       | 724,023        |       | 167,520            |       | (146,729         | )          | 747,002          |       |
| (Loss)  income from operations                           |       | (2,188     | )          | 45,506         |       | (9,572             | )          | —           |       | 33,746           |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Other  income (expense):                                 |       |       |       |           |       |               |       |             |       |             |       |
| Interest  and investment income                          |       | 30         |       | 764            |       | 142                |       | —           |       | 936              |       |
| Interest  expense                                        |       | (33,407    | )          | (15,220        | )          | (1,157             | )          | —           |       | (49,784          | )          |
| Interest  (expense) income to affiliate                  |       | (1,667     | )          | 4,464          |       | (2,797             | )          | —           |       | —           |       |
| Subsidiary  income (loss)                                |       | 14,826     |       | (7,527         | )          | —             |       | (7,299           | )          | —           |       |
| Other  income (expense), net                             |       | 2,783      |       | 379            |       | —             |       | —           |       | 3,162            |       |
|                                                     |       | (17,435    | )          | (17,140        | )          | (3,812             | )          | (7,299           | )          | (45,686          | )          |
| (Loss)  income before income taxes                       |       | (19,623    | )          | 28,366         |       | (13,384            | )          | (7,299           | )          | (11,940          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Income  tax (benefit) expense                            |       | (12,298    | )          | 12,354         |       | (3,740             | )          | —           |       | (3,684           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income                                       |       | (7,325     | )          | 16,012         |       | (9,644             | )          | (7,299           | )          | (8,256           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Less:  Net loss attributable to noncontrolling interests |       | —     |       | —         |       | (931               | )          | —           |       | (931             | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income attributable to NCO Group, Inc.  |       | $          | (7,325     | )              | $          | 16,012             |       | $                | (8,713     | )                | $          | (7,299 | ) | $ | (7,325 | ) |

 

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

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

**Forthe Six Months Ended June 30, 2008**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                               | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                 |       | $          | —     |           | $          | 736,110            |       | $                | 175,660    |             | $          | (180,172 | ) | $ | 731,598 |   |
| Portfolio                                                |       | —     |       | 17,635         |       | 18,579             |       | —           |       | 36,214           |       |
| Portfolio  sales                                         |       | —     |       | 318            |       | 1,422              |       | —           |       | 1,740            |       |
| Total  revenues                                          |       | —     |       | 754,063        |       | 195,661            |       | (180,172         | )          | 769,552          |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Operating  costs and expenses:                           |       |       |       |           |       |               |       |             |       |             |       |
| Payroll  and related expenses                            |       | 7          |       | 429,882        |       | 119,413            |       | (128,989         | )          | 420,313          |       |
| Selling,  general and administrative expenses            |       | 2,102      |       | 252,507        |       | 73,011             |       | (51,183          | )          | 276,437          |       |
| Depreciation  and amortization expense                   |       | —     |       | 44,729         |       | 15,204             |       | —           |       | 59,933           |       |
| Restructuring  charges                                   |       | —     |       | 3,635          |       | 3,233              |       | —           |       | 6,868            |       |
| Total  operating costs and expenses                      |       | 2,109      |       | 730,753        |       | 210,861            |       | (180,172         | )          | 763,551          |       |
| (Loss)  income from operations                           |       | (2,109     | )          | 23,310         |       | (15,200            | )          | —           |       | 6,001            |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Other  income (expense):                                 |       |       |       |           |       |               |       |             |       |             |       |
| Interest  and investment (expense) income                |       | (31        | )          | 531            |       | 319                |       | —           |       | 819              |       |
| Interest  expense                                        |       | (32,052    | )          | (13,880        | )          | 522                |       | —           |       | (45,410          | )          |
| Interest  (expense) income to affiliate                  |       | (1,310     | )          | 4,596          |       | (3,286             | )          | —           |       | —           |       |
| Subsidiary  (loss) income                                |       | (1,886     | )          | (11,283        | )          | —             |       | 13,169           |       | —           |       |
| Other  income (expense), net                             |       | —     |       | (161           | )          | —             |       | —           |       | (161             | )          |
|                                                     |       | (35,279    | )          | (20,197        | )          | (2,445             | )          | 13,169           |       | (44,752          | )          |
| (Loss)  income before income taxes                       |       | (37,388    | )          | 3,113          |       | (17,645            | )          | 13,169           |       | (38,751          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Income  tax (benefit) expense                            |       | (13,401    | )          | 5,015          |       | (3,617             | )          | —           |       | (12,003          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income                                       |       | (23,987    | )          | (1,902         | )          | (14,028            | )          | 13,169           |       | (26,748          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Less:  Net loss attributable to noncontrolling interests |       | —     |       | —         |       | (2,761             | )          | —           |       | (2,761           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net  (loss) income attributable to NCO Group, Inc.  |       | $          | (23,987    | )              | $          | (1,902             | )          | $                | (11,267    | )                | $          | 13,169 |   | $ | (23,987 | ) |

 

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

 

**NCOGROUP, INC**

**ConsolidatingStatement of Cash Flows**

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

**(Unaudited)**

**(Amountsin thousands)**

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

 

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

 

**NCOGROUP, INC**

**ConsolidatingStatement of Cash Flows**

**Forthe Six Months Ended June 30, 2008**

**(Unaudited)**

**(Amountsin thousands)**

 
| ** **                                                         | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** |
| Net  cash (used in) provided by operating activities               |       | $          | (21,541    | )              | $          | 68,111             |       | $                | 21,742     |   | $ | 68,312 |   |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  flows from investing activities:                             |       |       |       |           |       |               |       |             |       |
| Purchases  of accounts receivable                                  |       | —     |       | (29,375        | )          | (44,514            | )          | (73,889          | )          |
| Collections  applied to principal of purchased accounts receivable |       | —     |       | (1,789         | )          | 47,573             |       | 45,784           |       |
| Proceeds  from sales and resales of purchased accounts receivable  |       | —     |       | 345            |       | 1,540              |       | 1,885            |       |
| Purchases  of property and equipment                               |       | —     |       | (14,763        | )          | (3,547             | )          | (18,310          | )          |
| Proceeds  from bonds and notes receivable                          |       | —     |       | 418            |       | —             |       | 418              |       |
| Net  cash paid for acquisitions and related costs                  |       | —     |       | (325,686       | )          | 223                |       | (325,463         | )          |
| Net  cash (used in) provided by investing activities               |       | —     |       | (370,850       | )          | 1,275              |       | (369,575         | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  flows from financing activities:                             |       |       |       |           |       |               |       |             |       |
| Repayment  of notes payable                                        |       | —     |       | (109           | )          | (19,651            | )          | (19,760          | )          |
| Borrowings  under notes payable                                    |       | —     |       | —         |       | 13,306             |       | 13,306           |       |
| Net  borrowings under revolving credit facility                    |       | 9,000      |       | —         |       | —             |       | 9,000            |       |
| Repayment  of borrowings under senior term loan                    |       | —     |       | (7,718         | )          | —             |       | (7,718           | )          |
| Borrowings  under senior term loan, net of fees                    |       | —     |       | 134,135        |       | —             |       | 134,135          |       |
| Borrowings  under (repayments of) intercompany notes payable       |       | (185,011   | )          | 186,637        |       | (1,626             | )          | —           |       |
| Payment  of fees to obtain debt                                    |       | (10        | )          | (4,307         | )          | —             |       | (4,317           | )          |
| Investment  in subsidiary by noncontrolling interests              |       | —     |       | —         |       | 2,191              |       | 2,191            |       |
| Return  of investment in subsidiary to noncontrolling interests    |       | —     |       | —         |       | (5,631             | )          | (5,631           | )          |
| 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               |       | 21,541     |       | 308,638        |       | (11,411            | )          | 318,768          |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Effect  of exchange rate on cash                                   |       | —     |       | —         |       | (372               | )          | (372             | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Net  increase in cash and cash equivalents                         |       | —     |       | 5,899          |       | 11,234             |       | 17,133           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  and cash equivalents at beginning of the period              |       | —     |       | 17,755         |       | 13,528             |       | 31,283           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash  and cash equivalents at end of the period                    |       | $          | —     |           | $          | 23,654             |       | $                | 24,762     |   | $ | 48,416 |   |

 

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

 

***Forward-LookingStatements***

 

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

 

·                  the Company’s expected future results of operations;

·                  economic conditions;

·                  the Company’s business and growth strategy;

·                  fluctuations in quarterly operating results;

·                  the integration of acquisitions;

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

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

·                  expected increases in operating efficiencies;

·                  anticipated trends in the business process outsourcingindustry, 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 pronouncements;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. On January 2,2008, we acquired Systems & Services Technologies, Inc., referredto as SST, a third-party consumer receivable servicer, for $18.4 million. On February 29,2008, we acquired Outsourcing Solutions Inc., referred to as OSI, a leadingprovider of

 

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

 

Prior to theacquisition of SST, on January 2, 2008, SST was a wholly owned subsidiaryof JPMorgan Chase & Co., referred to as JPM. JPM also wholly owns OneEquity Partners, referred to as OEP, which has had a controlling interest in ussince November 15, 2006. Financial Accounting Standards Board, referred toas FASB, Statement of Financial Accounting Standards No. 141, “BusinessCombinations,” referred to as SFAS 141, states that a “business combination”excludes transfers of net assets or exchanges of equity interests betweenentities under common control. SFAS 141 also states that transfers of netassets or exchanges of equity interests between entities under common controlshould be accounted for similar to the pooling-of-interests method (“as-ifpooling-of-interests”) in that the entity that receives the net assets or theequity interests initially recognizes the assets and liabilities transferred attheir carrying amounts in the accounts of the transferring entity at the dateof transfer. Because NCO and SST were under common control at the time of theSST acquisition, the transfer of assets and liabilities of SST was accountedfor at historical cost in a manner similar to a pooling of interests.

 

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

 

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

 

*Revenue.*  Revenue decreased $26.4 million, or 6.5percent, to $378.6 million for the three months ended June 30, 2009, from$405.0 million for the three months ended June 30, 2008. For the threemonths ended June 30, 2009, ARM, CRM, Portfolio Management accounted for$296.2 million, $85.2 million and $17.6 million of revenue, respectively.Included in ARM’s revenue was $16.3 million of intercompany revenue fromPortfolio Management and included in CRM’s revenue was $4.1 million ofintercompany revenue from ARM, which were eliminated upon consolidation. Forthe three months ended June 30, 2008, these divisions accounted for $334.8million, $84.8 million and $8.8 million of revenue, respectively. Included inARM’s revenue was $22.7 million of intercompany revenue from PortfolioManagement and included in CRM’s revenue was $705,000 of intercompany revenuefrom ARM, which were eliminated upon consolidation.

 

ARM’s revenue decreased $38.6million, or 11.5 percent, to $296.2 million for the three months ended June 30,2009, from $334.8 million for the three months ended June 30, 2008. Thedecrease in ARM’s revenue was primarily attributable to lower than expectedoverall collections and a $6.3 million decrease in fees from collectionservices performed for Portfolio Management, partially offset by increasedvolume from new and existing clients in both first-party (early stage) andcontingent collections.

 

Revenue for the CRM divisionincreased $400,000, or 0.5 percent, to $85.2 million for the three months endedJune 30, 2009, from $84.8 million for the three months ended June 30,2008. The increase in CRM’s revenue was primarily due to increased clientvolume related to the implementation of new contracts during 2008 and 2009,partially offset by lower volumes from certain existing clients due to theimpact of the economy.

 

Portfolio Management’srevenue increased $8.8 million, or 100 percent, to $17.6 million for the threemonths ended June 30, 2009, from $8.8 million for the three months ended June 30,2008. Portfolio Management’s collections, excluding all portfolio sales,decreased $15.9 million, or 29.0 percent, to $38.9 million for the three monthsended June 30, 2009, from $54.8 million for the three months ended June 30,2008. Revenue for the three months ended June 30, 2009, included a $1.4million impairment charge recorded for a valuation allowance against thecarrying value of the portfolios, compared to an impairment of $24.6 millionfor the three months ended June 30, 2008. Excluding the effect of theimpairment charges, as well as portfolio sales, Portfolio Management’s revenuerepresented 47.7 percent of collections for the three months ended June 30,2009, as compared to 58.4 percent of collections for the three months ended June 30,2008. The remaining decrease in revenue and collections was attributable to theeffect of the weaker collection environment during the later half of 2008 and2009. There was no revenue from portfolio sales for the three months ended June 30,2009, compared to $917,000 for the three months ended June 30, 2008.

 

*Payroll and relatedexpenses.*  Payroll andrelated expenses decreased $26.0 million to $197.9 million for the three monthsended June 30, 2009, from $223.9 million for the three months ended June 30,2008, and decreased as a percentage of revenue to 52.3 percent from 55.3percent.

 

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ARM’s payroll and related expensesdecreased $21.1 million to $139.3 million for the three months ended June 30,2009, from $160.4 million for the three months ended June 30, 2008, anddecreased as a percentage of revenue to 47.0 percent from 47.9 percent. ARM’spayroll and related expenses decreased as a percentage of revenue primarily dueto the integration efforts following the acquisition of OSI on February 29,2008, as well as the deployment of additional staff in off-shore locationswhere labor costs are lower. Included in ARM’s payroll and related expenses forthe three months ended June 30, 2009 and 2008, was $4.1 million and$705,000, respectively, of intercompany expense from CRM, for services providedto ARM.

 

CRM’s payroll and related expenses decreased $1.1million to $61.1 million for the three months ended June 30, 2009, from$62.2 million for the three months ended June 30, 2008, and decreased as apercentage of revenue to 71.7 percent from 73.3 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, offset inpart by increases from ramping up capacity due to increasing client volumes, inadvance of the offsetting revenue generation.

 

Portfolio Management’s payroll and related expensesdecreased $429,000 to $1.6 million for the three months ended June 30,2009, from $2.0 million for the three months ended June 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 decreased $10.0 million to$137.6 million for the three months ended June 30, 2009, from $147.6million for the three months ended June 30, 2008, and decreased slightlyas a percentage of revenue to 36.3 percent from 36.5 percent.

 

ARM’s selling, general and administrative expensesdecreased $10.8 million to $120.8 million for the three months ended June 30,2009, from $131.6 million for the three months ended June 30, 2008, butincreased as a percentage of revenue to 40.8 percent from 39.3 percent. Theincrease in ARM’s selling, general and administrative expenses as a percentageof revenue was primarily attributable to leveraging our infrastructure over thelower revenue base.

 

CRM’s selling, general and administrative expensesincreased $1.3 million to $16.3 million for the three months ended June 30,2009, from $15.0 million for the three months ended June 30, 2008, andincreased as a percentage of revenue to 19.1 percent from 17.7 percent. Theincrease in CRM’s selling, general and administrative expenses as a percentageof revenue was primarily attributable to ramping up capacity due to increasingclient volumes, in advance of the offsetting revenue generation.

 

Portfolio Management’s selling, general andadministrative expenses decreased $6.9 million to $16.8 million for the threemonths ended June 30, 2009, from $23.7 million for the three months ended June 30,2008, but increased as a percentage of revenue, excluding portfolio salesrevenue and net impairment charges, to 88.7 percent from 72.9 percent. Thedecrease in Portfolio Management’s selling, general and administrative expensesresulted from a $6.3 million decrease in fees for collection services providedby ARM. The increase as a percentage of revenue was primarily due to thedecrease in revenue due to lower collections. Included in Portfolio Management’sselling, general and administrative expenses for the three months ended June 30,2009 and 2008, was $16.3 million and $22.7 million, respectively, ofintercompany expense from ARM, for services provided to Portfolio Management.

 

*Restructuringcharge. *During the threemonths ended June 30, 2009, we incurred restructuring charges of $1.3million related to the restructuring of our legacy operations to streamline ourcost structure. The charges consisted primarily of severance costs. Thiscompares to $4.2 million of restructuring charges for the three months ended June 30,2008.

 

*Depreciation and amortization.* Depreciation and amortization decreased to $30.6 million for the threemonths ended June 30, 2009, from $32.1 million for the three months ended June 30,2008. The decrease was primarily attributable to lower depreciation resultingfrom a lower level of property and equipment.

 

*Other income(expense).*  Interestexpense increased to $26.7 million for the three months ended June 30,2009, from $23.0 million for the three months ended June 30, 2008. Theincrease was primarily attributable to higher interest 

 

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rates under our amended credit facility, partially offset bylower outstanding debt under our senior credit facility. Interest expense forthe three months ended June 30, 2009 and 2008 included $4.0 million and$3.2 million, respectively, of losses from interest rate swap agreements and embeddedderivatives related to our nonrecourse credit facility. Other income (expense), net for thethree months ended June 30, 2009 and 2008 included approximately $6.2million of net gains and $403,000 of net losses, respectively, resulting fromforeign exchange contracts.

 

*Incometax (benefit) expense*.  For the three months ended June 30,2009, the effective income tax rate increased slightly to 31.3 percent from31.2 percent for the three months ended June 30, 2008.

 

***SixMonths Ended June 30, 2009 Compared to Six Months Ended June 30, 2008***

 

*Revenue.*  Revenue increased $11.1 million, or 1.4percent, to $780.7 million for the six months ended June 30, 2009, from$769.6 million for the six months ended June 30, 2008. For the six monthsended June 30, 2009, ARM, CRM, Portfolio Management accounted for $607.5million, $174.3 million and $37.9 million of revenue, respectively. Included inARM’s revenue was $34.0 million of intercompany revenue from PortfolioManagement and included in CRM’s revenue was $5.0 million of intercompanyrevenue from ARM, which were eliminated upon consolidation. For the six monthsended June 30, 2008, these divisions accounted for $608.0 million, $170.5million and $37.5 million of revenue, respectively. Included in ARM’s revenuewas $45.5 million of intercompany revenue from Portfolio Management andincluded in CRM’s revenue was $902,000 of intercompany revenue from ARM, whichwere eliminated upon consolidation.

 

ARM’s revenue decreased $487,000, or0.1 percent, to $607.5 million for the six months ended June 30, 2009,from $608.0 million for the six months ended June 30, 2008. The decreasein ARM’s revenue was primarily attributable to lower than expected overallcollections and an $11.5 million decrease in fees from collection servicesperformed for Portfolio Management, partially offset by increased volume fromnew and existing clients in both first-party (early stage) and contingentcollections.

 

Revenue for the CRM divisionincreased $3.8 million, or 2.2 percent, to $174.3 million for the six monthsended June 30, 2009, from $170.5 million for the six months ended June 30,2008. The increase in CRM’s revenue was primarily due to increased clientvolume related to the implementation of new contracts during 2008 and 2009,partially offset by lower volumes from certain existing clients due to theimpact of the economy.

 

Portfolio Management’srevenue increased $442,000, or 1.2 percent, to $37.9 million for the six monthsended June 30, 2009, from $37.5 million for the six months ended June 30,2008. Portfolio Management’s collections, excluding all portfolio sales,decreased $26.3 million, or 24.1 percent, to $82.7 million for the six monthsended June 30, 2009, from $109.0 million for the six months ended June 30,2008. Portfolio Management’s revenue represented 46.0 percent of collectionsfor the six months ended June 30, 2009 as compared to 34.0 percent ofcollections for the six months ended June 30, 2008, excluding allportfolio sales. Such increases in revenue were attributable to $1.3 million ofimpairment charges recorded for a valuation allowance against the carryingvalue of the portfolios, compared to impairment charges of $30.8 million forthe six months ended June 30, 2008. Portfolio sales revenue for the sixmonths ended June 30, 2009 was $361,000, compared to $1.7 million for thesix months ended June 30, 2008.

 

*Payroll and relatedexpenses.*  Payroll andrelated expenses decreased $16.6 million to $403.7 million for the six monthsended June 30, 2009, from $420.3 million for the six months ended June 30,2008, and decreased as a percentage of revenue to 51.7 percent from 54.6percent.

 

ARM’s payroll and related expenses decreased $7.7 million to $283.1 million for thesix months ended June 30, 2009, from $290.8 million for the six monthsended June 30, 2008, and decreased as a percentage of revenue to 46.6percent from 47.8 percent. ARM’s payroll and related expenses decreased as apercentage of revenue primarily due to the integration efforts following theacquisition of OSI on February 29, 2008, as well as the deployment ofadditional staff in off-shore locations where labor costs are lower. Includedin ARM’s payroll and related expenses for the six months ended June 30,2009 and 2008, was $5.0 million and $902,000, respectively, of intercompanyexpense from CRM, for services provided to ARM.

 

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CRM’s payroll and related expenses decreased $3.8million to $122.6 million for the six months ended June 30, 2009, from$126.4 million for the six months ended June 30, 2008, and decreased as apercentage of revenue to 70.3 percent from 74.1 percent. The decrease as apercentage of revenue was primarily a result of our continuing deployment ofadditional staff in off-shore locations where labor costs are lower.

 

Portfolio Management’s payroll and related expensesdecreased $1.1 million to $3.0 million for the six months ended June 30,2009, from $4.1 million for the six months ended June 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 $3.4 million to$279.8 million for the six months ended June 30, 2009, from $276.4 millionfor the six months ended June 30, 2008, but decreased slightly as apercentage of revenue to 35.8 percent from 35.9 percent.

 

ARM’s selling, general and administrative expensesincreased $1.9 million to $246.5 million for the six months ended June 30,2009, from $244.6 million for the six months ended June 30, 2008, andincreased slightly as a percentage of revenue to 40.6 percent from 40.2percent. The increase in ARM’s selling, general and administrative expenses asa percentage of revenue was primarily attributable to leveraging ourinfrastructure over the lower revenue base, offset in part by integrationefforts following the OSI acquisition.

 

CRM’s selling, general and administrative expensesincreased $2.3 million to $32.3 million for the six months ended June 30,2009, from $30.0 million for the six months ended June 30, 2008, andincreased as a percentage of revenue to 18.5 percent from 17.6 percent. Theincrease in CRM’s selling, general and administrative expenses as a percentageof revenue was primarily attributable to ramping up capacity due to increasingclient volumes, in advance of the offsetting revenue generation.

 

Portfolio Management’s selling, general andadministrative expenses decreased $12.2 million to $35.1 million for the sixmonths ended June 30, 2009, from $47.3 million for the six months ended June 30,2008, but increased as a percentage of revenue, excluding portfolio salesrevenue and net impairment charges, to 90.1 percent from 71.1 percent. Thedecrease in Portfolio Management’s selling, general and administrative expensesresulted from an $11.5 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 six monthsended June 30, 2009 and 2008, was $34.0 million and $45.5 million,respectively, of intercompany expense from ARM, for services provided toPortfolio Management.

 

*Restructuringcharge. *During the sixmonths ended June 30, 2009, we incurred restructuring charges of $1.8million related to the restructuring of our legacy operations to streamline ourcost structure. The charges consisted primarily of severance costs. Thiscompares to $6.9 million of restructuring charges for the six months ended June 30,2008.

 

*Depreciation and amortization.* Depreciation and amortization increased to $61.7 million for the sixmonths ended June 30, 2009, from $59.9 million for the six months ended June 30,2008. The increase was primarily attributable to amortization of the customerrelationships resulting from the OSI acquisition, offset partially by lowerdepreciation expense resulting from a lower level of property and equipment.

 

*Other income(expense).*  Interestexpense increased to $49.8 million for the six months ended June 30, 2009,from $45.4 million for the six months ended June 30, 2008. The increasewas attributable to additional borrowings under the senior credit facilityprimarily to fund a portion of the acquisition of OSI and higher interest ratesunder our amended credit facility. Interest expense for the six months ended June 30,2009 and 2008 included $6.4 million and $5.1 million, respectively, of lossesfrom interest rate swap agreements and embedded derivatives related to our nonrecourse credit facility. Otherincome (expense), net for the six months ended June 30, 2009 and 2008included approximately $2.8 million of net gains and $226,000 of net losses,respectively, resulting from foreign exchange contracts.

 

*Incometax (benefit) expense*.  For the six months ended June 30,2009, the effective income tax rate decreased slightly to 30.9 percent from31.0 percent for the six months ended June 30, 2008.

 

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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, nonrecourse borrowings, and equity and debt offerings. Cash hasbeen used for acquisitions, repayments of bank borrowings, purchases ofequipment, purchases of accounts receivable, and working capital to support ourgrowth.

 

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

 

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

 

At this time, we believe that we will be able to financeour current operations, planned capital expenditure requirements, internalgrowth and debt service obligations, at least through the next twelve months,with the funds generated from our operations, with our existing cash andavailable borrowings under our senior credit facility and nonrecourse creditfacility. Additionally, we may obtain cash through additional equity and debtofferings, if needed.

 

We have a senior credit facility, referred to as theCredit Facility, that consists of a term loan ($570.6 million outstanding as ofJune 30, 2009) and a $100.0 million revolving credit facility ($40.5million outstanding as of June 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. We are aware that our senior notesand senior subordinated notes are currently trading at a substantial discountto their face amounts. We or our stockholders may from time to time seekto retire or purchase our outstanding notes through cash purchases and/orexchanges for equity securities, in open market purchases, privately negotiatedtransactions or otherwise. Our stockholders who acquire such notes mayseek to contribute them to us, for retirement, in exchange for the issuance ofadditional equity. The amounts involved may be material.

 

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

 

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

 

The exclusivity agreement with our nonrecourse 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,which may limit the amount of portfolios we are able to purchase and limitborrowings for other uses.

 

*Cash Flows from Operating Activities*. Cash provided by operating activities was $58.9 million for the sixmonths ended June 30, 2009, compared to $68.3 million for the six monthsended June 30, 2008. The decrease in cash provided by operating activitieswas primarily attributable to a decrease in accounts payable and accruedexpenses of $10.9 million for the six months ended June 30, 2009,primarily due to changes in the fair value of derivative instruments, comparedto an increase of $162,000 in the prior year period. This decrease waspartially offset by a decrease in deferred income taxes of $5.7 million for thesix months ended June 30, 2009 compared to a decrease of $13.5 million inthe prior year period.

 

*Cash Flows from InvestingActivities.*  Cash used in investing activities was $4.5million for the six months ended June 30, 2009, compared to $369.6 millionfor the six months ended June 30, 2008. The decrease in cash used ininvesting activities was primarily attributable to net cash paid foracquisitions and related costs of $325.5 million during the six months ended June 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 $49.3million for the six months ended June 30, 2009, compared to cash providedby financing activities of $318.8 million for the six months ended June 30,2008. The cash used in financing activities was due primarily to the repaymentsof borrowings under our Credit Facility totaling $59.0 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*. We have a senior credit facility (“CreditFacility”) with a syndicate of financial institutions that consists of a termloan and a $100.0 million revolving credit facility. We are required to makequarterly principal repayments of $1.5 million on the term loan until itsmaturity in May 2013, at which time its remaining balance outstanding isdue. We are also required to make annual prepayments of 50 percent, 25 percentor zero percent of its excess annual cash flow, based on our leverage ratio.The revolving credit facility requires no minimum principal payments until itsmaturity in November 2011. At June 30, 2009, the balance outstandingon the term loan was $570.6 million and the balance outstanding on therevolving credit facility was $40.5 million. The availability of the revolvingcredit facility is reduced by any unused letters of credit ($19.6 million at June 30,2009). As of June 30, 2009, we had $39.9 million of remaining availabilityunder the revolving credit facility.

 

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 ofadditional debt, investments, investments in purchased accounts receivable, dispositionof assets, liens and dividends and other distributions. If an event of default,such as failure to comply with covenants or 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 June 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 

 

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

 

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

 

The indentures governingthe Notes contain a number of covenants that limit our and our restrictedsubsidiaries’ ability, among other things, to: incur additional indebtednessand issue certain preferred stock, pay certain dividends, acquire shares ofcapital stock, make payments on subordinated debt or make investments, placelimitations on distributions from restricted subsidiaries, issue or sell stockof restricted subsidiaries, guarantee indebtedness, sell or exchange assets,enter into transactions with affiliates, create certain liens, engage inunrelated businesses, and consolidate, merge or transfer all or substantiallyall of our assets and the assets of our subsidiaries on a consolidated basis.In addition, upon a change of control, we are required to offer to repurchaseall of the Notes then outstanding, at a purchase price equal to 101 percent oftheir principal 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 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 plus 2.50 percent, or as negotiated. These borrowings arenonrecourse to us and are due two years from the date of each respective loan,unless otherwise negotiated. As additional return on the debt financedportfolios, the lender receives residual cash flows, as negotiated, which is definedas all cash collections after servicing fees, floating rate interest, repaymentof the borrowing, and our initial investment, including interest. Total 

 

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debt outstanding underthis facility as of June 30, 2009 was $22.6 million, including $2.7million of accrued residual interest. As of June 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, which may limit the amount of portfolios we are able to purchaseand limit borrowings for other uses.

 

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

 

*ContractualObligations.*There have been no material changes, outside the ordinary course of ourbusiness, to our contractual obligations as of December 31, 2008 asreported in our Annual Report 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.* Foreign currency exposures arise fromtransactions denominated in a currency other than the functional currency andfrom foreign denominated revenue and profit translated into U.S. dollars. Theprimary currencies to which we are exposed include the Canadian dollar, thePhilippine peso, the British pound and the Australian dollar. Due to the sizeof the Canadian and Philippine operations, we currently use forward exchangecontracts to limit potential losses in earnings or cash flows from adverseforeign currency exchange rate movements. These contracts are entered into toprotect against the risk that the eventual cash flows resulting from suchcontracts will be adversely affected by changes in exchange rates. Ourobjective is to maintain economically balanced currency risk managementstrategies that provide adequate downside protection. During the six monthsended June 30, 2009, we continued to see volatility of the U.S. dollar,primarily as it relates to the Canadian dollar and the Philippine peso. Webelieve this trend may continue, and if so, it could have a negative impact onour future results of operations.

 

*Interest Rate Risk. *At June 30, 2009, we had $798.7 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.

 

***Critical Accounting Policies and Estimates***

*** ***

*General.* The preparation of consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and the accompanying notes.Actual results could differ from those estimates. We believe the followingaccounting policies and estimates are the most critical and could have the mostimpact on our results of operations: goodwill, other intangible assets andpurchase accounting, revenue recognition for purchased accounts receivable,income taxes, and allowance for doubtful accounts. These are described in note2 to our 2008 financial statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2008. During the six months ended June 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 Pronouncements***

 

For a discussion ofrecently issued accounting pronouncements, see note 17 in our Notes toConsolidated Financial Statements included in this Form 10-Q.

 

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

 

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

 

**Item 4T.  Controls and Procedures**

 

Our management, with the participation of our chiefexecutive officer and chief financial officer, conducted an evaluation of theeffectiveness of our disclosure controls and procedures, as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e), as of June 30, 2009. Based onthat evaluation, our chief executive officer and chief financial officerconcluded that, as of the end of the period covered by this Report, ourdisclosure controls and procedures were effective in reaching a reasonablelevel of assurance that the (i) information required to be disclosed by usin the reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms and (ii) informationrequired to be disclosed by us in the reports that we file or submit under theExchange Act is accumulated and communicated to our management including ourprincipal executive and principal financial officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding requireddisclosure.

 

Our management, with the participation of our chiefexecutive officer and chief financial officer, also conducted an evaluation ofour internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and15d-15(f), to determine whether any changes occurred during the quarter ended June 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 June 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.

 

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**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.

 

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:

 

In2004, the Company received notice of a proposed reassessment from a foreigntaxing authority relating to certain matters occurring from 1998 through 2001regarding one of its subsidiaries. In September 2006, the Company receivedthe formal notice of reassessment in the amount of $14.7 million includinginterest and penalties, converted as of June 30, 2009 ($14.6 millionconverted as of December 31, 2006), and in December 2006 the Companypaid a deposit of $8.5 million. The Company maintains a reserve and believes itis adequate to address its exposure to this matter.

 

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

 

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.

 

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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 to usor that we currently deem to be immaterial also may materially adversely affectour business, financial condition and/or operating results.

 

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

 

None

 

**Item 3.    Defaults Upon Senior Securities**

 

None

 

**Item 4.    Submission of Matters to a Vote of SecurityHolders**

 

None

 

**Item 5.    Other Information**

 

(a)          None

 

(b)         Not applicable

 

**Item 6.    Exhibits**

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

 

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**Signatures**

 

Pursuant to 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:  August 14, 2009 |   | By:                  | /s/ Michael J.  Barrist                       |
|                             |   |                 | Michael J. Barrist                            |
|                             |   |                 | Chairman of the Board,  President             |
|                             |   |                 | and Chief Executive  Officer                  |
|                             |   |                 | (principal executive  officer)                |
|                             |   |                 |                                          |
|                             |   |                 |                                          |
| Date:  August 14, 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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