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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**Form 10-K/A**

**(Amendment No. 1)**

**(Mark One)**

** **
| **x** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------------|

** **

**For the Fiscal Year ended December 31,2009**

** **

**or**

** **
| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

** **

**For the transition period from             to            **

** **

**Commission File No. 333-158745;333-150885**

** **

**NCOGROUP, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                     | ** ** | **02-0786880**                     |
|----------------------------------|------------|------------------------------------|
| (State or other  jurisdiction of |       | (IRS Employer  Identification No.) |
| incorporation or  organization)  |       |                               |

 

| **507  Prudential Road, Horsham, Pennsylvania** | ** ** | **19044**  |
|-------------------------------------------------|------------|------------|
| (Address of  principal executive offices)       |       | (Zip Code) |

 

Registrant’stelephone number, including area code ** (215) 441-3000**

 

Securities registeredpursuant to Section 12(b) of the Act: **None**

 

Securities registeredpursuant to Section 12(g) of the Act: **None**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  Yes o  No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes o  No x

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWebsite, 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 check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definition of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

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

 

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

 

The aggregate marketvalue of the registrant’s voting stock held by non-affiliates is zero. Theregistrant is a privately held corporation.

 

The number of shares ofeach of the registrant’s classes of common stock outstanding as of March 31,2010 was: 2,960,847 shares of Class A common stock, $0.01 par value, and399,814 shares of Class L common stock, $0.01 par value.

 

 

 

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**EXPLANATORYNOTE**

 

ThisAmendment No. 1 on Form 10-K/A to our annual report on Form 10-K for the yearended December 31, 2009 (“Original Filing”), initially filed with theSecurities and Exchange Commission on March 31, 2010, is being filed to add thename of our Independent Registered Public Accounting Firm,PricewaterhouseCoopers LLP, to their report included in Item 8, as it waserroneously omitted in the Original Filing.

 

Forthe convenience of the reader, this Form 10-K/A includes the Original Filing inits entirety as amended by this Form 10-K/A. However, this Form 10-K/A onlyamends and restates Item 8 of Part II of the Original Filing and no otherinformation in the Original Filing is amended hereby. The foregoing items havenot been updated to reflect other events concerning our business or financialcondition occurring after the Original Filing or to modify or update thosedisclosures affected by subsequent events. In addition, pursuant to the rules ofthe SEC, Item 15 of Part IV of the Original Filing has been amended to containcurrently-dated certifications from our Chief Executive Officer and ChiefFinancial Officer, as required by Sections 302 and 906 of the Sarbanes-OxleyAct of 2002. The certifications of our Chief Executive Officer and ChiefFinancial Officer are attached to this Form 10-K/A as Exhibits 31.1, 31.2, 32.1and 32.2.

 

Exceptfor the foregoing amended information, this Form 10-K/A continues to describeconditions as of the date of the Original Filing, and the disclosures containedherein have not been updated to reflect events, results or developments thatoccurred at a later date. Among other things, forward looking statements madein the Original Filing have not been revised to reflect events, results ordevelopments that occurred or facts that became known to us after the date ofthe Original Filing, and such forward looking statements should be read intheir historical context.

 

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**TABLE OF CONTENTS**

 
| ** **      | ** **                                                                                                               | ** ** | **Page** |
|-----------------|--------------------------------------------------------------------------------------------------------------------------|------------|----------|
| ** **      |                                                                                                                     |       |     |
| **PART  I**     |
| ** **      | ** **                                                                                                               |       |     |
| **Item  1.**    | **Business**                                                                                                             |       | 2        |
| **Item 1A.**    | **Risk  Factors**                                                                                                        |       | 13       |
| **Item 1B.**    | **Unresolved Staff  Comments**                                                                                           |       | 26       |
| **Item 2.**     | **Properties**                                                                                                           |       | 27       |
| **Item 3.**     | **Legal Proceedings**                                                                                                    |       | 27       |
| **Item 4.**     | **Reserved**                                                                                                             |       | 28       |
| ** **      |                                                                                                                     |       |     |
| **PART II**     |
| ** **      | ** **                                                                                                               |       |     |
| **Item 5.**     | **Market for  Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases  of Equity Securities** |       | 28       |
| **Item 6.**     | **Selected Financial  Data**                                                                                             |       | 29       |
| **Item 7.**     | **Management’s  Discussion and Analysis of Financial Condition and Resultsof Operations**                           |       | 30       |
| **Item 7A.**    | **Quantitative  and Qualitative Disclosures about Market Risk**                                                          |       | 44       |
| **Item 8.**     | **Financial  Statements and Supplementary Data**                                                                         |       | 44       |
| **Item 9.**     | **Changes  in and Disagreements with Accountants on Accounting And Financial Disclosure**                                |       | 44       |
| **Item 9A(T).** | **Controls  and Procedures**                                                                                             |       | 44       |
| **Item 9B.**    | **Other  Information**                                                                                                   |       | 45       |
| ** **      |                                                                                                                     |       |     |
| **PART III**    |
| ** **      | ** **                                                                                                               |       |     |
| **Item 10.**    | **Directors,  Executive Officers and Corporate Governance**                                                              |       | 46       |
| **Item 11.**    | **Executive  Compensation**                                                                                              |       | 48       |
| **Item 12.**    | **Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters**                     |       | 66       |
| **Item 13.**    | **Certain  Relationships and Related Transactions, and Director Independence**                                           |       | 68       |
| **Item 14.**    | **Principal  Accounting Fees and Services**                                                                              |       | 69       |
| ** **      |                                                                                                                     |       |     |
| **PART IV**     |
| ** **      | ** **                                                                                                               |       |     |
| **Item. 15.**   | **Exhibits,  Financial Statement Schedules**                                                                             |       | 71       |
| ** **      | **Signatures**                                                                                                           |       | 78       |
| ** **      |                                                                                                                     |       |     |
| ** **      | **Index to Consolidated Financial Statements**                                                                           |       | F-1      |

 

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As used in this Annual Report on Form10-K, unless the context otherwise requires, “we,” “us,” “our,” “Company” or “NCO”refers to NCO Group, Inc. and its subsidiaries.

 

**Forward-Looking Statements**

 

Certain statementsincluded in this Annual Report on Form 10-K, other than historical facts, areforward-looking statements (as such term is defined in the Securities ExchangeAct of 1934, as amended, and the regulations thereunder), which are intended tobe covered by the safe harbors created thereby. Forward-looking statementsinclude, 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 and amortizationexpense of customer relationships and other intangible assets;

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

·                  the effects of changes in accounting guidance; and

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

 

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

 

·                  risks related to the instability in the financialmarkets;

·                  risks related to adverse capital and credit marketconditions;

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

·                  risks related to the domestic and internationaleconomies;

·                  risks related to derivative transactions;

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

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

·                  risks related to the Company’s substantial indebtednessand 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;

·                  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;

 

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·                  risks related to past or possible future terroristattacks;

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

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

·                  risks related to the Company’s internationaloperations;

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

·                  risks related to currency fluctuations;

·                  risks related to reliance on independenttelecommunications service providers;

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

·                  risks related to the possible loss of key clients;

·                  risks related to changes in government regulations.

 

The Company cangive no assurance that any of the events anticipated by the forward-lookingstatements will occur or, if any of them does, what impact they will have onour results of operations and financial condition. The Company disclaims anyintent or obligation to publicly update or revise any forward-lookingstatements, regardless of whether new information becomes available, futuredevelopments occur or otherwise. For additional information concerning therisks that affect us, see “Part I. — Item 1A. Risk Factors” of this Report on Form10-K.

 

**PART I**

 

**Item 1.****                                                        ****Business**

 

**General**

 

NCO Group, Inc. isa holding company and conducts substantially all of its business operationsthrough its subsidiaries. NCO is an international provider of business processoutsourcing services, referred to as BPO, primarily focused on accountsreceivable management, referred to as ARM, and customer relationshipmanagement, referred to as CRM. We provide a wide range of ARM services to ourclients by utilizing an extensive technological infrastructure. Althoughtraditional ARM services have focused on the recovery of delinquent accounts,we also engage in the recovery of current accounts receivable and early stagedelinquencies (generally, accounts that are 180 days or less past due). Our CRMservices allow our clients to strengthen their customer relationships byproviding a high level of support to their customers and generate incrementalsales by acquiring new customers. We support essential business functionsacross key portions of the customer lifecycle including acquisition, growth,care, resolution and retention. The primary market sectors we support in ourBPO business are financial services, telecommunications, healthcare, retail andcommercial, utilities, education, technology, transportation/logistics andgovernment. Historically we have also purchased and collected past due consumeraccounts receivable from consumer creditors. However, we expect to limit futurepurchases, as further discussed below (see “Business Strategy — PortfolioManagement”). We operate our business in three segments: ARM, CRM and PortfolioManagement.

 

Our extensiveindustry knowledge, technological expertise, management depth, internationalscale, broad service offerings and long-standing client relationships enable usto deliver customized solutions that help our clients reduce their operatingcosts, increase cash flow, and improve their customers’ experience. We provideour services through our customer-driven model that provides optimalperformance, leading-edge technology, proven efficiency and quality, to a widerange of clients in North America and abroad. We currently have approximately32,900 full and part-time employees (including approximately 2,100 non-employeepersonnel utilized through subcontractors) who provide our services through ournetwork of over 100 offices in 11 countries. We also have employees who work in“virtual” offices out of their homes.

 

Our website iswww.ncogroup.com. We make available on our website, free of charge, our annualreport on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,and all amendments to those reports, filed or furnished pursuant to Section 13(a)or 15(d) of the Exchange Act, as soon as reasonably practicable after suchmaterial is electronically filed with or furnished to the SEC.

 

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In addition, wewill provide to our investors, at no cost, paper or electronic copies of ourreports and other filings (excluding exhibits) made with the SEC. Requestsshould be directed to:

 

NCO Group, Inc.

507 PrudentialRoad

Horsham, PA  19044

Attention:  Investor Relations

 

The information onthe website listed above, is not and should not be considered part of thisAnnual Report on Form 10-K and is not incorporated by reference in thisdocument. This website is, and is only intended to be, an inactive textualreference.

 

**IndustryBackground**

 

Companies are outsourcing manyessential, non-core business functions in order to focus on revenue-generatingactivities and core competencies, reduce costs and improve productivity andservice levels. In particular, many large corporations are recognizing theadvantages of outsourcing accounts receivable management and customer serviceand support. This trend is being driven by a number of industry-specificfactors, including:

 

·                  an increase in the complexity of collection and othercustomer service processes, which requires sophisticated call management anddatabase systems for efficient operations;

·                  the lack of expertise, resources and infrastructurenecessary to provide optimal customer support due to the growing scope andcomplexity of such activities;

·                  significant economies of scale achievable by thirdparties with focused capabilities; and

·                  a trend in certain industries to outsource essential,non-core functions due to competitive pressures, regulatory considerationsand/or required capital expenditures.

 

The BPO industry is highlyfragmented in the U.S. The leading providers of BPO services are largemultinational companies. We believe that many smaller competitors haveinsufficient capital to expand and invest in technology and are unable to meetthe geographic coverage, and regulatory requirements and quality standardsdemanded by businesses seeking to outsource their essential, non-core businessfunctions.

 

**BusinessStrategy**

 

Our primary businessstrategy is to strengthen our global position in the ARM and CRM markets, andto opportunistically expand our service offerings to other complementary BPOservices. We believe we build quality partnerships and use our operationalexpertise to create value for our customers, employees and shareholders.

 

**Expandour relationships with clients** — An integral component of our growth strategy isfocused on the expansion of existing client relationships. We plan to continueto grow these relationships and the resulting opportunities in both scale anddepth. We believe these relationships will continue to transition from vendorrelationships, focusing on the operational delivery of services, to strategicpartnerships focused on long-term, goal-oriented delivery of services. A keyfocus of this strategy is leveraging existing client relationships in onemarket to cross-sell our services in other markets.

 

**Enhanceour operating margins** — We intend to continue pursuing the following initiatives to increaseprofitability:

 

·                  standardization of systems and practices;

·                  consolidation of facilities;

·                  automation of clerical functions;

·                  utilization of near shore and offshore labor;

·                  use of statistical analysis to improve performance andreduce operating expenses;

·                  use of segmentation strategy to improve profitability;and

·                  leveraging our international size and presence.

 

#### **Continuouslyimprove business processes**— Weintend to continue developing and enhancing our technology and infrastructurewith initiatives that improve the efficiency of our operations and enhanceclient service. Examples of our recent initiatives include:

 

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·*Decision supportsystem:* We developed and implemented an innovative,proprietary, web-based suite of call center management tools called InsiteSM, which provides decision support for call centerperformance optimization. Insite provides us with a consistent view ofperformance and opportunity across the enterprise to ensure that NCO providestop tier performance on behalf of its clients.

 

·*Enhanced datamanagement and analytics:* We have bothclient-specific and pooled segmentation models to focus better our collectionsefforts. These models, coupled with iterative segment-based treatment testing,provide benefits by reducing operating expense and increasing collectionrevenues. Segmentation allows us to focus resources on accounts with thehighest likelihood of recovery, and devote less costly resources to lowerprobability accounts. Additionally, we began applying the use of segmentation modelsto make more strategic portfolio purchase decisions.

 

·*Online access for ourclients’ customers: *We implementeda self-service website to allow our clients’ customers to access their accountswith us. Our clients’ customers can use the website to update their accountinformation, request statements and make payments. Additionally, we launched aseparate consumer help website designed to allow our clients’ customers toeasily communicate with us anytime, via email, telephone, or request one of ourrepresentatives to call them.

 

·*Patternrecognition system:*  Ourpattern recognition system is designed to determine the patterns and profilesthat precede customer decisions such as purchase or defection. Leveragingpredictive analytic technologies increases the ability to predict customers’behaviors, thus improving the results of the outsourced solutions we provide toour clients, as well as improving our purchased portfolio analytics, whilereducing our costs.

 

·*Technologyupgrades:*  We are continuouslyupgrading and fine-tuning our technology to meet current and future clientneeds, while maximizing our investment through aggressive re-use philosophywherever possible.

 

·*Enhanceddata security:* We continue to deploy both physical and systemsecurity enhancements to help ensure ongoing protection and privacy of NCO’sand clients’ data as well as network and systems hardening. We incorporatesophisticated password, access and authentication controls, and emphasizesecurity awareness training programs.

 

**Expandinternationally** —We believe that the BPO industry is gaining widespread acceptance throughoutCanada, Europe, the Asia-Pacific region and Latin America. Our internationalexpansion strategy is designed to continue to capitalize on each of thesemarkets in the near term, as well as continue to develop access to lower-costforeign labor. We believe we are a leading provider of BPO services in Canada,Europe and Australia. During 2008, we expanded our presence in Australia, andbegan providing services in Mexico, both through acquisitions. We expect tofurther penetrate all of these markets through increased sales of ARM and CRMservices. Additionally, we expect to pursue direct investments, strategicalliances and partnerships as well as further explore acquisitions in thesemarkets and other markets.

 

**PortfolioManagement** —Historically, we have participated in the purchased accounts receivablebusiness on an opportunistic basis. Given the decline in liquidation rates,competition for purchased accounts receivable and the continued uncertainty ofcollectibility, we significantly reduced our purchases of accounts in 2009. Wecurrently expect to limit our purchases in 2010 to certain of ournon-cancelable forward flow commitments. Additionally, we may opportunisticallypurchase accounts receivable that allow us to leverage meaningful third-partyservicing contracts. Our amended senior credit facility (see note 12 in ourNotes to Consolidated Financial Statements) limits purchases in 2010 to $20million and purchases in 2011 and beyond to $10 million.

 

**Pursuestrategic acquisition opportunities**— We have developed a disciplined approach toacquisitions. We believe our approach enables us to efficiently integrate acquiredbusinesses, personnel and facilities into our existing technology platform,personnel matrix and facilities. By leveraging our shared services andinfrastructure, we facilitate the realization of cost synergies and growth ofsales and earnings. We intend to evaluate and pursue strategic acquisitions onan opportunistic basis as they become available.

 

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The followingtable is a list of our acquired companies in the past two years:

 
| **Date**      | ** ** | **Acquired Company**                                         | ** ** | **Description**                          |
|---------------|------------|--------------------------------------------------------------|------------|------------------------------------------|
| August 2009   |       | TSYS Total Debt  Management (“TDM”)                |       | Attorney network  receivables management |
| May 2009      |       | Complete Credit  Management, Ltd.                            |       | Receivables management  in the UK        |
| February 2008 |       | Outsourcing  Solutions Inc. (“OSI”)                |       | Receivables  management                  |
| January 2008  |       | Systems &  Services Technologies, Inc. (“SST”) |       | Active account  servicing                |
| 2008          |       | Various  international companies                             |       | Receivables  management                  |

 

**OurServices**

 

We provide thefollowing BPO services:

 

**AccountsReceivable Management**

 

We provide a widerange of ARM services to our clients by utilizing an extensive technologicalinfrastructure. Although traditional ARM services have focused on the recoveryof delinquent accounts (third-party), we also engage in the recovery of currentaccounts receivable and early stage delinquencies (generally, accounts that are180 days or less past due) (first-party). We generate ARM revenue from therecovery of delinquent accounts receivable on a contingency fee basis and fromcontractual collection services and other related services.

 

ARM servicestypically include the following activities:

 

***Engagement Planning.***  We customizesolutions for our clients based on a number of factors, including account sizeand demographics, the client’s specific requirements and our management’sestimate of the collectibility of the account. We integrate our standardprocesses for accounts receivable management, developed from decades ofaccumulated experience, to create a customized recovery solution. In manyinstances, the approach will evolve and change as the relationship with theclient develops, and both parties evaluate the most effective means ofrecovering accounts receivable. Our systematic approach to accounts receivablemanagement removes most decision making from the recovery staff and is designedto ensure uniform, cost-effective performance.

 

Once the approachhas been defined, we electronically or manually transfer pertinent client datainto our information system. When the client’s records have been established inour system, we begin the recovery process.

 

***Account Notification.***  We initiatethe recovery process by forwarding a preliminary letter that is designed toseek payment of the amount due or open a dialogue with the client’s customers.This letter also serves as an official notification to each client’s customerof his or her rights as required by the Federal Fair Debt Collection PracticesAct. We continue the recovery process with a series of mail and telephonenotifications. Telephone representatives remind the client’s customer of theirobligation, inform them that their account has been placed for collection withus and begin a dialogue to develop a payment program.

 

***Skip Tracing.***  In cases wherethe client’s customer’s contact information is unknown, we systematicallysearch the U.S. Post Office National Change of Address service, consumerdatabases, electronic telephone directories, credit agency reports, taxassessor and voter registration records, motor vehicle registrations, militaryrecords, and other sources. The geographic expansion of banks, credit cardcompanies, national and regional telecommunications companies, and national andregional hospital chains, along with the mobility of consumers, has increasedthe demand for locating the client’s customers. Once we have located the client’scustomer, the notification process can begin.

 

***First Party/Early Stage Delinquency Calls.*** Although companies understand the importanceof contacting customers early in the delinquency cycle, some do not possess theresources necessary to sustain consistent and cost-effective outbound telephonecampaigns. We provide a customized, service approach to contact our clients’customers and remind them of their obligation to pay their accounts.

 

We typicallyconduct reminder calls to recently past due customers and courtesy collectioncalls to more seriously delinquent customers. Our representatives leavecourteous messages if telephone contact attempts are unsuccessful after the secondday.

 

***Third Party Collection Services.*** The most common challenges encountered by companies are how to promptseriously delinquent customers to make payment before they are charged off asuncollectible or to collect the full 

 

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balance after charge-off.Our third party collection services communicate a sense of urgency to seriouslydelinquent customers during these periods, reducing net charge-offs and thecost of collection.

 

***Credit Reporting.***  Credit bureaureporting is used as a collection tool in accordance with NCO’s policy,applicable laws, and client guidelines. At a client’s request, we willelectronically report delinquent accounts to one or more of the national creditbureaus where it will remain for a period of up to seven years. The possibledenial of future credit often motivates the resolution of past due accounts.

 

***Payment Processing.***  After wereceive payment from the client’s customer, depending on the terms of ourcontract with the client, we can either remit the amount received minus our feeto the client or remit the entire amount received to the client andsubsequently bill the client for our collection services.

 

***Attorney Network Services.*** We coordinate and implement legal collection solutions undertaken onbehalf of our clients through the management of nationwide legal resourcesspecializing in collection litigation. Our collection support staff manages theattorney relationships and facilitates the transfer of necessary documentation.

 

***Agency Management.***  We help ourclients manage their accounts receivable management vendors. We establishconsistent performance reporting and hold agencies to rigorous performancestandards. We monitor and audit all of the agencies in our clients’ network forquality to ensure they are meeting all performance standards.

 

***NCOePayments.***  We provide ourclients’ customers with multiple secure payment options, accessible via thetelephone and the Internet, 24 hours a day, 365 days a year. We also providecontact center solutions utilizing our extranet technology, allowingrepresentatives to take payments directly from the customer.

 

***Consumer Loan Servicing.***  We provideconsumer loan servicing for a variety of consumer assets through an end-to-endservicing model, from asset generation to deficiency collections.

 

***Transworld Systems.***** **Our subsidiary, Transworld Systems Inc., provides first- and third-party earlystage and past due account recovery services for small, medium and largebusinesses on a fixed fee basis, through a demand series, reminder calls, or acustomized program to fit individual business needs.

 

***University Accounting Services.*** We provide loan billing services for institutions of higher education.

 

***Healthcare Services.***  We provideseveral specialty services for healthcare providers such as:

 

·                  Eligibility Patient Advocacy Liaison****—****providesfederal, state, and jurisdictional assistance programs to the uninsured andunderinsured.

·                  Extended Business Office Services —****operates as an extension of a healthcare business office.Services include the provision of all appropriate billing and follow-up,including billing, re-billing, and follow-up activities for any financial classand any age of placement.

·                  Patient Service Outsourcing —****providesthe resources needed to perform inbound and outbound patient contact servicesfor third-party eligibility verification, including Medicaid.

 

**CustomerRelationship Management**

 

Our CRM servicesallow our clients to strengthen their customer relationships by providing ahigh level of support to their customers and generate incremental sales byacquiring new customers. We design and implement customized outsourced customercare solutions including the following:

 

***Customer Care and Retention. ***Ourrepresentatives specialize in developing and maintaining the relationships thatour clients value. Customer care programs vary depending upon each client’sspecific goals, but often include services such as customer development andoutbound and inbound calling campaigns. Our representatives handle customercare inquiries such as billing questions, product and service inquiries, andcomplaint resolution. We also place calls on behalf of clients in welcoming newcustomers, retaining current customers, delivering notifications and conductingmarket research or satisfaction surveys. Our programs include specializedtraining in order to ensure that each representative is a seamless extension ofour clients’ businesses.

 

***Customer Acquisition and Sales.*** We support inbound and outbound sales efforts by conducting customizedprograms designed to acquire new customers, renew current customers, and winback or win over targeted customers. We execute multiple phases of the salesorder process, pre- and post-sale, from answering product related questions andmaking sales presentations to up selling, cross selling and order processing.

 

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***Product and Technical Support. ***In support of the increasing dependence of customersand businesses on technology, prompt and accurate responses to technologyinquires, product-related support issues, and service related concerns hasbecome a cornerstone to maintaining high customer satisfaction and achievingretention goals. Our product support services include help desk,troubleshooting, warranty, recall, and upgrade support. We strive for firstcall resolution and are committed to meeting client service level requirements.We believe that our highly trained customer contact staff is knowledgeable inall components of technical support and help desk related service requirements,and is adept at troubleshooting, evaluation and escalation procedures andresolving complaints quickly and effectively to increase our clients’ customerretention and loyalty.

 

***Interactive Voice Response. ***We useinteractive voice response (IVR) technology to cost-effectively facilitatecustomer care for our clients. Customers can efficiently obtain account balanceinformation, transfer funds, place an order, check status of an order, pay abill, or answer a survey. Incoming calls are routed to representatives throughsystematic call transfer protocols or as a result of a toll-free number beingincluded on customer correspondence. The process is completely automated, andif the caller wants to speak to a representative they can choose to beconnected to a live NCO customer service professional. This combination of liveand recorded telephone interaction benefits the customer through efficient, 24-hourservice, and decreased operating costs.

 

***Email Management. ***An important component to attracting andretaining customers is easy accessibility. Our email management services allowour clients’ customers to communicate with them day or night, 24 hours a day,seven days a week. Our response generation and intelligent routing provide anefficient means to respond to customer needs while increasing our clients’operational effectiveness and decreasing their costs.

 

***Web Chat. ***We have the ability to communicate withclients’ customers through our live Web chat service. Faster than email, ourWeb chat solution allows customers to interact with agents in real time. We canleverage our Web chat technology to provide customer care, answer productquestions, or offer technical support.

 

***Text Messaging Services. ***Usingtext messaging, we can relay a wide variety of information, includinginformation about new services, promotions, or important information likeconfirmation numbers.

 

***In-Language Contact.*** Our globalnetwork of call centers support all major languages, including English,Spanish, French, Arabic, Korean, Hindi, Polish, Russian, Tagalog, and numerousAsian dialects. We have a wealth of experience supporting multilingual programsand can work with clients to meet any language requirement.

 

***Order Processing.***  We supportmultiple phases of order processing, including answering product-relatedquestions and making sale presentations, up selling and cross selling, orderentry, and providing post-sale support.

 

**Technologyand Infrastructure**

 

We have implemented ascalable technical infrastructure that can flexibly support growing clientvolume while delivering a high level of reliability and service. Our customercontact centers feature advanced technologies, including predictive dialers,automated call distribution systems, digital switching, Voice over InternetProtocol (“VoIP”) technologies, digital recording, workforce management systemsand customized computer software, including the NCO ACCESS Interface Manager.This is a graphical user interface we developed for use in large-scaleoutsourcing engagements that enables better data integration, enhancedreporting, representative productivity, implementation speed, and security.  As a result, we believe we are able toaddress outsourced business process activities more reliably and moreefficiently than our competitors. Our IT staff is comprised of over 450professionals. We provide our services through the operation of over 100centers that are linked through an international wide area network.

 

We maintain disasterrecovery contingency plans and have implemented procedures to protect againstthe loss of data resulting from power outages, fire and other casualties. Webelieve fast recovery and continuous operation are ensured with multipleredundancies, uninterruptible power supplies and contracted backup and recoveryservices. We have implemented security systems to protect the integrity andconfidentiality of our computer systems and data, and we maintain comprehensivebusiness interruption and critical systems insurance on our telecommunicationsand computer systems. Our systems also permit secure network access to enableclients to establish real time communications with us and monitor operationalactivity. We employ a variety of industry leading measures including advancedfirewalls, data encryption, role specific access permissions, and site securityto ensure data remains safe and secure.

 

We continue to be anearly adopter of the Credit Card Industry best practices and compliance fordata protection. A Level I, audit/assessment is conducted annually by anoutside third-party firm, resulting in the satisfactory compliance with thePayment Card Industry (“PCI”), VISA Cardholder Information Security Program (“CISP”),MasterCard Site

 

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Data Protection (“SDP”)Program and American Express Data Security System (“DSS”) requirements. VISAand MasterCard have validated NCO as a Level I provider, which is the moststringent level in the PCI schema.

 

In 2009, the FSA changedits requirements to establish a continuous monitoring program to ensure thatcontrols are reviewed on a consistent basis and that documentation is up todate. To that end, the US Department of Education required that its third partycollections agencies comply with the Federal Information Security ManagementAct (FISMA) and to ensure that the system maintains its accreditation and “Authorizationto Process” by the end of October 2009. On October 22, 2009 NCOreceived the formal “Security Authorization to Operate Decision” from theDepartment of Education. This process will continue on an annual basis.

 

Our ARM call centersutilize both virtual and onsite predictive dialers with a total of over 4,800stations to address our low-balance, high-volume accounts, and our CRM centersutilize approximately 400 predictive dialer stations to conduct our clients’outbound calling campaigns. These systems scan our databases, simultaneouslyinitiate calls on all available telephone lines, and determine if a liveconnection is made. Upon determining that a live connection has been made, thecomputer immediately switches the call to an available representative andinstantaneously displays the associated account record on the representative’sworkstation. Calls that reach other signals, such as a busy signal, telephonecompany intercept or no answer, are tagged for statistical analysis and placedin priority recall queues or multiple-pass calling cycles. NCO systems alsoautomate almost all record keeping and workflow activities including letter andreport generation. We believe that our automated method of operationsdramatically improves the productivity of our staff.

 

**QualityAssurance and Client Service**

 

We believe areputation for quality service is critical to acquiring and retaining clients.Therefore, our representatives are supervised, by both NCO and our clients, forstrict compliance with client specifications, our policies, and applicable lawsand regulations. We regularly measure the quality of our services by capturingand reviewing such information as the amount of time spent talking with clients’customers, level of customer complaints and operating performance. In order toprovide ongoing improvement to our telephone representatives’ performance andto ensure compliance with our policies and standards, as well as federal, stateand local guidelines, quality assurance personnel supervise each telephonerepresentative on a frequent basis and provide ongoing training to therepresentative based on this review. Our information systems enable us toprovide clients with reports on a real-time basis as to the status of theiraccounts and clients can choose to network with our computer system to accesssuch information directly.

 

We maintain aclient service department to promptly address client issues and questions andalert senior executives of potential problems that require their attention. Inaddition to addressing specific issues, a team of client servicerepresentatives contact clients on a regular basis in order to establish aclose relationship, determine clients’ overall level of satisfaction, andidentify practical methods of improving their satisfaction.

 

Additionally, in2009 we launched a new consumer help website designed to allow our clients’customers to communicate with us 24 hours a day, seven days a week, 365 days ayear. Consumers can choose to contact us via email or telephone, or they canchoose to have one of our representatives call them. We have a dedicated teamof representatives to support the website.

 

**ClientRelationships**

 

Our active client base currentlyincludes over 18,500 companies in the financial services, telecommunications,healthcare, retail and commercial, education and government, utilities,technology and transportation/logistics sectors. Our 10 largest clients in 2009accounted for approximately 38.7 percent of our consolidated revenue excludingreimbursable costs and fees. Our largest client during the year ended December 31,2009, was in the telecommunications sector and represented 9.6 percent of ourconsolidated revenue, excluding reimbursable costs and fees, for the year endedDecember 31, 2009. While our CRM division relies on revenue from a few keyclients, none of these clients represented more than 10 percent of ourconsolidated revenue. In 2009, we derived 34.5 percent of our revenue fromfinancial services (which includes the banking and insurance sectors), 22.1percent from telecommunications companies, 10.6 percent from healthcareorganizations, 10.2 percent from retail and commercial entities, 8.6 percentfrom education and government organizations, 8.1 percent from utilities, 3.1percent from technology companies and 2.8 percent from transportation/logisticscompanies, in each case excluding purchased accounts receivable.

 

Our ARM contractsgenerally define, among other things, fee arrangements, scope of services andtermination provisions. Clients may usually terminate such contracts on 30 or60 days notice. In the event of termination, however, 

 

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clients typically do notwithdraw accounts referred to us prior to the date of termination, thusproviding us with an ongoing stream of revenue from such accounts, whichdiminishes over time. Under the terms of our contracts, clients are notrequired to place accounts with us but do so on a discretionary basis.

 

Our CRM contractsare generally for terms of up to three years. Contracts are typicallyterminable by either party upon 60 days notice; however, in some cases,particularly in our longer term inbound contracts which often requiresubstantial capital expenditures on our part, a client may be required to payus a termination fee in connection with an early termination of the contract.

 

In addition,certain inbound CRM contracts may contain minimum volume commitments requiringour clients to provide us with agreed-upon levels of calls during the terms ofthe contracts. Our fees for services rendered under these contracts are basedon pre-determined contracted chargeable rates that may include a base rate perminute or per hour plus a higher rate or “bonus” rate if we meet pre-determinedobjective performance criteria, such as sales generated during a definedperiod, and may be reduced by any contractual monthly performance penalties towhich the client may be entitled. Additionally, we may receive additional discretionaryclient determined bonuses based upon criteria established by our clients.

 

Some of ourcustomer contracts provide for limited currency rate protection below certainpre-determined exchange rate levels and limited gain sharing above certainpre-determined exchange rate levels. Such contracts may mitigate certaincurrency risks, however, there can be no assurance that new contracts will besuccessfully negotiated with such provisions or that existing contractprovisions will result in the reduction of currency risk for such contracts.

 

**Personneland Training**

 

Our success inrecruiting, hiring and training a large number of employees is critical to ourability to provide high quality BPO services to our clients. We seek to hirepersonnel with previous experience in the industry or with experience astelephone representatives. We generally offer internal promotion opportunitiesand competitive compensation and benefits.

 

All of our callcenter personnel receive comprehensive training that consists of three stages:introduction training, behavioral training and functional training. Theseprograms are conducted through a combination of classroom and role-playingsessions. Prior to customer contact, new employees receive one week of trainingin our operating systems, procedures and telephone techniques and instructionin applicable federal and state regulatory requirements. Our personnel alsoreceive a wide variety of continuing professional education and on-goingrefresher training, as well as additional product training on an as-neededbasis.

 

As of December 31,2009, we had a total of approximately 28,200 full-time employees and 2,600part-time employees, of which approximately 17,700 were telephonerepresentatives. In addition, as of December 31, 2009, we utilizedapproximately 1,400 telephone representatives and 700 sales professionalsthrough subcontractors. We believe that our relations with our employees aregood.

 

Typically, ouremployees are not represented by a labor union. However, from time to time, ourfacilities are targeted by union organizers. We are not aware of any currentunion organizing efforts at any of our facilities.

 

**Salesand Marketing**

 

Our sales force isorganized to best match our sales professionals’ experience and expertise withthe appropriate target market. Our core sales force, composed of approximately50 sales professionals, is organized by industry and geographical location toensure the highest level of focus and service to potential and existingbusiness partners. This group is focused on forming and cultivating strategic,long-term partnerships with large, multinational firms in order to maximizeoutsourcing opportunities via our full suite of BPO services.  Additionally, we have a sales force ofapproximately 700 people, working on a contract basis, focused on sellingaccount recovery services for small, medium and large businesses on a fixed feebasis.

 

Our in-house marketingdepartment provides innovative customer contact solutions and sales support byperforming a wide range of personalized services such as customer databaseadministration, advertising, marketing campaigns and direct mailings,collateral development, trade show and site visit management, market andcompetitive research, and more. These functions are all integrated with ourclient relationship management system to provide a seamless interface betweenour sales team and our marketing department. We also maintain a dedicated teamof skilled writers who prepare detailed, professional responses to formal requestsfor proposals and requests for information.

 

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**Competition**

 

The BPO industry is highlycompetitive. We compete with a large number of ARM providers, including largenational corporations such as Alliance One, GC Services LP and iQor, Inc.,as well as many regional and local firms. We also compete with large CRMproviders such as Convergys Corporation, Sitel Worldwide Corporation, SykesEnterprises, Inc., TeleTech Holdings, Inc., and West Corporation.Some of our competitors may offer more diversified services and/or operate inbroader geographic areas than we do. In addition, many companies perform theBPO services offered by us in-house. Moreover, many larger clients retainmultiple outsourcing providers, which exposes us to continuous competition inorder to remain a preferred vendor. We believe that the primary competitivefactors in obtaining and retaining clients are the ability to providecustomized solutions to a client’s requirements, personalized quality service,sophisticated call and information systems, and a competitive price.

 

**Regulation**

 

We devotesignificant and continuous efforts, through training of personnel andmonitoring of compliance, to ensure that we comply with all applicable foreign,federal and state regulatory requirements. We believe that we are in materialcompliance with all such regulatory requirements.

 

**AccountsReceivable Management**

 

The ARM industry in the UnitedStates is regulated both at the federal and state level. The Federal Fair DebtCollection Practices Act, referred to as the FDCPA, regulates any person whoregularly collects or attempts to collect, directly or indirectly, consumerdebts owed or asserted to be owed to another person. The FDCPA establishesspecific guidelines and procedures that debt collectors must follow incommunicating with consumer debtors, including the time, place and manner ofsuch communications. Further, it prohibits harassment or abuse by debtcollectors, including the threat of violence or criminal prosecution, obscenelanguage or repeated telephone calls made with the intent to abuse or harass.The FDCPA also places restrictions on communications with individuals otherthan consumer debtors in connection with the collection of any consumer debtand sets forth specific procedures to be followed when communicating with suchthird parties for purposes of obtaining location information about the consumer.Additionally, the FDCPA contains various notice and disclosure requirements andprohibits unfair or misleading representations by debt collectors. We are alsosubject to the Fair Credit Reporting Act, which regulates the consumer creditreporting industry and which may impose liability on us to the extent that theadverse credit information reported on a consumer to a credit bureau is falseor inaccurate. The Federal Trade Commission, referred to as the FTC, has theauthority to investigate consumer complaints against debt collection companiesand to recommend enforcement actions and seek monetary penalties. The ARMbusiness is also subject to state regulation. Some states require that we belicensed as a debt collection company. We believe that we currently holdapplicable state licenses from all states where required.

 

We provide services to healthcareclients that are considered “covered entities” under the Health InsurancePortability and Accountability Act of 1996, referred to as HIPAA. As coveredentities, our clients must comply with the standards for privacy, transactionand code sets, and data security. Under HIPAA, we are considered a “businessassociate,” which requires that we protect the security and privacy of “protectedhealth information” provided to us by our clients for the collection ofpayments for healthcare services. We believe that we operate in compliance withall applicable standards under HIPAA in all material respects.

 

The collection ofaccounts receivable by collection agencies in Canada is regulated at theprovincial and territorial level in substantially the same fashion as isaccomplished by federal and state laws in the United States. The manner inwhich we conduct the business of collecting accounts is subject, in allprovinces and territories, to established rules of common law or civil lawand statute. Such laws establish rules and procedures governing thetracing, contacting and dealing with debtors in relation to the collection ofoutstanding accounts. These rules and procedures prohibit debt collectorsfrom engaging in intimidating, misleading and fraudulent behavior whenattempting to recover outstanding 

 

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debts. In Canada, ourcollection operations are subject to licensing requirements and periodic auditsby government agencies and other regulatory bodies. Generally, such licensesare subject to annual renewal. We believe that we hold all necessary licensesin those provinces and territories that require them.

 

In Australia, debtcollection and debt purchasing activities are regulated by legislation andregulation at a state and federal level, with licenses required forcorporations and individuals with varying effect at a state Level. TheTrade Practices Act, The Privacy Act and the Anti Money Laundering legislationare the primary federal laws, and the Commercial Agents legislation is thestate level legislation. NCO’s Australian operations are licensed across allrequired jurisdictions. We believe that we hold all necessary licenses in thosejurisdictions that require them.

 

In addition, theARM industry is regulated in the United Kingdom and Europe, including licensingrequirements. We believe we hold all necessary licenses required in the UnitedKingdom and Europe. If we expand our international operations, we may becomesubject to additional government control and regulation in other countries,which may be more onerous than those in the United States.

 

Several of theindustries served by us are also subject to varying degrees of governmentregulation. Although compliance with these regulations is generally theresponsibility of our clients, we could be subject to various enforcement orprivate actions for our failure or the failure of our clients to comply withsuch regulations.

 

**CustomerRelationship Management**

 

In the UnitedStates, there are two major federal laws that specifically addresstelemarketing, the Telephone Consumer Protection Act, referred to as TCPA,which authorized the Federal Communications Commission, referred to as the FCC,to regulate the telemarketing industry, and the Telemarketing and ConsumerFraud and Abuse Prevention Act, referred to as the Fraud Prevention Act, whichauthorized the FTC, to adopt the Telemarketing Sales Rule, referred to as theTSR, which includes restrictions on telemarketing activities. These laws havebeen amended several times since their inception. In addition, the states havevarious regulatory restrictions and requirements for telemarketing companies.

 

The TCPA placesrestrictions on unsolicited automated telephone calls to residential telephonesubscribers by means of automatic telephone dialing systems, prerecorded orartificial voice messages and telephone fax machines. It provides requirementsfor caller identification and call abandonment. In addition, the regulationsrequire CRM firms to develop and maintain an internal “Do Not Call” list, tocomply with the rules regarding the national “Do-Not-Call” registry, asdiscussed below, and to train their CRM personnel to comply with theserestrictions. We train our service representatives to comply with all of theseregulations of the TCPA.

 

The FTC regulatesboth general sales practices and telemarketing specifically and has broadauthority to prohibit a variety of advertising or marketing practices that mayconstitute “unfair or deceptive acts or practices.” The FTC administers theFraud Prevention Act under which the FTC has issued the TSR prohibiting avariety of deceptive, unfair or abusive practices in direct telephone sales.Generally, these rules prohibit misrepresentations of the cost, quantity,terms, restrictions, performance or characteristics of products or servicesoffered by telephone solicitation or of refund, cancellation or exchangepolicies. The rules also require that a telemarketer identify promptly andclearly the seller on whose behalf the CRM representative is calling, thepurpose of the call, the nature of the goods or services offered and that nopurchase or payment is necessary to win a prize. Service providers are requiredto maintain records on various aspects of their businesses. The TSR alsoestablished the national “Do Not Call” registry, where consumers could registeronce to stop all unwanted telemarketing calls. A consumer who receives atelemarketing call despite being on the registry can file a complaint with theFTC. In addition, the TSR restricts call abandonment (with certain safeharbors) and unauthorized billing, and it requires telemarketers to transmittheir telephone numbers and, if possible, their names to consumers’ calleridentification services.

 

Most states havealso enacted consumer protection statutes prohibiting unfair or deceptive actsor practices as they relate to telemarketing sales. For example, telephonesales in certain states are not final until a written contract is delivered toand signed by the buyer, and such a contract often may be canceled within threebusiness days. At least one state also prohibits parties conducting directtelephone sales from requesting credit card numbers in certain situations, andseveral other states require certain providers of such services to registerannually, post bonds or submit sales scripts to the state’s attorney general.Some states have established their own statewide “Do Not Call” lists whileother states have opted to use the FTC’s “Do Not Call” list as their officialstate list.

 

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Additionally, somestates have enacted laws and others are considering enacting laws targeted atdirect telephone sales practices. Some examples include laws regulating electronicmonitoring of telephone calls and laws prohibiting any interference by directtelephone sales with caller identification services.

 

In Canada, theCanadian Radio-Television and Telecommunications Commission, referred to asCRTC, enforces rules regarding unsolicited communications using automaticdialing and announcing devices, live voice and fax. Canada also instituted theCanadian National Do Not Call list, referred to as the NDNCL, under which atelemarketer shall not initiate a telemarketing communication on behalf of aclient unless that client is a registered subscriber of the NDNCL and theapplicable fees have been paid. We are registered as a telemarketer with theNDNCL. Additionally, we ensure that our clients have properly registered and paidfor the NDNCL by requesting the client’s registration number.

 

Canada’s PersonalInformation Protection and Electronic Documents Act, referred to as the FederalAct requires all commercial enterprises to obtain consent for the collection,use, and disclosure of an individual’s personal information. The Federal Actpermits any Province of Canada to enact substantially similar legislationgoverning the subject matter of the Federal Act, in which case the legislationof the Province will override the provisions of the Federal Act. Our Canadianoperations are located primarily in the Provinces of Ontario, British Columbiaand New Brunswick. British Columbia has enacted legislation, referred to as theB.C. Act, governing the subject matter of the Federal Act. The federalgovernment of Canada has not yet declared the B.C. Act substantially similar tothe Federal Act. Until such time as the federal government of Canada makes suchdeclaration, both the B.C. Act and the Federal Act will apply concurrently toour operations in British Columbia. Though neither has yet enacted legislationthat is substantially similar to the Federal Act, both Ontario and NewBrunswick have indicated that they may enact legislation governing the subjectmatter of the Federal Act.

 

Canada’sCompetition Act contains a number of provisions that regulate the conduct oftelemarketers in Canada, in particular the manner in which outbound calls areto be conducted.

 

The industries weserve are also subject to government regulation, and, from time to time, billsare introduced in Congress, which, if enacted, could affect our operations. We,and our employees who sell insurance products, are required to be licensed byvarious state and Canadian provincial insurance commissions for the particulartype of insurance product to be sold and are required to participate in regularcontinuing education programs.

 

We provide serviceto the telecommunications industry, which is subject to government regulation.For example, “slamming” is the illegal practice of changing a consumer’stelephone service without permission. The FCC has promulgated regulationsregarding slamming rules that apply solely to the telecommunicationscarrier and not the telemarketer or the independent party verifying the servicechange. However, some state slamming rules may extend liability forviolations to agents and other representatives of telecommunications carriers,such as telemarketers.

 

Ourrepresentatives undergo an extensive training program, part of which is aimedto ensure their compliance with all such laws and regulations affecting thetelemarketing industry. We also program our call management system to avoidinitiating telephone calls during restricted hours or to individuals maintainedon our “Do Not Call” list.

 

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**Segmentand Geographical Financial Information**

 

See Note 20 in our Notes to Consolidated Financial Statements for the yearended December 31, 2009 for disclosure of financial information regardingour segments. The following table presents revenues and total assets, net ofany intercompany balances, by geographic location (amounts in millions):

 
| ** **    | ** ** | **For the Years Ended December 31,** | ** ** |
|---------------|------------|-------------------------------------------|------------|
| ** **    | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:     |       |                                      |       |   |   |   |   |
| U.S.          |       | $                                         | 1,432.5    |   | $ | 1,369.7 |   | $ | 1,151.8 |   |
| Canada        |       | 44.5                                      |       | 46.8 |   | 57.2 |   |
| Panama        |       | 28.7                                      |       | 28.7 |   | 27.1 |   |
| Australia     |       | 23.1                                      |       | 19.2 |   | 15.5 |   |
| U.K.          |       | 22.4                                      |       | 25.7 |   | 24.1 |   |
| Mexico        |       | 12.7                                      |       | 10.9 |   | — |   |
| Other         |       | —                                    |       | 12.1 |   | 9.7 |   |
|          |       |                                      |       |   |   |   |   |
| Total assets: |       |                                      |       |   |   |   |   |
| U.S.          |       | $                                         | 1,284.7    |   | $ | 1,411.5 |   | $ | 1,441.0 |   |
| Panama        |       | 46.9                                      |       | 55.9 |   | 56.8 |   |
| Australia     |       | 33.3                                      |       | 47.0 |   | 28.9 |   |
| U.K.          |       | 27.5                                      |       | 18.7 |   | 15.5 |   |
| Canada        |       | 29.2                                      |       | 121.4 |   | 118.2 |   |
| Philippines   |       | 18.4                                      |       | 25.1 |   | 8.3 |   |
| Mexico        |       | 11.5                                      |       | 5.9 |   | — |   |
| Other         |       | 8.5                                       |       | 16.1 |   | 9.3 |   |

 

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

 

You shouldcarefully consider the following risk factors. The risks and uncertaintiesdescribed below are not the only ones we face. Additional risks anduncertainties that we are unaware of, or that we currently deem immaterial,also may become important factors that affect us.

 

**Risks Related to the Current Environment and RecentDevelopments**

** **

**Recentinstability in the financial markets and global economy may affect our accessto capital, our ability to purchase accounts, and the success of our collectionefforts which could have a material adverse effect on our results of operationsand revenue.**

 

The stressexperienced by global capital markets that began in the second half of 2007,and which substantially increased during the second half of 2008, continued in2009. Concerns over inflation, energy costs, geopolitical issues, theavailability and cost of credit, the U.S. mortgage market and a declining realestate market in the U.S. have contributed to increased volatility anddiminished expectations for the economy and the markets going forward. Thesefactors, combined with volatile oil prices, declining business and consumerconfidence and increased unemployment, have precipitated a recession. Thiseconomic downturn has adversely affected the ability and willingness ofconsumers to pay their debts and resulted in a weaker collection environment in2008 and 2009. The economic downturn may continue and unemployment may continueto rise. The ability and willingness of consumers to pay their debts couldcontinue to be adversely affected, which could have a material adverse effecton our results of operations, collections and revenue.

 

Furtherdeterioration in economic conditions in the United States may also lead tohigher rates of personal bankruptcy filings. Defaulted consumer loans that weservice or purchase are generally unsecured, and we may be unable to collectthese loans in the case of personal bankruptcy of a consumer. Increases inbankruptcy filings could have a material adverse effect on our results ofoperations, collections and revenue.

 

Continued orfurther credit market dislocations or sustained market downturns may alsoreduce the ability of lenders to originate new credit, limiting our ability toservice or purchase defaulted consumer loans in the future. We are currently incompliance with all of our debt covenants, but the future impact on ouroperations and financial projections from the challenging economic and businessenvironment may impact our ability to meet our debt covenants in the 

 

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future. Further,increased financial pressure on the distressed consumer may result inadditional regulatory restrictions on our operations and increased litigationfiled against us. We are unable to predict the likely duration or severity ofthe current disruption in financial markets and adverse economic conditions andthe effects they may have on our business, financial condition and results ofoperations.

 

**Adversecapital and credit market conditions may significantly affect our ability tomeet liquidity needs and access capital.**

 

The current globalfinancial and credit crisis exposes us to a variety of risks. The capital andcredit markets have been experiencing extreme volatility and disruption formore than twelve months. Disruptions in the credit markets make it harder andmore expensive to obtain funding.  Insome cases, the markets have exerted downward pressure on availability ofliquidity and credit capacity for certain issuers.

 

We need liquidityto pay our operating expenses and debt service obligations. Without sufficientliquidity, we could be forced to limit our investment in growth opportunitiesor curtail operations. The principal sources of our liquidity are cash flowsfrom operations, including collections on purchased accounts receivable, bankborrowings, and equity and debt offerings. As a result of the global financialcrisis, there is a risk that one or more lenders in our senior credit facilitysyndicate could be unable to meet contractually obligated borrowing requests inthe future. In the event current resources do not satisfy our needs, we mayhave to seek additional financing. The availability of additional financingwill depend on a variety of factors such as market conditions and the generalavailability of credit. If current levels of market disruption and volatilitycontinue or worsen, we may not be able to successfully obtain additionalfinancing on favorable terms, or at all.

 

**Therecan be no assurance that actions of the U.S. Government, Federal Reserve andother governmental and regulatory bodies for the purpose of stabilizing thefinancial markets will achieve the intended effect.**

 

In response to thefinancial crises affecting the banking system and financial markets and goingconcern threats to investment banks and other financial institutions, theFederal Government, Federal Reserve and other governmental and regulatorybodies have taken action and are considering taking further actions to addressthe financial crisis. There can be no assurance as to what impact such actionswill have on the financial markets, including the extreme levels of volatilitycurrently being experienced.

 

**Derivativetransactions may expose us to unexpected risk and potential losses.**

 

We are party tocertain derivative transactions, such as interest rate swap contracts andforeign exchange contracts, with financial institutions to hedge against certainfinancial risks. Changes in the fair value of these derivative financialinstruments that are not cash flow hedges are reported in income, andaccordingly could materially affect our reported income in any period.Moreover, in the light of current economic uncertainty and potential forfinancial institution failures, we may be exposed to the risk that ourcounterparty in a derivative transaction may be unable to perform itsobligations as a result of being placed in receivership or otherwise. In the eventthat a counterparty to a material derivative transaction is unable to performits obligations thereunder, we may experience material losses that couldmaterially adversely affect our results of operations and financial condition.

 

### **Risks Related toour Business**

###  

**Ourbusiness is dependent on our ability to grow internally.**

 

Our business isdependent on our ability to grow internally, which is dependent upon:

 

· our ability to retain existing clientsand expand our existing client relationships; and

· our ability to attract new clients.

 

Our ability toretain existing clients and expand those relationships is subject to a numberof risks, including the risk that:

 

·      we fail to maintain the quality ofservices we provide to our clients;

·      we fail to maintain the level ofattention expected by our clients;

·      we fail to successfully leverage ourexisting client relationships to sell additional services; and

·      we fail to provide competitively pricedservices.

 

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Our ability toattract new clients is subject to a number of risks, including:

 

·      the market acceptance of our serviceofferings;

·      the quality and effectiveness of oursales force; and

·      the competitive factors within the BPOindustry.

 

If our efforts toretain and expand our client relationships and to attract new clients do notprove effective, it could have a materially adverse effect on our business,results of operations and financial condition.

 

**Wecompete with a large number of providers in the ARM and CRM industries. Thiscompetition could have a materially adverse effect on our future financialresults.**

 

We compete with alarge number of companies in the industries in which we provide services. Inthe ARM industry, we compete with other sizable corporations in the U.S. andabroad such as Alliance One, GC Services LP and IntelliRisk ManagementCorporation, as well as many regional and local firms. In the CRM industry, wecompete with large customer care outsourcing providers such as ConvergysCorporation, Sitel Worldwide Corporation, Sykes Enterprises, Inc.,TeleTech Holdings, Inc., and West Corporation. We may lose business tocompetitors that offer more diversified services, have greater financial andother resources and/or operate in broader geographic areas than we do. We mayalso lose business to regional or local firms who are able to use theirproximity to or contacts at local clients as a marketing advantage. Inaddition, many companies perform the BPO services offered by us in-house. Manylarger clients retain multiple BPO providers, which exposes us to continuouscompetition in order to remain a preferred provider. Because of thiscompetition, in the future we may have to reduce our fees to remain competitiveand this competition could have a materially adverse effect on our futurefinancial results.

 

**Manyof our clients are concentrated in the financial services, telecommunications,and healthcare sectors. If any of these sectors performs poorly or if there areany adverse trends in these sectors it could materially adversely affect us.**

 

For the year endedDecember 31, 2009, we derived 34.5 percent of our revenue from clients inthe financial services sector, 22.1 percent of our revenue from clients in thetelecommunications industry, 10.6 percent of our revenue from clients in thehealthcare sector, and 10.2 percent from clients in the retail and commercialsector, in each case excluding purchased accounts receivable. If any of thesesectors performs poorly, clients in these sectors may do less business with us,or they may elect to perform the services provided by us in-house. If there areany trends in any of these sectors to reduce or eliminate the use ofthird-party BPO service providers, it could harm our business and results ofoperations.

 

**We have international operations and utilize foreign sources of labor, and various factors relating to our international operations, including fluctuations in currency exchange rates, could adversely affect our results of operations.**

 

Approximately 5.7% of our 2009 revenues were derived from clients in Canada, the United Kingdom and Australia. Political or economic instability in Canada, the United Kingdom or Australia could have an adverse impact on our results of operations due to diminished revenues in these countries. Our future revenue, costs of operations and profitability could also be affected by a number of other factors related to our international operations, including changes in economic conditions from country to country, changes in a country’s political condition, trade protection measures, licensing and other legal requirements, and local tax or foreign exchange issues. Unanticipated currency fluctuations in the Canadian Dollar, British Pound, Euro or the Australian Dollar could lead to lower reported consolidated results of operations due to the translation of these currencies into U.S. dollars when we consolidate our financial results.

 

We provide ARM and CRM services to our U.S. clients utilizing foreign sources of labor through call centers in Canada, India, the Philippines, Barbados, Antigua, Australia, Panama, Mexico and Guatemala. Any political or economic instability in these countries could result in our having to replace or reduce these labor sources, which may increase our labor costs and have an adverse impact on our results of operations. A decrease in the value of the U.S. dollar in relation to the currencies of the countries in which we operate could increase our cost of doing business in those countries. In addition, we expect to expand our operations into other countries and, accordingly, will face similar risks with respect to the costs of doing business in such countries including as a result of any decreases in the value of the U.S. dollar in relation to the currencies of such countries. There is no guarantee that we will be able to successfully hedge our foreign currency exposure in the future.

 

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We seek growth opportunities for our business in parts of the world where we have had little or no prior experience. International expansion into new markets with different cultures and laws poses additional risks and costs, including the risk that we will not be able to obtain the required permits, comply with local laws and regulations, hire, train and maintain a workforce, and obtain and maintain physical facilities in a culture and under laws that we are not familiar with. In addition, we may have to customize certain of our collection techniques to work with a different consumer base in a different regulatory environment. Also, we may have to revise certain of our analytical portfolio techniques as we apply them in different countries.

 

**Weare dependent on our employees and a higher turnover rate would have a materialadverse effect on us.**

 

We are dependenton our ability to attract, hire and retain qualified employees. The BPOindustry, by its nature, is labor intensive and experiences a high employeeturnover rate. Many of our employees receive modest hourly wages and some ofthese employees are employed on a part-time basis. A higher turnover rate amongour employees would increase our recruiting and training costs and couldmaterially adversely impact the quality of services we provide to our clients.If we were unable to recruit and retain a sufficient number of employees, wewould be forced to limit our growth or possibly curtail our operations. Growthin our business will require us to recruit and train qualified personnel at anaccelerated rate from time to time. We cannot assure that we will be able tocontinue to hire, train and retain a sufficient number of qualified employeesto meet the needs of our business or to support our growth. If we are unable todo so, our results of operations could be harmed. Any increase in hourly wages,costs of employee benefits or employment taxes could also have a materiallyadverse affect on our results of operations.

 

**Theemployees at one of our offices voted to join a labor union. Our otheremployees could become unionized in the future, which could increase our costsand result in a loss of customers.**

 

In February 2006,the employees at our call center in Surrey, British Columbia, Canada voted infavor of joining the B.C. Government and Services Employees’ Union, and acollective agreement was ratified in the first quarter of 2007. We arecurrently not aware of any other union organizing efforts at any of our otherfacilities. If our other employees are successful in organizing a labor unionat any of our locations, it could further increase labor costs, decreaseoperating efficiency and productivity in the future, result in office closures,and result in a loss of customers.

 

**Ifwe are not able to respond to technological changes in telecommunications andcomputer systems in a timely manner, we may not be able to remain competitive.**

 

Our successdepends in large part on our sophisticated telecommunications and computersystems. We use these systems to identify and contact large numbers of debtorsand record the results of our collection efforts, as well as to providecustomer service to our clients’ customers. If we are not able to respond totechnological changes in telecommunications and computer systems in a timelymanner, we may not be able to remain competitive. We have made a significantinvestment in technology to remain competitive and we anticipate that it willbe necessary to continue to do so in the future. Telecommunications andcomputer technologies are changing rapidly and are characterized by shortproduct life cycles, so we must anticipate technological developments. If weare not successful in anticipating, managing, or adopting technological changeson a timely basis or if we do not have the capital resources available toinvest in new technologies, our business could be materially adverselyaffected.

 

**Weare highly dependent on our telecommunications and computer systems.**

 

As noted above,our business is highly dependent on our telecommunications and computersystems. These systems could be interrupted by terrorist acts, naturaldisasters, power losses, computer viruses, or similar events. Our business isalso materially dependent on services provided by various local and longdistance telephone companies. If our equipment or systems cease to work orbecome unavailable, or if there is any significant interruption in telephoneservices, we may be prevented from providing services and collecting onaccounts receivable portfolios we have purchased. Because we generallyrecognize revenue and generate operating cash flow primarily through ARMcollections and providing CRM services, any failure or interruption of servicesand collections would mean that we would continue to incur payroll and otherexpenses without any corresponding income.

 

**Anincrease in communication rates or a significant interruption in communicationservice could harm our business.**

 

Our ability to offerservices at competitive rates is highly dependent upon the cost ofcommunication services provided by various local and long distance telephonecompanies. Any change in the telecommunications market that would affect ourability to obtain favorable rates on communication services could harm ourbusiness. Moreover, any 

 

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significant interruptionin communication service or developments that could limit the ability oftelephone companies to provide us with increased capacity in the future couldharm existing operations and prospects for future growth.

 

**Wemay seek to make strategic acquisitions of companies. Acquisitions involveadditional risks that may adversely affect us.**

 

From time to time,we may seek to make acquisitions of businesses that provide BPO services. Wemay be unable to make acquisitions if suitable businesses that provide BPOservices are not available at favorable prices due to increased competition forthese businesses.

 

We may have toborrow money, incur liabilities, or sell or issue stock to pay for futureacquisitions and we may not be able to do so on terms favorable to us, or atall. Additional borrowings and liabilities may have a materially adverse effecton our liquidity and capital resources. If we issue stock for all or a portionof the purchase price for future acquisitions, our stockholders’ ownershipinterest may be diluted. Our common stock is not publicly traded and potentialsellers may be unwilling to accept equity in a privately held company aspayment for the sale of their business. If potential sellers are not willing toaccept our common stock as payment for the sale of their business, we may berequired to use more of our cash resources, if available, in order to continueour acquisition strategy.

 

Completingacquisitions involves a number of risks, including diverting management’sattention from our daily operations, other additional management, operationaland financial resources, system conversions and the inability to maintain keypre-acquisition relationships with customers, suppliers and employees. We mightnot be able to successfully integrate future acquisitions into our business oroperate the acquired businesses profitably, and we may be subject tounanticipated problems and liabilities of acquired companies.

 

**Oursuccess depends on our senior management team and if we are not able to retainthem, it could have a materially adverse effect on us.**

 

We are highlydependent upon the continued services and experience of our senior managementteam, including Michael J. Barrist, our Chairman, President and Chief ExecutiveOfficer. We depend on the services of Mr. Barrist and the other members ofour senior management team to, among other things, continue the development andimplementation of our growth strategies, and maintain and develop our clientrelationships.

 

**Goodwilland other intangible assets represented 60.2 percent of our total assets at December 31,2009. If the goodwill or the other intangible assets, primarily our customerrelationships and trade name, are deemed to be impaired, we may need to take acharge to earnings to write-down the goodwill or other intangibles to its fairvalue.**

 

Our balance sheetincludes goodwill, which represents the excess of the purchase price over thefair market value of the net assets of acquired businesses based on theirrespective fair values at the date of acquisition. Trade name represents thefair value of the NCO name and is an indefinite-lived intangible asset. Otherintangibles are composed of customer relationships, which represent theinformation and regular contact we have with our clients and non-competeagreements.

 

Goodwill is testedat least annually for impairment. The test for impairment uses a fair valuebased approach, whereby if the implied fair value of a reporting unit’sgoodwill is less than its carrying amount, goodwill would be consideredimpaired. The trade name intangible asset is also reviewed for impairment on anannual basis.

 

As a result of theannual impairment testing, we recorded goodwill impairment charges of $24.7million in the CRM segment in 2009. We recorded goodwill impairment charges of$275.5 million and trade name impairment charges of $14.0 million in 2008. Wewere not required to record any impairment charges based upon the annual impairmenttests in 2007. If our goodwill or trade name are deemed to be further impaired,we will need to take an additional charge to earnings in the future towrite-down the asset to its fair value.

 

We makesignificant assumptions to estimate the future revenue and cash flows used todetermine the fair value of our reporting units. These assumptions includefuture growth rates, profitability, discount factors, market comparables,future tax rates, and other factors. Variations in any of these assumptionscould result in materially different calculations of impairment amounts. If theexpected revenue and cash flows are not realized, additional impairment lossesmay be recorded in the future.

 

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Our otherintangible assets, consisting of customer relationships and non-competeagreements, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying value may not be recoverable. Forexample, the loss of a larger client could require a review of the customerrelationship for impairment. We made significant assumptions to estimate thefuture cash flows used to determine the fair value of the customerrelationship. If we lost a significant customer relationship, the future cashflows expected to be generated by the customer relationship would be less thanthe carrying amount, and an impairment loss may be recorded.

 

During 2009, webegan to reduce our purchases of portfolios of accounts receivable and we madea decision to minimize further investments in the future. As a result of thisdecision, we recorded an impairment charge of $5.3 million for customerrelationship intangible assets.

 

As of December 31,2009, our balance sheet included goodwill, trade name and other intangiblesthat represented 36.7 percent, 5.8 percent and 17.7 percent of total assets,respectively, and 233.9 percent, 36.6 percent and 112.9 percent of stockholders’equity, respectively.

 

**Securityand privacy breaches of the systems we use to protect personal data couldadversely affect our business, results of operations and financial condition.**

 

Our databasescontain personal data of our clients’ customers, including credit card andhealthcare information. Any security or privacy breach of these databases couldexpose us to liability, increase our expenses relating to the resolution ofthese breaches and deter our clients from selecting our services. Our datasecurity procedures may not effectively counter evolving security risks,address the security and privacy concerns of existing or potential clients orbe compliant with federal, state, and local laws and regulations in allrespects. Any failures in our security and privacy measures could adverselyaffect our business, financial condition and results of operations.

 

**Ifwe fail to maintain an effective system of internal control over financialreporting and disclosure controls and procedures, we may be unable toaccurately report our financial results and comply with the reportingrequirements under the Securities Exchange Act of 1934.  As a result, investors may lose confidence inour financial reporting and disclosure required under the Securities ExchangeAct of 1934, which could adversely affect our business and could subject us toregulatory scrutiny.**

 

Pursuant to Section 404of the Sarbanes-Oxley Act of 2002, referred to as Section 404, we arerequired to include in our Annual Reports on Form 10-K, our management’sreport on internal control over financial reporting and, beginning with ourAnnual Report on Form 10-K for 2010, our registered public accounting firm’sattestation report on our internal control over financial reporting. While wehave reported no “material weaknesses” in the Form 10-K for the fiscalyear ended December 31, 2009, we cannot guarantee that we will not haveany “material weaknesses” reported by our management or our independentregistered public accounting firm in the future. Compliance with therequirements of Section 404 is expensive and time-consuming. If in thefuture we fail to complete this evaluation in a timely manner, or if ourindependent registered public accounting firm cannot timely attest to ourinternal controls, we could be subject to regulatory scrutiny and a loss ofpublic confidence in our internal control over financial reporting. Inaddition, any failure to establish an effective system of disclosure controlsand procedures could cause our current and potential investors and customers tolose confidence in our financial reporting and disclosure required under theSecurities Exchange Act of 1934, which could adversely affect our business.

 

###### **Terrorist attacks,war and threats of attacks and war may adversely impact our results ofoperations, revenue and profitability.**

######  

Terrorist attacksin the United States and abroad, as well as war and threats of war or actualconflicts involving the United States or other countries in which we operate,may adversely impact our operations, including affecting our ability to collectour clients’ accounts receivable. More generally, any of these events couldcause consumer confidence and spending to decrease. They could also result inan adverse effect on the economies of the United States and other countries inwhich we operate. Any of these occurrences could have a material adverse effecton our results of operations, collections and revenue.

 

### **Risks Related toour ARM Business**

###  

### We are subject to business-relatedrisks specific to the ARM business. Some of those risks are:

###  

**Mostof our ARM contracts do not require clients to place accounts with us, may beterminated on 30 or 60 days notice, and are on a contingent fee basis. Wecannot guarantee that existing clients will continue to use our services athistorical levels, if at all.**

 

### Under the terms of most of our ARM contracts, clients are notrequired to give accounts to us for collection and usually have the right toterminate our services on 30 or 60 days notice. Accordingly, we cannotguarantee that existing 

 

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clients will continue touse our services at historical levels, if at all. In addition, most of thesecontracts provide that we are entitled to be paid only when we collectaccounts. Therefore, for these contracts, we can only recognize revenues uponthe collection of funds on behalf of clients.

 

**Ifwe fail to comply with government regulation of the collections industry, itcould result in the suspension or termination of our ability to conductbusiness.**

 

The collectionsindustry is regulated under various U.S. federal and state, Canadian, UnitedKingdom and Australian laws and regulations. Many states, as well as Canada,the United Kingdom and Australia, require that we be licensed as a debtcollection company. The Federal Trade Commission, referred to as the FTC, hasthe authority to investigate consumer complaints against debt collectioncompanies and to recommend enforcement actions and seek monetary penalties. Ifwe fail to comply with applicable laws and regulations, it could result infines as well as the suspension or termination of our ability to conductcollections, which would materially adversely affect us. State regulatoryauthorities have similar powers. If such matters resulted in furtherinvestigations and subsequent enforcement actions, we could be subject to finesas well as the suspension or termination of our ability to conduct collections,which would materially adversely affect our financial position and results ofoperations. In addition, new federal, state or foreign laws or regulations, orchanges in the ways these rules or laws are interpreted or enforced, couldlimit our activities in the future or significantly increase the cost ofregulatory compliance. If we expand our international operations, we may becomesubject to additional government controls and regulations in other countries,which may be stricter or more burdensome than those government controls andregulations to which we are currently subject.

 

### Several of the industries we serveare also subject to varying degrees of government regulation. Although ourclients are generally responsible for complying with these regulations, wecould be subject to various enforcement or private actions for our failure, orthe failure of our clients, to comply with these regulations.

###  

**RisksRelated to our CRM Business**

 

### We are subject to business-relatedrisks specific to the CRM business. Some of those risks are:

###  

**TheCRM division relies on a few key clients for a significant portion of itsrevenues. The loss of any of these clients or their failure to pay us couldreduce revenues and adversely affect results of operations.**

 

The CRM division ischaracterized by substantial revenues from a few key clients. While noindividual CRM client represented more than 10 percent of our consolidatedrevenue, we are exposed to customer concentration within this division. Most ofthese clients are not contractually obligated to continue to use our servicesat historic levels or at all. If any of these clients were to significantlyreduce the amount of service, fail to pay, or terminate the relationshipaltogether, our CRM business could be harmed.

 

**Governmentregulation of the CRM industry and the industries we serve may increase ourcosts and restrict the operation and growth of our CRM business.**

 

The CRM services industryis subject to an increasing amount of regulation in the United States andCanada. In the United States, the FCC places restrictions on unsolicitedautomated telephone calls to residential telephone subscribers by means ofautomatic telephone dialing systems, prerecorded or artificial voice messagesand telephone fax machines, and requires CRM firms to develop a “do not call”list and to train their CRM personnel to comply with these restrictions. TheFTC regulates both general sales practices and telemarketing specifically andhas broad authority to prohibit a variety of advertising or marketing practicesthat may constitute “unfair or deceptive acts or practices.” Most of thestatutes and regulations in the United States allow a private right of actionfor the recovery of damages or provide for enforcement by the FTC, stateattorneys general or state agencies permitting the recovery of significantcivil or criminal penalties, costs and attorneys’ fees in the event thatregulations are violated. The Canadian Radio-Television and TelecommunicationsCommission enforces rules regarding unsolicited communications usingautomatic dialing and announcing devices, live voice and fax. We cannot assureyou that we will be in compliance with all applicable regulations at all times.We also cannot assure you that new laws, if enacted, will not adversely affector limit our current or future operations.

 

Several of the industrieswe serve, particularly the insurance, financial services and telecommunicationsindustries, are subject to government regulation. We could be subject to a varietyof private actions or regulatory enforcement for our failure or the failure ofour clients to comply with these regulations. Our results of operations couldbe adversely impacted if the effect of government regulation of the industrieswe serve is to reduce the demand for our CRM services or expose us to potentialliability. We, and our employees who sell insurance products, are required tobe 

 

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licensed by various stateinsurance commissions for the particular type of insurance product sold and toparticipate in regular continuing education programs. Our participation inthese insurance programs requires us to comply with certain state regulations,changes in which could materially increase our operating costs associated withcomplying with these regulations.

 

### **Risks Related toour Purchased Accounts Receivable Business**

###  

We are subject to business-related risks specific tothe Purchased Accounts Receivable business. Some of those risks are:

 

**Collectionsmay not be sufficient to recover the cost of investments in purchased accountsreceivable and support operations.**

 

We purchase past dueaccounts receivable generated primarily by consumer credit transactions. Theseare obligations that the individual consumer has failed to pay when due. Theaccounts receivable are purchased from consumer creditors such as banks,finance companies, retail merchants, hospitals, utilities, and otherconsumer-oriented companies. Substantially all of the accounts receivableconsist of account balances that the credit grantor has made numerous attemptsto collect, has subsequently deemed uncollectible, and charged off. Afterpurchase, collections on accounts receivable could be reduced by consumerbankruptcy filings. The accounts receivable are purchased at a significantdiscount, typically less than 10 percent of face value, and, although weestimate that the recoveries on the accounts receivable will be in excess ofthe amount paid for the accounts receivable, actual recoveries on the accountsreceivable will vary and may be less than the amount expected, and may even beless than the purchase price paid for such accounts. In addition, the timing oramounts to be collected on those accounts receivable cannot be assured. If cashflows from operations are less than anticipated as a result of our inability tocollect accounts receivable, we may have difficulty servicing our debt obligationsand may not be able to purchase new accounts receivable, and our future growthand profitability will be materially adversely affected.

 

**Weuse estimates to report results. For the year ended December 31, 2009, werecorded an impairment charge of $21.5 million relating to our purchasedreceivables portfolio. If the amount and/or timing of collections on portfoliosare materially different than expected, we may be required to record furtherimpairment charges that could have a materially adverse effect on us.**

 

Our revenue is recognizedbased on estimates of future collections on portfolios of accounts receivablepurchased. Although these estimates are based on analytics, the actual amountcollected on portfolios and the timing of those collections will differ fromour estimates. If collections on portfolios are less than estimated, we may berequired to record an allowance for impairment of our purchased receivablesportfolio, which could materially adversely affect our earnings, financialcondition and creditworthiness. For the year ended December 31, 2009, werecorded an impairment charge of $21.5 million relating to our purchasedreceivables portfolio. If we continue to experience adverse effects of thechallenging economic and business environment, including changes in financialprojections, we may have to recognize further impairment charges on ourpurchased receivables portfolio.

 

### **Risks Related toour Structure**

###  

**Weare controlled by an investor group led by One Equity Partners, a privateequity firm, and its affiliates, whose interests may not be aligned with thoseof our noteholders.**

 

Our equity investorscontrol the election of our directors and thereby have the power to control ouraffairs and policies, including the appointment of management, the issuance ofadditional stock, stock repurchase programs and the declaration and payment ofdividends. In addition, our equity investors must consent to the entering intoof mergers, sales of substantially all our assets and certain othertransactions.

 

Circumstances may occurin which the interests of our equity investors could be in conflict with thoseof our noteholders. For example if we encounter financial difficulties or areunable to pay our debts as they mature, our equity investors might pursuestrategies that favor equity investors over our debt investors. One EquityPartners may also have an interest in pursuing acquisitions, divestitures,financing or other transactions that, in their judgment, could enhance theirequity investments, even though such transaction might involve risk to ournoteholders. Additionally, One Equity Partners is not prohibited from makinginvestments in any of our competitors.

 

### **Risks Related toour $165.0 million of Floating Rate Senior Notes due 2013 (“senior notes”), our$200.0 million of 11.875 percent Senior Subordinated Notes due 2014 (“seniorsubordinated notes”) (collectively, the**

 

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### **“notes”) and our Other Indebtedness**

###  

**Oursubstantial leverage and significant debt service obligations could adverselyaffect our financial condition and our ability to fulfill our obligations andoperate our business.**

 

We are highly leveragedand have significant debt service obligations. Our financial performance couldbe affected by our substantial leverage. At December 31, 2009, our totalindebtedness was $951.5 million, and we had $71.2 million of borrowing capacityunder the revolving portion of our senior credit facility and $11.8 million ofletters of credit outstanding. We may also incur additional indebtedness in thefuture.

 

This high level ofindebtedness could have important negative consequences to us and ournoteholders, including:

 

·                                          we may have difficulty satisfying ourobligations with respect to our senior notes and our senior subordinated notes,collectively referred to as the notes;

·                                          we may have difficulty obtainingfinancing in the future for working capital, capital expenditures, acquisitionsor other purposes;

·                                          we will need to use all, or a substantialportion, of our available cash flow to pay interest and principal on our debt,which will reduce the amount of money available to finance our operations andother business activities;

·                                          some of our debt, including ourborrowings under our senior credit facilities, has variable rates of interest,which exposes us to the risk of increased interest rates;

·                                          our debt level increases ourvulnerability to general economic downturns and adverse industry conditions;

·                                          our debt level could limit ourflexibility in planning for, or reacting to, changes in our business and in ourindustry in general;

·                                          our substantial amount of debt and theamount we must pay to service our debt obligations could place us at acompetitive disadvantage compared to our competitors that have less debt;

·                                          our customers may react adversely to oursignificant debt level and seek or develop alternative suppliers;

·                                          we may have insufficient funds, and ourdebt level may also restrict us from raising the funds necessary, to repurchaseall of the notes tendered to us upon the occurrence of a change of control,which would constitute an event of default under the notes; and

·                                          our failure to comply with the financialand other restrictive covenants in our debt instruments which, among otherthings, require us to maintain specified financial ratios and limit our abilityto incur debt and sell assets, could result in an event of default that, if notcured or waived, could have a material adverse effect on our business orprospects.

 

Our high level ofindebtedness requires that we use a substantial portion of our cash flow fromoperations to pay principal of, and interest on, our indebtedness, which willreduce the availability of cash to fund working capital requirements, capitalexpenditures or other general corporate or business activities, includingfuture acquisitions.

 

In addition, asubstantial portion of our indebtedness bears interest at variable rates,including indebtedness under our senior notes and our senior credit facility.If market interest rates increase, debt service on our variable-rate debt willrise, which would adversely affect our cash flow. We may employ hedgingstrategies to help reduce the impact of fluctuations in interest rates. Theportion of our variable rate debt that is not hedged will be subject to changesin interest rates.

 

**Wemay be unable to generate sufficient cash to service all of our indebtedness,including the notes, and meet our other ongoing liquidity needs and may beforced to take other actions to satisfy our obligations under our indebtedness,which may be unsuccessful.**

 

Our ability to makescheduled payments or to refinance our debt obligations, including the notes,and to fund our planned capital expenditures and other ongoing liquidity needs,depends on our financial and operating performance, which is subject toprevailing economic and competitive conditions and to certain financial,business and other factors beyond our control. Our business may not generatesufficient cash flow from operations or future borrowings may not be availableto us under our senior credit facility or otherwise in an amount sufficient topermit us to pay the principal, premium, if any, and interest on ourindebtedness or to fund our other liquidity needs. We may need to refinance allor a portion of our debt on or before maturity. We may be unable to refinanceany of our debt on commercially reasonable terms.

 

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If our cash flows andcapital resources are insufficient to fund our debt service obligations, we maybe forced to reduce or delay capital expenditures, seek additional capital orseek to restructure or refinance our indebtedness, including the notes. Thesealternative measures may be unsuccessful and may not permit us to meet ourscheduled debt service obligations. In the absence of such operating results andresources, we could face substantial liquidity problems and might be requiredto sell material assets or operations to attempt to meet our debt service andother obligations. Our senior credit facility and the indentures governing thenotes restrict our ability to use the proceeds from certain asset sales. We maybe unable to consummate those asset sales to raise capital or sell assets atprices that we believe are fair and proceeds that we do receive may beinadequate to meet any debt service obligations then due.

 

**Despiteour current leverage, we and our subsidiaries may still be able to incursubstantially more debt. This could further exacerbate the risks that we andour subsidiaries face.**

 

We and our subsidiariesmay be able to incur substantial additional indebtedness in the future. Theterms of the indentures do not fully prohibit us or our subsidiaries from doingso. The revolving credit portion of our senior credit facility providescommitments of up to $100.0 million, $71.2 million of which was available forfuture borrowings, subject to certain conditions, as of December 31, 2009.All of those borrowings are secured, and as a result, are effectively senior tothe notes and the guarantees of the notes by our subsidiary guarantors. If weincur any additional indebtedness that ranks equally with the notes, theholders of that debt will be entitled to share ratably with the holders of thenotes in any proceeds distributed in connection with any insolvency,liquidation, reorganization, dissolution or other winding-up of us. This mayhave the effect of reducing the amount of proceeds paid to our noteholders. Ifnew debt is added to our current debt levels, the related risks that we and oursubsidiaries now face could intensify.

 

**Oursenior credit facility contains, and the indentures governing the notescontain, a number of restrictive covenants which will limit our ability tofinance future operations or capital needs or engage in other businessactivities that may be in our interest.**

 

Our senior credit facilityand the indentures governing the notes impose, and the terms of any futureindebtedness may impose, operating and other restrictions on us and oursubsidiaries. Such restrictions affect or will affect, and in many respectslimit or prohibit, among other things, our ability and the ability of ourrestricted subsidiaries to:

 

·                                          incur additional indebtedness;

·                                          create liens;

·                                          pay dividends and make otherdistributions in respect of our capital stock;

·                                          redeem our capital stock;

·                                          purchase accounts receivable;

·                                          make certain investments or certain otherrestricted payments;

·                                          sell certain kinds of assets;

·                                          enter into certain types of transactionswith affiliates; and

·                                          effect mergers or consolidations.

 

In addition, our seniorcredit facility includes other more restrictive covenants. Our senior creditfacility also requires us to achieve certain financial and operating resultsand maintain compliance with specified financial ratios. Our ability to complywith these ratios may be affected by events beyond our control.

 

The restrictionscontained in our senior credit facility and the indentures could:

 

·                                          limit our ability to plan for or react tomarket or economic conditions or meet capital needs or otherwise restrict ouractivities or business plans; and

·                                          adversely affect our ability to financeour operations, acquisitions, investments or strategic alliances or othercapital needs or to engage in other business activities that would be in ourinterest.

 

A breach of any of thesecovenants or our inability to comply with the required financial ratios couldresult in a default under our senior credit facility and/or the indentures. Ifan event of default occurs under our senior credit facility, which includes anevent of default under the indentures governing the notes, the lenders couldelect to:

 

·                                          declare all borrowings outstanding,together with accrued and unpaid interest, to be immediately due and payable;

·                                          require us to apply all of our availablecash to repay the borrowings; or

·                                          prevent us from making debt servicepayments on the notes;

 

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any of which could resultin an event of default under the notes. The lenders will also have the right inthese circumstances to terminate any commitments they have to provide furtherfinancing.

 

If we were unable torepay or otherwise refinance these borrowings when due, our lenders could sellthe collateral securing our senior credit facility, which constitutes substantiallyall of our and our domestic wholly-owned subsidiaries’ assets (other thancertain assets relating to portfolio transactions). Although holders of thenotes could accelerate the notes upon the acceleration of the obligations underour senior credit facility, we cannot assure you that sufficient assets willremain to repay the notes after we have paid all the borrowings under oursenior credit facility and any other senior debt.

 

**Weare a holding company and we depend upon cash from our subsidiaries to serviceour debt. If we do not receive cash distributions, dividends or other paymentsfrom our subsidiaries, we may be unable to make payments on the notes.**

 

We are a holding companyand all of our operations are conducted through our subsidiaries. Accordingly,we are dependent upon the earnings and cash flows of, and cash distributions,dividends and other payments from, our subsidiaries to provide the fundsnecessary to meet our debt service obligations, including the required paymentson the notes. If we do not receive such cash distributions, dividends or otherpayments from our subsidiaries, we may be unable to pay the principal orinterest on the notes. In addition, certain of our subsidiaries who areguarantors of the notes are holding companies that will rely on subsidiaries oftheir own as a source of funds to meet any obligations that might arise undertheir guarantees.

 

Generally, the ability ofa subsidiary to make cash available to its parent is affected by its ownoperating results and is subject to applicable laws and contractualrestrictions contained in its debt instruments and other agreements. Althoughthe indentures governing the notes will limit the extent to which oursubsidiaries may restrict their ability to make dividend and other payments tous, these limitations will be subject to significant qualifications andexceptions. The indentures governing the notes also allow us to include theoperating results of our subsidiaries in our consolidated Adjusted EBITDA, asdefined in the indentures, for the purpose of determining whether we can incuradditional indebtedness under the indentures, even though some of thosesubsidiaries are subject to contractual restrictions on making dividends ordistributions of cash to us for the purposes of servicing such indebtedness. Inaddition, the indentures allow us to create limitations on distributions anddividends under the terms of our and any of our subsidiaries’ future creditfacilities. Moreover, there may be restrictions on payments by our subsidiariesto us under applicable laws, including laws that require companies to maintainminimum amounts of capital and to make payments to stockholders only fromprofits. As a result, although our subsidiaries may have cash, we or oursubsidiary guarantors may be unable to obtain that cash to satisfy ourobligations under the notes or the guarantees, as applicable.

 

**Eachnoteholder’s right to receive payments on the notes is effectively junior tothose lenders who have a security interest in our assets.**

 

Our obligations under thenotes and our guarantors’ obligations under their guarantees of the notes areunsecured, but our obligations under our senior credit facility and eachguarantor’s obligations under their respective guarantees of the senior creditfacility are secured by a security interest in substantially all of ourdomestic tangible and intangible assets (other than certain assets relating toportfolio transactions) and the assets and a portion of the stock of certain ofour non-U.S. subsidiaries. If we are declared bankrupt or insolvent, or if wedefault under our senior credit facility, the lenders could declare all of thefunds borrowed thereunder, together with accrued interest, immediately due andpayable. If we were unable to repay such indebtedness, the lenders couldforeclose on the pledged assets to the exclusion of holders of the notes, evenif an event of default exists under the indentures governing the notes at suchtime. Furthermore, if the lenders foreclose and sell the pledged equityinterests in any subsidiary guarantor under the notes, then that guarantor willbe released from its guarantee of the notes automatically and immediately uponsuch sale. In any such event, because the notes are not secured by any of ourassets or the equity interests in subsidiary guarantors, it is possible thatthere would be no assets remaining from which noteholders’ claims could besatisfied or, if any assets remained, they might be insufficient to satisfynoteholders’ claims fully.

 

As of December 31,2009, the notes and the guarantees were subordinated or effectivelysubordinated to $566.3 million of indebtedness (representing borrowings underour senior credit facility which did not include availability of approximately$71.2 million under the revolving portion of our senior credit facility aftergiving effect to letters of credit outstanding as of December 31, 2009).The indentures will permit the incurrence of substantial additionalindebtedness by us and our restricted subsidiaries in the future, includingsecured indebtedness.

 

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**Claimsof noteholders will be structurally subordinate to claims of creditors of allof our non-U.S. subsidiaries and some of our U.S. subsidiaries because theyhave not guaranteed the notes.**

 

The notes are notguaranteed by any of our non-U.S. subsidiaries, and certain other domesticsubsidiaries. Accordingly, claims of holders of the notes will be structurallysubordinate to the claims of creditors of these non-guarantor subsidiaries,including trade creditors. All obligations of our non-guarantor subsidiarieswill have to be satisfied before any of the assets of such subsidiaries wouldbe available for distribution, upon a liquidation or otherwise, to us or aguarantor of the notes.

 

As of December 31,2009, our non-guarantor subsidiaries had total liabilities (excludingintercompany liabilities) of $78.4 million, representing 6.4 percent of ourtotal consolidated liabilities. Our non-guarantor subsidiaries accounted for$320.8 million, or 20.5 percent of our consolidated revenue, and had $14.8million of net loss, compared to our consolidated net loss of $84.2 million,for the year ended December 31, 2009. In addition, our non-guarantorsubsidiaries accounted for $238.7 million, or 16.3 percent, of our consolidatedassets at December 31, 2009.

 

Because a portion of ouroperations are conducted by subsidiaries that have not guaranteed the notes,our cash flow and our ability to service debt, including our and the guarantors’ability to pay the interest on and principal of the notes when due, aredependent to a significant extent on interest payments, cash dividends anddistributions and other transfers of cash from subsidiaries that have notguaranteed the notes. In addition, any payment of interest, dividends,distributions, loans or advances by subsidiaries that have not guaranteed thenotes to us and the guarantors, as applicable, could be subject to taxation orother restrictions on dividends or repatriation of earnings under applicablelocal law, monetary transfer restrictions and foreign currency regulations inthe jurisdiction in which these subsidiaries operate. Moreover, payments to usand the guarantors by subsidiaries that have not guaranteed the notes will becontingent upon these subsidiaries’ earnings.

 

Our subsidiaries thathave not guaranteed the notes are separate and distinct legal entities and haveno obligation, contingent or otherwise, to pay any amounts due pursuant to thenotes, or to make any funds available therefore, whether by dividends, loans,distributions or other payments. Any right that we or the guarantors have toreceive any assets of any subsidiaries that have not guaranteed the notes uponthe liquidation or reorganization of those subsidiaries, and the consequentrights of holders of notes to realize proceeds from the sale of any of thosesubsidiaries’ assets, will be effectively subordinated to the claims of thatsubsidiary’s creditors, including trade creditors and holders of debt of thatsubsidiary.

 

We also have jointventures and subsidiaries in which we own less than 100 percent of the equityso that, in addition to the structurally senior claims of creditors of thoseentities, the equity interests of our joint venture partners or otherstockholders in any dividend or other distribution made by these entities wouldneed to be satisfied on a proportionate basis with us. These joint ventures andless than wholly-owned subsidiaries may also be subject to restrictions ontheir ability to distribute cash to us in their financing or other agreementsand, as a result, we may not be able to access their cash flow to service ourdebt obligations, including in respect of the notes.

 

**Eachnoteholder’s right to receive payments on the notes is junior to all of ourexisting and future senior indebtedness and the guarantees of the notes isjunior to all the guarantors’ existing and future senior indebtedness.**

 

The notes are generalunsecured obligations that are junior in right of payment to all our existingand future senior indebtedness, including our senior credit facility. Theguarantees are general unsecured obligations of the guarantors that are juniorin right of payment to all of the applicable guarantor’s existing and futuresenior indebtedness, including our senior credit facility.

 

We and the guarantors maynot pay principal, premium, if any, interest or other amounts on account of thenotes or the guarantees in the event of a payment default or certain otherdefaults in respect of certain of our senior indebtedness, including debt underour senior credit facility, unless the senior indebtedness has been paid infull or the default has been cured or waived. In addition, in the event ofcertain other defaults with respect to the senior indebtedness, we or theguarantors may not be permitted to pay any amount on account of the notes orthe guarantees for a designated period of time.

 

The subordinationprovisions in the notes and the guarantees provide that, in the event of abankruptcy, liquidation or dissolution of us or any guarantor, our or theguarantor’s assets will not be available to pay obligations under the notes orthe applicable guarantee until we or the guarantor has made all payments on itsrespective senior indebtedness. We and the guarantors may not have sufficientassets after all these payments have been made to make any payments 

 

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on the notes or theapplicable guarantee, including payments of principal or interest when due.

 

As of December 31,2009, the notes and the guarantees were subordinated or effectivelysubordinated to $566.3 million of indebtedness (representing borrowings underour senior credit facility which did not include availability of approximately$71.2 million under the revolving portion of our senior credit facility aftergiving effect to letters of credit outstanding as of December 31, 2009).The indentures will permit the incurrence of substantial additionalindebtedness, including senior debt, by us and our restricted subsidiaries inthe future.

 

**Ifwe default on our obligations to pay our other indebtedness, we may be unableto make payments on the notes.**

 

Any default under theagreements governing our indebtedness, including a default under our seniorcredit facility that is not waived by the required lenders, and the remediessought by the holders of such indebtedness could make us unable to payprincipal, premium, if any, and interest on the notes and substantiallydecrease the market value of the notes. If we are unable to generate sufficientcash flow and are otherwise unable to obtain funds necessary to meet requiredpayments of principal, premium, if any, and interest on our indebtedness, or ifwe otherwise fail to comply with the various covenants, including financial andoperating covenants, in the instruments governing our indebtedness (includingour senior credit facility), we could be in default under the terms of theagreements governing such indebtedness. In the event of such default, theholders of such indebtedness could elect to declare all the funds borrowedthereunder to be due and payable, together with accrued and unpaid interest,the lenders under the revolving portion of our senior credit facility couldelect to terminate their commitments, cease making further loans and instituteforeclosure proceedings against our assets, and we could be forced intobankruptcy or liquidation. If our operating performance declines, we may in thefuture need to seek and obtain waivers from the required lenders under oursenior credit facility to avoid being in default. If we breach our covenantsunder our senior credit facility and seek a waiver, we may not be able toobtain a waiver from the required lenders. If this occurs, we would be indefault under our senior credit facility, the lenders could exercise theirrights as described above, and we could be forced into bankruptcy orliquidation.

 

**Federaland state fraudulent transfer laws may permit a court to void the notes and theguarantees and if that occurs, noteholders may not receive any payments on thenotes.**

 

The issuance of the notesand the guarantees may be subject to review under federal bankruptcy law orrelevant state fraudulent transfer and conveyance statutes. While the relevantlaws may vary from state to state, under such laws, generally, the payment ofconsideration will be a fraudulent conveyance if (1) we paid theconsideration with the intent of hindering, delaying or defrauding creditors or(2) we or any of the guarantors, as applicable, received less thanreasonably equivalent value or fair consideration in return for issuing eitherthe notes or a guarantee, and, in the case of (2) only, one of thefollowing is also true:

 

·                                          we or any of the guarantors was insolventor rendered insolvent by reason of the incurrence of the indebtedness; or

·                                          payment of the consideration left us orany of the guarantors with an unreasonably small amount of capital to carry onthe business; or

·                                          we or any of the guarantors intended to,or believed that it would, incur debts beyond its ability to pay as theymature.

 

If a court were to findthat the issuance of the notes or a guarantee was a fraudulent conveyance, thecourt could void the payment obligations under the notes or such guarantee orfurther subordinate the notes or such guarantee to presently existing andfuture indebtedness of ours or such guarantor, or require the holders of thenotes to repay any amounts received with respect to the notes or suchguarantee. In the event of a finding that a fraudulent conveyance occurred,noteholders may not receive any repayment on the notes. Further, the voidanceof the notes could result in an event of default with respect to our and oursubsidiaries’ other debt that could result in the acceleration of such debt.

 

Generally, an entitywould be considered insolvent if, at the time it incurred indebtedness:

 

·                                          the sum of its debts, includingcontingent liabilities, was greater than the fair salable value of all itsassets; or

·                                          the present fair salable value of itsassets was less than the amount that would be required to pay its probableliability on its existing debts and liabilities, including contingentliabilities, as they become absolute and mature; or

·                                          it could not pay its debts as they becomedue.

 

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We cannot be certain asto the standards a court would use to determine whether or not we or theguarantors were solvent at the relevant time, or regardless of the standardthat a court uses, that the issuance of the notes and the guarantees would notbe further subordinated to our or any of our guarantors’ other debt.

 

If the guarantees werelegally challenged, any guarantee could also be subject to the claim that,since the guarantee was incurred for our benefit, and only indirectly for thebenefit of the applicable guarantor and none of the proceeds of the notes werepaid to any guarantor, the obligations of the applicable guarantor wereincurred for less than fair consideration. A court could thus void theobligations under the guarantees, subordinate them to the applicable guarantor’sother debt or take other action detrimental to the holders of the notes.

 

**Noteholders’ability to transfer the notes may be limited by the absence of an activetrading market, and there is no assurance that any active trading market willdevelop for the notes.**

 

The notes are securitiesfor which there is no existing public market. Accordingly, the development orliquidity of any market for the notes is uncertain. We cannot assurenoteholders as to the liquidity of markets that may develop for the notes,noteholders’ ability to sell the notes or the price at which noteholders wouldbe able to sell the notes. We do not intend to apply for a listing of the noteson a securities exchange or on any automated dealer quotation system.

 

In connection with theprivate offering of the notes, the placement agents in such offering haveadvised us that they intend to make a market in the notes, as permitted byapplicable laws and regulations. However, the placement agents are notobligated to make a market in the notes, and they may discontinue theirmarket-making activities at any time without notice. Additionally, we arecontrolled by One Equity Partners, an affiliate of J.P. Morgan Securities Inc.,one of the placement agents of the notes. As a result of this affiliaterelationship, if J.P. Morgan Securities Inc. conducts any market makingactivities with respect to the notes, J.P. Morgan Securities Inc. will berequired to deliver a market making prospectus when effecting offers and salesof the notes. For as long as a market making prospectus is required to bedelivered, the ability of J.P. Morgan Securities Inc. to make a market in thenotes may, in part, be dependent on our ability to maintain a current marketmaking prospectus for its use. If we are unable to maintain a current marketmaking prospectus, J.P. Morgan Securities Inc. may be required to discontinueits market making activities without notice. Therefore, we cannot assure youthat an active market for the notes will develop or, if developed, that it willcontinue. Historically, the market for non-investment grade debt has beensubject to disruptions that have caused substantial volatility in the prices ofsecurities similar to the notes. The market, if any, for the notes mayexperience similar disruptions and any such disruptions may adversely affectthe prices at which noteholders may sell the notes. In addition, the notes maytrade at discounts from their initial offering prices, depending uponprevailing interest rates, the market for similar notes, our financial andoperating performance and other factors.

 

**Item 1B.****                                               ****Unresolved Staff Comments**

 

Not Applicable

 

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**Item 2.****                                                        ****Properties**

 

The following table summarizes thelocations of our facilities by segment. Certain of our facilities are used forboth ARM and CRM operations. Portfolio Management operates in one of the “ARMOnly” U.S. facilities and one of the “ARM and CRM” U.S. facilities. We leaseall but one of these facilities. The leases expire between 2010 and 2021, andmost contain renewal options.

 
| ** **     | ** ** | **ARM Only** | ** ** | **CRM Only** | ** ** | **ARM and  CRM** | ** ** | **Total** | ** ** |
|----------------|------------|--------------|------------|--------------|------------|------------------|------------|-----------|------------|
| U.S.           |       | 56           |       | 4            |       | 8                |       | 68        |       |
| Canada         |       | 6            |       | 1            |       | 1                |       | 8         |       |
| Australia      |       | 5            |       | —       |       | —           |       | 5         |       |
| Panama         |       | —       |       | 3            |       | 1                |       | 4         |       |
| United Kingdom |       | 2            |       | —       |       | —           |       | 2         |       |
| Philippines    |       | —       |       | —       |       | 4                |       | 4         |       |
| Barbados       |       | —       |       | —       |       | 1                |       | 1         |       |
| Antigua        |       | —       |       | —       |       | 1                |       | 1         |       |
| Puerto Rico    |       | 2            |       | —       |       | —           |       | 2         |       |
| Mexico         |       | 4            |       | —       |       | 1                |       | 5         |       |
| Guatemala      |       | —       |       | 1            |       | —           |       | 1         |       |
| Total          |       | 75           |       | 9            |       | 17               |       | 101       |       |

 

We believe that our facilities areadequate for our current operations, but additional facilities may be requiredto support growth. We believe that suitable additional or alternative spacewill be available as needed on commercially reasonable terms.

 

**Item 3.****                                                        ****Legal Proceedings**

 

*FortWashington Flood:*

 

In June 2001, the first floor of our FortWashington, Pennsylvania, headquarters was severely damaged by a flood causedby remnants of Tropical Storm Allison. We subsequently decided to relocate ourcorporate headquarters to Horsham, Pennsylvania. We filed a lawsuit on August 14,2001 in the Court of Common Pleas, Montgomery County, Pennsylvania (CivilAction No. 01-15576) against the current landlord and the former landlordof the Fort Washington facilities to terminate the leases and to obtain otherrelief. The landlord and former landlord filed counter-claims against us. Wemaintain a reserve that we believe is adequate to address our exposure to thismatter and we plan 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 we reportedto federal authorities and the client in 2003 involving three employees who engagedin unauthorized student loan consolidations in connection with a clientcontract. The responsible employees were terminated at that time in 2003. Wedid not agree with the allegations regarding damages. In March 2010, wesettled this matter with the Department of Justice for $500,000 and fullrelease of all liabilities with respect to the unauthorized student loanconsolidations. The amount paid was partially covered by insurance.

 

*Tax Matters:*

 

We received notice of areassessment from a foreign taxing authority relating to certain mattersoccurring from 1998 through 2001 regarding one of our subsidiaries in theamount of $16.2 million including interest and penalties. In order to pursue anappeal of the reassessment, we paid a deposit of $8.5 million in December 2006.In October 2009, we entered into a settlement agreement regarding thereassessment. In January 2010, we received a refund of approximately $2.8million (net of a $1.7 million payment due back to the taxing authority).Management has adjusted its reserve to cover any potential future exposure.

 

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*Attorneys General:*

 

Fromtime to time, we receive subpoenas or other similar information requests fromvarious states’ Attorneys General, requesting information relating to NCO’sdebt collection practices in such states. We respond to such inquires orinvestigations and provide certain information to the respective AttorneysGeneral offices. We believe we are in compliance with the laws of the states inwhich we do business relating to debt collection practices in all materialrespects. However, no assurance can be given that any such inquiries orinvestigations will not result in a formal investigation or an enforcementaction. Any such enforcement actions could result in fines as well as thesuspension or termination of our ability to conduct business in such states.

 

*Other:*

 

We areinvolved in other legal proceedings, regulatory investigations, client auditsand tax examinations from time to time in the ordinary course of business.Management believes that none of these other legal proceedings, regulatoryinvestigations, client audits or tax examinations will have a materiallyadverse effect on our financial condition or results of operations.

 

**Item 4.****                  ****[Reserved]**

 

**PART II**

 

**Item 5.****                  ****Market for Registrant’sCommon Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities**

 

Thereis no established public trading market for each of our Class A commonstock and our Class L common stock, and all of our outstanding commonequity is privately held.  As of March 31,2010, there were 51 holders of record of our Class A common stock(including holders of our restricted stock) and 18 holders of our Class Lcommon stock.

 

Ourability to pay cash dividends on our capital stock is limited by the terms ofour senior credit facility and the indentures governing the terms of ournotes.  We do not anticipate paying acash dividend on our capital stock in the near future. See Note 15 in our Notesto Consolidated Financial Statements included elsewhere in this Report on Form 10-Kfor disclosure of information regarding the payment of dividends.

 

See Part III, Item 12 of this Form 10-Kfor information regarding equity compensation plan information.

 

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**Item 6.****                  ****Selected Financial Data**

 

**SELECTED FINANCIAL DATA (1)**

**(Amounts in thousands)**

 
| ** **                                                        | ** ** | **Successor(2)**                                              | ** ** | ** **            | ** ** | **Successor(2)**      | ** ** | **Predecessor(2)**    | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | ** **                                                    | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** | **Period from** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                        | ** ** | ** **                                                    | ** ** | ** **            | ** ** | ** **            | ** ** | **Combined**          | ** ** | **July 13, 2006** | ** ** | **Period from** | ** ** | ** ** | ** ** |
| ** **                                                        | ** ** | ** **                                                    | ** ** | ** **            | ** ** | ** **            | ** ** | **For the**      | ** ** | **(date of inception)** | ** ** | **January 1** | ** ** | **For the** | ** ** |
| ** **                                                        | ** ** | ** **                                                    | ** ** | ** **            | ** ** | ** **            | ** ** | **year ended**   | ** ** | **through** | ** ** | **through** | ** ** | **year ended** | ** ** |
| ** **                                                        | ** ** | **For the years ended December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **November 15,** | ** ** | **December 31,** | ** ** |
| ** **                                                        | ** ** | **2009(3)**                                                   | ** ** | **2008(4)**           | ** ** | **2007**              | ** ** | **2006(5)(6)**        | ** ** | **2006(7)** | ** ** | **2006(8)** | ** ** | **2005** | ** ** |
| **Statement  of Operations Data:**                                |       |                                                          |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Revenues:                                                         |       |                                                          |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Services                                                          |       | $                                                             | 1,400,610  |                  | $          | 1,466,318             |       | $                     | 1,102,343  |   | $ | 998,493 |   | $ | 130,877 |   | $ | 867,616 |   | $ | 897,990 |   |
| Portfolio                                                         |       | 51,398                                                        |       | 18,029                |       | 132,413               |       | 165,263               |       | 13,557 |   | 151,706 |   | 133,868 |   |
| Portfolio sales                                                   |       | 361                                                           |       | 3,002                 |       | 21,093                |       | 22,757                |       | — |   | 22,757 |   | 12,157 |   |
| Reimbursable costs and  fees                                      |       | 111,549                                                       |       | 25,792                |       | 29,581                |       | 9,653                 |       | 1,931 |   | 7,722 |   | 8,268 |   |
| Total revenues                                                    |       | 1,563,918                                                     |       | 1,513,141             |       | 1,285,430             |       | 1,196,166             |       | 146,365 |   | 1,049,801 |   | 1,052,283 |   |
| Operating costs and  expenses:                                    |       |                                                          |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Payroll and related  expenses                                     |       | 781,888                                                       |       | 845,481               |       | 679,951               |       | 633,048               |       | 79,165 |   | 553,883 |   | 528,932 |   |
| Selling, general and  administrative expenses                     |       | 508,378                                                       |       | 536,547               |       | 429,589               |       | 415,619               |       | 48,191 |   | 367,428 |   | 368,338 |   |
| Reimbursable costs and  fees                                      |       | 111,549                                                       |       | 25,792                |       | 29,581                |       | 9,653                 |       | 1,931 |   | 7,722 |   | 8,268 |   |
| Depreciation and  amortization expense                            |       | 119,570                                                       |       | 121,324               |       | 102,349               |       | 58,923                |       | 12,228 |   | 46,695 |   | 45,787 |   |
| Impairment of intangible  assets                                  |       | 30,032                                                        |       | 289,492               |       | —                |       | 69,898                |       | 69,898 |   | — |   | — |   |
| Restructuring charges                                             |       | 10,868                                                        |       | 11,600                |       | —                |       | 12,765                |       | — |   | 12,765 |   | 9,621 |   |
| Income (loss) from  operations                                    |       | 1,633                                                         |       | (317,095              | )          | 43,960                |       | (3,740                | )          | (65,048 | ) | 61,308 |   | 91,337 |   |
| Other expense                                                     |       | 90,941                                                        |       | 110,208               |       | 89,051                |       | 36,064                |       | 14,422 |   | 21,642 |   | 19,423 |   |
| (Loss) income before  income taxes                                |       | (89,308                                                       | )          | (427,303              | )          | (45,091               | )          | (39,804               | )          | (79,470 | ) | 39,666 |   | 71,914 |   |
| Income tax (benefit)  expense                                     |       | (1,166                                                        | )          | (71,947               | )          | (16,104               | )          | 11,220                |       | (3,522 | ) | 14,742 |   | 26,182 |   |
| Net (loss) income                                                 |       | (88,142                                                       | )          | (355,356              | )          | (28,987               | )          | (51,024               | )          | (75,948 | ) | 24,924 |   | 45,732 |   |
| Less: Net (loss) income  attributable to noncontrolling interests |       | (3,921                                                        | )          | (18,250               | )          | 2,735                 |       | 4,047                 |       | 157 |   | 3,890 |   | 1,213 |   |
| Net (loss) income  attributable to NCO Group, Inc.           |       | $                                                             | (84,221    | )                     | $          | (337,106              | )          | $                     | (31,722    | ) | $ | (55,071 | ) | $ | (76,105 | ) | $ | 21,034 |   | $ | 44,519 |   |
|                                                              |       |                                                          |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| **Statement  of Cash Flows Data:**                                |       |                                                          |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Net cash provided by  (used in) operating activities              |       | $                                                             | 98,474     |                  | $          | 93,733                |       | $                     | 43,995     |   | $ | 104,715 |   | $ | (4,957 | ) | $ | 109,672 |   | $ | 89,550 |   |
| Net cash provided by  (used in) investing activities              |       | 16,714                                                        |       | (424,159              | )          | (32,719               | )          | (1,006,275            | )          | (990,329 | ) | (15,946 | ) | (221,994 | ) |
| Net cash (used in)  provided by financing activities              |       | (107,153                                                      | )          | 332,204               |       | (2,869                | )          | 914,898               |       | 1,010,775 |   | (95,877 | ) | 130,147 |   |

 
| ** **                              | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                              | ** ** | **2009**              | ** ** | **2008**              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Balance Sheet Data:**                 |       |                  |       |                  |       |   |   |   |   |   |   |
| Cash  and cash equivalents              |       | $                     | 39,221     |                  | $          | 29,880 |   | $ | 31,283 |   | $ | 20,703 |   | $ | 23,716 |   |
| Working  capital                        |       | 86,708                |       | 151,547               |       | 162,471 |   | 200,398 |   | 171,587 |   |
| Total  assets                           |       | 1,460,035             |       | 1,701,639             |       | 1,677,999 |   | 1,692,673 |   | 1,327,962 |   |
| Long-term  debt, net of current portion |       | 909,831               |       | 1,048,517             |       | 903,052 |   | 892,271 |   | 321,834 |   |
| Noncontrolling  interests               |       | 11,450                |       | 22,803                |       | 48,948 |   | 55,628 |   | 34,643 |   |
| Stockholders’  equity              |       | 240,550               |       | 283,789               |       | 408,045 |   | 420,434 |   | 743,114 |   |
|                                         |            |                       |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |

 

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| (1) |   | This data should be read in  conjunction with the consolidated financial statements, including the  accompanying notes, included elsewhere in this Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | On November 15, 2006,  NCO Group, Inc. was acquired by and became a wholly owned subsidiary of  Collect Holdings, Inc., an entity controlled by One Equity Partners and  its affiliates, with participation by certain members of executive management  and other co-investors, referred to as the Transaction. Subsequent to the  Transaction, NCO Group, Inc. was merged with and into Collect  Holdings, Inc. and the surviving corporation was renamed NCO  Group, Inc. The selected financial data are presented for two periods,  Predecessor and Successor which relate to the period of operations preceding  the Transaction and the period of operations succeeding the Transaction,  respectively. Collect Holdings was formed on July 13, 2006 (there were  no operations from the date of inception until the Transaction on November 15,  2006). |
| (3) |   | Includes $30.0 million of  impairment charges to goodwill and customer relationships and $11.6 million  of restructuring, integration and acquisition costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (4) |   | The Company acquired  Outsourcing Solutions, Inc. on February 29, 2008 (see note 4 in the  Company’s Notes to Consolidated Financial Statements, included elsewhere in  this Report on Form 10-K). Also includes $289.5 million of impairment  charges to goodwill and trade name, and $15.2 million of merger,  restructuring and integration costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (5) |   | The combined results for  the year ended December 31, 2006 represent the addition of the  Predecessor period from January 1, 2006 through November 15, 2006  and the Successor period from July 13, 2006 through December 31,  2006. This combination does not comply with GAAP or with the rules of  pro forma presentation, however we believe it provides investors the most  meaningful comparison of our results. The combined operating results do not  reflect the actual results we would have achieved if the Transaction did not  occur and may not be predictive of future results of operations.                                                                                                                                                                                                                                                             |
| (6) |   | Includes $33.9 million, net  of taxes, of charges and costs related to the Transaction and restructuring  and integration plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (7) |   | Includes $22.8 million, net  of taxes, of charges and costs related to the Transaction, and a $69.9  million SST goodwill impairment charge.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (8) |   | Includes  $11.1 million, net of taxes, of charges and costs related to the Transaction  and restructuring and integration plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

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**Item 7.****                  ****Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

**Overview**

 

We are a holding company and conduct substantially allof our business operations through our subsidiaries. We are an internationalprovider of business process outsourcing services, referred to as BPO,primarily focused on accounts receivable management, referred to as ARM, andcustomer relationship management, referred to as CRM, serving a wide range ofclients in North America and abroad through our global network of over 100offices. We also purchase and collect past due accounts receivable fromconsumer creditors such as banks, finance companies, retail merchants,utilities, healthcare companies, and other consumer-oriented companies.

 

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

 

During2009, we generated approximately 50 percent of our ARM revenue from therecovery of delinquent accounts receivable on a contingency fee basis. Our ARMcontingency fees range from five percent for the management of accounts placedearly in the accounts receivable cycle to 52 percent for accounts that havebeen serviced extensively by the client or by third-party providers. Ouraverage fee for ARM contingency-based revenue across all industries wasapproximately 18 percent during 2009 and 17 percent during 2008, and 2007. Inaddition, we generate revenue from certain contractual ARM services. Generally,revenue is earned and recognized upon collection of accounts receivable forcontingency fee services and as work is performed for contractual services. Weenter into contracts with most of our clients that define, among other things,fee arrangements, scope of services, and termination provisions. Clientstypically have the right to terminate their contracts on 30 or 60 days’ notice.Approximately 50 percent of our ARM revenue is generated from contractualcollection services, where fees are based on a monthly rate or a per servicecharge, and other ARM services.

 

During2009, approximately 94 percent of our CRM revenue was generated from inboundservices, which consist primarily of customer service and technical supportprograms, and to a lesser extent acquisition and retention services. Inboundservices involve the processing of incoming calls, often placed by our clients’customers using toll-free numbers, to a customer service representative forservice, order fulfillment or information. During 2009, outbound services,which consist of customer acquisition and customer retention services,represented approximately six percent of our CRM revenue.

 

Historically,we have participated in the purchased accounts receivable business on anopportunistic basis. Given the decline in liquidation rates, competition forpurchased accounts receivable and the continued uncertainty of collectibility,we significantly reduced our purchases of accounts in 2009. We currently expectto limit our purchases in 2010 to certain of our non-cancelable forward flowcommitments.  Additionally, we may opportunistically purchaseaccounts receivable that allow us to leverage meaningful third-party servicingcontracts.  Our amended Credit Facility limitspurchases in 2010 to $20 million and purchases in 2011 and beyond to $10 million.

 

Ouroperating costs consist principally of payroll and related costs; selling,general and administrative costs; and depreciation and amortization. Payrolland related expenses consist of wages and salaries, commissions, bonuses, andbenefits for all of our employees, including management and administrativepersonnel. Selling, general and administrative expenses include telephone,postage and mailing costs, outside collection attorneys and other third-partycollection services providers, and other collection costs, as well as expensesthat directly support operations, including facility costs, equipmentmaintenance, sales and marketing, data processing, professional fees, and othermanagement costs.

 

Due tothe expected impact of the economic environment on our clients’ business in2010, in the fourth quarter of 2009 we reduced our budgeted volumes fromcertain of our clients in the CRM reporting unit. As a result, our 2009 annualimpairment test for goodwill indicated that the carrying value of our CRMreporting unit exceeded its fair value and we recorded goodwill impairmentcharges of $24.7 million in the CRM segment in 2009. We were not required torecord trade name impairment charges in 2009. Late in 2008, the ARM andPortfolio Management reporting units experienced a significant reduction in thecollectability of both customer-placed and purchased accounts receivableresulting from deteriorating economic conditions. Due to the expected impact ofthe economic environment, we reduced our 2009 budgeted expectations for each ofour reporting units. As a result, our 2008 annual impairment test for goodwilland trade name indicated that the carrying values of all of our reporting unitsexceeded their fair values and we recorded goodwill impairment charges of$275.5 million and trade name impairment charges of $14.0 million in 2008. Wewere not required to record any impairment charges based upon the annualimpairment tests in 2007. Additionally, revenue for 2009 and 2008 was reducedby a $21.5 million and a $98.9 million, respectively, impairment chargerecorded to increase the valuation allowance against the carrying value of theportfolios of purchased accounts receivable.

 

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Duringthe second half of 2007 and during 2008, our payroll and related expenses werenegatively impacted by the decline in the U.S. dollar against the Canadiandollar.  During 2009, the U.S. dollarstrengthened, resulting in a positive impact compared to the prior year.

 

Changesto the economic conditions in the U.S., either positive or negative, could havea significant impact on our business, including, but not limited to:

 

·      further impairmentcharges to our goodwill, trade name and purchased accounts receivable;

·      fluctuations in thevolume of placements of accounts and the collectability of those accounts forour ARM contingency fee based services;

·      volume fluctuations inour ARM fixed fee based services;

·      volume fluctuations inour CRM services; and,

·      variability in thecollectability of existing.

 

Wehave grown rapidly, through both acquisitions as well as internal growth. Thefollowing table lists the companies we have acquired in the past three years(purchase price in millions):

 
| **Date**           | ** ** | **Acquired Company**                                                   | ** ** | **Description**                          | ** ** | **Purchase  Price** | ** ** |
|--------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------|------------|---------------------|------------|
| August 2009   |       | TSYS Total Debt  Management (“TDM”)                          |       | Attorney network  receivables management |       | $                   | 4.5        | (1) |
| May 2009           |       | Complete Credit  Management, Ltd.                                      |       | Receivables  management in the UK        |       | $                   | 0.7        |   |
| February 2008 |       | Outsourcing  Solutions, Inc. (“OSI”)                    |       | Receivables  management                  |       | $                   | 334.0      |   |
| January 2008  |       | Systems &  Services Technologies, Inc. (“SST”) |       | Active account  servicing                |       | $                   | 18.4       |   |
| 2008               |       | Various  international companies                                       |       | Receivables  management                  |       | $                   | 9.3        |   |
| January 2007  |       | Statewide  Mercantile Services (“SMS”)                       |       | Receivables  management in Australia     |       | $                   | 2.1        |   |

 

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(1) Subject to post-closing adjustments.

 

InOctober 2009, we sold our print and mail business for approximately $20.0million in cash, subject to certain post-closing adjustments.

 

Priorto the acquisition of SST on January 2, 2008, SST was a wholly ownedsubsidiary of JPMorgan Chase & Co., referred to as JPM. JPM alsowholly owns One Equity Partners, which has had a controlling interest in ussince our “going-private” transaction on November 15, 2006, referred to asthe Transaction. Transfers of net assets or exchanges of equity interestsbetween entities under common control are accounted for similar to thepooling-of-interests method (“as-if pooling-of-interests”) in that the entitythat receives the net assets or the equity interests initially recognizes theassets and liabilities transferred at their carrying amounts in the accounts ofthe transferring entity at the date of transfer. Because NCO and SST were undercommon control at the time of the SST acquisition, the transfer of assets andliabilities of SST were accounted for at historical cost in a manner similar toa pooling of interests. For financial accounting purposes, the acquisition wasviewed as a change in reporting entity and, as a result, required restatementof our financial statements for all periods subsequent to November 15,2006, the date of the Transaction and the date at which common control of NCOand SST by JPM commenced.

 

**CriticalAccounting Policies and Estimates**

 

*General*

 

Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and the accompanying notes. Actual results could differ from thoseestimates. We believe the following accounting policies and estimates are themost critical and could have the most impact on our results of operations. Fora discussion of these and other accounting policies, see note 2 in our Notes toConsolidated Financial Statements.

 

As aresult of the Transaction, the majority of our assets and liabilities,including our portfolio of accounts receivable, were adjusted to their fairvalue as of the date of the Transaction. We made significant assumptions indetermining the fair value of intangible assets and other assets andliabilities in connection with purchase accounting. Additionally, a portion ofthe equity related to our management stockholders was recorded at thestockholder’s predecessor basis and a corresponding portion of the acquiredassets was reduced accordingly.

 

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*Goodwill,Other Intangible Assets and Purchase Accounting*

 

Assets acquiredand liabilities assumed must be recorded at their fair value at the date ofacquisition. Our balance sheet includes amounts designated as “Goodwill”, “Tradename” and “Customer relationships and other intangible assets.” Goodwillrepresents the excess of the purchase price over the fair value of the netassets of acquired businesses. Trade name represents the fair value of the NCOname. Other intangible assets consist primarily of customer relationships,which represent the information and regular contact we have with our clients,and non-compete agreements.

 

As of December 31,2009, our balance sheet included goodwill, trade name and other intangiblesthat represented 36.7 percent, 5.8 percent and 17.7 percent of total assets,respectively, and 233.9 percent, 36.6 percent and 112.9 percent of stockholders’equity, respectively.

 

Goodwill and tradename are tested for impairment at least annually and as triggering eventsoccur. The test for impairment is performed at the reporting unit level andinvolves a two-step approach, the first step identifies any potentialimpairment and the second step measures the amount of the impairment, ifapplicable. The first test for potential impairment compares the fair value ofa reporting unit’s goodwill to its carrying amount. If the fair value is lessthan the carrying amount, the reporting unit’s goodwill would be consideredimpaired and we could be required to take a charge to earnings, which could bematerial.

 

Due to theexpected impact of the economic environment on our clients’ business in 2010, inthe fourth quarter of 2009 we reduced the expected volumes from certain of ourclients in the CRM reporting unit. As a result, our 2009 annual impairment testfor goodwill indicated that the carrying value of our CRM reporting unitexceeded its fair value. Fair values were determined by using a combination ofthe market approach and income approach. Our fair value calculations were basedon projected financial results that were prepared in connection with our annualbudget and forecasting process that included the expected impact of thereduction in CRM business volume. The fair value calculations were also basedon other assumptions including long-term growth rates of 3 percent and weightedaverage cost of capital ranging from 13 percent to 14 percent.

 

Late in 2008, ourARM and Portfolio Management reporting units experienced a significantreduction in the collectability of both customer-placed and purchased accountsreceivable resulting from deteriorating economic conditions. Due to theexpected impact of the economic environment, we reduced our 2009 budgetedexpectations for each of our reporting units. As a result, our 2008 annualimpairment test for goodwill and trade name indicated that the carrying valuesof all of our reporting units exceeded their fair values. Fair values weredetermined by using a combination of the market approach and income approach.Our fair value calculations were based on projected financial results that wereprepared in connection with our annual budget and forecasting process thatincluded the expected impact of the current economic environment. The fairvalue calculations were also based on other assumptions including long-termgrowth rates of 4 percent and weighted average cost of capital ranging from 13percent to 14 percent.

 

As a result of theannual impairment testing, we recorded goodwill impairment charges of $24.7million in the CRM reporting unit in 2009. We were not required to record anytrade name impairment charges in 2009. We recorded total goodwill impairment chargesof $275.5 million and total trade name impairment charges of $14.0 million inthe ARM and Portfolio Management reporting units in 2008. We were not requiredto record any impairment charges based upon the annual impairment tests in2007.

 

We make significantassumptions to estimate the future revenue and cash flows used to determine thefair value of our reporting units. These assumptions include future growthrates, profitability, discount factors, market comparables, future tax rates,and other factors. Variations in any of these assumptions could result inmaterially different calculations of impairment amounts. If the expectedrevenue and cash flows are not realized, additional impairment losses may berecorded in the future.

 

We periodicallyevaluate the net realizable value of identifiable definite-lived intangibleassets for impairment, based on the estimated undiscounted future cash flows,whenever events or changes in circumstances indicate that the carrying amountof the asset may not be recoverable.

 

During 2009, theCompany began to reduce its purchases of portfolios of accounts receivable andhas made a decision to minimize further investments in purchased accountsreceivable in the future. This decision resulted primarily from the continuationof the difficult collection environment, the competitive market for portfolioinvestments, as well as potential regulatory changes affecting the purchasedaccounts receivable business. As a result of this decision, the 

 

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Company recorded animpairment charge of $5.3 million for the Portfolio Management reporting unit’scustomer relationship intangible assets.

 

*RevenueRecognition for Purchased Accounts Receivable*

 

In the ordinary course ofaccounting for purchased accounts receivable, estimates have been made bymanagement as to the amount of future cash flows expected from each portfolio.We have historical collection records for all of our purchased accountsreceivable which provide us a reasonable basis for our judgment that it isprobable that we will ultimately collect the recorded amount of our purchasedaccounts receivable plus a premium or yield. The historical collection amountsalso provide a reasonable basis for determining the timing of the collections.We use all available information to forecast the cash flows of our purchasedaccounts receivable including, but not limited to, historical collections,payment patterns on similar purchases, credit scores of the underlying debtors,seller’s credit policies, and location of the debtor. The estimated future cashflow of each portfolio is used to compute the internal rate of return, referredto as the IRR, for each portfolio. The IRR is used to allocate collectionsbetween revenue and amortization of the carrying values of the purchasedaccounts receivable.

 

If the originalcollection estimates are lowered, an allowance is established in the amountrequired to maintain the original IRR. If collection estimates are raised,increases are first used to recover any previously recorded allowances and thenrecognized prospectively through an increase in the IRR over a portfolio’sremaining life. Any increase in the IRR must be used for subsequent revenuerecognition and allowance testing.

 

If management came to adifferent conclusion as to the future estimated collections, it could have hada significant impact on the amount of revenue that was recorded from the purchasedaccounts receivable. A five percent increase in the amount of future expectedcollections would have resulted in additional income of $2.5 million for theyear ended December 31, 2009, largely as a result of lower allowancessince increases in future expected collections are recognized to the extentsufficient to recover any allowances or to increase the expected IRR. A fivepercent decrease in the amount of future expected collections would haveresulted in additional loss of $2.5 million for the year ended December 31,2009, largely as a result of higher allowances.

 

*IncomeTaxes*

 

Deferred tax assets andliabilities are recognized using enacted tax rates for the effect of temporarydifferences between the book and tax bases of recorded assets and liabilities.Deferred tax assets are reduced by a valuation allowance, if it is more likelythan not that some portion or all of the deferred tax asset will not berealized. Deferred taxes have not been provided on the cumulative undistributedearnings of foreign subsidiaries because such amounts are expected to bereinvested indefinitely.

 

In assessing therealization of deferred tax assets, management considers whether it is morelikely than not that some portion of the deferred tax assets will not be realized. Theultimate realization of deferred tax assets is dependent upon the generation offuture taxable income during the periods in which those temporary differencesbecome deductible or the net operating losses can be utilized. A valuationallowance of $36.5 million has been provided on federal and certain statedeferred tax assets due to the uncertainty of realizing the benefit of certaindeferred tax assets.  In addition, a valuation allowance of $31.9 millionhas been provided on a portion of deferred tax assets relating to certainforeign and state net operating losses and state tax credits that, based onmanagement’s assessment, it is more likely than not that such amounts will notbe realized. This represents an increase of $37.1 million due to theincrease in federal and certain state deferred tax assets and additional stateand foreign net operating losses in 2009. The utilization of net operating losscarryforwards and tax credits is an estimate based on a number of factorsbeyond our control, including the level of taxable income available fromsuccessful operations in the future. If we are unable to utilize the federalnet operating loss carryforwards, it may result in incremental tax expense infuture periods.

 

Our annual provision forincome taxes and the determination of the resulting deferred tax assets andliabilities involve a significant amount of judgment and are based on thelatest information available at the time. We are subject to audit within thefederal, state and international taxing jurisdictions, and these audits caninvolve complex issues that may require an extended period of time to resolve.We maintain reserves for estimated tax exposures, which are ultimately settledprimarily through the settlement of audits within these tax jurisdictions,changes in applicable tax law, or other factors. We believe that an appropriateliability has been established for financial statement purposes; however,actual results may differ from these estimates.

 

As of December 31,2009 and 2008, we had $4.9 million and $8.3 million, respectively, in reservesfor uncertain tax positions, including penalties, that, if recognized, wouldaffect the effective tax rate. We recognize interest related to 

 

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uncertain tax positions in interest expense. As of December 31,2009, 2008 and 2007, we had approximately $4.5 million, $6.1 million and $4.1million, respectively, of accrued interest related to uncertain tax positions.The Company recognizes penalties related to uncertain tax positions in theprovision for income taxes.

 

We are subject tofederal, state and foreign income tax audits from time to time that could resultin proposed assessments. We cannot predict with certainty how these audits willbe resolved and whether we will be required to make additional tax payments,which may or may not include penalties and interest. As of December 31,2009, we are no longer subject to federal income tax examinations for yearsprior to 2005. For most states and foreign countries where we conduct business,we are subject to examination for the preceding three to six years. In certainstates and foreign countries, the period could be longer.

 

*Allowancefor Doubtful Accounts*

 

Allowances for doubtfulaccounts are determined based on estimates of losses related to customerreceivable balances. In establishing the appropriate provision for customerreceivables balances, we make assumptions with respect to their futurecollectibility. Our assumptions are based on an individual assessment of acustomer’s credit quality as well as subjective factors and trends, includingthe aging of receivable balances. Generally, these individual creditassessments occur at regular reviews during the life of the exposure andconsider factors such as a customer’s ability to meet and sustain theirfinancial commitments, a customer’s current financial condition and historicalpayment patterns. Our level of reserves for our customer accounts receivablefluctuates depending upon all of the factors mentioned above, in addition toany contractual rights that allow us to reduce outstanding receivable balancesthrough the application of future collections. If our estimate is notsufficient to cover actual losses, we would be required to take additionalcharges to our earnings.

 

**Resultsof Operations**

 

The followingtable sets forth selected historical statement of operations data (amounts inthousands):

 
| ** **                                         | ** ** | **For the  Years Ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                         | ** ** | **Amount**                                 | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Revenues:                                          |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Services                                           |       | $                                          | 1,400,610  |   | 89.6 | % | $ | 1,466,318 |   | 96.9 | % | $ | 1,102,343 |   | 85.8 | % |
| Portfolio                                          |       | 51,398                                     |       | 3.3 |   | 18,029 |   | 1.2 |   | 132,413 |   | 10.3 |   |
| Portfolio sales                                    |       | 361                                        |       | — |   | 3,002 |   | 0.2 |   | 21,093 |   | 1.6 |   |
| Reimbursable costs and fees                        |       | 111,549                                    |       | 7.1 |   | 25,792 |   | 1.7 |   | 29,581 |   | 2.3 |   |
| Total revenues                                     |       | 1,563,918                                  |       | 100.0 |   | 1,513,141 |   | 100.0 |   | 1,285,430 |   | 100.0 |   |
| Payroll and related expenses                       |       | 781,888                                    |       | 50.0 |   | 845,481 |   | 55.9 |   | 679,951 |   | 52.9 |   |
| Selling,  general and admin. expenses              |       | 508,378                                    |       | 32.5 |   | 536,547 |   | 35.5 |   | 429,589 |   | 33.4 |   |
| Reimbursable costs and fees                        |       | 111,549                                    |       | 7.1 |   | 25,792 |   | 1.7 |   | 29,581 |   | 2.3 |   |
| Depreciation and amortization                      |       | 119,570                                    |       | 7.6 |   | 121,324 |   | 8.0 |   | 102,349 |   | 8.0 |   |
| Impairment of intangible assets                    |       | 30,032                                     |       | 1.9 |   | 289,492 |   | 19.1 |   | — |   | — |   |
| Restructuring charges                              |       | 10,868                                     |       | 0.7 |   | 11,600 |   | 0.8 |   | — |   | — |   |
| Income (loss) from operations                      |       | 1,633                                      |       | 0.1 |   | (317,095 | ) | 21.0 |   | 43,960 |   | 3.4 |   |
| Other expense                                      |       | 90,941                                     |       | 5.8 |   | 110,208 |   | 7.3 |   | 89,051 |   | 6.9 |   |
| Income tax benefit                                 |       | (1,166                                     | )          | 0.1 |   | (71,947 | ) | 4.8 |   | (16,104 | ) | 1.3 |   |
| Net  loss attributable to noncontrolling interests |       | (3,921                                     | )          | 0.3 |   | (18,250 | ) | 1.2 |   | 2,735 |   | 0.2 |   |
| Net loss attributable to NCO                       |       | $                                          | (84,221    | ) | 5.4 | % | $ | (337,106 | ) | 22.3 | % | $ | (31,722 | ) | 2.5 | % |

 

***Yearended December 31, 2009 Compared to Year ended December 31, 2008***

 

***Revenue.**** *Revenueincreased $50.8 million, or 3.4 percent, to $1,563.9 million for 2009, from$1,513.1 million in 2008. Revenue for the year ended December 31, 2009 wasreduced by a $21.5 million impairment charge recorded to increase the valuationallowance against the carrying value of the portfolios of purchased accountsreceivable, compared to an impairment charge of $98.9 million in 2008.

 

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Revenue by segment (amounts in thousands):

 
| ** **           | ** ** | **For the Year Ended  December 31,** | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------|------------|-------------------------------------------|------------|-------------|------------|------------|------------|
| ** **           | ** ** | ** **                                | ** ** | **% of**    | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2009**                                  | ** ** | **Revenue** | ** ** | **2008**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                  |       | $                                         | 1,246,555  |        | 79.7       | %          | $          | 1,219,348 |   | 80.6 | % | $ | 27,207 |   | 2.2 | % |
| CRM                  |       | 334,492                                   |       | 21.4        | %          | 361,096    |       | 23.9 | % | (26,604 | ) | (7.4 | )% |
| Portfolio Management |       | 48,482                                    |       | 3.1         | %          | 18,389     |       | 1.2 | % | 30,093 |   | 163.6 | % |
| Eliminations         |       | (65,611                                   | )          | (4.2        | )%         | (85,692    | )          | (5.7 | )% | 20,081 |   | (23.4 | )% |
| Total                |       | $                                         | 1,563,918  |        | 100.0      | %          | $          | 1,513,141 |   | 100.0 | % | $ | 50,777 |   | 3.4 | % |

 

ARM’s revenue for2009 included $60.5 million of intercompany revenue earned on servicesperformed for Portfolio Management and CRM’s revenue for 2009 included $5.1million of intercompany revenue earned on services performed for ARM, whichwere eliminated upon consolidation. ARM’s revenue for 2008 included $82.8million of intercompany revenue earned on services performed for PortfolioManagement and CRM’s revenue for 2008 included $2.9 million of intercompany revenueearned on services performed for ARM, which were eliminated upon consolidation.

 

The increase in ARM’srevenue was primarily attributable to increased volume from new and existingclients in both first-party (early stage) and contingent collections as well asa full year of revenue from the OSI acquisition completed on February 29,2008. This increase was offset in part by the weaker collection environmentduring 2009 and a $22.3 million decrease in fees from collection servicesperformed for Portfolio Management.

 

The decrease in CRM’srevenue was primarily due to lower volumes from certain existing clientsattributable to the impact of the economy on the clients’ business, partiallyoffset by increased client volumes related to the implementation of newcontracts during 2008 and 2009.

 

Portfolio Management’s collections, excluding all portfolio sales,decreased $48.4 million, or 24.6 percent, to $148.4 million in 2009, from$196.8 million in 2008. Revenue for 2009 was reduced by a $21.5 million impairmentcharge recorded to increase the valuation allowance against the carrying valueof the portfolios of purchased accounts receivable, due to the impact of thedeteriorating economic conditions on cash collected and lower estimates offuture collections, compared to an impairment charge of $98.2 million in theprior year. Excluding the effect of the impairment charges as well as portfoliosales, Portfolio Management’s revenue represented 46.0 percent of collectionsin 2009, as compared to 57.1 percent of collections in 2008. The remainingdecrease in revenue and collections was attributable to lower portfoliopurchases and the affect of the weaker collection environment during 2009.Portfolio sales revenue for 2009 was $361,000 compared to $3.0 million for2008.

 

***Payroll and related expenses.*** Payroll and related expenses decreased $63.6 million to $781.9 millionin 2009, from $845.5 million in 2008, and decreased as a percentage of revenueto 50.0 percent from 55.9 percent.

 

Payroll and related expenses by segment (amounts inthousands):

 
| ** **           | ** ** | **For the Year Ended December 31,** | ** ** | ** **    | ** ** | ** ** | ** ** |
|----------------------|------------|--------------------------------------------------------------|------------|---------------|------------|------------|------------|
| ** **           | ** ** | ** **                                                   | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2009**                                                     | ** ** | **Revenue**   | ** ** | **2008**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                  |       | $                                                            | 542,919    |          | 43.6       | %          | $          | 583,658 |   | 47.9 | % | $ | (40,739 | ) | (7.0 | )% |
| CRM                  |       | 238,836                                                      |       | 71.4          | %          | 256,895    |       | 71.1 | % | (18,059 | ) | (7.0 | )% |
| Portfolio Management |       | 5,244                                                        |       | 10.8          | %          | 7,822      |       | 42.5 | % | (2,578 | ) | (33.0 | )% |
| Eliminations         |       | (5,111                                                       | )          | 7.8           | %          | (2,894     | )          | 3.4 | % | (2,217 | ) | 76.6 | % |
| Total                |       | $                                                            | 781,888    |          | 50.0       | %          | $          | 845,481 |   | 55.9 | % | $ | (63,593 | ) | (7.5 | )% |

 

The decrease in ARM’s payroll and related expenses asa percentage of revenue was primarily due to the integration efforts followingthe acquisition 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 was $5.1 million of intercompany expenseto CRM, for services provided to ARM.

 

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CRM’s payroll and related expenses decreased as apercentage of revenue primarily as a result of our continuing deployment ofadditional staff in off-shore locations where labor costs are lower.

 

PortfolioManagement outsources all of its collection services to ARM and, therefore, hasa relatively small fixed payroll cost structure. The decrease in payroll andrelated expenses as a percentage of revenue was primarily attributable to the$98.9 impairment charge recorded on purchased accounts receivables in 2008,which is recorded in revenue, compared to a $21.5 million impairment charge in2009.

 

***Selling, generaland administrative expenses.***  Selling,general and administrative expenses decreased $28.1 million to $508.4 millionin 2009, from $536.5 million in 2008, and decreased as a percentage of revenueto 32.5 percent from 35.5 percent.

 

Selling, general and administrative expenses bysegment (amounts in thousands):

 
| ** **           | ** ** | **For the Year Ended December 31,** | ** ** | ** **    | ** ** | ** ** | ** ** |
|----------------------|------------|--------------------------------------------------------------|------------|---------------|------------|------------|------------|
| ** **           | ** ** | ** **                                                   | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2009**                                                     | ** ** | **Revenue**   | ** ** | **2008**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                  |       | $                                                            | 443,040    |          | 35.5       | %          | $          | 463,083 |   | 38.0 | % | $ | (20,043 | ) | (4.3 | )% |
| CRM                  |       | 59,892                                                       |       | 17.9          | %          | 61,723     |       | 17.1 | % | (1,831 | ) | (3.0 | )% |
| Portfolio Management |       | 62,779                                                       |       | 129.5         | %          | 86,533     |       | 470.6 | % | (23,754 | ) | (27.5 | )% |
| Eliminations         |       | (57,333                                                      | )          | 87.4          | %          | (74,792    | )          | 87.3 | % | 17,459 |   | (23.3 | )% |
| Total                |       | $                                                            | 508,378    |          | 32.5       | %          | $          | 536,547 |   | 35.5 | % | $ | (28,169 | ) | (5.3 | )% |

 

The decrease in ARM’s selling, general andadministrative expenses as a percentage of revenue was primarily attributableto the effective management of expenses and integration efforts following theOSI acquisition.

 

The increase in CRM’s selling, general andadministrative expenses as a percentage of revenue was primarily attributableto increasing capacity due to anticipated higher client volumes, in advance ofthe offsetting revenue generation.

 

The decrease in Portfolio Management’s selling,general and administrative expenses resulted from a $22.3 million decrease infees for collection services provided by ARM. The decrease as a percentage ofrevenue was primarily due to the decrease in revenue resulting from lowercollections. Included in Portfolio Management’s selling, general andadministrative expenses for 2009 and 2008 was $60.5 million and $82.8 million,respectively, of intercompany expense to ARM, for services provided toPortfolio Management.

 

***Reimbursable costsand fees. ***Reimbursable costs and fees consist of court costs, legal fees andrepossession fees, representing out-of-pocket expenses that are reimbursed bythe Company’s clients. Reimbursable costs and fees are recorded as both revenueand operating expenses on the statement of operations. The increase inreimbursable costs and fees was due to the acquisition of TDM in August 2009.

 

***Depreciation andamortization.***  Depreciation and amortization decreased to$119.6 million in 2009, from $121.3 million in 2008. This decrease wasprimarily attributable to lower depreciation expense resulting from a lowerlevel of property and equipment, offset partially by higher amortization ofcustomer relationships and other intangible assets following the OSIacquisition in February 2008.

 

***Impairment ofintangible assets.***  During the fourth quarter of2009, the Company recorded goodwill impairment charges of $24.7 million in theCRM segment, and customer relationship impairment charges of $5.3 million inthe Portfolio Management segment.

 

***Restructuringcharges.***  We incurred restructuring charges of $10.9million in 2009, which related to restructuring of our legacy operations tostreamline our cost structure. The charges consisted primarily of severancecosts. This compares to $11.6 million of restructuring charges in 2008, whichprimarily related to the OSI acquisition.

 

***Otherincome (expense).*** Interest expense increased to $99.2 million for 2009, from $94.8 millionfor 2008. Interest expense for 2009 included $14.1 million of losses, comparedto $717,000 of gains in 2008, from interest rate swap agreements and embeddedderivatives. This was offset partially by lower interest expense under ouramended senior credit facility in 2009, due to a lower level of debt resultingfrom debt repayments during 2009. Other income (expense), net for 2009 and 2008included approximately $7.0 million of net gains and $16.8 million of netlosses,

 

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respectively, resulting from the settlement of certainforeign exchange contracts. Other income (expense) for 2009 also included a$5.0 million loss from writing down one of our notes receivable and a $4.4million gain on sale of our print and mail business.

 

***Incometax benefit.*** For 2009, the effective income tax rate decreased to 1.3 percent from16.8 percent for 2008, due primarily to the recognition of a valuationallowance on certain domestic net deferred tax assets.

 

***Yearended December 31, 2008 Compared to Year ended December 31, 2007***

 

***Revenue.**** *Revenue increased $227.7 million, or 17.7 percent, to$1,513.1 million for 2008, from $1,285.4 million in 2007. Revenue for the yearended December 31, 2008 was reduced by a $98.9 million impairment chargerecorded to increase the valuation allowance against the carrying value of theportfolios of purchased accounts receivable.

 

Revenue by segment(amounts in thousands):

 
|                 |       | **For the Year Ended December 31,** |       |          |       |       |       |
|----------------------|------------|--------------------------------------------------------------|------------|---------------|------------|------------|------------|
| ** **           | ** ** | ** **                                                   | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2008**                                                     | ** ** | **Revenue**   | ** ** | **2007**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                  |       | $                                                            | 1,219,348  |          | 80.6       | %          | $          | 915,603 |   | 71.2 | % | $ | 303,745 |   | 33.2 | % |
| CRM                  |       | 361,096                                                      |       | 23.9          | %          | 328,560    |       | 25.6 | % | 32,536 |   | 9.9 | % |
| Portfolio Management |       | 18,389                                                       |       | 1.2           | %          | 150,909    |       | 11.7 | % | (132,520 | ) | (87.8 | )% |
| Eliminations         |       | (85,692                                                      | )          | (5.7          | )%         | (109,642   | )          | (8.5 | )% | 23,950 |   | (21.8 | )% |
| Total                |       | $                                                            | 1,513,141  |          | 100.0      | %          | $          | 1,285,430 |   | 100.0 | % | $ | 227,711 |   | 17.7 | % |

 

ARM’s revenue for 2008 included $82.8 million ofintercompany revenue earned on services performed for Portfolio Management andCRM’s revenue for 2008 included $2.9 million of intercompany revenue earned onservices performed for ARM, which were eliminated upon consolidation. ARM’srevenue for 2007 included $109.1 million of intercompany revenue earned onservices performed for Portfolio Management and CRM’s revenue for 2007 included$532,000 of intercompany revenue earned on services performed for ARM, whichwere eliminated upon consolidation.

 

The increase in ARM’s revenue was primarilyattributable to the acquisition of OSI on February 29, 2008, which added$337.3 million of revenue. This increase was offset in part by the weakercollection environment during 2008 and a $26.3 million decrease in fees fromcollection services performed for Portfolio Management. Included in ARM’sintercompany service fees for 2008, was $1.7 million of commissions from thesales of portfolios by Portfolio Management, compared to $12.8 million in 2007.

 

The increase in CRM’s revenue was primarily due toincreased client volume, related to the implementation of new contracts during2007 and 2008, partially offset by lower volumes from certain existing clientsdue to the impact of the economy.

 

Portfolio Management’s collections, excluding all portfolio sales,decreased $25.9 million, or 11.6 percent, to $196.8 million in 2008, from$222.7 million in 2007. Revenue for 2008 was reduced by a $98.2 millionimpairment charge recorded to increase the valuation allowance against thecarrying value of the portfolios of purchased accounts receivable, due to theimpact of the deteriorating economic conditions on cash collected and lowerestimates of future collections, compared to an impairment charge of $25.0million in the prior year. Excluding the effect of the impairment charges andall portfolio sales, Portfolio Management’s revenue represented 57.1 percent ofcollections in 2008, as compared to 68.3 percent of collections in 2007. Theremaining decrease in revenue and collections primarily reflected the effect ofthe weaker collection environment during 2008. Portfolio sales for 2008 were$3.0 million compared to $21.1 million for 2007.

 

***Payroll and relatedexpenses.***  Payroll and related expenses increased $165.5million to $845.5 million in 2008, from $680.0 million in 2007, and increasedas a percentage of revenue to 55.9 percent from 52.9 percent. The increase inpayroll and related expenses as a percentage of revenue was primarilyattributable to the decrease in revenues due to the $98.9 impairment chargerecorded on purchased accounts receivables in the year ended December 31,2008.

 

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Payroll and related expenses by segment (amounts inthousands):

 
| ** **           | ** ** | **For the Year Ended December 31,** | ** ** | ** **    | ** ** | ** ** | ** ** |
|----------------------|------------|--------------------------------------------------------------|------------|---------------|------------|------------|------------|
| ** **           | ** ** | ** **                                                   | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2008**                                                     | ** ** | **Revenue**   | ** ** | **2007**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                  |       | $                                                            | 583,658    |          | 47.9       | %     | $          | 426,177 |   | 46.5 | %  | $ | 157,481 |   | 37.0 | % |
| CRM                  |       | 256,895                                                      |       | 71.1          | %          | 246,655    |       | 75.1 | % | 10,240 |   | 4.2 | % |
| Portfolio Management |       | 7,822                                                        |       | 42.5          | %          | 7,651      |       | 5.1 | % | 171 |   | 2.2 | % |
| Eliminations         |       | (2,894                                                       | )          | 3.4           | %          | (532       | )          | 0.5 | % | (2,362 | ) | 444.0 | % |
| Total                |       | $                                                            | 845,481    |          | 55.9       | %     | $          | 679,951 |   | 52.9 | %  | $ | 165,530 |   | 24.3 | % |

 

ARM’s payroll and related expenses increased primarilydue to the acquisition of OSI on February 29, 2008, and increased as apercentage of revenue due to the OSI acquisition as well as the effect of theweaker collection environment on ARM’s revenue. Included in ARM’s payroll andrelated expenses was $2.9 million of intercompany expense to CRM, for servicesprovided to ARM.

 

The decrease in CRM’s payroll and related expenses asa percentage of revenue was primarily a result of our continuing deployment ofadditional staff in off-shore locations.

 

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

 

***Selling, generaland administrative expenses.***  Selling,general and administrative expenses increased $106.9 million to $536.5 millionin 2008, from $429.6 million in 2007, and increased as a percentage of revenueto 35.5 percent from 33.4 percent.

 

Selling, general and administrative expenses bysegment (amounts in thousands):

 
| ** **           | ** ** | **For the Year Ended December 31,** | ** ** | ** **    | ** ** | ** ** | ** ** |
|----------------------|------------|--------------------------------------------------------------|------------|---------------|------------|------------|------------|
| ** **           | ** ** | ** **                                                   | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2008**                                                     | ** ** | **Revenue**   | ** ** | **2007**   | ** ** | **Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ARM                  |       | $                                                            | 463,083    |          | 38.0       | %     | $          | 362,242 |   | 39.6 | %  | $ | 100,841 |   | 27.8 | % |
| CRM                  |       | 61,723                                                       |       | 17.1          | %          | 54,323     |       | 16.5 | % | 7,400 |   | 13.6 | % |
| Portfolio Management |       | 86,533                                                       |       | 470.6         | %          | 112,708    |       | 74.7 | % | (26,175 | ) | (23.2 | )% |
| Eliminations         |       | (74,792                                                      | )          | 87.3          | %          | (99,684    | )          | 90.9 | % | 24,892 |   | (25.0 | )% |
| Total                |       | $                                                            | 536,547    |          | 35.5       | %     | $          | 429,589 |   | 33.4 | %  | $ | 106,958 |   | 24.9 | % |

 

The increase in ARM’s selling, general andadministrative expenses was primarily due to the OSI acquisition. The decreasein ARM’s selling, general and administrative expenses as a percentage ofrevenue was primarily attributable to leveraging our infrastructure over thelarger revenue base.

 

The increase in CRM’s selling, general andadministrative expenses as a percentage of revenue was primarily attributableto ramping up capacity due to increasing client volumes, in advance of theoffsetting revenue generation.

 

The decrease in Portfolio Management’s selling,general and administrative expenses resulted from a $26.3 million decrease infees for collection services provided by ARM. The increase as a percentage ofrevenue was primarily due to the decrease in revenue due to lower collections.Included in Portfolio Management’s selling, general and administrative expensesfor 2008 and 2007 was $82.8 million and $109.1 million, respectively, ofintercompany expense to ARM, for services provided to Portfolio Management.

 

***Reimbursable costsand fees. ***Reimbursable costs and fees consist of court costs, legal fees andrepossession fees, representing out-of-pocket expenses that are reimbursed bythe Company’s clients. Reimbursable costs and fees are recorded as both revenueand operating expenses on the statement of operations.

 

***Depreciation andamortization.***  Depreciation and amortization increased to$121.3 million in 2008, from $102.3 million in 2007. This increase wasprimarily attributable to the amortization of the customer relationshipsresulting from the OSI acquisition.

 

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***Impairment of intangible assets.*** During the fourth quarter of 2008, the Company performed its annualimpairment tests of goodwill and trade name and recorded impairment chargestotaling $289.5 million.

 

***Restructuringcharges.***  During 2008 we incurred restructuring chargesof $11.6 million related to restructuring of our legacy operations tostreamline our cost structure, in conjunction with the OSI acquisition. Thecharges consisted primarily of costs associated with the closing of redundantfacilities and severance.

 

***Otherincome (expense).*** Interest expense decreased to $94.8 million for 2008, from $95.3 millionfor 2007.  The decrease was attributableto lower floating interest rates on the senior credit facility and the seniornotes. The lower interest rates were partially offset by additional borrowingsunder the senior credit facility primarily to fund a portion of the acquisitionof OSI. Other income (expense), net for 2008 and 2007 included approximately$16.8 million of net losses and $2.2 million of net gains, respectively,resulting from the settlement of certain foreign exchange contracts.

 

***Incometax (benefit) expense.*** For 2008, the effective income tax rate decreased to 16.8 percent from35.7 percent for 2007, due to losses in the domestic ARM, CRM and PortfolioManagement businesses combined with income from certain foreign businesses,which are not subject to income tax, and less income attributable to noncontrollinginterests.

 

**Liquidityand Capital Resources**

 

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

 

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

 

The capital and credit markets have experiencedsignificant volatility in the recent past and if this continues, it is possiblethat our ability to access the capital and credit markets may be limited.Currently, our senior notes and senior subordinated notes are assigned ratingsby certain rating agencies. Changes in our business environment, operatingresults, cash flows, or financial position could impact the ratings assigned bythese rating agencies. Such significant volatility could also significantlyaffect the costs of borrowing, which could have a material impact on ourfinancial condition and results of operations. We are currently in compliancewith all of our debt covenants, but the future impact on the Company’soperations and financial projections from the challenging economic and businessenvironment may impact our ability to meet our debt covenants in the future.

 

At this time, we believe that we will be able tofinance our current operations, planned capital expenditure requirements,internal growth and debt service obligations, at least through the next twelvemonths, with the funds generated from our operations, with our existing cashand available borrowings under our Credit Facility (as defined below).Additionally, we may obtain cash through additional equity and debt offerings,if needed.

 

We have a senior credit facility, referred to as theCredit Facility, that consists of a term loan ($549.3 million outstanding as ofDecember 31, 2009) and a $100.0 million revolving credit facility ($17.0million outstanding as of December 31, 2009). Additionally, we have $165.0million of floating rate senior notes and $200.0 million 11.875 percent seniorsubordinated notes. The Credit Facility contains certain financial and othercovenants, the most restrictive of which are the maximum leverage ratio and theminimum interest coverage ratio. At December 31, 2009, our leverage ratiowas 4.59, compared to the maximum of 5.50, and our interest coverage ratio was2.30, compared to the minimum of 1.85.

 

Due to the expected impact of the economic environmenton our clients’ business, and the resulting expected impact of that on our 2010results, as well as financial covenant ratio adjustments required under theCredit Facility in 2010, we became uncertain of our ability to remain incompliance with the financial covenants through 2010. Therefore, on March 31,2010, we amended the Credit Facility to, among other things, adjust thefinancial covenants, including increasing maximum leverage ratios anddecreasing minimum interest coverage ratios. In 2010, our maximum leverageratio covenant is 5.75 and our minimum interest coverage ratio covenant is1.80. We believe we will be able to maintain compliance with such covenants in2010. Our ability to maintain compliance with our covenants will be highlydependent on our results of operations and, to the extent necessary, ourability to implement remedial measures such as further reductions in operatingcosts. If we were to enter into an agreement with our lenders for futurecovenant compliance relief, such relief could result in additional fees andhigher interest expense.

 

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Our Credit Facility permits us to repurchase oursenior notes and senior subordinated notes out of the net cash proceeds of newequity issuances. We are aware that our senior notes and senior subordinatednotes are currently trading at a substantial discount to their face amounts. Weor our stockholders may from time to time seek to retire or purchase ouroutstanding notes through cash purchases and/or exchanges for equitysecurities, in open market purchases, privately negotiated transactions orotherwise. Our stockholders who acquire such notes may seek to contribute themto us, for retirement, in exchange for the issuance of additionalequity. The amounts involved may be material.

 

On March 25, 2009, we privately placed 148,463.6shares of our Series B-1 Preferred Stock and 19,957.4 shares of our Series B-2Preferred Stock to One Equity Partners, Michael J. Barrist and certain membersof executive management, and other co-investors for an aggregate purchase priceof $40.0 million. 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.

 

In February 2009, we issued 7,400 shares of Series APreferred Stock to JPM as additional consideration for the acquisition of SST(see Note 4 to our Notes to Consolidated Financial Statements includedelsewhere in this Report).

 

The exclusivity agreement to our nonrecourse creditfacility expired on June 30, 2009. As a result, we are no longer requiredto offer all purchases with a purchase price in excess of $1.0 million to thenonrecourse lender for financing. The borrowings outstanding under thenonrecourse credit facility were not affected and remain subject to the termsdiscussed below.

 

Given the decline in liquidation rates, competitionfor purchased accounts receivable and the continued uncertainty of collectibility,we significantly reduced our purchases of accounts in 2009. We currently expectto limit our purchases in 2010 to certain of our non-cancelable forward flowcommitments. Additionally, we may opportunistically purchase accountsreceivable that allow us to leverage meaningful third-party servicingcontracts.  Our amended Credit Facility limitspurchases in 2010 to $20 million and purchases in 2011 and beyond to $10 million.

 

***Cash Flows fromOperating Activities.***  Cash provided by operatingactivities was $98.5 million in 2009, compared to $93.7 million in 2008. Theincrease in cash provided by operating activities was primarily attributable toa decrease in accounts receivable, trade of $43.9 million for 2009, compared toa decrease of $11.8 million in the prior year, resulting from the collection ofa large outstanding receivable balance during 2009, offset partially bydecreases in accounts payable and accrued expenses and income taxes payable.

 

Cash provided by operating activities was $93.7million in 2008, compared to $44.0 million in 2007. The increase in cashprovided by operating activities was primarily attributable to the operatingactivities of OSI, which was acquired on February 29, 2008, and a decreasein accounts receivable, trade of $11.8 million for 2008, compared to anincrease of $28.6 million in the prior year, resulting from the collection of alarge outstanding receivable balance during 2008. These increases were partiallyoffset by a decrease in accounts payable and accrued expenses of $23.2 millionfor 2008, compared to an increase of $3.4 million in the prior year.

 

***Cash Flows fromInvesting Activities.***  Cash provided by investingactivities was $16.7 million in 2009 compared to cash used in investingactivities of $424.2 million in 2008. The change in investing activities wasprimarily attributable to cash paid for acquisitions and acquisition-relatedcosts of $349.4 million in 2008 primarily incurred in connection with theacquisition of OSI on February 29, 2008, as well as lower purchases ofaccounts receivable in 2009 and $20.0 million of cash received from the sale ofour print and mail business in 2009.

 

Cash used in investing activities was $424.2 millionin 2008, compared to $32.7 million in 2007. The increase in cash used ininvesting activities was primarily attributable to cash paid for acquisitionsand acquisition-related costs of $349.4 million in 2008 primarily incurred inconnection with the acquisition of OSI on February 29, 2008.

 

***Cash Flows fromFinancing Activities.***  Cash used in financingactivities was $107.2 million in 2009, compared to cash provided by financingactivities of $332.2 million in 2008. The change in financing activitiesresulted from the additional borrowings of $139.0 million under our CreditFacility and the issuance of $210.0 million of stock, both of which were usedprimarily to fund the OSI acquisition in 2008. Also contributing to the changewas a total of $103.8 million of net repayments of borrowings under the CreditFacility in 2009, compared to total net borrowings of $23.8 million in 2008.During 2008, we paid $17.5 million to JPM in connection with the acquisition ofSST, which was deemed to be a cash dividend for accounting purposes.

 

Cash provided by financing activities was $332.2million in 2008, compared to cash used in financing activities of $2.9 millionin 2007. The change in financing activities resulted from the additionalborrowings of $139.0 million under 

 

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our Credit Facility and the issuance of $210.0 millionof stock, both of which were used primarily to fund the OSI acquisition. During2008, we paid $17.5 million to JPM in connection with the acquisition of SST,which was deemed to be a cash dividend for accounting purposes.

 

***Senior Credit Facility.***  Our CreditFacility is with a syndicate of financial institutions and consists of a termloan ($549.3 million outstanding at December 31, 2009) and a $100.0million revolving credit facility. The availability of the revolving creditfacility is reduced by any unused letters of credit ($11.8 million at December 31,2009). As of December 31, 2009, we had $71.2 million of remainingavailability under 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, disposition of assets, liens and dividends andother distributions. If an event of default, such as failure to comply withcovenants or a change of control, and the failure to negotiate and obtain anyrequired relief from our lenders, were to occur under the Credit Facility, thelenders would be entitled to declare all amounts outstanding under itimmediately due and payable and foreclose on the pledged assets. Under thesecircumstances, the acceleration of our debt could have a material adverseeffect on our business. Notwithstanding the foregoing, we may from time to timeseek to amend our existing Credit Facility or obtain other funding oradditional financing, which may result in additional fees and higher interestrates. Amending our Credit Facility or obtaining other funding or additionalfinancing prior to the expiration of the current agreement will be essential asthe remaining outstanding balance under the term loan will be due upon theexpiration of the Credit Facility in May 2013. At December 31, 2009,our leverage ratio was 4.59, compared to the maximum of 5.50, and our interestcoverage ratio was 2.30, compared to the minimum of 1.85. We were in compliancewith all required financial covenants and we were not aware of any events ofdefault as of December 31, 2009.

 

Due to the expected impact of the economic environmenton our clients’ business, and the resulting expected impact of that on our 2010results, as well as financial covenant ratio adjustments required under theCredit Facility in 2010, we became uncertain of our ability to remain in compliancewith the financial covenants through 2010. Therefore, on March 31, 2010,we amended the Credit Facility to, among other things, adjust the financialcovenants, including increasing maximum leverage ratios and decreasing minimuminterest coverage ratios, and adjust the required principal prepayments. 

 

In 2010, our amended Credit Facility requires amaximum leverage ratio of 5.75 and a minimum interest coverage ratio of 1.80.We believe that over the next 12 months we will continue to maintain our compliancewith these covenants. Our ability to maintain compliance with our covenantswill be highly dependent on our results of operations and, to the extentnecessary, our ability to implement remedial measures such as furtherreductions in operating costs. If we were to enter into an agreement with ourlenders for future covenant compliance relief, such relief could result inadditional fees and higher interest expense.

 

The amended Credit Facility requires quarterlyprincipal repayments of $1.5 million on the term loan until its maturity in May2013, at which time its remaining balance outstanding is due. The revolvingcredit facility requires no minimum principal payments until its maturity inNovember 2011. The amended Credit Facility also requires quarterly prepaymentsof 75 percent of the excess cash flow from our purchased accounts receivable,as well as annual prepayments of 75 percent or 50 percent of our excess annualcash flow, based on our leverage ratio, less the amounts paid during the yearfrom the purchased accounts receivable excess cash flow prepayments. 

 

***Senior Notes and Senior Subordinated Notes.*** We have $165.0 million of floating ratesenior notes due 2013 (“Senior Notes”) and $200.0 million of 11.875 percentsenior subordinated notes due 2014 (“Senior Subordinated Notes”) (collectively,“the Notes”). The Notes are guaranteed, jointly and severally, on a seniorbasis with respect to the Senior Notes and on a senior subordinated basis withrespect to the Senior Subordinated Notes, in each case by all of our existingand future domestic restricted subsidiaries (other than certain subsidiariesand joint ventures engaged in financing the purchase of delinquent accountsreceivable portfolios and certain immaterial subsidiaries).

 

The Senior Notesare unsecured senior obligations and are senior in right of payment to allexisting and future senior subordinated indebtedness, including the SeniorSubordinated Notes, and all future subordinated indebtedness. The Senior Notesbear interest at an annual rate equal to the London Interbank Offered Rate,referred to as LIBOR, plus 4.875 percent, reset quarterly. We may redeem theSenior Notes, in whole or in part, at varying redemption prices depending onthe redemption date, plus accrued and unpaid interest.

 

The SeniorSubordinated Notes are unsecured senior subordinated obligations and aresubordinated in right of payment to all existing and future seniorindebtedness, including the Senior Notes and borrowings under the CreditFacility. We may redeem the Senior Subordinated Notes, in whole or in part, atany time on or after November 15, 2010 at varying redemption pricesdepending on the redemption date, plus accrued and unpaid interest. We also mayredeem some or all of the Senior Subordinated Notes at any time prior to November 15,2010, at 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 indenturesgoverning the Notes contain a number of covenants that limit our and ourrestricted 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 stock of restricted subsidiaries, guarantee indebtedness, sell orexchange assets, enter into transactions with affiliates, create certain liens,engage in unrelated businesses, and consolidate, merge or transfer all orsubstantially all of our assets and the assets of our subsidiaries on aconsolidated basis. In addition, upon a change of control, we are required tooffer to repurchase all of the Notes then outstanding, at a purchase priceequal to 101 percent of their principal amount, plus any accrued interest tothe date of repurchase.

 

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Upon certainevents of default, the trustee or the holders of at least 25 percent in theaggregate principal amount of the notes, then outstanding, may, and the trusteeat the request of the holders will, declare the principal of, premium, if any,and accrued interest on the notes to be immediately due and payable. In theevent a court enters a decree or order for relief against us in an involuntarycase under 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.

 

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

 

Borrowings underthis relationship are nonrecourse to us, except for the assets within theentities established in connection with the financing agreement. Thenonrecourse debt agreements contain a collections performance requirement,among other covenants, that, if not met, provides for cross-collateralizationwith any other portfolios financed by the nonrecourse lender, in addition toother remedies.

 

The totalnonrecourse debt outstanding was $14.3 million and $37.2 million as of December 31,2009 and 2008, respectively, which included $2.1 million and $3.7 million,respectively, of accrued residual interest. The effective interest rate onthese loans, including the residual interest component, was approximately 12.8percent and 10.0 percent for the years ended December 31, 2009 and 2008,respectively. The nonrecourse debt agreements contain certain covenants such asmeeting minimum cumulative collection targets. As of December 31, 2009, wewere in compliance with all required covenants.

 

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***Contractual Obligations.***  The followingsummarizes our contractual obligations as of December 31, 2009 (amounts inthousands). For a detailed discussion of these contractual obligations, seenotes 12, 13 and 19 in our Notes to Consolidated Financial Statements.

 
| ** **                      | ** ** | **Payments Due by Period(1)** | ** ** |
|---------------------------------|------------|----------------------------------------------|------------|
| ** **                      | ** ** | **Total**                                    | ** ** | **Less than  1 Year** | ** ** | **1 to 3  Years** | ** ** | **3 to 5  Years** | ** ** | **More than  5 Years** | ** ** |
|                            |       |                                         |       |   |   |   |   |   |   |   |   |
| Credit  Facility                |       | $                                            | 566,260    |   | $ | 29,334 |   | $ | 29,108 |   | $ | 507,818 |   | $ | — |   |
| Notes                           |       | 365,000                                      |       | — |   | — |   | 365,000 |   | — |   |
| Nonrecourse  credit facility    |       | 14,322                                       |       | 10,898 |   | 3,424 |   | — |   | — |   |
| Capital  leases                 |       | 4,789                                        |       | 496 |   | 903 |   | 989 |   | 2,401 |   |
| Other  long-term debt           |       | 1,159                                        |       | 971 |   | 161 |   | 27 |   | — |   |
| Estimated  interest payments(2) |       | 304,545                                      |       | 85,714 |   | 150,461 |   | 68,370 |   | — |   |
| Operating  leases(3)            |       | 181,607                                      |       | 49,557 |   | 73,243 |   | 41,260 |   | 17,547 |   |
| Purchase  commitments           |       | 50,609                                       |       | 29,562 |   | 21,047 |   | — |   | — |   |
| Forward-flow  agreements        |       | 10,352                                       |       | 10,352 |   | — |   | — |   | — |   |
|                            |       |                                         |       |   |   |   |   |   |   |   |   |
| Total  contractual obligations  |       | $                                            | 1,498,643  |   | $ | 216,884 |   | $ | 278,347 |   | $ | 983,464 |   | $ | 19,948 |   |

 

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(1)  Does not includedeferred income taxes since the timing of payment is not certain (see note 14in our Notes to Consolidated Financial Statements). Payments of debt assume noprepayments.

(2)  Representsestimated future interest expense based on applicable rates, including minimumrates as defined in our amended senior credit facility.

(3)  Does not includethe leases from our former Fort Washington locations (see note 19 in our Notesto Consolidated Financial Statements).

 

Because their future cashoutflows are uncertain, noncurrent liabilities for income tax contingencies areexcluded from the table above. As discussed in Note 2 in our Notes toConsolidated Financial Statements, we adopted the provisions of theauthoritative guidance for accounting for uncertainty in income taxes on January 1,2007. At December 31, 2009, we had approximately $4.9 million in reservesfor uncertain tax positions and an accrual for related interest expense of $4.5million. Currently, we do not estimate a cash settlement with the applicabletaxing authority will occur within 12 months for the majority of theseunrecognized tax benefits.

 

**Off-BalanceSheet Arrangements**

 

We do not have any off-balance sheet arrangements as defined byRegulation S-K 303(a)(4) of the Securities Exchange Act of 1934.

 

**MarketRisk**

 

We are exposed to various types of market risk in the normal course ofbusiness, including the impact of interest rate changes, foreign currencyexchange rate fluctuations, changes in corporate tax rates, and inflation. Weemploy risk management strategies that may include the use of derivatives, suchas interest rate swap agreements, interest rate cap agreements, and foreigncurrency forwards and options to manage these exposures. We do not enter intoderivatives 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 Philippine operations, we currently use forward exchange contracts tolimit potential losses in earnings or cash flows from adverse foreign currencyexchange rate movements. These contracts are entered into to protect againstthe risk that the eventual cash flows resulting from such contracts will beadversely affected by changes in exchange rates. Our objective is to maintaineconomically balanced currency risk management strategies that provide adequatedownside protection.

 

***Interest Rate Risk.***** **At December 31, 2009, we had $745.6 million in outstanding variablerate borrowings. A material change in interest rates could adversely affect ouroperating results and cash flows. A 25 basis-point increase in interest ratescould increase our annual interest expense by $125,000 for each $50 million ofvariable debt outstanding for the entire year. Currently, we primarily useinterest rate swap agreements to limit potential losses from adverse interestrate changes. Our interest rate swap agreements minimize the impact of LIBORfluctuations on the interest payments on our floating rate debt. We arerequired to pay the counterparties quarterly interest payments at a weightedaverage fixed rate, and we receive from the counterparties variable quarterlyinterest 

 

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paymentsbased on LIBOR.

 

**Impact ofRecently Issued and Proposed Accounting Guidance**

 

In June 2009, the FASB issuedauthoritative guidance for transfers of financial assets. This guidance removesthe concept of qualifying special-purpose entities and eliminates the exceptionfrom applying guidance related to consolidating of variable interest entitiesto qualifying special-purpose entities. This guidance requires additionaldisclosures in order to provide greater transparency about transfers offinancial assets and a transferor’s continuing involvement with transferredfinancial assets. This guidance is effective for us on January 1, 2010. Weare currently reviewing the guidance to assess the impact of adoption.

 

In June 2009, the FASB issuedamended guidance for consolidation of variable interest entities. This guidanceamends previous guidance to require companies to perform an analysis todetermine if their variable interest gives them a controlling financialinterest in the variable interest entity, and requires ongoing reassessments ofwho is the primary beneficiary of a variable interest entity. This guidancealso requires enhanced disclosures of information about involvement in avariable interest entity. This guidance is effective for us on January 1,2010. We are currently reviewing the guidance to assess the impact of adoption.

 

In October 2009, the FASBissued amended guidance for revenue recognition related to multiple-deliverablerevenue arrangements. This guidance, among other things, creates a hierarchyfor determining the selling price of a deliverable, which will now include anestimated selling price if neither vendor-specific objective evidence northird-party evidence exist. This may result in more instances of separatingconsideration in multiple-deliverable arrangements. Disclosures related tomultiple-deliverable revenue arrangements have also been expanded. Thisguidance is effective for us for revenue arrangements entered into ormaterially modified on or after January 1, 2011, with early adoptionpermitted. We are currently reviewing the guidance to assess the impact ofadoption.

 

**Item 7A.****                ****Quantitative andQualitative Disclosures about Market Risk**

 

Disclosure regarding this item isincluded in Item 6, Management’s Discussion and Analysis of Financial Conditionand Results of Operations, under the heading of “Market Risk,” of this Reporton Form 10-K and note 16 in our Notes to Consolidated Financial Statementsincluded elsewhere in this Report on Form 10-K.

 

**Item 8.****                   ****Financial Statements andSupplementary Data**

 

The financialstatements, financial statement schedules and related documents that are filedwith this Report are listed in Item 15 of this Report on Form 10-K andbegin on page F-1.

 

**Item 9.****                   ****Changes in andDisagreements with Accountants on Accounting and Financial Disclosure**

 

None

 

**Item 9A(T).****          ****Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

Our management,with the participation of our chief executive officer and chief financialofficer, conducted an evaluation of the effectiveness of our disclosurecontrols and procedures, as defined in Exchange Act Rules 13a-15(e) and15d-15(e), as of December 31, 2009. Based on that evaluation, our chiefexecutive officer and chief financial officer concluded that, as of the end ofthe period covered by this Report, our disclosure controls and procedures wereeffective as of December 31, 2009, in reaching a reasonable level ofassurance that (i) information required to be disclosed by the Company inthe reports that it files or submits under the Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms and (ii) information required to bedisclosed by the Company in the reports that it files or submits under the Actis accumulated and communicated to the Company’s management, including itsprincipal executive and principal financial officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding requireddisclosure.

 

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**Changesto Internal Control over Financial Reporting During the Quarter Ended December 31,2009**

 

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

 

**Management’sAnnual Report on Internal Control over Financial Reporting**

 

Management of NCOGroup, Inc. is responsible for establishing and maintaining adequateinternal control over financial reporting, as such term is defined in ExchangeAct Rule 15d-15(f).

 

Our management,with the participation of our chief executive officer and chief financialofficer, conducted an assessment as of December 31, 2009, of theeffectiveness of the Company’s internal control over financial reporting, usingthe framework established in Internal Control — Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO).Based on this assessment, our management concluded that, as of December 31,2009, the Company’s internal control over financial reporting was effective toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles.

 

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 or will be detected. Because of the inherentlimitations in a cost-effective control system, misstatements due to error orfraud may occur and not be detected.

 

This report on Form 10-Kdoes not include an attestation report of the Company’s independent registeredpublic accounting firm regarding internal control over financial reporting.Management’s report was not subject to attestation by the Company’s independentregistered public accounting firm pursuant to temporary rules of theSecurities and Exchange Commission that permit the Company to provide onlymanagement’s report in this report on Form 10-K.

 

**InherentLimitations on Effectiveness of Controls**

 

A control system,no matter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Further,the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all controls systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within our company have been detected. Becauseof the inherent limitations in a cost-effective control system, misstatementsdue to error or fraud may occur and not be detected.

 

**Item 9B.****        ****Other Information**

 

**Entryinto a Material Definitive Agreement**

 

On March 31,2010, NCO Group, Inc. (the “Company”) entered into the Third Amendment tothe Credit Agreement by and among the Company, NCO Financial Systems, Inc.,certain guarantors under the Credit Agreement (defined below), Citizens Bank ofPennsylvania as the administrative agent, Citizens Bank of Pennsylvania as soleissuing bank and certain lenders (the “Third Amendment”). The Third Amendmentamended the Credit Agreement dated as of November 15, 2006 among theCompany, NCO Financial Systems, Inc., the subsidiary guarantors partythereto, Morgan Stanley & Co. Incorporated as collateral agent, MorganStanley Senior Funding, Inc. as administrative agent, and the other lendersparty thereto, as amended pursuant to the First Amendment to Credit Agreementdated as of February 8, 2008 and the Second Amendment to Credit Agreementdated as of March 25, 2009 (as amended, the “Credit Agreement”). The ThirdAmendment amends the Credit Agreement to, among other things: (i) adjustthe financial covenants, including increasing maximum leverage ratios anddecreasing minimum interest coverage ratios; (ii) require quarterlymandatory prepayments of term loan borrowings of 75 percent of the netportfolio collections (as defined in the Credit Agreement) from the Company’spurchased accounts receivable business for such fiscal quarter, subject todeduction for voluntary prepayments of term loan borrowings;(iii) increase the annual prepayments required to be made to an amountequal to 75 percent or 50 percent of the Company’s annual excess cash flow, asdefined in the Credit Agreement, based on its leverage ratio, less the amountspaid under the quarterly purchased accounts receivable excess cash flowprepayments and any voluntary prepayments; (iv) limit the Company’sinvestments in purchased accounts receivable to $20 million in 2010 and $10million in 2011 and each year thereafter; and (v) eliminate the ability touse available excess cash flow to repurchase the Company’s notes.  A copy of the Third Amendment is attached asexhibit 10.34 hereto and is incorporated herein by reference.

 

The lenders ortheir affiliates have in the past engaged, and may in the future engage, intransactions with and perform services, including commercial banking, financialadvisory and investment banking services, for the Company and its affiliates inthe ordinary course of business for which they have received or will receivecustomary fees and expenses. One Equity Partners, a significant stockholder ofthe Company, manages certain investments and commitments for JP Morgan Chase &Co., an affiliate of JPMorgan Chase Bank, N.A., in direct private equitytransactions. JPMorgan Chase Bank, N.A. is a lender under our Credit Agreement.One Equity Partners is managed by OEP Holding Corporation, a wholly-ownedindirect subsidiary of JPMorgan Chase & Co.

 

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**PART III**

 

**Item 10.****        ****Directors, Executive Officers and CorporateGovernance**

 

Set forth below isinformation concerning our directors and executive officers.

 
| **Name**                  | ** ** | **Age(1)** | ** ** | **Position**                                                                    |
|---------------------------|------------|------------|------------|---------------------------------------------------------------------------------|
| Michael J. Barrist        |       | 49         |       | Chairman of the  Board(2), President and Chief Executive Officer                |
|                      |       |       |       |                                                                            |
| Stephen W. Elliott        |       | 48         |       | Executive Vice  President, Information Technology and Chief Information Officer |
|                      |       |       |       |                                                                            |
| Joshua  Gindin, Esq. |       | 53         |       | Executive Vice  President and General Counsel                                   |
|                      |       |       |       |                                                                            |
| Steven Leckerman          |       | 57         |       | Executive Vice  President and Chief Operating Officer                           |
|                      |       |       |       |                                                                            |
| John R. Schwab            |       | 42         |       | Executive Vice  President, Finance, Chief Financial Officer and Treasurer       |
|                      |       |       |       |                                                                            |
| Albert Zezulinski         |       | 63         |       | Executive Vice  President, Marketing and Administrative Operations              |
|                      |       |       |       |                                                                            |
| Austin A. Adams           |       | 67         |       | Director(2)                                                                     |
|                      |       |       |       |                                                                            |
| Henry H. Briance          |       | 25         |       | Director(2)                                                                     |
|                      |       |       |       |                                                                            |
| Colin M. Farmer           |       | 36         |       | Director(2)                                                                     |
|                      |       |       |       |                                                                            |
| Edward A. Kangas          |       | 65         |       | Director(2)                                                                     |
|                      |       |       |       |                                                                            |
| Leo J. Pound              |       | 55         |       | Director(2)                                                                     |

 

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(1)  As of March 31,2010

(2)  Each Directorserves a term of one year and until his successor is duly elected and qualified

 

*MichaelJ. Barrist* — Mr. Barristhas served as our Chairman of the Board, President and Chief Executive Officersince purchasing the Company in 1986. Mr. Barrist was employed by U.S.Healthcare, Inc., a managed healthcare company, from 1984 to 1986, mostrecently as Vice President of Operations, and was employed by Gross &Company, a certified public accounting firm, from 1980 through 1984. Mr. Barristis a Certified Public Accountant. Mr. Barrist’s day to day leadership ofthe Company, as Chief Executive Officer, provides him with in-depth knowledgeof the Company’s operations. Mr. Barrist’s years of experience running theCompany provides the Board with an extensive understanding of the Company’shistory, challenges and operations, which adds valuable insight for Boarddecision making.

 

*StephenW. Elliott* — Mr. Elliottjoined us in 1996 as Senior Vice President, Technology and Chief InformationOfficer and became an Executive Vice President in February 1999. Prior tojoining us, Mr. Elliott was employed by Electronic Data Systems, acomputer services company, for almost 10 years, most recently as Senior AccountManager.

 

*JoshuaGindin, Esq.*— Mr. Gindin joined us in May 1998. Prior to joining us, Mr. Gindinwas a partner in the law firm of Kessler & Gindin, which had served asour legal counsel since 1986.

 

*StevenLeckerman* — Mr. Leckermanjoined us in 1995 as Senior Vice President, Collection Operations and sincethen has held various positions. In November 2008, Mr. Leckermanbecame Executive Vice President and Chief Operating Officer. From 1982 to 1995,Mr. Leckerman was a manager of dialer and special projects at Allied BondCorporation, a collection company that was a division of TransUnion Corporation.

 

*JohnR. Schwab* — Mr. Schwabjoined us as Senior Vice President, Finance and Chief Accounting Officer,through the acquisition of RMH Teleservices, Inc. in April 2004,where he was the Chief Financial Officer since 2003. In May 2006, Mr. Schwabbecame Executive Vice President, Finance, Chief Financial Officer and 

 

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Treasurer. From 2000 to2003, Mr. Schwab was employed by Inrange Technologies, Inc., a datastorage networking company, most recently as the Chief Financial Officer. Priorto that, Mr. Schwab worked for Arthur Andersen for 11 years.

 

*AlbertZezulinski* — Mr. Zezulinskijoined us in January 2001 as Executive Vice President, Health Services,became Executive Vice President, Corporate and Government Affairs in May 2002,and in September 2005 became Executive Vice President, Global PortfolioOperations. In November 2008, Mr. Zezulinski became Executive VicePresident, Marketing and Administrative Operations. Mr. Zezulinski hasmore than 30 years of consulting and healthcare experience. Prior to joiningus, Mr. Zezulinski was the Director of Healthcare Financial Services forBDO Seidman, LLP, an international accounting and consulting firm.

 

*AustinA. Adams* — Mr. Adams was the Corporate ChiefInformation Officer of JPMorgan Chase from July 2004, when JPMorgan Chasemerged with Bank One Corporation, until his retirement in October 2006.Prior to the merger, Mr. Adams was Executive Vice President and ChiefInformation Officer of Bank One. Prior to joining Bank One in 2001, Mr. Adamswas Chief Information Officer of First Union Corporation. Mr. Adams wasappointed to the Board of Directors in February 2007. Mr. Adams isalso a director of the Dun & Bradstreet Corporation and Spectra EnergyCorp. Mr. Adams has substantial experience with complex informationtechnology infrastructures, such as ours, and brings significant experience tothe Board having served as Chief Information Officer of several large financialservices companies, and director of large public corporations.

 

*HenryH. Briance* — Mr. Briance is a Vice President at OneEquity Partners, which he joined in September 2006. Mr. Briancereceived a BA in Classics from the University of Cambridge in 2005. Mr. Briancehas experience in investment banking and financial services, and serves as adirector of several private companies. He is familiar with highly complexcapital structures.

 

*ColinM. Farmer* — Mr. Farmer is a Managing Director of OneEquity Partners. Prior to joining One Equity Partners in October 2006, Mr. Farmerspent eight years at Harvest Partners, a middle-market private equity firm.Prior to that, Mr. Farmer worked at Robertson Stephens & Company.Mr. Farmer is a Trustee of the Princeton University Rowing Association. Mr. Farmeris also a director of X-Rite, Incorporated. Mr. Farmer has significantexperience as an executive of several private equity firms. He is familiar withand has designed highly complex capital structures. His experience with thefinancial markets has helped guide our capital structure decisions.  In addition Mr. Farmer serves as adirector of a number of companies.

 

*EdwardA. Kangas* — Mr. Kangas was Chairman and Chief ExecutiveOfficer of Deloitte Touche Tohmatsu from 1989 until his retirement in 2000. Mr. Kangasserved as Managing Partner of Deloitte & Touche (USA) from 1989 to1994 and Managing Partner and Chief Executive Officer of Touche Ross in from1985 to 1989. After his retirement, Mr. Kangas served as a consultant toDeloitte until 2004. Mr. Kangas was appointed to the Board of Directors inFebruary 2007. Mr. Kangas is also a director of Eclipsys Corporation,United Technologies Corporation, Hovnanian Enterprises, Inc., Intuit Inc.and Tenet Healthcare Corporation. Mr. Kangas was on the board ofElectronic Data Systems Corporation from 2004 to 2008. Mr. Kangas hassubstantial financial and accounting expertise and brings significantexperience to the Board having served as Chief Executive Officer of one of thelargest public accounting firms and director of many large public corporations.

 

*LeoJ. Pound* — Mr. Poundhas been a Principal of Pound Consulting, which provides management consultantservices to both public and private enterprises, since July 2000. From February 1999to July 2000, Mr. Pound was Chief Financial Officer of MarbleCrafters, a stone importer and fabricator. From October 1995 to February 1999,he was Chief Financial Officer of Jos. H. Stomel & Sons, a wholesaledistributor. Mr. Pound is a Certified Public Accountant and a member ofthe American and Pennsylvania Institutes of Certified Public Accountants. Mr. Pound was appointed to the Board ofDirectors in February 2007. He had previously served on the Board ofDirectors of NCO Group, Inc. from 2000 until the date of theCompany’s “going-private” transaction, referred to as the Transaction, in November 2006.Mr. Pound has extensive experience in financial and accounting matters, aswell as mergers and acquisitions, due diligence, management structure andbusiness and financial planning. He also has a long history with the Companywhich provides a helpful perspective for Board decision making. Mr. Poundqualifies as an audit committee financial expert due to his previous experiencein public accounting and as a Chief Financial Officer for several privatecompanies.

 

Effective March 9,2009, Mr. Richard M. Cashin, Jr. resigned from our Board of Directorsand Mr. Briance was appointed as director by the remaining members of ourBoard to fill the vacancy. Mr. Cashin was, and Mr. Briance is, arepresentative designee of One Equity Partners, referred to as OEP, under theStockholders’ Agreement described below. Effective March 22, 2010, Mr. Cohen,a representative designee of OEP, resigned from our Board of Directors. OEP hasnot yet designated a replacement director.

 

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**Stockholders’Agreement**

 

In connection withthe Transaction, on November 15, 2006, we and Michael J. Barrist, certainof Mr. Barrist’s family members and trusts formed for his or theirbenefit, our other executive officers and the other co-investors entered intostockholders’ agreements, including a stockholders agreement and a registrationrights agreement, collectively referred to as the Stockholders’ Agreements. TheStockholders’ Agreements contain agreements among the parties with respect todelivery of our periodic financial reports, confidentiality, restrictions oncertain issuances and transfers of shares, including rights of first offer,participation rights, tag-along rights and drag-along rights, registrationrights (including customary indemnification provisions) and limited call andput rights.

 

The Stockholders’Agreements further provide that our Board will consist of seven members, whichsubject to certain exceptions, will be determined as follows: Mr. Barristhas the right to be a member of our Board (including the compensation committeeand any other committee of the Board at Mr. Barrist’s election, subject tolegal limitations), and also has the right, so long as he is our chiefexecutive officer, to designate an independent member to our Board (who must bereasonably satisfactory to OEP). OEP has the right to designate three membersof our Board as representatives of OEP and to designate two additionalindependent members (who must be reasonably acceptable to Mr. Barrist).

 

OEP’srepresentative designees on our Board are Messrs. Briance and Farmer andindependent designees on our Board are Messrs. Adams and Kangas. Mr. Barrist’sindependent designee on our Board is Mr. Pound.

 

**Code of Ethics**

 

The Company hasadopted a Code of Ethics and Conduct that applies to all of its directors andemployees including, the Company’s principal executive officer, principalfinancial officer, principal accounting officer and all employees performingsimilar functions. The Company will provide a copy of the Code of Ethics andConduct without charge upon written request directed to: Joshua Gindin, Esq.,Corporate Secretary, NCO Group, Inc., 507 Prudential Road Horsham, Pennsylvania19044. The Company intends to satisfy the disclosure requirement under Item5.05 of Form 8-K regarding any future amendments to a provision of itsCode of Ethics and Conduct by posting such information on the Company’s websitewww.ncogroup.com.

 

The information onthe website listed above, is not and should not be considered part of thisAnnual Report on Form 10-K and is not incorporated by reference in thisdocument. This website is, and is only intended to be, an inactive textualreference.

 

**Audit Committee Financial Expert**

 

The Board ofDirectors of the Company has determined that Mr. Pound qualifies as an “auditcommittee financial expert” as that term is defined in SEC regulations.Although not formally considered by the Board given that the Company’ssecurities are not registered or traded on any national securities exchange,based upon the listing standards of The Nasdaq Stock Market, LLC, we believethat Mr. Pound is independent under such standards.

 

**Item 11.****                ****Executive Compensation**

 

**Compensation Discussion and Analysis**

 

**Objectives of Our CompensationProgram**

 

Our overallcompensation program with respect to our executive officers is designed toachieve the following objectives:

 

·      to provide compensation that will attract and retainsuperior executive talent;

·      to provide our executive officers with compensationthat reflects their overall experience, position with NCO and expectedcontributions to NCO;

·      to support the achievement of the goals contained inour annual budget by linking a portion of the executive officer’s compensationto the achievement of such goals;

·      to be competitive with compensation programs offeredby companies of a similar size within similar industries based on formal andinformal surveys conducted by us; and

 

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·      to offer to our executive officers an economicallyreasonable amount of appropriate benefits and perquisites comparable to thoseoffered by other companies of a similar size within similar industries.

 

**Elements of Executive Compensation**

 

The compensationpaid to our executive officers consists of the following elements:

 

·      base salary;

·      performance-based cash bonuses;

·      equity compensation;

·      severance benefits, death benefits andright to participate in a nonqualified deferred compensation plan;

·      other benefits, such as the use of anautomobile and, in the case of Mr. Barrist, the personal use of anairplane; and

·      benefits that are generally available toall full-time employees of our company, such as participation in group medical,disability and life insurance plans and a 401(k) plan.

 

These elements are discussed in greater detail below.

 

***Base Salary.*** Base salary is used to reward superior individualperformance of each executive officer on a day-to-day basis during the year,and to encourage them to perform at their highest levels. We also use our basesalary to attract and retain top quality executives and other managementemployees from other companies. Moreover, base salary and increases to basesalary recognize the overall experience, position and responsibilities withinNCO and expected contributions to NCO of each executive officer. Typically, theCompensation Committee will review and adjust base salaries on an annual basis.In connection with the closing of our “going-private” transaction, referred toas the Transaction, we entered into new employment agreements with each of ourexecutive officers. For a description of the material terms of such employmentagreements, see “—Employment Agreements.” Each employment agreement, amongother things, sets forth the executive’s minimum base salary (which shall at aminimum be upwardly adjusted each year in accordance with the Consumer PriceIndex (“CPI”)). Given that the compensation of each of our executive officershad been renegotiated in connection with the Transaction, we did not engage theservices of a compensation consultant with respect to, or otherwise undertakean extensive reassessment of, executive compensation for 2007 or 2008. In March 2009,the Compensation Committee increased Mr. Leckerman’s annual base salary to$700,000 in light of the additional responsibilities he had assumed in 2008,and increased Mr. Schwab’s annual base salary to  $400,000 so that Mr. Schwab wascompensated at a level that the Compensation Committee believed was comparableto that of chief financial officers of similarly situated companies. TheCompensation Committee determined that the annual base salaries of our otherexecutive officers would not be increased for 2009, other than for a CPIadjustment. In March 2010, the Compensation Committee determined that theannual base salaries of our executive officers would not be increased for 2010.Additionally, our executive officers did not receive the annual CPI upwardadjustment in 2010 because the change in CPI was negative. Under theiremployment agreements, Messrs. Barrist, Schwab, Elliott, Gindin andLeckerman are entitled to receive annual base salaries for 2010 of $811,750,$400,000, $397,171, $397,171 and $700,000, respectively. Information concerningbase salaries paid to these executive officers in 2009 is set forth in “—SummaryCompensation—2009 Summary Compensation Table.”

 

***Management Incentive Compensation.*** We believe that a significant portion ofthe total potential compensation of our executive officers should depend uponthe degree of our financial success in a particular year.  Management incentive compensation is used toreward our executives upon the achievement of certain goals contained in ourannual operating plan. Under the employment agreements that we entered intowith each of our executive officers, each executive is entitled to earn cashincentive compensation of from 75 percent to 100 percent of his base salarybased on the achievement of the Company’s annual operating plan.

 

Each year theCompensation Committee sets performance-based targets based on our annual operatingplan that must be met in order for the executive officers to earn an annualbonus. For 2009, 50 percent of the bonus was based on achieving targets for NCO’searnings before interest, taxes, depreciation and amortization, referred to asEBITDA, and 50 percent was based on senior debt repayment targets. The targetsset by the Compensation Committee included a range of performance levels thatgave the executive officers the potential to earn from zero percent to 150percent of the cash incentive compensation specified in their respectiveemployment agreements.  For example, ifNCO achieved EBITDA of $218 million for 2009 and repaid $31 million of seniordebt during 2009, the executive officers would have received 100 percent oftheir cash incentive compensation specified in their respective employmentagreements.

 

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The CompensationCommittee may, in determining the annual bonus amount, take into considerationother extenuating circumstances not within the control of the Company that mayhave occurred during the year that impacted the annual operating plan thusrendering the performance-based targets unattainable.

 

In March 2009,the Compensation Committee determined that the goals for 2008 had not beenachieved and did not award any bonuses under the employment agreements. In March 2010,the Compensation Committee determined that the EBITDA targets for 2009 were notachieved but the debt repayment targets were achieved, and awarded 50 percentof the bonus potential to the executive officers. The Compensation Committeehas not yet determined the incentive compensation performance-based targets for2010.

 

See “—SummaryCompensation—2009 Summary Compensation Table” for the actual amounts paid outto the Named Executive Officers for 2009, 2008 and 2007. References to our “NamedExecutive Officers” means all of the executive officers named in the “2009Summary Compensation Table.” Amounts paid under the management incentiveprogram are reported in the “Non-Equity Incentive Plan Compensation” column.

 

For 2010, Messrs. Barrist’s,Schwab’s, Elliott’s, Gindin’s and Leckerman’s maximum bonus potential as apercentage of each individual’s base salary is equal to 100 percent, 75percent, 75 percent, 75 percent and 100 percent, respectively.

 

***Equity Compensation.*** We have a Restricted Share Plan which authorizesgrants of restricted shares of our Class A common stock to our officers,key employees and directors. The total number of restricted shares authorizedfor issuance under the Restricted Share Plan is 336,666.7 shares. Each share ofrestricted stock issued pursuant to the Restricted Share Plan, regardless ofwhether the restriction period with regard to such share has lapsed, is subjectto the transfer restrictions, repurchase rights and other restrictions pursuantto the terms of a Stockholders’ Agreement. The purpose of the restricted shareplan awards is to align managements’ objectives with those of the stockholders.The number of shares awarded to management is based on recommendations made by Mr. Barristand approved by the Compensation Committee. There were no restricted shareawards granted to our executive officers during 2009. Generally, the RestrictedShare Plan states that the Compensation Committee of our Board will determine,in the terms of the applicable award agreement, the time or times when and themanner and condition in which each award will vest. The shares of restrictedstock that have been granted under the Restricted Share Plan to our executiveofficers vest in 25 percent increments upon each anniversary of the date ofgrant, each, referred to as an annual vesting date, provided that the recipientremains employed by us. In addition, if a recipient’s employment is terminatedby us without Cause (as defined in the Restricted Share Plan) or if a recipientterminates his employment with us for Good Reason (as defined in the RestrictedShare Plan) within three months immediately preceding an annual vesting date,such award will immediately vest with respect to the 25 percent of the thenunvested shares that would have vested had such recipient remained employedthrough the annual vesting date. In addition, each restricted share award willimmediately vest in full in the event a Change in Control or Public Offering(each as defined in the Restricted Share Plan) occurs, subject to certainresale restrictions if vesting occurs as a result of a Public Offering.  For a description of additional terminationor change in control provisions in the Restricted Share Plan, see “ — PotentialPayments Upon Termination of Employment or Change in Control.”

 

In the future, theCompensation Committee, on a discretionary basis, may elect to award ourexecutive officers restricted stock under the Restricted Share Plan, althoughthere is no obligation for us to do so and we do not expect any such awards tobe material.

 

As a condition tothe grant of an award under our Restricted Share Plan, the recipient isrequired to make an election to include in the recipient’s current year incomethe fair market value, as of the date of grant, of the restricted sharespursuant to Internal Revenue Code Section 83(b). We pay the recipient anamount equal to the income taxes that the recipient incurs as a result ofmaking the 83(b) election, as well as any additional taxes imposed as aresult of the payment, referred to as a “gross-up.” These amounts are includedin “All Other Compensation” column in the “—Summary Compensation—2009 SummaryCompensation Table.”

 

***Severance Benefits.*** Each Named Executive Officer’s employment agreementcontains termination provisions that provide each respective executive officerwith severance payments if their respective employment is terminated inspecified circumstances. See “—Potential Payments Upon Termination ofEmployment or Change in Control—Termination or Change in Control Provisions inEmployment Agreements.”

 

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***Death Benefits.*** We provide beneficiaries of designated participantswith a death benefit in the event of the participant’s death while employed byus. The benefit provides each participant, as long as such participant isemployed with the Company, with a fixed dollar term life insurance policy forthe beneficiaries of such participant’s choice. Executive participants areselected by the Board, and each of our Named Executive Officers is aparticipant. Under this benefit, beneficiaries of Messrs. Barrist, Schwab,Elliott, Gindin and Leckerman would be entitled to receive a lump sum paymentof $4,500,000, $2,000,000, $2,000,000, $2,000,000 and $4,000,000, respectively.The Company previously had an Executive Salary Continuation Plan, which in 2009was replaced by the death benefit described above. See “—Potential PaymentsUpon Termination of Employment or Change in Control—Death Benefits.”

 

***401(k) Plan Matching Contributions.*** We match, in cash, 25 percent of thefirst 6 percent of the contributions to our 401(k) plan that eachemployee, including each Named Executive Officer, makes during the year. Foreach eligible employee, their contributions are limited to the 15 percent ofsuch employee’s income on a pre-tax basis, subject to limitations under Section 401(k) ofthe Internal Revenue Code of 1986, as amended, referred to as the Code. Weprovide these matching contributions to all of our employees, including NamedExecutive Officers, who participate in the 401(k) plan, to encourage themto systematically save for retirement.

 

***Deferred Compensation Plan.*** We maintain a non-qualified deferredcompensation plan that allows eligible employees, including executive officers,to defer compensation in excess of the amounts that the employee can deferunder our 401(k) plan because of limits under the Code on the amount ofcompensation that can be deferred. In addition, in our absolute and solediscretion, we may make a contribution that will be allocated amongparticipants in proportion to their deferrals for such year. For moreinformation, see “—Nonqualified Deferred Compensation.”

 

***Perquisites, Personal Benefits and Other Compensation.*** Each of our Named Executive Officersreceives a limited amount of perquisites and other personal benefits that wepay on their behalf or for which we provide reimbursement. We provide our NamedExecutive Officers the use of an automobile leased by us at prices ranging from$1,250 to $2,300 per month or a monthly cash allowance for an equivalentamount. Mr. Barrist’s compensation also includes the use by Mr. Barristof an aggregate of 150 hours on an airplane that is partly owned by NCO forboth business and personal use, as determined by Mr. Barrist in hisdiscretion. We believe providing our Named Executive Officers with thesebenefits is justified because our Named Executive Officers contributesubstantially to our financial and operating performance and to the growth anddevelopment of our business. The perquisites and other personal benefitsprovided to our Named Executive Officers are disclosed below in the “All OtherCompensation” column in “—Summary Compensation—2009 Summary Compensation Table.”

 

**Processes and Procedures for theDetermination of Executive Officer Compensation**

 

***Meetings of the Compensation Committee.*** The Compensation Committee meets atleast annually and more frequently as circumstances require, and it alsoconsiders and takes action by written consent. The Compensation Committeereports on committee actions and recommendations at Board meetings.

 

***Scope of Authority of the Compensation Committee.*** The scope of the Compensation Committee’sauthority and responsibilities is set forth in its charter. The CompensationCommittee’s authority includes the authority to:

 

·      Review and approve annually our goals andobjectives relevant to the compensation of the executive officers and evaluateannually the performance of the executive officers in light of those goals andobjectives, and consistent with the requirements of any employment agreement,determine the compensation of the executive officers based on this evaluation;

·      Review annually and make recommendationsto our Board concerning the following with respect to our executive officers:employment agreements, severance agreements, change in controlagreements/provisions and other compensatory arrangements, in each case as,when and if appropriate, and any special or supplemental benefits, in each casesubject to the terms of any existing applicable employment agreement terms;

·      Review and approve new hire and promotioncompensation arrangements for executive officers; and

·      Review and recommend to our Boardincentive compensation plans, long-term compensation plans, equity-based plansand deferred compensation plans for executive officers, including anymodification to such plans, and oversee the performance objectives and fundingfor such plans and, to the extent permitted under such plans, implement andadminister such plans.

 

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***Delegation of Authority.*** As provided under the Compensation Committee’scharter, the Compensation Committee may delegate its authority to specialsubcommittees of the Compensation Committee as the Compensation Committee deemsappropriate, consistent with applicable law. To date, the CompensationCommittee has not delegated its responsibilities.

 

***Role of Management in Determining or Recommending ExecutiveCompensation.***Mr. Barrist makes recommendations concerning the amount of compensation tobe awarded to our executive officers, including himself, but does notparticipate in the Compensation Committee’s deliberations or decisions.

 

***Role of Compensation Consultants in Determining orRecommending Executive Compensation.*** Under its charter, the Compensation Committee hasauthority to retain, at our expense, such counsel, consultants, experts andother professionals as it deems necessary. The Compensation Committee has notused consultants in the past, and there are currently no plans to engageconsultants in the future.

 

**Compensation Committee Report**

 

The CompensationCommittee has reviewed and discussed the Compensation Discussion and Analysissection appearing above with our management. Based on this review and thesediscussions, the Compensation Committee recommended to our Board of Directorsthat the Compensation Discussion and Analysis be included in our Annual Reporton Form 10-K for 2009.

 

Membersof the Compensation Committee

 

AustinA. Adams

ColinM. Farmer

EdwardA. Kangas

 

*Theinformation contained in this Compensation Committee Report is not “solicitingmaterial” and has not been “filed” with the Securities and ExchangeCommission.  This Compensation Committee Reportwill not be incorporated by reference into any of our future filings under theSecurities Act of 1933 or the Securities Exchange Act of 1934, except to theextent that we may specifically incorporate it by reference into a futurefiling.*

 

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**Summary Compensation**

 

The following table setsforth the compensation earned during 2009, 2008 and 2007 by our Chief ExecutiveOfficer, our Chief Financial Officer, and our three other most highlycompensated executive officers who were serving as executive officers at theend of 2009. We refer to these individuals collectively as our “Named ExecutiveOfficers.”

 

**2009 Summary Compensation Table**

 
| ** **                                                                                          | ** ** | ** **       | ** ** | ** **                | ** ** | ** **             | ** ** | ** **              | ** ** | **Non-Equity**           | ** ** | ** **             | ** ** | ** **                | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------|------------|---------------------------|------------|------------------------|------------|-------------------------|------------|--------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                                                                                          | ** ** | ** **       | ** ** | ** **                | ** ** | ** **             | ** ** | **Stock**               | ** ** | **Incentive Plan**  | ** ** | **All Other**     | ** ** | ** **                | ** ** |
| **Name and Principal**                                                                    | ** ** | ** **       | ** ** | **Salary**                | ** ** | **Bonus(1)**           | ** ** | **Awards(2)**           | ** ** | **Compensation(3)**      | ** ** | **Compensation(4)**    | ** ** | **Total**                 | ** ** |
| **Position**                                                                                        | ** ** | **Year**         | ** ** | **($)**                   | ** ** | **($)**                | ** ** | **($)**                 | ** ** | **($)**                  | ** ** | **($)**                | ** ** | **($)**                   | ** ** |
| Michael J.  Barrist

President and Chief  Executive Officer                                         |       | 2009             |       | 810,926                   |       | —                 |       | —                  |       | 405,875                  |       | 540,411                |       | 1,757,212                 |       |
|                                                                                                | 2008       |             | 784,592    |                      | —     |                   | 208,031    |                    | —     |                     | 768,018    |                   | 1,760,641  |                      |
|                                                                                                | 2007       |             | 767,838    |                      | —     |                   | —     |                    | 768,084    |                     | 518,342    |                   | 2,054,264  |                      |
|                                                                                                |       |             |       |                      |       |                   |       |                    |       |                     |       |                   |       |                      |       |
| John R. Schwab

Executive Vice  President, Finance, Chief Financial Officer and Treasurer           |       | 2009

2008

2007 |       | 390,515

344,933

337,741 |       | —

—

75,000 |       | —

118,378

44,431 |       | 150,000

—

253,256 |       | 24,532

95,212

18,643 |       | 565,047

558,523

729,071 |       |
|                                                                                                |       |             |       |                      |       |                   |       |                    |       |                     |       |                   |       |                      |       |
| Stephen W. Elliott

Executive Vice  President, Information Technology and Chief Information Officer |       | 2009

2008

2007 |       | 396,768

383,883

382,354 |       | —

—

53,000 |       | —

121,498

44,431 |       | 148,939

—

281,854 |       | 32,509

86,119

31,225 |       | 578,216

591,500

792,864 |       |
|                                                                                                |       |             |       |                      |       |                   |       |                    |       |                     |       |                   |       |                      |       |
| Joshua Gindin,  Esq.

Executive Vice  President and General Counsel                                 |       | 2009             |       | 396,768                   |       | —                 |       | —                  |       | 148,939                  |       | 32,695                 |       | 578,402                   |       |
|                                                                                                | 2008       |             | 383,883    |                      | —     |                   | 119,938    |                    | —     |                     | 83,545     |                   | 587,366    |                      |
|                                                                                                | 2007       |             | 378,536    |                      | 94,000     |                   | 44,431     |                    | 281,855    |                     | 27,127     |                   | 825,949    |                      |
|                                                                                                |       |             |       |                      |       |                   |       |                    |       |                     |       |                   |       |                      |       |
| Steven Leckerman

Executive Vice President  and Chief Operating Officer                             |       | 2009             |       | 692,627                   |       | —                 |       | —                  |       | 350,000                  |       | 51,962                 |       | 1,094,589                 |       |
|                                                                                                | 2008       |             | 645,784    |                      | —     |                   | 153,867    |                    | —     |                     | 97,807     |                   | 897,458    |                      |
|                                                                                                | 2007       |             | 622,950    |                      | 561,000    |                   | 56,687     |                    | 623,400    |                     | 24,461     |                   | 1,888,498  |                      |

 

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(1)   The amounts in this columnrepresent transition bonuses earned by the Named Executive Officers. Inconnection with the Transaction, each of the Named Executive Officers wasawarded a transition bonus for certain transition services performed by theNamed Executive Officers. Each of the transition bonuses in this column werepaid in installments in 2007 per a schedule set forth in the applicableemployment agreement.

(2)   The amounts in this columnrepresent the aggregate grant date fair value for restricted stock grantedunder our Restricted Share Plan computed in accordance with FASB ASC Topic 718.In accordance with rules of the SEC, any estimate for forfeitures isexcluded from and does not reduce, such amounts. Generally, the full grant datefair value is the amount we would recognize for financial statement reportingpurposes over the award’s vesting schedule. Our common stock is not publiclytraded and therefore no market value for our shares is readily available.Amounts in this column represent the value of the shares based on their mostrecent purchase price per share.

(3)   Represents amounts earnedunder our management incentive program for executive officers. See “—Grants ofPlan-Based Awards.”

(4)   The following tablesummarizes all other compensation paid during 2009 to our Named ExecutiveOfficers.

 
| **Executive Officer** | ** ** | **Car (a)********($)** | ** ** | **Aircraft********Usage(b)********($)** | ** ** | **Other  Compensation(c)********($)** | ** ** | **Total All Other********Compensation********($)** | ** ** |
|----------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|--------------------------------------------------------------|------------|
| Michael  J. Barrist        |       | 25,918                      |       | 495,873                                 |       | 18,620                                |       | 540,411                                                      |       |
| John  R. Schwab            |       | 15,041                      |       | —                                  |       | 9,491                                 |       | 24,532                                                       |       |
| Stephen  W. Elliott        |       | 19,170                      |       | —                                  |       | 13,339                                |       | 32,509                                                       |       |
| Joshua  Gindin, Esq.  |       | 18,592                      |       | —                                  |       | 14,103                                |       | 32,695                                                       |       |
| Steven  Leckerman          |       | 27,719                      |       | —                                  |       | 24,243                                |       | 51,962                                                       |       |

 

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(a)     The amountreported represents the amount we paid to lease the Named Executive Officers’respective cars.

(b)     Represents Mr. Barrist’spersonal use of an aircraft partly owned by us, calculated by using our actualvariable operating costs of $275,663 plus the hourly cost equivalent for themonthly management fee, interest and depreciation of $38,985 and lost taxbenefits to us of $181,225 attributable to such flights.

(c)     RepresentsCompany paid or reimbursed health, disability, and life insurance premiums andCompany contributions to 401(k) plans.

 

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**Grants of Plan-Based Awards**

 

The following table showsall plan-based awards granted to the Named Executive Officers during 2009.

 
| ** **                | ** ** | ** **            | ** ** | **Estimated Possible Payouts********Under Non-Equity Incentive********Plan Awards** | ** ** |
|---------------------------|------------|-----------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|
| **Name**                  | ** ** | **Grant********Date** | ** ** | **Threshold********($)**                                                                                     | ** ** | **Target********($)** | ** ** | **Maximum********($)** | ** ** |
| Michael  J. Barrist       |       | (1)                   |       | —                                                                                                       | (2)        | 811,750 | (1) | 1,217,625 | (2) |
| John  R. Schwab           |       | (1)                   |       | —                                                                                                       | (2)        | 300,000 | (1) | 450,000 | (2) |
| Stephen  W. Elliott       |       | (1)                   |       | —                                                                                                       | (2)        | 297,878 | (1) | 446,817 | (2) |
| Joshua  Gindin, Esq. |       | (1)                   |       | —                                                                                                       | (2)        | 297,878 | (1) | 446,817 | (2) |
| Steven  Leckerman         |       | (1)                   |       | —                                                                                                       | (2)        | 700,000 | (1) | 1,050,000 | (2) |

 

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(1)   Under the employmentagreements with each of our executive officers, each executive is entitled toearn incentive compensation of from 75 percent to 100 percent of his basesalary based on our achievement of our annual operating plan for the year. See “CompensationDiscussion and Analysis—Elements of Executive Compensation—Management IncentiveCompensation.” Messrs. Barrist’s, Schwab’s, Elliott’s, Gindin’s and Leckerman’starget bonus potential as a percentage of each individual’s base salary isequal to 100 percent, 75 percent, 75 percent, 75 percent and 100 percent,respectively. The Compensation Committee has the discretion to pay at, above orbelow these targets.

(2)   The performance targets setby the Compensation Committee included a range of performance levels that gavethe executive officers the potential to earn from zero percent to 150 percentof the cash incentive compensation specified in their respective employmentagreements.

 

**Employment Agreements**

 

We entered intodefinitive employment agreements, effective as of November 15, 2006, witheach of our executive officers.

 

The current terms of Mr. Barrist’semployment agreement include:

 

·      Mr. Barrist will serve as our President and ChiefExecutive Officer;

·      The initial term of Mr. Barrist’s employmentagreement is five years, may be extended thereafter and is subject to earlytermination;

·      Mr. Barrist will receive a base salary as statedin the employment agreement, to be adjusted upward, at a minimum, annually inaccordance with the Consumer Price Index in effect for such year;

·      Mr. Barrist will receive employee benefitssimilar with those provided to him prior to the Transaction;

·      Mr. Barrist will have the opportunity to earn anannual cash bonus equal to 100 percent of his base salary (such percentage ofbase salary is referred to as Mr. Barrist’s “target bonus”), based uponthe achievement by us of our annual operating plan as presented to the Board byour chief executive officer and approved by the Board;

·      Mr. Barrist will receive a car allowance of$2,500 per month, an aggregate of 150 hours per year (for both business andpersonal use) on an airplane that is partly owned by us, in addition to otherperquisites;

·      Upon a termination of employment by reason of death,disability, without “cause” or a resignation for “good reason,” Mr. Barristwill receive his accrued but unpaid base salary and target bonus, continue toreceive base salary, target bonuses and health and welfare benefits for thegreater of (i) one year or (ii) the remainder of the initial term ofhis employment agreement, referred to as the “Barrist Severance Period” (see “—PotentialPayments Upon Termination of Employment or Change in Control”);

·      Upon a termination of employment by reason of death, Mr. Barrist’sbeneficiaries will also receive the benefits provided under our death benefit(see “—Potential Payments Upon Termination of Employment or Change in Control”);

·      Upon a termination of employment for “cause” or aresignation without “good reason,” Mr. Barrist will receive his accruedbut unpaid base salary and annual bonus (see “—Potential Payments UponTermination of Employment or Change in Control”);

 

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·      Mr. Barrist is subject to non-compete,non-solicitation and non-interference covenants during his employment andending on the later of (i) the last day of the Barrist Severance Period or(ii) two years after termination of employment;

·      During and after Mr. Barrist’s employment withus, Mr. Barrist is subject to a confidentiality covenant; and

·      Mr. Barrist will be entitled, under certaincircumstances, to receive reimbursement from us for taxes, if any, imposed on Mr. Barristunder Section 4999 of the Code and/or under Section 409A of the Codeand any federal, state, local and excise taxes imposed upon the reimbursement.

 

The terms of theemployment agreements of our other named executive officers, Messrs. Schwab,Elliott, Gindin and Leckerman include the following terms:

 

·      Each executive will retain the same position as thatheld with NCO prior to the Transaction;

·      The initial term of each employment agreement is fiveyears, each may be extended thereafter and each is subject to earlytermination;

·      Each of Messrs. Schwab, Elliott, Gindin andLeckerman will receive base salaries as stated in their respective employmentagreements, to be adjusted upward, at a minimum, annually in accordance withthe Consumer Price Index in effect for such year;

·      Each executive will receive employee benefits andperquisites similar with those provided prior to the Transaction;

·      Each of Messrs. Schwab, Elliott, Gindin andLeckerman will have the opportunity to earn an annual bonus equal to 75percent, 75 percent, 75 percent and 100 percent, respectively, of his basesalary (such percentage of base salary is referred to as such executive’s “targetbonus”), based upon the achievement by us of our annual operating plan aspresented to the Board by our chief executive officer and approved by the Board;

·      Each of Messrs. Schwab, Elliott, Gindin andLeckerman were entitled to receive a pre-determined cash bonus, ranging from$415,000 to $1.45 million, for certain transition services, referred to as atransition bonus, to be performed by such executive during the 12-month periodfollowing the closing of the Transaction;

·      Upon a termination of employment during the five yearperiod commencing November 15, 2006 by reason of death, disability,without “cause” or a resignation for “good reason,” the executive will receivehis accrued but unpaid base salary and annual bonus, will continue to receivebase salary, target bonuses and health and welfare benefits for two yearsfollowing termination and, within 10 days of termination, will receive a lumpsum payment of any and all unpaid installments of such executive’s transitionbonus (see “—Potential Payments Upon Termination of Employment or Change inControl”);

·      Upon a termination of employment after the five yearperiod commencing November 15, 2006 by reason of death, disability,without “cause” or a resignation for “good reason,” the executive will receivehis accrued but unpaid base salary and annual bonus, will continue to receivehis base salary, target bonus and health and welfare benefits for one yearfollowing termination and, within 10 days of termination, will receive a lumpsum payment of any and all unpaid installments of such executive’s transition bonus(see “—Potential Payments Upon Termination of Employment or Change in Control”);

·      Upon a termination of employment by reason of death,the executive’s beneficiaries will also receive the benefits provided under ourdeath benefit (see “—Potential Payments Upon Termination of Employment orChange in Control”);

·      Upon a termination of employment for “cause” or aresignation without “good reason,” the executive will receive his accrued butunpaid base salary and annual bonus and, within 10 days of termination, willreceive a lump sum payment of the unpaid balance of a certain portion of suchexecutive’s transition bonus (see “—Potential Payments Upon Termination ofEmployment or Change in Control”);

·      The executive is subject to non-compete andnon-solicitation covenants during his employment and for (i) two yearsafter termination of employment if his employment is terminated during the fiveyear period commencing November 15, 2006 or (ii) one year aftertermination of employment if his employment is terminated after the five yearperiod commencing November 15, 2006;

·      The executive is subject to a non-interferencecovenant during his employment and for (i) three years after terminationof employment if his employment is terminated during the five year periodcommencing November 15, 2006 or (ii) two years after termination ofemployment if his employment is terminated after the five year periodcommencing November 15, 2006;

·      During and after employment with us, the executive issubject to a confidentiality covenant; and

 

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·      The executive will be entitled, under certaincircumstances, to receive reimbursement from us for taxes, if any, imposed onthe executive under Section 4999 of the Code and/or under Section 409Aof the Code and any federal, state, local and excise taxes imposed upon thereimbursement.

 

**Restricted Share Plan**

 

On November 15,2006, we adopted a restricted share plan, known as the NCO Group, Inc.Restricted Share Plan (the “Restricted Share Plan”) which authorizes grants ofrestricted shares of our Class A common stock to our officers and key employees.On March 28, 2008, the Board of Directors approved the amendment andrestatement of the Restricted Share Plan to: (i) permit members of ourBoard of Directors to participate in the Restricted Share Plan and (ii) toincrease the number of shares authorized for issuance under the RestrictedShare Plan to 336,666.7 shares. No awards were granted under the RestrictedShare Plan during 2009. At December 31, 2009, there were 333,010.8 sharesissued under the Restricted Share Plan and 3,655.9 shares available for futureissuance.

 

The Restricted Share Planis administered by the Compensation Committee of our Board. Each share ofrestricted stock issued pursuant to the Restricted Share Plan, regardless ofwhether the restriction period with regard to such share has lapsed, is subjectto the transfer restrictions, repurchase rights and other restrictions pursuantto the terms of a Stockholders’ Agreement.

 

Generally, the RestrictedShare Plan states that the Compensation Committee of our Board will determine, inthe terms of the applicable award agreement, the time or times when and themanner and condition in which each award will vest. The shares of restrictedstock that have been granted under the Restricted Share Plan vest in 25 percentincrements upon each anniversary of the date of grant, each, referred to as anannual vesting date, provided that the recipient remains employed by us orcontinues to serve as our director, as applicable. In addition, if a recipient’semployment or service as a director, as applicable, is terminated by us withoutCause (as defined in the Restricted Share Plan) or if a recipient terminateshis employment, or service as a director, as applicable, with us for GoodReason (as defined in the Restricted Share Plan) within three monthsimmediately preceding an annual vesting date, such award will immediately vestwith respect to the 25 percent of the then unvested shares that would havevested had such recipient remained employed, or remained as our director, asapplicable, through the annual vesting date. For purposes of awards to thedirectors, the terms “Cause” and “Good Reason” are as defined in the RestrictedShare Plan, except that such terms are interpreted as applicable to apply tothe termination of a director’s service as a director rather than terminationof employment. In addition, each restricted share award will immediately vestin full in the event a Change in Control or Public Offering (each as defined inthe Restricted Share Plan) occurs, subject to certain resale restrictions ifvesting occurs as a result of a Public Offering. For a description ofadditional termination or change in control provisions in the Restricted SharePlan, which are applicable to the awards that have been issued to our executiveofficers and directors, see “—Potential Payments Upon Termination of Employmentor Change in Control.”

 

In the future, theCompensation Committee, on a discretionary basis, may elect to award ourexecutive officers or directors restricted stock under the Restricted Share Plan,although there is no obligation for us to do so and we do not expect any suchawards to be material.

 

If cash dividends aredeclared by our Board on our common stock, dividends will be paid on the sharesof restricted stock awarded under our Restricted Share Plan regardless ofvesting. In addition, unless otherwise determined by the CompensationCommittee, holders of restricted shares will have the right to vote such sharesduring the restriction period.

 

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**Outstanding Equity Awards at Fiscal Year End**

 

The following table showsall outstanding equity awards held by the Named Executive Officers as of December 31,2009.

 
| ** **                | ** ** | ** **                  | ** ** | **Stock Awards**                                                                                                                | ** ** |
|---------------------------|------------|-----------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|
| **Name**                  | ** ** | **Date of Grant** | ** ** | **Number of Shares********or Units of Stock********That Have Not Vested(1)********(#)** | ** ** | **Market Value of Shares********or Units of Stock That********Have Not Vested(2)********($)** | ** ** |
| Michael  J. Barrist       |       | 3/31/2008                   |       | 15,602.3                                                                                                                        |       | N/A |   |
| John  R. Schwab           |       | 11/17/2006                  |       | 5,185.1                                                                                                                         |       | N/A |   |
|                      |       | 8/10/2007                   |       | 2,221.5                                                                                                                         |       | N/A |   |
|                      |       | 3/31/2008                   |       | 8,878.3                                                                                                                         |       | N/A |   |
| Stephen  W. Elliott       |       | 11/17/2006                  |       | 5,185.1                                                                                                                         |       | N/A |   |
|                      |       | 8/10/2007                   |       | 2,221.5                                                                                                                         |       | N/A |   |
|                      |       | 3/31/2008                   |       | 9,112.4                                                                                                                         |       | N/A |   |
| Joshua  Gindin, Esq. |       | 11/17/2006                  |       | 5,185.1                                                                                                                         |       | N/A |   |
|                      |       | 8/10/2007                   |       | 2,221.5                                                                                                                         |       | N/A |   |
|                      |       | 3/31/2008                   |       | 8,995.3                                                                                                                         |       | N/A |   |
| Steven  Leckerman         |       | 11/17/2006                  |       | 6,615.4                                                                                                                         |       | N/A |   |
|                      |       | 8/10/2007                   |       | 2,834.4                                                                                                                         |       | N/A |   |
|                      |       | 3/31/2008                   |       | 11,540.0                                                                                                                        |       | N/A |   |

 

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(1)   Representsawards of restricted shares under our Restricted Share Plan which are scheduledto vest in 25 percent increments over a period of 4 years beginning on thefirst anniversary of the date of grant, provided that the recipient remainsemployed by us. In addition, if a recipient’s employment is terminated by uswithout Cause (as defined in the Restricted Share Plan) or if a recipientterminates his employment with us for Good Reason (as defined in the RestrictedShare Plan) within three months immediately preceding an annual vesting date,such award will immediately vest with respect to the 25 percent of the thenunvested shares that would have vested had such recipient remained employedthrough the annual vesting date. In addition, each restricted share award willimmediately vest in full in the event a Change in Control or Public Offering(each as defined in the Restricted Share Plan) occurs. See “—Restricted SharePlan”. For a description of additional termination or change in controlprovisions, including our right to repurchase the shares issued, in theRestricted Share Plan, see “—Potential Payments Upon Termination of Employmentor Change in Control.” In addition, each share of restricted stock issuedpursuant to the Restricted Stock Plan, regardless of whether the restrictionperiod with regard to such share has lapsed, is subject to transferrestrictions, repurchase rights and other restrictions set forth in aStockholders’ Agreement.  See “—RestrictedShare Plan.”

(2)   Our common stockis not publicly traded and therefore no market value for our shares is readilyavailable.

 

**Stock Vested in 2009**

 

The following table providesinformation concerning restricted share awards held by the Named ExecutiveOfficers that vested during 2009.

 
| ** **                | ** ** | **Stock Awards**                                                                 | ** ** |
|---------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **Name**                  | ** ** | **Number of********Shares********Acquired on********Vesting********(#)(1)** | ** ** | **Value********Realized on********Vesting********($)(2)** | ** ** |
| Michael  J. Barrist       |       | 5,200.8                                                                               |       | N/A |   |
| John  R. Schwab           |       | 9,255.3                                                                               |       | N/A |   |
| Stephen  W. Elliott       |       | 9,333.3                                                                               |       | N/A |   |
| Joshua  Gindin, Esq. |       | 9,294.3                                                                               |       | N/A |   |
| Steven  Leckerman         |       | 11,879.3                                                                              |       | N/A |   |

 

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(1)     These sharesremain subject to transfer restrictions, repurchase rights and otherrestrictions set forth in a Stockholders’ Agreement and the stock awards issuedpursuant to the Restricted Share Plan. See “—Restricted Share Plan” and “-Potential Payments Upon Terminationof Employment or Change in Control.”

(2)     Our common stockis not publicly traded and therefore no market value for our shares is readilyavailable.

 

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**Nonqualified Deferred Compensation**

 

Our Deferred CompensationPlan permits eligible employees to defer receipt and taxation of theircompensation each year up to the limit in effect under Section 402(g) ofthe Code ($16,500 for 2009) (less amounts contributed to our 401(k) Plan).In addition, in our absolute and sole discretion, we may make a contributionthat will be allocated among participants in proportion to their deferrals forsuch year. All executive officers and other key employees designated by us areeligible to participate in the Deferred Compensation Plan.

 

Amounts deferred orcontributed are placed in a rabbi trust, of which Putnam Fiduciary Trust Companyis directed trustee. Participants may designate certain Putnam mutual funds bywhich the value of their accounts will be measured, but all investments ofDeferred Compensation Plan funds are made as directed by us in our solediscretion.

 

A participant is 100percent vested as to amounts deferred by the participant. Any companycontributions will be 100 percent vested upon a participant’s having threeyears of service, termination of employment due to death or disability,reaching age 65 or upon a “change of control” (as defined in the DeferredCompensation Plan) of us. A participant’s benefits in the Deferred CompensationPlan are payable as soon as practicable following termination of employment ora “change of control” of the Company.

 

A participant may make anearly withdrawal if such participant demonstrates a special need or hardshipdue to “severe financial emergency.”

 

The following tableprovides information concerning amounts held under the Deferred CompensationPlan for the benefit of our Named Executive Officers.

 
| **Name**                  | ** ** | **Executive********Contributions********in Last FY********($)** | ** ** | **Registrant********Contributions********in Last FY********($)** | ** ** | **Aggregate********Earnings in********Last FY (1)********($)** | ** ** | **Aggregate********Balance at********Last FY (2)********($)** | ** ** |
|---------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| Michael  J. Barrist       |       | —                                                          |       | —                                                           |       | 6,516                                                               |       | 26,757                                                                  |       |
| John  R. Schwab           |       | —                                                          |       | —                                                           |       | 1,389                                                               |       | 8,542                                                                   |       |
| Stephen  W. Elliott       |       | —                                                          |       | —                                                           |       | —                                                              |       | —                                                                  |       |
| Joshua  Gindin, Esq. |       | —                                                          |       | —                                                           |       | —                                                              |       | —                                                                  |       |
| Steven  Leckerman         |       | —                                                          |       | —                                                           |       | —                                                              |       | —                                                                  |       |

 

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(1)         The aggregate earningsrepresent the market value change of this plan during 2009. Earnings receivedby the Named Executive Officers are not reported as compensation in the SummaryCompensation Table because such earnings are not considered to be “above market”earnings under SEC regulations.

(2)         Amounts reported in theAggregate Balance at Last FY which were previously reported as compensation tothe Named Executive Officers in the Summary Compensation Table included inprior SEC filings for previous years included $22,416 and $5,894 for Messrs. Barristand Schwab, respectively. These amounts represent executive contributions andregistrant contributions for prior years.

 

**Potential Payments Upon Termination of Employment or Changein Control**

 

**Death Benefits**

 

We provide beneficiariesof designated participants with a death benefit in the event of the participant’sdeath while employed by us. The benefit provides each participant, as long assuch participant is employed with the Company, with a fixed dollar term lifeinsurance policy for the beneficiaries of such participant’s choice. Executiveparticipants are selected by the Board, and each of our Named ExecutiveOfficers is a participant. Under this benefit, beneficiaries of Messrs. Barrist,Schwab, Elliott, Gindin and Leckerman would be entitled to receive a lump sumpayment of $4,500,000, $2,000,000, $2,000,000, $2,000,000 and $4,000,000,respectively. The Company previously had an Executive Salary Continuation Plan,which in 2009 was replaced by the death benefit described above.

 

**Termination or Change in ControlProvisions in Restricted Share Plan**

 

Generally, the RestrictedShare Plan states that the Compensation Committee of our Board will determine,in the terms of the applicable award agreement, the time or times when and themanner and condition in which each award will vest and the extent, if any, towhich vesting accelerates upon a Change in Control. “Change of Control” isdefined in the Restricted Share Plan as (i) any liquidation, dissolutionor winding up of our company, 

 

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whether voluntary orinvoluntary, (ii) any transfer by our company of all or substantially allof its assets on a consolidated basis, (iii) any consolidation, merger orreorganization of our company with or into any other entity or entities as aresult of which the holders of our company’s outstanding capital stockpossessing the voting power (under ordinary circumstances) to elect a majorityof our Board immediately prior to such consolidation, merger or reorganizationno longer beneficially own, directly or indirectly, the outstanding capitalstock of the surviving corporation possessing the voting power (under ordinarycircumstances) to elect a majority of the surviving corporation’s board ofdirectors, (iv) any transfer to any third party of shares of our company’scapital stock by the holders thereof as a result of which the holders of ourcompany’s outstanding capital stock possessing the voting power (under ordinarycircumstances) to elect a majority of our company’s Board immediately prior tosuch transfer no longer beneficially own, directly or indirectly, theoutstanding capital stock of our company possessing the voting power (underordinary circumstances) to elect a majority of our company’s Board, or (v) achange in the constituency of the Board with the result that individuals, whowere members of the Board on November 15, 2006 (or individuals designatedby OEP or Mr. Barrist in place thereof) cease for any reason to constituteat least a majority of the Board.

 

The individual awardagreements that have been issued to our executives provide the followingenhanced vesting provisions related to termination of employment or a Change ofControl:

 

·                  If a holder’s employment is terminated by us without “Cause”or if the holder terminates his employment for “Good Reason” within threemonths immediately preceding an annual vesting date, such holder’s award willimmediately vest with respect to the 25 percent of the then unvested sharesthat would have vested had the holder remained employed through that annualvesting date; and

·                  In the event that during a holder’s service with us, aChange in Control occurs, then 100 percent of the holder’s award will becomevested.

 

“Cause” is defined in theRestricted Share Plan as (i) an indictment of employee in connection witha crime involving moral turpitude or any felony, which materially adverselyaffects our company or employee’s ability to perform the duties of hisemployment; (ii) a conviction of, or a plea of guilty or no-contest by,employee to any felony; (iii) the employee’s dishonesty, fraud, unethicalor illegal act, misappropriation or embezzlement which does (or wouldreasonably be likely to) materially damage our company or our company’sreputation; (iv) willful or deliberate material violations of the employee’sobligations to our company; or (v) a material breach of any of the termsor conditions of an employment agreement between the employee and us, subject,in the case of (iv) and (v) above, to a 20 day cure period. “GoodReason” is defined in the Restricted Share Plan as: (i) a materialdiminution of the employee’s duties or responsibilities under a contract ofemployment with our company; (ii) a material decrease in the employee’sbase salary or bonus opportunity or other material benefits, other than inconnection with such a reduction occasioned by our company’s businessconditions or prospects and applicable to all similarly situated company employees;and (iii) any material violation by our company of a contract ofemployment with the employee, subject, in the case of (i) — (iii) above,to a 20 day cure period.

 

The individual awardagreements that have been issued to our executives also provide that in theevent that no public offering has occurred and a holder of restricted sharesceases to be employed by us for any reason within five years of the date ofgrant, all of the holder’s restricted shares, whether or not vested, willremain outstanding following the date of such holder’s termination ofemployment and, for a 180-day period thereafter, we will have the right torepurchase both the vested and unvested portions of such awards at the pricesset forth below, as applicable:

 

·                  If a holder ceases to be employed by us for any reasonother than a termination for Cause, we will repurchase the portion of suchaward that is (a) vested shares of common stock for their then Fair MarketValue (as defined below); and (b) not vested for the lesser of (i) theFair Market Value as of the termination date, or (ii) 40 percent of theFair Market Value as of the date of grant of the restricted shares; and

·                  If a holder is terminated for Cause, any stock thatsuch holder would have acquired under the award, whether or not vested andotherwise free from restriction, will be subject to repurchase by us for thelesser of (i) the Fair Market Value as of the termination date, or (ii) 40percent of the Fair Market Value as of the date of grant of the restrictedshares.

 

“Fair Market Value”, inthe context of our current repurchase option, is defined in the RestrictedShare Plan as the fair market value as determined by the Board, subject incertain cases, to change based upon an appraisal by an independent investmentbank or other independent valuation expert.

 

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In the event that we donot exercise our buyback right described above within 180 days following theexecutive’s termination of employment, the restrictions on the restrictedshares that were not vested (and did not vest) as a result of the holder’stermination of employment will at that date lapse in full and the holder willretain all such restricted shares, as well as all of the restricted shares thatwere vested as of, or vested in connection with, the holder’s termination ofemployment.

 

The individual awardagreements that have been issued to our executives further provide that in theevent a holder’s employment terminates at any time following, the earlier tooccur of (a) a public offering and (b) the fifth anniversary of thegrant date, the holder will retain all restricted shares that were vested atthe time of termination (including any restricted shares that vested inconnection with the public offering or termination).

 

**Termination or Change in ControlProvisions in Employment Agreements**

 

***MichaelJ. Barrist.*** Mr. Barrist’semployment agreement provides that upon a termination of employment by reasonof death, disability, without “Cause” or a resignation for “Good Reason,” Mr. Barristwill receive his accrued but unpaid base salary and target bonus, and willcontinue to receive base salary, target bonuses and health and welfare benefitsfor the greater of (i) one year or (ii) the remainder of the initialterm of his employment agreement. In addition, Mr. Barrist’s employmentagreement provides that if Mr. Barrist’s employment is terminated byreason of death, his beneficiaries will be paid the amounts owed under ourExecutive Salary Continuation Plan. See “—Executive Salary Continuation Plan”described above. If Mr. Barrist during any period of disability, includingafter termination of his employment agreement, receives any periodic paymentsrepresenting lost compensation under any health and accident policy or underany salary continuation insurance policy, the premiums for which have been paidby us, the amount of the base salary that Mr. Barrist would be entitled toreceive from us shall be decreased by the amounts of such payments.

 

Mr. Barrist’semployment agreement provides that upon a termination of employment for “Cause”or a resignation without “Good Reason,” Mr. Barrist will receive hisaccrued but unpaid base salary and annual bonus.

 

“Cause” is defined in Mr. Barrist’semployment agreement as his (i) conviction of, or guilty plea with respectto, a felony; (ii) a nolo contender plea with respect to a felony (other than in respect of a claim orallegation by a governmental regulatory authority); (iii) willful illegalconduct or gross misconduct that, in the reasonable good faith judgment of theBoard, materially interferes with Mr. Barrist’s ability to perform hisduties for our company; or (iv) any willful material breach of any of thecovenants in his employment agreement after notice and thirty days from thedate Mr. Barrist receives such notice, to cure such event or condition tothe extent such event or conditions is reasonably susceptible to cure. No actor failure to act by Mr. Barrist will be considered willful unless it isdone, or omitted to be done, by Mr. Barrist in bad faith or withoutreasonable belief that such action or inaction was in the best interests of ourcompany. Any act, or failure to act by Mr. Barrist, based on authoritygiven pursuant to a resolution duly adopted by the Board or based upon theadvice of counsel of our company will be conclusively presumed to be in goodfaith and in the bests interests of our company.

 

“Good Reason” is definedin Mr. Barrist’s employment agreement as (i) the assignment to Mr. Barristof any duties materially inconsistent, in any respect, with Mr. Barrist’sposition (including status, offices, titles and reporting requirements),authority, duties or responsibilities as contemplated by Mr. Barrist’semployment agreement, or any other action by us which results in a materialdiminution in such position, authority, duties or responsibilities, excludingfor this purpose any action not taken in bad faith and which is remedied by uspromptly after receipt of notice thereof given by Mr. Barrist; (ii) achange in Mr. Barrist’s principal work location to a location more than 40miles from Horsham, Pennsylvania, except for required travel on company businessto an extent substantially consistent with Mr. Barrist’s business travelobligations; (iii) any violation of the terms or conditions of Mr. Barrist’semployment agreement, including, without limitation, failure to pay anycompensation when due; (iv) any material change to the nature of ourbusiness if such change is implemented over Mr. Barrist’s objection,which, for purposes hereof, is agreed to be (a) business processoutsourcing focused primarily on accounts receivable collections, portfolio purchaseand customer relationship management and (b) the purchase and managementof overdue accounts receivable (the “Business”); or (v) in the event thatJPMorgan Chase Bank (either directly or indirectly) requires changes to ourmanagement or strategic plans in order to address concerns or issues that areprimarily related to JPMorgan Chase Bank and its affiliates (other than ourcompany) (including the ownership by JPMorgan Chase Bank and its affiliates(other than our company) of a company engaged in the Business) as opposed toconcerns or issues primarily related to the performance of our company, andsuch interference would reasonably be expected to have an adverse effect of amaterial nature on the value of Mr. Barrist’s investment in our company,or may result in the liquidation or sale of our company, subject in the

 

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case of (i) — (v) aboveto a 30 day cure period.

 

Mr. Barrist’semployment agreement provides that he will be entitled to reimbursement ofcertain excise taxes imposed upon him in connection with payments to be made tohim in connection with a change in control of the Company and any federal,state and local income tax and excise tax imposed on the reimbursed excise tax.

 

***OtherNamed Executive Officers.*** The employment agreements of our other NamedExecutive Officers, Messrs. Schwab, Elliott, Gindin and Leckerman, providethat upon a termination of employment during the five year period commencing November 15,2006 by reason of death, disability, without “Cause” or a resignation for “GoodReason,” the executive will receive his accrued but unpaid base salary andannual bonus, and will continue to receive his then current base salary, targetbonuses and health and welfare benefits for two years following termination. Inaddition, each of the employment agreements provide that if such executive’semployment is terminated by reason of death, his beneficiaries will be paid theamounts owed under our Executive Salary Continuation Plan. See “—ExecutiveSalary Continuation Plan” described above.

 

The employment agreementsfurther provide that upon a termination of employment after the five yearperiod commencing November 15, 2006 by reason of death, disability,without “Cause” or a resignation for “Good Reason,” the executive will receivehis accrued but unpaid base salary and annual bonus, and will continue toreceive his then current base salary, target bonus and health and welfarebenefits for one year following termination.

 

The employment agreementsalso provide that upon a termination of employment for “Cause” or a resignationwithout “Good Reason,” the executive will receive his accrued but unpaid basesalary and annual bonus.

 

“Cause” is defined ineach of the employment agreements as the executive’s (i) indictment inconnection with a crime involving moral turpitude or any felony, whichmaterially adversely affects our company or his ability to perform the dutiesof his employment; (ii) conviction of, or pleading of guilty or no-contestby, to any felony; (iii) dishonesty, fraud, unethical or illegal act,misappropriation or embezzlement which does (or would reasonably be likely to)materially damage our company or our company’s reputation; (iv) willful ordeliberate material violations of his obligations to our company; or (v) materialbreach of any of the terms or conditions of his employment agreement, subjectin the case of (iv) and (v) above, to a 20 day cure period. No act orfailure to act by the executive will be considered willful unless it is done,or omitted to be done, by the executive in bad faith or without reasonablebelief that such action or omission was in the best interests of our company.Any act, or failure to act by an executive, based on authority given by ourcompany’s Chief Executive Officer or pursuant to a resolution duly adopted bythe Board or based upon the advice of counsel of our company will beconclusively presumed to be in good faith and in the bests interests of ourcompany.

 

“Good Reason” is definedin each of the employment agreements as: (i) a material diminution of hisposition, authority, duties or responsibilities (including any material adversechange to his title); (ii) a material decrease in his base salary orannual bonus opportunity or other material benefits, other than in connectionwith such a reduction occasioned by our company’s business conditions orprospects and applicable to all similarly situated company management; (iii) ourcompany relocates his principal place of employment to a location in excess of40 miles from the principal place of his employment as of the date of theapplicable employment agreement; and (iv) any material violation of theexecutive’s employment agreement by our company, subject in the case of (i) —(iv) above to a 20 day cure period.

 

Each executive officer’semployment agreement provides that the executive will be entitled toreimbursement of certain excise taxes imposed upon such executive in connectionwith payments to be made to such executive in connection with a change incontrol of the Company and any federal, state and local income tax and excisetax imposed on the reimbursed excise tax.

 

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The following table showsthe estimated amount of payments and benefits that would be provided by us toour Named Executive Officers under the plans and agreements described aboveassuming that (i) their employment was terminated as of December 31,2009 for various reasons as described below or (ii) there was a change ofcontrol of the Company effective as of December 31, 2009:

 
| ** **                                      | ** ** | **Reason  for Termination of Employment**                                        | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **Named  Officer and********Nature of Payment** | ** ** | **Termination********by Executive********without Good********Reason********($)** | ** ** | **Termination********by Us without********Cause or********Termination by********Executive for********Good Reason********($)** | ** ** | **Cause********($)** | ** ** | **Death********($)** | ** ** | **Disability********($)** | ** ** | **Payments********in connection********with a Change********of Control********($)** | ** ** |
| Michael J. Barrist                              |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Total  cash payment                             |       | 433,866                                                                          | (1)        | 3,883,804 | (2) | 433,886 | (1) | 8,383,804 | (2)(3) | 3,883,804 | (2) | — | (4) |
| Cost  of continuation of benefits               |       | —                                                                           |       | 25,461 | (5) | — |   | 25,461 | (5) | 25,461 | (5) | — | (4) |
| Effect  on stock awards                         |       |                                                                             | (10)       |   | (10) |   | (11) |   | (10) |   | (10) |   | (12) |
|                                            |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| John  R. Schwab                                 |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Total  cash payment                             |       | 163,793                                                                          | (6)        | 1,563,793 | (7) | 163,793 | (6) | 3,563,793 | (7)(8) | 1,563,793 | (7) | — | (4) |
| Cost  of continuation of benefits               |       | —                                                                           |       | 21,578 | (9) | — |   | 21,578 | (9) | 21,578 | (9) | — | (4) |
| Effect  on stock awards                         |       |                                                                             | (10)       |   | (10) |   | (11) |   | (10) |   | (10) |   | (12) |
|                                            |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Stephen  W. Elliott                             |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Total  cash payment                             |       | 162,635                                                                          | (6)        | 1,552,733 | (7) | 162,635 | (6) | 3,552,733 | (7)(13) | 1,552,733 | (7) | — | (4) |
| Cost  of continuation of benefits               |       | —                                                                           |       | 30,491 | (9) | — |   | 30,491 | (9) | 30,491 | (9) | — | (4) |
| Effect  on stock awards                         |       |                                                                             | (10)       |   | (10) |   | (11) |   | (10) |   | (10) |   | (12) |
|                                            |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Joshua  Gindin, Esq.                       |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Total  cash payment                             |       | 162,635                                                                          | (6)        | 1,552,733 | (7) | 162,635 | (6) | 3,552,733 | (7)(14) | 1,552,733 | (7) | — | (4) |
| Cost  of continuation of benefits               |       | —                                                                           |       | 24,394 | (9) | — |   | 24,394 | (9) | 24,394 | (9) | — | (4) |
| Effect  on stock awards                         |       |                                                                             | (10)       |   | (10) |   | (11) |   | (10) |   | (10) |   | (12) |
|                                            |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Steven  Leckerman                               |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Total  cash payment                             |       | 374,138                                                                          | (6)        | 3,174,138 | (7) | 374,138 | (6) | 7,174,138 | (7)(15) | 3,174,138 | (7) | — | (4) |
| Cost  of continuation of benefits               |       | —                                                                           |       | 16,538 | (9) | — |   | 16,538 | (9) | 16,538 | (9) | — | (4) |
| Effect  on stock awards                         |       |                                                                             | (10)       |   | (10) |   | (11) |   | (10) |   | (10) |   | (12) |

 

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| (1) | Represents  amounts payable under his employment agreement, representing accrued but  unpaid base salary and annual bonus at December 31, 2009, payable in a  lump sum as soon as practicable after termination of employment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Represents  amounts payable under his employment agreement. Includes $839,742 representing  accrued but unpaid base salary and target bonus at December 31, 2009,  payable in a lump sum as soon as practicable after termination of employment  and $3,044,062 representing Mr. Barrist’s base salary and target bonus  for 1.875 years after termination payable pro rata bi-weekly over 1.875 years  from the date of termination of employment. Assumes no base salary increases.  This amount would be reduced to the extent of any disability payments  representing lost compensation received by Mr. Barrist from any policy  maintained by us.                                                                                                                                                                                  |
| (3) | Includes  $4,500,000 payable to Mr. Barrist’s beneficiaries under our death  benefit and $3,883,804 payable under Mr. Barrist’s employment agreement  (See Footnote 2 regarding the amounts payable under Mr. Barrist’s  employment agreement.).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (4) | Each  executive’s employment agreement provides that the executive is entitled to  reimbursement of certain excise taxes imposed upon such executive in  connection with payments made to such executive in connection with a change  in control of the Company and any federal, state and local income tax and  excise tax imposed on the reimbursed excise tax. Assuming that a change in  control involving NCO, whether or not the executive was terminated in  connection therewith, occurred on December 31, 2009, there would be no  tax liability calculated in accordance with Sections 280G and 4999 of the  Internal Revenue Code. See termination payments set forth in other columns of  this table for determination of severance benefits payable to each executive  if termination occurs at the same time as a change of control. |
| (5) | Represents  the estimated cost to continue Mr. Barrist’s health and welfare benefits  for the remainder of the initial term of his employment agreement following  termination of employment, assuming no increase in premiums.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (6) | Represents  amounts payable under such executive’s employment agreement, representing  accrued but unpaid base salary and annual bonus at December 31, 2009,  payable in a lump sum as soon as practicable after termination of employment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (7) | Represents  amounts payable under such executive’s employment agreement. Includes  $163,793, $162,635, $162,635 and $374,138 payable to each of  Messrs. Schwab, Elliott, Gindin and Leckerman, respectively,  representing accrued but unpaid base salary and annual bonus at  December 31,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

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|   | 2009,  payable in a lump sum as soon as practicable after termination of employment,  and $1,400,000, $1,390,098, $1,390,098 and $2,800,000 payable to each of  Messrs. Schwab, Elliott, Gindin and Leckerman, respectively,  representing base salary and target bonus for two years after termination  payable pro rata bi-weekly over two years from the date of termination of  employment. Assumes no base salary increases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (8)    | Includes  $2,000,000 payable to Mr. Schwab’s beneficiaries under our death benefit  and $1,563,793 payable under Mr. Schwab’s employment agreement (See  Footnote 7 regarding the amounts payable under Mr. Schwab’s employment  agreement.).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (9)    | Represents  the estimated cost to continue the executive’s health and welfare benefits  for two years following termination of employment, assuming no increase in  premiums.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (10)   | For  a 180-day period after termination, we would have had the right to repurchase  both the vested and unvested portions of all outstanding restricted stock  awards at the following prices: the portion of such award that was  (a) vested for their then Fair Market Value; and (b) not vested for  the lesser of (i) the Fair Market Value as of the termination date, or  (ii) 40 percent of the Fair Market Value as of the date of grant of the  restricted shares. As of December 31, 2009, in the case of termination  (not in connection with a Change in Control), 5,200.8, 20,736.1, 20,814.2,  20,775.2 and 26,527.3 restricted shares held by Messrs. Barrist, Schwab,  Elliott, Gindin and Leckerman, respectively, would have been vested, and  15,602.3, 16,284.9, 16,519.0, 16,401.9 and 20,989.8 shares held by  Messrs. Barrist, Schwab, Elliott, Gindin and Leckerman, respectively,  would have been unvested. In the case of termination in connection with a  Change in Control, 100 percent of the holder’s restricted stock would have  become vested upon termination. Accordingly, as of December 31, 2009,  Messrs. Barrist, Schwab, Elliott, Gindin and Leckerman would have held  20,803.1, 37,021.1, 37,333.1, 37,177.1 and 47,517.1 vested shares of our  common stock, respectively. In the event that we did not exercise our buyback  right described above, at the end of the 180-day buyback period, all of the  restricted shares held by each executive would have become vested and such  executive would have had the right to retain all of the shares issued to him  under our Restricted Share Plan. |
| (11)   | For  a 180-day period after termination, we would have had the right to repurchase  both the vested and unvested portions of all outstanding restricted stock  awards for the lesser of (i) the Fair Market Value as of the termination  date, or (ii) 40 percent of the Fair Market Value as of the date of  grant of the restricted shares. As of December 31, 2009, in the case of  termination (not in connection with a Change in Control), 5,200.8, 20,736.1,  20,814.2, 20,775.2 and 26,527.3 restricted shares held by  Messrs. Barrist, Schwab, Elliott, Gindin and Leckerman, respectively,  would have been vested, and 15,602.3, 16,284.9, 16,519.0, 16,401.9 and  20,989.8 shares held by Messrs. Barrist, Schwab, Elliott, Gindin and  Leckerman, respectively, would have been unvested. In the event that we did  not exercise our buyback right described above, at the end of the 180-day  buyback period, all of the restricted shares held by each executive would  have become vested and such executive would have had the right to retain all  of the shares issued to him under our Restricted Share Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (12)   | In  the event a change of control occurs, then 100 percent of the executive’s  stock award will become vested. See also footnote 10 if the executive is  terminated in connection with a change of control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (13)   | Includes  $2,000,000 payable to Mr. Elliott’s beneficiaries under our death  benefit and $1,552,733 payable under Mr. Elliot’s employment agreement  (See Footnote 7 regarding the amounts payable under his employment agreement.).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (14)   | Includes  $2,000,000 payable to Mr. Gindin’s beneficiaries under our death benefit  and $1,552,733 payable under Mr. Gindin’s employment agreement (See  Footnote 7 regarding the amounts payable under his employment agreement.).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (15)   | Includes  $4,000,000 payable to Mr. Leckerman’s beneficiaries under our death  benefit and $3,174,138 payable under Mr. Leckerman’s employment  agreement (See Footnote 7 regarding the amounts payable under his employment  agreement.).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

**Termination or Change in ControlProvisions in Deferred Compensation Plan**

 

In addition to theamounts set forth in the table above, our Deferred Compensation Plan providesthat:

 

·                  a participant is 100 percent vested as to amounts deferred by theparticipant; and

·                  any company contributions will be 100 percent vested upon a participant’shaving three years of service, termination of employment due to death ordisability, reaching age 65 or upon a “change of control” (as defined in theDeferred Compensation Plan) of us.

 

A participant’s benefitsin the Deferred Compensation Plan are payable as soon as practicable followingtermination of employment or a “change of control” of the Company. Messrs. Barristand Schwab participate in our Deferred Compensation Plan. The following tableprovides information concerning amounts held (including both participantcontributions and company contributions) under our Deferred Compensation Planfor the benefit of our Named Executive Officers as of December 31, 2009:

 
| **Name**                  | ** ** | **Aggregate Balance at  December 31, 2009** | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|
| Michael  J. Barrist       |       | $                                                | 26,757     |   |
| John  R. Schwab           |       | 8,542                                            |       |
| Stephen  W. Elliott       |       | —                                           |       |
| Joshua  Gindin, Esq. |       | —                                           |       |
| Steven  Leckerman         |       | —                                           |       |
|                           |            |                                                  |            |  |

 

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**Director Compensation**

 

As of January 1,2009, our Board of Directors was comprised of Michael J. Barrist, Austin A.Adams, Edward A. Kangas, Leo J. Pound, Richard M. Cashin, Jr., David M.Cohen and Colin M. Farmer. Effective March 9, 2009, Mr. Cashinresigned and our Board appointed Henry H. Briance to fill the vacancy.Effective March 22, 2010, Mr. Cohen resigned from our Board ofDirectors. OEP has not yet designated a replacement director.

 

As directors not employedby us or affiliated with OEP, sometimes referred to as “non-employee directors”,each of Messrs. Adams, Kangas and Pound received an annual director fee of$100,000 for 2009, payable in quarterly installments, plus reimbursement ofexpenses incurred in attending Board and committee meetings. In addition, Mr. Kangasreceived an annual fee of $50,000 for his services as lead director and Mr. Poundreceived an annual fee of $25,000 for his services as chairman of the AuditCommittee, in each case payable in quarterly installments. We offer optionalhealth insurance coverage to non-employee directors and their families underour health insurance plan.

 

The following table setsforth information concerning the compensation of each of our directors during2009.

 
| **Name (1)**                 | ** ** | **Fees Earned********or Paid********in Cash********($)** | ** ** | **Stock********Awards(2)********($)** | ** ** | **All Other********Compensation(3)********($)** | ** ** | **Total********($)** | ** ** |
|------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------------|------------|----------------------|------------|
| Austin  A. Adams             |       | 100,000                                                            |       | —                                |       | —                                          |       | 100,000              |       |
| Edward  A. Kangas            |       | 150,000                                                            |       | —                                |       | —                                          |       | 150,000              |       |
| Leo  J. Pound                |       | 125,000                                                            |       | —                                |       | 16,483                                          |       | 141,483              |       |
| Richard  M. Cashin, Jr. |       | —                                                             |       | —                                |       | —                                          |       | —               |       |
| David  M. Cohen              |       | —                                                             |       | —                                |       | —                                          |       | —               |       |
| Colin  M. Farmer             |       | —                                                             |       | —                                |       | —                                          |       | —               |       |
| Henry  H. Briance            |       | —                                                             |       | —                                |       | —                                          |       | —               |       |

 

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| (1) | Mr. Barrist  has been omitted from this table because he received no additional  compensation for serving as a director.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | There  were no restricted stock awards granted to directors during 2009. As of  December 31, 2009, the number of unvested restricted shares held by each  of Messrs. Adams, Kangas and Pound was 2,355.3 shares and the number of  vested restricted shares held by each of Messrs. Adams, Kangas and Pound  was 1,709.3 shares. All shares issued to directors under the Restricted Share  Plan, regardless of whether the restriction period with regard to such shares  has lapsed, remain subject to transfer restrictions, repurchase rights and  other restrictions set forth in a Stockholders’ Agreement and the stock  awards issued pursuant to the Restricted Share Plan. See “-Restricted Share  Plan.” |
| (3) | Represents  the amount we paid for health insurance on behalf of the director and his  family.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

**Compensation Policies and Practices Related to RiskManagement**

 

We believe severalfeatures of our employee compensation programs reflect positive risk managementpractices for our employees and are not likely to have a material adverseaffect on the Company. We believe we have allocated our compensation among basesalary and short and long-term compensation, and set incentive compensationtargets in such a way as to not encourage excessive risk-taking. Our incentivecompensation targets are based on Company-wide performance metrics, which webelieve encourages decision-making that is in the best long-term interests ofthe Company.

 

**Compensation Committee Interlocks and Insider Participation**

 

In 2009, the CompensationCommittee consisted of Messrs. Adams, Kangas and Farmer. No person whoserved as a member of the Compensation Committee during 2009 was a current orformer officer or employee of the Company or, except as described below withrespect to Mr. Farmer, engaged in certain transactions with the Companyrequired to be disclosed by regulations of the SEC. Additionally, there were noCompensation Committee “interlocks” during 2009, which generally means that noexecutive officer of the Company served as a director or member of thecompensation committee of another entity, one of whose executive officersserved as a director or member of the Company’s Compensation Committee.

 

***Management Agreement.*** On November 15,2006, we entered into a ten-year management agreement with OEP pursuant towhich OEP provides business and organizational strategy and financial advisoryservices. OEP is our principal shareholder. Mr. Cashin, our director from March2008 until March 2009, is a Managing Partner of OEP. Messrs. Cohen and Farmerare Managing Directors of OEP and Mr. Briance is a Vice President of OEP.Pursuant to the management agreement, we pay OEP $3.0 million per annum plusreimbursement of expenses. We 

 

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do not know and cannot determine the approximate dollar value of theinterest of each of Messrs. Briance, Cashin, Cohen and Farmer in themanagement fees that we paid to OEP. We do not separately compensate OEP or itsdesignated representatives on our Board of Directors for their services asdirectors, but OEP may receive fees in connection with its role in specifictransactions in the future.

 

***Systems & Services Technologies, Inc.*** In January 2008, we acquired Systems & ServicesTechnologies, Inc. (“SST”), a third-party consumer receivable servicer,for $18.4 million, including certain post-closing adjustments. The purchaseprice consisted of cash consideration of $11.3 million, $3.2 million of whichwas paid during 2009, and the issuance of 29,884.7 shares of our Series A14% PIK Preferred Stock, of which 7,400 shares were issued during 2009. SST wasa wholly owned subsidiary of JPMorgan Chase Bank, National Association.JPMorgan Chase Bank, National Association is an affiliate of One Equity Partners.

 

***Additional Equity Investment by Certain Stockholders and Management.*** On March 25,2009, we sold a total of 148,463.6 shares of our Series B-1 PreferredStock and 19,957.4 shares of our Series B-2 Preferred Stock in a privateplacement to certain of our existing stockholders. The offering price per sharewas $237.50 per share of Series B-1 Preferred Stock and $237.50 per shareof Series B-2 Preferred Stock. The aggregate cash purchase price was $40.0million.

 

Setforth below is information concerning those stockholders that purchased morethan $120,000 of our securities in the March 2009 private placement:

 
| **Purchaser**                                                  | ** ** | **Shares of  Company  Series B-1  Preferred  Stock** | ** ** | **Shares of  Company  Series B-2  Preferred  Stock** | ** ** | **Cash  Purchase  Price** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------|------------|
|                                                           |       |                                                      |       |                                                      |       |                      |       |
| One  Equity Partners II, L.P.                                  |       | 148,463.6                                                 |       | —                                                    |       | $                         | 35,260,115 |   |
| OEP  II Co-Investors,L.P.                                      |       | —                                                    |       | 2,935.0                                                   |       | 697,068                   |       |
| OEP  II Partners Co. Invest, L.P.                              |       | —                                                    |       | 1,045.6                                                   |       | 248,340                   |       |
| Citigroup  Capital Partners II 2006 Citigroup Investment, L.P. |       | —                                                    |       | 3,570.6                                                   |       | 848,014                   |       |
| Citigroup  Capital Partners II Employee Master Fund, L.P.      |       | —                                                    |       | 4,010.8                                                   |       | 952,562                   |       |
| Citigroup  Capital Partners II Onshore, L.P.                   |       | —                                                    |       | 1,810.7                                                   |       | 430,041                   |       |
| Citigroup  Capital Partners II Cayman Holdings, L.P.           |       | —                                                    |       | 2,268.9                                                   |       | 538,861                   |       |
| Michael  J. Barrist                                            |       | —                                                    |       | 2,105.3                                                   |       | 500,000                   |       |
| Barrist  Family Foundation(1)                                  |       | —                                                    |       | 2,105.3                                                   |       | 500,000                   |       |
|                                                                |            |                                                           |            |                                                           |            |                           |            |  |

 

----

(1) TheBarrist Family Foundation is a charitable trust of which Mr. Barrist is aco-trustee.

 

***RegistrationRights Agreement.*** In connection with the Transaction, on November 15, 2006, we alsoentered into customary registration rights agreements with the placement agentsof the original notes, for the benefit of the holders of the original notes.The registration rights agreements provide that so long as J.P. MorganSecurities Inc. proposes to make a market in the notes as part of its businessin the ordinary course, we must, within certain time periods, file a marketmaking registration statement and, subject to certain exceptions, keep therelated prospectus current in order to enable J.P. Morgan Securities Inc. tocontinue its market making activities with respect to the notes.

 

***OtherArrangements.***OEP is managed by OEP Holding Corporation, a wholly owned indirect subsidiaryof JP Morgan Chase & Co., referred to as JPM, and JPM is a client ofours. For the year ended December 31, 2009, we received fees for providingservices to JPM of $12.6 million.

 

JPMorganChase Bank, N.A., an affiliate of JPM, is a lender under our Credit Facility.The Credit Facility consists of substantially the same terms, including interestrates and collateral, as those prevailing for comparable transactions forunrelated parties, and does not involve more than the normal risk ofuncollectibility or present other unfavorable features.

 

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Wealso have certain corporate banking relationships with affiliates of JPM and weare charged market rates for these services.

 

**Item 12.****                         ****Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

 

**EquityCompensation Plan Information**

 

The followingtable details information regarding the Company’s existing equity compensationplans as of December 31, 2009:

 
| ** **                                                  | ** ** | **(a)**                                                                                                | ** ** | **(b)**                                                                                  | ** ** | **(c)**                                                                                                                                              | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                           | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights(1)** | ** ** | **Weighted-  average exercise  price of  outstanding  options, warrants  and rights(1)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))** | ** ** |
| Equity  compensation plans approved by security holders     |       | —                                                                                                 |       | —                                                                                   |       | 3,656                                                                                                                                                |       |
| Equity  compensation plans not approved by security holders |       | —                                                                                                 |       | —                                                                                   |       | —                                                                                                                                               |       |
| Total                                                       |       | —                                                                                                 |       | —                                                                                   |       | 3,656                                                                                                                                                |       |

 

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(1)         As of December 31,2009, 333,011 restricted shares of Class A common stock were issued andoutstanding, subject, in certain circumstances, to vesting and forfeiture.These awards are issuable without the payment of any cash consideration by theholder.

 

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**SecurityOwnership of Certain Beneficial Owners and Management**

 

The followingtable summarizes the beneficial ownership of our voting common stock,consisting of Class A common stock and Class L common stock, as of March 31,2010 for:

 

·                  each person who we know beneficially ownsmore than 5 percent of our voting common stock;

·                  each director

·                  each of the Named Executive Officers whoappears in the Summary Compensation Table; and

·                  all directors and executive officers as agroup.

 

As of March 31,2010, there were 2,960,847 shares of Class A common stock and 399,814shares of Class L common stock outstanding.

 
| ** **                                                        | ** ** | **Shares  Beneficially Owned (1)**                              | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| **Name of  Beneficial Owner**                                     | ** ** | **Number of********Class L********Common Stock** | ** ** | **Percent of********Class L********Common Stock** | ** ** | **Number  of********Class A********Common Stock** | ** ** | **Percent of********Class A********Common Stock** | ** ** | **Percent  of********Combined********Class L and********Class A********Common Stock** | ** ** |
| One Equity Partners II, L.P,                                      |       |                                                            |       |   |   |   |   |   |   |   |   |
| OEP II Co-Investors, L.P.                                         |       |                                                            |       |   |   |   |   |   |   |   |   |
| OEP II Partners Co-Invest, L.P.                                   |       |                                                            |       |   |   |   |   |   |   |   |   |
| OEP General Partners II, L.P.                                     |       |                                                            |       |   |   |   |   |   |   |   |   |
| OEP Co-Investors Management II, Ltd.          |       |                                                            |       |   |   |   |   |   |   |   |   |
| OEP II Partners Co-Invest, G.P., Ltd.    |       |                                                            |       |   |   |   |   |   |   |   |   |
| OEP Holding Corporation                                           |       |                                                            |       |   |   |   |   |   |   |   |   |
| c/o One Equity Partners                                           |       |                                                            |       |   |   |   |   |   |   |   |   |
| 320 Park Avenue, 18th Floor                                  |       |                                                            |       |   |   |   |   |   |   |   |   |
| New York, NY 10022 (2)                                            |       | 129,294                                                         |       | 32.3 | % | 2,560,206 |   | 86.5 | % | 80.0 | % |
| Citigroup Capital Partners II 2006            |       |                                                            |       |   |   |   |   |   |   |   |   |
| Citigroup Investment, L.P.,                                       |       |                                                            |       |   |   |   |   |   |   |   |   |
| Citigroup Capital Partners II                                     |       |                                                            |       |   |   |   |   |   |   |   |   |
| Employee Master Fund, L.P.                                        |       |                                                            |       |   |   |   |   |   |   |   |   |
| Citigroup Capital Partners II                                     |       |                                                            |       |   |   |   |   |   |   |   |   |
| Onshore, L.P.                                                     |       |                                                            |       |   |   |   |   |   |   |   |   |
| Citigroup Capital Partners II                                     |       |                                                            |       |   |   |   |   |   |   |   |   |
| Cayman Holdings, L.P.                                        |       |                                                            |       |   |   |   |   |   |   |   |   |
| c/o Citigroup Private Equity                                      |       |                                                            |       |   |   |   |   |   |   |   |   |
| 388 Greenwich Street                                              |       |                                                            |       |   |   |   |   |   |   |   |   |
| 32nd Floor                                                   |       |                                                            |       |   |   |   |   |   |   |   |   |
| New York, NY 10013 (3)                                            |       | 160,000                                                         |       | 40.0 | % | 40,000 |   | 1.4 | % | 6.0 | % |
| Helzberg Angrist Investors I, LLC                                 |       |                                                            |       |   |   |   |   |   |   |   |   |
| 4049 Pennsylvania Avenue, #204                                    |       |                                                            |       |   |   |   |   |   |   |   |   |
| Kansas City, MO 64111 (4)                                         |       | 20,000                                                          |       | 5.0 | % | 5,000 |   | * |   | * |   |
| Michael J. Barrist (5)                                            |       | 67,262                                                          |       | 16.8 | % | 37,619 |   | 1.3 | % | 3.1 | % |
| Austin A. Adams                                                   |       | —                                                          |       | — |   | 4,065 |   | * |   | * |   |
| Edward A. Kangas                                                  |       | —                                                          |       | — |   | 4,065 |   | * |   | * |   |
| Leo J. Pound                                                      |       | —                                                          |       | — |   | 4,065 |   | * |   | * |   |
| Henry H. Briance (2) (6)                                     |       | 129,294                                                         |       | 32.3 | % | 2,560,206 |   | 86.5 | % | 80.0 | % |
| Colin M. Farmer (2) (7)                                      |       | 129,294                                                         |       | 32.3 | % | 2,560,206 |   | 86.5 | % | 80.0 | % |
| John R. Schwab                                                    |       | 460                                                             |       | * |   | 37,136 |   | 1.3 | % | 1.1 | % |
| Stephen W. Elliott                                                |       | 1,660                                                           |       | * |   | 37,748 |   | 1.3 | % | 1.2 | % |
| Joshua Gindin, Esq. (8)                                      |       | 26,220                                                          |       | 6.6 | % | 43,732 |   | 1.5 | % | 2.1 | % |
| Steven Leckerman                                                  |       | 1,720                                                           |       | * |   | 47,947 |   | 1.6 | % | 1.5 | % |
| All directors and executive officers as a group (11  persons) (9) |       | 98,162                                                          |       | 24.6 | % | 251,754 |   | 8.5 | % | 10.4 | % |

 

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| *   | Less  than one percent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | The securities  “beneficially owned” by a person are determined in accordance with the  definition of “beneficial ownership” set forth in the regulations of the SEC  and, accordingly, include securities as to which the person has or shares  voting or investment power. Shares of NCO voting common stock which a person  has the right to acquire within 60 days of March 31, 2010 are deemed  outstanding for computing the share ownership and percentage ownership of the  person having such right, but are not deemed outstanding for computing the  percentage of any other person. The same shares may be beneficially owned by  more than one person. Beneficial ownership may be disclaimed as to certain of  the securities. Fractional shares are rounded to the nearest whole share. |
| (2) | Includes 2,527,882  shares of Class A common stock owned by One Equity Partners II, L.P.  (“OEP II”), 44,930 shares of Class L common stock and 11,233 shares of  Class A common stock owned by OEP II Co-Investors, L.P. (“OEP II Co”)  and 84,364 shares of Class L common stock and 21,091 shares of  Class A common stock owned by OEP II Partners Co-Invest, L.P. (“OEP II  Partners” and collectively with OEP II and OEP II Co, “OEP”). The general  partner of OEP II is OEP General Partners II, L.P. (“OEP                                                                                                                                                                                                                                      |

 

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|   | General”). The general  partner of OEP General is OEP Holding Corporation (“OEP Holding”). The  general partner of OEP II Co is OEP Co-Investors Management II, Ltd. (“OEP  Co-Investors”). The general partner of OEP II Partners is OEP II Partners  Co-Invest G.P., Ltd. (“OEP II Partners GP”). Messrs. Cohen and Farmer  are managing directors of OEP Holding, OEP Co-Investors and OEP II Partners  GP. Mr. Briance is a vice president of OEP. Messrs. Briance, Cohen  and Farmer may be deemed to beneficially own these shares, but disclaim  beneficial ownership of such shares except to the extent of their respective  pecuniary interest therein.                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3)    | Includes 48,992 shares  of Class L common stock and 12,248 shares of Class A common stock  held by Citigroup Capital Partners II 2006 Citigroup Investment, L.P., 55,032  shares of Class L common stock and 13,758 shares of Class A common  stock held by Citigroup Capital Partners II Employee Master Fund, L.P.,  24,845 shares of Class L common stock and 6,211 shares of Class A  common stock held by Citigroup Capital Partners II Onshore, L.P. and 31,131  shares of Class L common stock and 7,783 shares of Class A common  stock held by Citigroup Capital Partners II Cayman Holdings, L.P. Citigroup  Private Equity LP is the general partner of Citigroup Capital Partners II  2006 Citigroup Investment, L.P., Citigroup Capital Partners II Employee  Master Fund, L.P., Citigroup Capital Partners II Onshore, L.P. and Citigroup  Partners II Cayman Holdings, L.P.                                                                                                                                                                                                                             |
| (4)    | All shares of  Class L common stock and Class A common stock are held by Helzberg  Angrist Investors, I, LLC. Helzberg Angrist Capital, LLC is the manager  of Helzberg Angrist Investors I, LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (5)    | Includes: (i) 306  shares of Class L common stock and 76 shares of Class A common  stock owned by Mrs. Cheryl Lazarus which Mr. Barrist has the sole  right to vote pursuant to an irrevocable proxy and for which he shares  dispositive power with her; (ii) 8,442 shares of Class L common  stock and 2,111 shares of Class A common stock held in trust for the  benefit of members of Mr. Barrist’s family for which Mr. Barrist is  a co-trustee and (iii) 9,108 shares of Class L common stock and  2,277 shares of Class A common stock held by the Barrist Family  Foundation, a charitable trust, for which Mr. Barrist is co-trustee.  Excludes 16,738 shares of Class L common stock and 4,184 shares of  Class A common stock held in trust for the benefit of Mr. Barrist’s  children, as to all of which shares Mr. Barrist disclaims beneficial  ownership. Mrs. Cheryl Lazarus is the sister of Michael J. Barrist.  Mr. Barrist’s address is c/o NCO Group, Inc., 507 Prudential Road,  Horsham, Pennsylvania 19044. |
| (6)    | Mr. Briance, our  director, was designated by OEP. Mr. Briance is a vice president at OEP.  Amounts disclosed for Mr. Briance are also included above in footnote 2.  Mr. Briance disclaims beneficial ownership of any shares beneficially  owned by OEP, except to the extent of his pecuniary interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (7)    | Mr. Farmer, our  director, was designated by OEP. Mr. Farmer is a managing director at  OEP Holding, the general partner of OEP II General, the general partner of  OEP II, and is a managing director of OEP Co-Investors and OEP II Partners  GP. Amounts disclosed for Mr. Farmer are also included above in footnote  2. Mr. Farmer disclaims beneficial ownership of any shares beneficially  owned by OEP, except to the extent of his pecuniary interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (9)    | Includes:  (i) 16,738 shares of Class L common stock and 4,184 shares of  Class A common stock held in trust for the benefit of Mr. Barrist’s  children for which Mr. Gindin is co-trustee and (ii) 8,442 shares  of Class L common stock and 2,111 shares of Class A common stock  held in trust for the benefit of members of Mr. Barrist’s family for  which Mr. Gindin is co-trustee. Mr. Gindin’s address is c/o NCO  Group, Inc., 507 Prudential Road, Horsham, Pennsylvania 19044.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (9)    | Excludes 129,294 shares  of Class L common stock and 2,560,206 shares of Class A common  stock described in footnote 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

**Item 13.         CertainRelationships and Related Transactions, and Director Independence**

 

**Policywith Respect to Approval of Related Party Transactions**

 

Under its charter,our Audit Committee is responsible for reviewing and approving the terms andconditions of all transactions between us and any employee, officer, directorand certain of their family members and other related persons required to bereported under Item 404 of SEC Regulation S-K. In practice, related partytransactions are reviewed and approved by directors that do not have a director indirect interest in such transaction. We have not adopted written policiesand procedures with respect to the approval of related party transactions.Generally, under the agreements governing our outstanding notes and bankindebtedness, we are prohibited from entering into transactions with affiliatesexcept upon terms that, taken as a whole, are materially not less favorable tous than could be obtained, at the time of such transaction, in a comparable arm’s-lengthtransaction with a person that is not such an affiliate.

 

The transactionsdescribed in “Item 11. Executive Compensation” under the heading “CompensationCommittee Interlocks and Insider Participation” are incorporated herein byreference.

 

**Transactionswith Certain Clients**

 

Affiliates ofCitigroup are investors in us, and Citigroup is a client of ours. For the yearended December 31, 2009, we received fees for providing services toCitigroup of $57.5 million. At December 31, 2009, we had accountsreceivable of $5.8 million due from Citigroup.

 

**Employmentof Related Persons**

 

We employ BrettLeckerman as a general manager of one of our collection units. Mr. Leckermanis the son of Steven Leckerman, an executive officer of ours. Mr. Leckermanreceived salary and bonus totaling $132,875 in 2009. Mr. Brett Leckermanalso received an automobile allowance in 2009. We believe that the compensationpaid to Mr. Brett Leckerman was comparable with compensation paid to otheremployees with similar levels of responsibility and years of service.

 

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**Independenceof the Board of Directors**

 

Because our commonstock is not listed on any national securities exchange or inter-dealerquotation system, we are not required to comply with the listing standards ofsuch exchanges or quotation systems that require that a majority of an issuer’sdirectors be independent.

 

In evaluating theindependence of our directors, we use the definition of independence containedin the listing standards of The NASDAQ Stock Market LLC, referred to as Nasdaq,the national securities exchange upon which our common stock was listed priorto the Transaction. Though not formally considered by our Board given that oursecurities are not registered or traded on any national securities exchange,based upon the listing standards of Nasdaq, we believe that Messrs. Adams,Kangas and Pound are independent.

 

Under applicableNasdaq listing standards, a majority of the members of a company’s board ofdirectors must qualify as “independent,” unless the company is a controlledcompany. A controlled company is a company in which more than 50 percent of thevoting power is held by an individual, group or other company. We would qualifyas a controlled company because OEP owns approximately 80.0 percent of ourvoting common stock, and, as such, would not be required to have a majority ofthe members of our Board be independent.

 

Our Board hasthree standing committees: an Audit Committee, a Compensation Committee and aNominating and Corporate Governance Committee. The current members of the AuditCommittee are Messrs. Adams, Kangas and Pound. The current members of theCompensation Committee are Messrs. Adams, Kangas and Farmer. The currentmembers of Nominating and Corporate Governance Committee are Messrs. Adams,Pound and Briance. Though not formally considered by our Board given that oursecurities are not registered or traded on any national securities exchange,based upon the listing standards of Nasdaq, we believe that each current memberof the Audit Committee, the Compensation Committee, other than Mr. Farmer,and the Nominating and Corporate Governance Committee, other than Mr. Brianceis independent.

 

**Item 14.         PrincipalAccounting Fees and Services**

 

**IndependentRegistered Public Accounting Firm Fees and Services**

 

The aggregate feesfor professional services rendered to us by PricewaterhouseCoopers LLP, ourcurrent independent registered public accounting firm, as of or for the yearsended December 31, 2009 and 2008, were as follows:

 
| **Services Rendered (1)** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
| Audit fees                |       | $        | 2,340,000  |     | $          | 2,415,000 |   |
| Audit-Related fees        |       | $        | 450,000    |     | $          | 838,000 |   |
| Tax fees                  |       | $        | 225,000    |     | $          | 237,000 |   |
| All other fees            |       | $        | 8,500      |     | $          | 8,000 |   |

 

----

(1)        The aggregate fees includedin Audit Fees are fees billed *for*the fiscal year.

The aggregate fees included in each of the other categories are feesbilled *in* the fiscal year.

 

***AuditFees.*** Theaudit fees for 2009 and 2008 include fees for professional services renderedfor the audit of the Company’s consolidated financial statements, review of theinterim consolidated financial statements included in quarterly reports, andservices that generally only the independent registered public accounting firmcan reasonably provide, such as statutory audits, consents and assistance withand review of documents filed with the SEC. The change in the 2008 audit feesfrom the amount previously reported was due to the finalization of audit fees.

 

***Audit-RelatedFees.*** Theaudit-related fees for 2009 and 2008 include fees for assurance and relatedservices that are reasonably related to the performance of the audit or reviewof the Company’s consolidated financial statements and are not reported under “AuditFees.” These services include attest services that are not required by statuteor regulation, and consultations concerning financial accounting and reportingstandards. Audit-related fees for 2009 and 2008 also include fees for SAS 70engagements.

 

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***TaxFees.*** Taxfees for 2009 and 2008 include fees for services related to tax compliance, andtax planning and advice including tax assistance with tax audits. Theseservices include assistance regarding federal and state tax compliance andadvice, review of tax returns, and federal and state tax planning.

 

***AllOther Fees.***All other fees for 2009 and 2008 represent annual fees for a subscription toPricewaterhouseCoopers’ proprietary research tool.

 

The AuditCommittee has considered and determined that the services provided byPricewaterhouseCoopers LLP are compatible with PricewaterhouseCoopers LLPmaintaining its independence.

 

The AuditCommittee has adopted a policy that requires advance approval of all audit,audit-related, tax services and other services performed byPricewaterhouseCoopers LLP. The policy provides for pre-approval by the AuditCommittee, or the Chairman of the Audit Committee, of specifically definedaudit and non-audit services. Unless the specific service has been previouslypre-approved with respect to that year, the Audit Committee must approve thepermitted service before PricewaterhouseCoopers LLP is engaged to perform it.The Audit Committee pre-approved all of the audit and non-audit servicesprovided to the Company by PricewaterhouseCoopers LLP in 2009 and 2008.

 

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**PART IV**

 

**Item 15.         Exhibitsand Financial Statement Schedules.**

 

1.     List of Consolidated Financial Statements.The consolidated financial statements and the accompanying notes of NCO Group, Inc.,have been included in this Report on Form 10-K beginning on page F-1:

 
| Report of Independent Registered Public Accounting  Firm                                                         |
|------------------------------------------------------------------------------------------------------------------|
|                                                                                                             |
| Consolidated  Balance Sheets as of December 31, 2009 and 2008                                               |
|                                                                                                             |
| Consolidated Statements of Operations for the years  ended December 31, 2009, 2008 and 2007.                |
|                                                                                                             |
| Consolidated Statements of Stockholders’ Equity for  the years ended December 31, 2009, 2008 and 2007. |
|                                                                                                             |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2009, 2008 and 2007.                |
|                                                                                                             |
| Notes to Consolidated Financial Statements                                                                       |

 

2.     All financial statement schedules areomitted because the required information is not present or not present inamounts sufficient to require submission of the schedule or because theinformation required is included in the respective financial statements ornotes thereto contained herein.

 

3.     List of Exhibits filed in accordance withItem 601 of Regulation S-K. The warranties, representations and covenantscontained in the agreements, documents and other instruments included orincorporated by reference herein or which appear as exhibits hereto should notbe relied upon by buyers, sellers or holders of the company’s securities andare not intended as warranties, representations or covenants to any individualor entity except as specifically set forth in such agreements, documents andother instruments. The following exhibits are incorporated by reference in, orfiled with, this Report on Form 10-K. Management contracts andcompensatory plans, contracts and arrangements are indicated by “*”:

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.1                  |       | Agreement and Plan of  Merger, dated as of July 21, 2006, by and among Collect  Holdings, Inc., Collect Acquisition Corp. and NCO Group, Inc.  (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s  Current Report on Form 8-K filed on July 25, 2006 (000-21639)) (NCO  Group, Inc. agrees to furnish supplementally to the SEC, upon request, a  copy of any omitted schedules or exhibits.)    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.2                  |       | Agreement and Plan of  Merger, dated as of February 27, 2007, by and between NCO  Group, Inc. and Collect Holdings, Inc. (incorporated by reference  to Exhibits filed with NCO Group, Inc.’s Registration Statement on  Form S-4 (333-144067) filed on June 26, 2007)                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.3                  |       | Agreement and Plan of  Merger by and among Outsourcing Solutions Inc., NCO Group, Inc. and NCO  Acquisition Sub, Inc. dated as of December 11, 2007 (incorporated  by reference to the Exhibits filed with NCO Group, Inc.’s Annual Report  on Form 10-K for the year ended December 31, 2007 (333-144067,  333-144067), filed on March 31, 2008)                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.4                  |       | Agreement and Plan of  Merger by and among NCO Group, Inc., Systems & Services  Technologies Merger Corp., System & Services Technologies, Inc.  and JPMorgan Chase Bank, National Association dated as of August 27,  2007 (incorporated by reference to the Exhibits filed with NCO  Group, Inc.’s Current Report on Form 8-K (333-144067, 333-144068)  filed on May 13, 2008)                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.5                  |       | Amendment No. 1  dated as of December 12, 2007 to the Agreement and Plan of Merger by and  among NCO Group, Inc., System & Services Technologies Merger  Corp., System & Services Technologies, Inc, and JPMorgan Chase Bank,  National Association (incorporated by reference to the Exhibits filed with  NCO Group, Inc.’s Current Report on Form 8-K (333-144067,  333-144068) filed on May 13, 2008) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.1                  |       | Second Amended and  Restated Certificate of Incorporation of NCO Group, Inc., as amended  (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s  Annual Report on Form 10-K for the year ended December 31, 2008  (333-150885), filed on March 31, 2009.                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.2                  |       | Amended and Restated  Bylaws of NCO Group, Inc. (incorporated by reference to Exhibits filed  with NCO Group, Inc.’s Registration Statement on Form S-4  (333-144067) filed on June 26, 2007)                                                                                                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1                  |       | Indenture, dated as of  November 15, 2006, among NCO Group, Inc., the Guarantors signatory  thereto and The Bank of New York, as Trustee, with respect to the Floating  Rate Senior Notes due 2013 (incorporated by reference to Exhibits filed with  NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067)  filed on June 26, 2007)                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.2                  |       | Indenture, dated as of  November 15, 2006, among NCO Group, Inc., the Guarantors signatory  thereto and The Bank of New York, as Trustee, with respect to the 11.875%  Senior Subordinated Notes due 2014 (incorporated by reference to Exhibits  filed with NCO Group, Inc.’s Registration Statement on Form S-4  (333-144067) filed on June 26, 2007)                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.3                  |       | Supplemental Indenture,  dated as of November 15, 2006, among NCO Group, Inc. and The Bank  of New York, as Trustee, with respect to the Floating Rate Senior Notes due  2013 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s  Registration Statement on Form S-4 (333-144067) filed on June 26,  2007)                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.4                  |       | Supplemental Indenture,  dated as of November 15, 2006, among NCO Group, Inc. and The Bank  of New York, as Trustee, with respect to the 11.875% Senior Subordinated  Notes due 2014 (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007)                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.5                  |       | Second Supplemental  Indenture, dated as of February 27, 2007, among NCO Group, Inc. and  The Bank of New York, as Trustee, with respect to the Floating Rate Senior  Notes due 2013 (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s                                                                                                                                                                                 |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       | Registration Statement  on Form S-4 (333-144067) filed on June 26, 2007)                                                                                                                                                                                                                                                                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.6                  |       | Second Supplemental  Indenture, dated as of February 27, 2007, among NCO Group, Inc. and  The Bank of New York, as Trustee, with respect to the 11.875% Senior  Subordinated Notes due 2014 (incorporated by reference to Exhibits filed with  NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067)  filed on June 26, 2007)                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.7                  |       | Third Supplemental  Indenture, dated as of February 27, 2007, among Collect  Holdings, Inc. and The Bank of New York, as Trustee, with respect to the  Floating Rate Senior Notes due 2013 (incorporated by reference to Exhibits  filed with NCO Group, Inc.’s Registration Statement on Form S-4  (333-144067) filed on June 26, 2007)                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.8                  |       | Third Supplemental  Indenture, dated as of February 27, 2007, among Collect  Holdings, Inc. and The Bank of New York, as Trustee, with respect to the  11.875% Senior Subordinated Notes due 2014 (incorporated by reference to  Exhibits filed with NCO Group, Inc.’s Registration Statement on  Form S-4 (333-144067) filed on June 26, 2007)                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.9                  |       | Registration Rights  Agreement, dated as of November 15, 2006, among NCO Group, Inc.,  the Guarantors signatory thereto and Morgan Stanley & Co.  Incorporation, J.P. Morgan Securities Inc. and Banc of America Securities LLP  with respect to the Floating Rate Senior Notes due 2013 (incorporated by  reference to Exhibits filed with NCO Group, Inc.’s Registration  Statement on Form S-4 (333-144067) filed on June 26, 2007)        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.10                 |       | Registration Rights  Agreement, dated as of November 15, 2006, among NCO Group, Inc.,  the Guarantors signatory thereto and Morgan Stanley & Co.  Incorporation, J.P. Morgan Securities Inc. and Banc of America Securities LLP  with respect to the 11.875% Senior Subordinated Notes due 2013 (incorporated  by reference to Exhibits filed with NCO Group, Inc.’s Registration  Statement on Form S-4 (333-144067) filed on June 26, 2007) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.11                 |       | Form of 144A and  Regulation S Floating Rate Senior Notes due 2013 (contained in  Exhibit 4.1) (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007)                                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.12                 |       | Form of 144A and  Regulation S 11.875% Senior Subordinated Notes due 2014 (contained in  Exhibit 4.2) (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007)                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.13                 |       | 144A Notation of Senior  Guarantee by the Guarantors named therein, with respect to the Floating Rate  Senior Notes due 2013 (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007)                                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.14                 |       | Regulation S Notation  of Senior Guarantee by the Guarantors named therein, with respect to the  Floating Rate Senior Notes due 2013 (incorporated by reference to Exhibits  filed with NCO Group, Inc.’s Registration Statement on Form S-4  (333-144067) filed on June 26, 2007)                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.15                 |       | 144A Notation of Senior  Subordinated Guarantee by the Guarantors named therein, with respect to the  11.875% Senior Subordinated Notes due 2014 (incorporated by reference to  Exhibits filed with NCO Group, Inc.’s Registration Statement on  Form S-4 (333-144067) filed on June 26, 2007)                                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.16                 |       | Regulation S Notation  of Senior Subordinated Guarantee by the Guarantors named therein, with  respect to the 11.875% Senior Subordinated Notes due 2014 (incorporated by  reference to Exhibits filed with NCO Group, Inc.’s Registration  Statement on Form S-4 (333-144067) filed on June 26, 2007)                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.17                 |       | Registration Rights  Agreement, dated as of November 15, 2006, among Collect  Holdings, Inc., One Equity Partners II, L.P., OEP II Partners  Co-Investors, L.P., OEP II Partners Co-Invest, L.P., Michael Barrist and the  other non-OEP Investors named therein (incorporated by reference to Exhibits  filed with NCO Group, Inc.’s Registration                                                                                                               |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       | Statement on  Form S-4 (333-144067) filed on June 26, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.18                 |       | Fourth Supplemental  Indenture, dated as of July 11, 2007, among NCO Group, Inc., NCOP  IX, LLC and The Bank of New York, as Trustee, with respect to the Floating  Rate Senior Notes due 2013 (incorporated by reference to the Exhibits filed  with NCO Group, Inc.’s Registration Statement on Form S-4/A  (333-144067) filed on July 13, 2007)                                                                                                                                                                                                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.19                 |       | Fourth Supplemental  Indenture, dated as of July 11, 2007, among NCO Group, Inc., NCOP  IX, LLC and The Bank of New York, as Trustee, with respect to the 11.875%  Senior Subordinated Notes due 2014 (incorporated by reference to the Exhibits  filed with NCO Group, Inc.’s Registration Statement on Form S-4/A  (333-144067) filed on July 13, 2007)                                                                                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.20                 |       | Form of Exchange  Floating Rate Senior Note due 2013 (incorporated by reference to the Exhibits  filed with NCO Group, Inc.’s Registration Statement on Form S-4/A  (333-144067) filed on July 13, 2007)                                                                                                                                                                                                                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.21                 |       | Form of Exchange  11.875% Senior Subordinated Note due 2014 (incorporated by reference to the  Exhibits filed with NCO Group, Inc.’s Registration Statement on  Form S-4/A (333-144067) filed on July 13, 2007)                                                                                                                                                                                                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.22                 |       | Fifth Supplemental  Indenture, dated as of February 29, 2008, among NCO Group, Inc.,  the New Guarantors (as defined therein), and The Bank of New York, as  Trustee, with respect to the Floating Rate Senior Notes due 2013  (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s  Registration Statement on Form S-1 (333-150885) filed on May 13,  2008)                                                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.23                 |       | Fifth Supplemental  Indenture, dated as of February 29, 2008, among NCO Group, Inc.,  the New Guarantors (as defined therein), and The Bank of New York, as  Trustee, with respect to the 11.875% Senior Subordinated Notes due 2014  (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s  Registration Statement on Form S-1 (333-150885) filed on May 13,  2008)                                                                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.24                 |       | Sixth Supplemental  Indenture, dated as of March 25, 2009, among NCO Group, Inc., the  New Guarantor (as defined therein), and The Bank of New York Mellon, as  successor to The Bank of New York, as Trustee, with respect to the Floating  Rate Senior Notes due 2013 (incorporated by reference to Exhibits filed with  NCO Group, Inc.’s Registration Statement on Form S-1 (333-158745,  333-150885) filed on April 24, 2009)                                                                                                                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.25                 |       | Sixth Supplemental  Indenture, dated as of March 25, 2009, among NCO Group, Inc., the  New Guarantor (as defined therein), and The Bank of New York Mellon, as  successor to The Bank of New York, as Trustee, with respect to the 11.875%  Senior Subordinated Notes due 2014 (incorporated by reference to Exhibits  filed with NCO Group, Inc.’s Registration Statement on Form S-1  (333-158745, 333-150885) filed on April 24, 2009)                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1                 |       | Credit Agreement, dated  as of November 15, 2006, among NCO Group, Inc. (as survivor of the  merger with Collect Acquisition Corp.), NCO Financial Systems, Inc., the  Subsidiary Guarantors, the Lenders and agents named therein and Morgan  Stanley Senior Funding, Inc., as administrative agent (incorporated by  reference to Exhibits filed with NCO Group, Inc.’s Registration  Statement on Form S-4 (333-144067) filed on June 26, 2007) (NCO  Group, Inc. agrees to furnish supplementally to the SEC, upon request, a  copy of any omitted schedules or exhibits.) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.2                 |       | Security Agreement,  dated November 15, 2006, made by Collect Acquisition Corp., NCO  Financial Systems, Inc., Collect Holdings, Inc., the Subsidiary  Guarantors and the Other Grantors Identified Therein, to Morgan  Stanley & Co. Incorporated, as Collateral Agent (incorporated by  reference to Exhibits filed with NCO Group, Inc.’s Registration  Statement on Form S-4 (333-144067) filed on June 26, 2007) (NCO  Group, Inc. agrees to furnish supplementally to the SEC, upon request, a  copy of any omitted schedules or exhibits.)                          |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.3                 |       | Intellectual Property  Security Agreement, dated November 15, 2006, made by Collect Acquisition  Corp., NCO Financial Systems, Inc., Collect Holdings, Inc., NCO  Group, Inc. and the Subsidiary Guarantors in favor of Morgan  Stanley & Co. Incorporated, as Collateral Agent (incorporated by  reference to Exhibits filed with NCO Group, Inc.’s Registration  Statement on Form S-4 (333-144067) filed on June 26, 2007) (NCO  Group, Inc. agrees to furnish supplementally to the SEC, upon request, a  copy of any omitted schedules or exhibits.) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.4                 |       | Stockholders Agreement,  dated as of November 15, 2006, among Collect Holdings, Inc., One  Equity Partners II, L.P., OEP II Co-Investors, L.P., OEP II Partners  Co-Invest, L.P., Michael Barrist, and the Rollover Investors, Management  Investors and Institutional Investors named therein (incorporated by  reference to Exhibits filed with NCO Group, Inc.’s Registration  Statement on Form S-4 (333-144067) filed on June 26, 2007) (NCO  Group, Inc. agrees to furnish supplementally to the SEC, upon request, a  copy of any omitted schedules or exhibits.)     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| *10.5                |       | NCO Group, Inc.  Amended and Restated Restricted Share Plan (incorporated by reference to  Exhibits filed with NCO Group, Inc.’s Registration Statement on  Form S-1 (333-150885) filed on May 13, 2008)                                                                                                                                                                                                                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| *10.6                |       | Form of Award  Agreement pursuant to the NCO Group, Inc. Restricted Share Plan  (incorporated by reference to Exhibits filed with NCO Group, Inc.’s  Registration Statement on Form S-4 (333-144067) filed on June 26,  2007)                                                                                                                                                                                                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| *10.7                |       | Employment Agreement,  dated as of November 15, 2006, between NCO Group, Inc. and Michael  J. Barrist (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007)                                                                                                                                                                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| *10.8                |       | Employment Agreement,  dated as of November 15, 2006, between NCO Group, Inc. and Stephen  W. Elliott (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007)                                                                                                                                                                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| *10.9                |       | Employment Agreement,  dated as of November 15, 2006, between NCO Group, Inc. and Joshua  Gindin (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007)                                                                                                                                                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| *10.10               |       | Employment Agreement,  dated as of November 15, 2006, between NCO Group, Inc. and Steven  Leckerman, including the First Amendment to Employment Agreement dated  June 14, 2007 (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007)                                                                                                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| *10.11               |       | Employment Agreement,  dated as of November 15, 2006, between NCO Group, Inc. and John R.  Schwab (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007)                                                                                                                                                                                                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.12                |       | Management Agreement,  dated as of November 15, 2006, between One Equity Partners II, L.P. and  Collect Holdings, Inc. (incorporated by reference to Exhibits filed with  NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007)                                                                                                                                                                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.13                |       | Rollover Agreement,  dated as of July 21, 2006, between Collect Holdings, Inc. and  Michael Barrist (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007) (NCO Group, Inc. agrees to furnish supplementally  to the SEC, upon request, a copy of any omitted schedules or exhibits).                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.14                |       | Joinder and Amendment  to Rollover Agreement, dated November 15, 2006, among Michael Barrist,  Michael and Natalie Barrist Trust, Annette H. Barrist and the Annette H.  Barrist Trust (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007)                                                                                                                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| *10.15               |       | Executive Deferred  Compensation Plan Basic Document (incorporated by reference to the Exhibits  filed with NCO Group, Inc.’s Current Report on Form 8-K (000-21639)  filed on January 6, 2005)                                                                                                                                                                                                                                                                                                                                                                                             |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *10.16               |       | Executive Deferred  Compensation Plan Adoption Agreement (incorporated by reference to the  Exhibits filed with NCO Group, Inc.’s Current Report on Form 8-K  (000-21639) filed on January 6, 2005)                                                                                                                                                                                                                                                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *10.17               |       | Rabbi Trust Agreement  with Putnam Fiduciary Trust Company (incorporated by reference to the  Exhibits filed with NCO Group, Inc.’s Current Report on Form 8-K  (000-21639) filed on January 6, 2005)                                                                                                                                                                                                                                                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.18                |       | Credit Agreement, dated  as of November 26, 2002, by and among NCOP Capital, Inc. as  Borrower and CFSC Capital Corp. XXXIV as Lender (incorporated by reference to  Exhibit 10.48 to NCO Portfolio Management, Inc.’s Annual Report on  Form 10-K for the year ended December 31, 2002 (000-32403), filed  on March 13, 2003)                                                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10. 19               |       | Second Amendment to  Credit Agreement, dated as of June 30, 2005, by and among NCOP  Capital, Inc. as Borrower and CFSC Capital Corp. XXXIV as Lender  (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  2005 (000-21639), filed on November 14, 2005)                                                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.20                |       | Fee Letter Agreement,  dated November 15, 2006, between One Equity Partners II, L.P., Collect  Holdings, Inc. and Collect Acquisition Corp. (incorporated by reference  to Exhibits filed with NCO Group, Inc.’s Registration Statement on  Form S-4 (333-144067) filed on June 26, 2007)                                                                                                                                                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.21                |       | Stock Subscription  Agreement, dated as of November 14, 2006, by and among Collect Holdings, Inc.,  One Equity Partners II, L.P., OEP II Co-Investors, L.P. and OEP II Partners  Co-Invest, L.P. and several other individuals and entities listed on the  signature page (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007) (NCO Group, Inc. agrees to furnish supplementally  to the SEC, upon request, a copy of any omitted schedules or exhibits)                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.22                |       | Stock Subscription  Agreement, dated as of November 15, 2006, by and among Collect  Holdings, Inc. and the several individuals listed on the signature  page (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007) (NCO Group, Inc. agrees to furnish supplementally  to the SEC, upon request, a copy of any omitted schedules or exhibits)                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.23                |       | Credit Agreement  between NCOP Capital III, LLC and CVI GVF FINCO, LLC dated as of  August 31, 2007. (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2007 (333-144067, 333-144068), filed on November 14,  2007)                                                                                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.24                |       | Credit Agreement  between NCOP Capital IV, LLC and CVI GVF FINCO, LLC dated as of  August 31, 2007. (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2007 (333-144067, 333-144068), filed on November 14,  2007)                                                                                                                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.25                |       | Second Amended and  Restated Exclusivity Agreement dated as of August 31, 2007 among NCOP  Lakes, Inc., NCO Financial Systems, Inc., NCO Portfolio  Management, Inc., NCO Group, Inc., NCOP Capital, Inc., NCOP  Capital I, LLC, NCOP-CF II, LLC, NCOP/CF, LLC, NCOP Capital III, LLC, NCOP  Capital IV, LLC, CARVAL INVESTORS, LLC and CVI GVF FINCO, LLC. (incorporated  by reference to Exhibits filed with NCO Group, Inc.’s Quarterly Report  on Form 10-Q for the quarter ended September 30, 2007 (333-144067,  333-144068), filed on November 14, 2007) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.26                |       | Limited Liability Company  Agreement of NCOP/CF II, LLC dated as of August 31, 2007 between NCOP  Nevada Holdings, Inc. and CVI GVF FINCO, LLC. (incorporated by reference  to Exhibits filed with NCO Group, Inc.’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2007 (333-144067,  333-144068), filed on November 14, 2007)                                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.27                |       | First Amended Credit  Agreement dated as of February 8, 2008 by and among NCO  Group, Inc., NCO Financial Systems, Inc., certain guarantors,  Citizens Bank of Pennsylvania, and RBS Securities Corporation d/b/a RBS  Greenwich Capital, as lead                                                                                                                                                                                                                                                                                                                                                       |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       | arranger and  bookrunner, and the Lenders (incorporated by reference to Exhibits filed with  NCO Group, Inc.’s Annual Report on Form 10-K for the year ended  December 31, 2007 (333-144067, 333-144068), filed on March 31,  2008)                                                                                                                                                                                                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.28                |       | Security Agreement  Supplement dated as of February 29, 2008 made by NCO Group, Inc.,  NCO Financial Systems, Inc., the Subsidiary Guarantors and the Other  Grantors identified therein to Citizens Bank of Pennsylvania, as the  Collateral Agent and Administrative Agent (incorporated by reference to  Exhibits filed with NCO Group, Inc.’s Annual Report on Form 10-K  for the year ended December 31, 2007 (333-144067, 333-144068), filed on  March 31, 2008) ( NCO Group, Inc. agrees to furnish supplementally  to the SEC, upon request, a copy of any omitted schedules or exhibits.) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.29                |       | Intellectual Property  Security Agreement, dated February 29, 2008, made by the persons listed  on the signature pages in favor of Citizens Bank of Pennsylvania, as the  Collateral Agent (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Annual Report on Form 10-K for the year ended  December 31, 2007 (333-144067, 333-144068), filed on March 31,  2008) (NCO Group, Inc. agrees to furnish supplementally to the SEC, upon  request, a copy of any omitted schedules or exhibits.)                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.30                |       | Subscription Agreement  dated as of February 27, 2008 by and among NCO Group, Inc., One  Equity Partners II, L.P., OEP II Co-Investors, OEP II Partners Co-Invest L.P.  and several other individuals and entities listed on the signature  pages thereto (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Annual Report on Form 10-K for the year ended  December 31, 2007 (333-144067, 333-144068), filed on March 31,  2008)                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.31                |       | Subscription Agreement  dated as of December 8, 2008 by and among NCO Group, Inc., One  Equity Partners II, L.P., OEP II Co-Investors, L.P., OEP II Partners  Co-Invest, L.P. and several other individuals and entities listed on the  signature pages thereto (incorporated by reference to Exhibits filed  with NCO Group, Inc.’s Current Report on Form 8-K (333-144067,  333-144068) filed on December 12, 2008)                                                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.32                |       | Second Amendment to  Credit Agreement dated as of March 25, 2009 by and among NCO  Group, Inc., NCO Financial Systems, Inc., certain guarantors under  the Credit Agreement, Citizens Bank of Pennsylvania as the administrative  agent, Citizens Bank of Pennsylvania as sole issuing bank and certain lenders  (incorporated by reference to Exhibits filed with NCO Group, Inc.’s  Current Report on Form 8-K (333-144067, 333-144068) filed on  March 26, 2009)                                                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.33                |       | Subscription Agreement  dated as of March 25, 2009 by and among NCO Group, Inc., One Equity  Partners II, L.P., OEP II Co-Investors, L.P., OEP II Partners Co-Invest, L.P.  and several other individuals and entities listed on the signature  pages thereto (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Current Report on Form 8-K (333-144067, 333-144068)  filed on March 26, 2009)                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.34                |       | Third Amendment to  Credit Agreement dated as of March 31, 2010 by and among NCO  Group, Inc., NCO Financial Systems, Inc., certain guarantors under  the Credit Agreement, Citizens Bank of Pennsylvania as the administrative  agent, Citizens Bank of Pennsylvania as sole issuing bank and certain lenders                                                                                                                                                                                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 12                   |       | Statement of  Computation of Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 21.1                 |       | Subsidiaries of the  Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 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 Section 13 or 15(d) the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned hereunto duly authorized.

 
|                      | **NCO GROUP, INC.** |
|---------------------------|---------------------|
|                      |                |
| Date:  April 5, 2010 | By:                 | /s/ John R. Schwab |
|                      | Name:               | John R. Schwab |
|                      | Title:              | Executive Vice  President, Finance and  Chief Financial Officer |
|                      |                |   |
|                           |                     |  |  |

 

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#### **Table of Contents**

 

#### **INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

#### ** **

| Report  of Independent Registered Public Accounting Firm                                                        | F-2    |
|-----------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                            |   |
| Consolidated  Balance Sheets as of December 31, 2009 and 2008                                              | F-3    |
|                                                                                                            |   |
| Consolidated  Statements of Operations for the years ended December 31, 2009, 2008 and  2007               | F-4    |
|                                                                                                            |   |
| Consolidated Statements of Stockholders’ Equity for  the years ended December 31, 2009, 2008 and 2007 | F-5    |
|                                                                                                            |   |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2009, 2008 and 2007                | F-6    |
|                                                                                                            |   |
| Notes to Consolidated Financial Statements                                                                      | F-7    |

 

F-1

----

### Table ofContents

 

### **Report of Independent Registered Public Accounting Firm**

###  

To Board of Directors andStockholders of NCO Group, Inc:

 

In our opinion, theaccompanying consolidated balance sheets and the related consolidated statementsof operations, stockholders’ equity, and cash flows present fairly, in allmaterial respects, the financial position of NCO Group, Inc and itssubsidiaries at December 31, 2009 and 2008, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2009 in conformity with accounting principles generallyaccepted in the United States of America. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits. We conducted ouraudits of these statements in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

As discussed in Note 2 tothe consolidated financial statements, the Company changed the manner in whichit presents non-controlling interest in subsidiaries in 2009.

 

/s/ PricewaterhouseCoopersLLP

 

Philadelphia,Pennsylvania

March 31, 2010

 

F-2

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Table of Contents

 

**NCO GROUP, INC.**

**Consolidated Balance Sheets**

**(Amounts in thousands, except pershare amounts)**

 
| ** **                                                                                                                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                   | ** ** | **2009**              | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                   | ** ** | ** **            | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                   | ** ** | ** **            | ** ** | ** **            | ** ** |
|                                                                                                                                         |       |                  |       |                  |       |
| Current  assets:                                                                                                                             |       |                  |       |                  |       |
| Cash  and cash equivalents                                                                                                                   |       | $                     | 39,221     |                  | $          | 29,880 |   |
| Accounts  receivable, trade, net of allowance for doubtful accounts of $5,824 and  $5,008, respectively                                      |       | 178,067               |       | 210,043               |       |
| Purchased  accounts receivable, current portion, net of allowance for impairment of  $144,397 and $123,804, respectively                     |       | 50,960                |       | 70,006                |       |
| Deferred  income taxes                                                                                                                       |       | 1,753                 |       | 34,216                |       |
| Prepaid  expenses and other current assets                                                                                                   |       | 61,981                |       | 63,197                |       |
| Assets  held for sale, current portion                                                                                                       |       | —                |       | 12,004                |       |
| Total  current assets                                                                                                                        |       | 331,982               |       | 419,346               |       |
|                                                                                                                                         |       |                  |       |                  |       |
| Funds  held on behalf of clients (note 8)                                                                                                    |       |                  |       |                  |       |
|                                                                                                                                         |       |                  |       |                  |       |
| Property  and equipment, net                                                                                                                 |       | 122,317               |       | 137,896               |       |
|                                                                                                                                         |       |                  |       |                  |       |
| Other  assets:                                                                                                                               |       |                  |       |                  |       |
| Goodwill                                                                                                                                     |       | 535,857               |       | 564,617               |       |
| Trade  name, net of accumulated amortization                                                                                                 |       | 83,912                |       | 85,466                |       |
| Customer  relationships and other intangible assets, net of accumulated amortization                                                         |       | 258,682               |       | 327,633               |       |
| Purchased  accounts receivable, net of current portion                                                                                       |       | 87,469                |       | 115,653               |       |
| Deferred  income taxes                                                                                                                       |       | 3,548                 |       | —                |       |
| Other  assets                                                                                                                                |       | 36,268                |       | 44,264                |       |
| Assets  held for sale, net of current portion                                                                                                |       | —                |       | 6,764                 |       |
| Total  other assets                                                                                                                          |       | 1,005,736             |       | 1,144,397             |       |
| Total  assets                                                                                                                                |       | $                     | 1,460,035  |                  | $          | 1,701,639 |   |
|                                                                                                                                         |       |                  |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                               | ** ** | ** **            | ** ** | ** **            | ** ** |
|                                                                                                                                         |       |                  |       |                  |       |
| Current  liabilities:                                                                                                                        |       |                  |       |                  |       |
| Long-term  debt, current portion                                                                                                             |       | $                     | 41,699     |                  | $          | 30,559 |   |
| Income  taxes payable                                                                                                                        |       | 2,838                 |       | 3,543                 |       |
| Accounts  payable                                                                                                                            |       | 15,865                |       | 18,018                |       |
| Accrued  expenses                                                                                                                            |       | 107,250               |       | 127,722               |       |
| Accrued  compensation and related expenses                                                                                                   |       | 38,094                |       | 46,252                |       |
| Deferred  revenue, current portion                                                                                                           |       | 39,528                |       | 40,731                |       |
| Liabilities  held for sale, current portion                                                                                                  |       | —                |       | 974                   |       |
| Total  current liabilities                                                                                                                   |       | 245,274               |       | 267,799               |       |
|                                                                                                                                         |       |                  |       |                  |       |
| Funds  held on behalf of clients (note 8)                                                                                                    |       |                  |       |                  |       |
|                                                                                                                                         |       |                  |       |                  |       |
| Long-term  liabilities:                                                                                                                      |       |                  |       |                  |       |
| Long-term  debt, net of current portion                                                                                                      |       | 909,831               |       | 1,048,517             |       |
| Deferred  income taxes                                                                                                                       |       | 31,972                |       | 60,407                |       |
| Deferred  revenue, net of current portion                                                                                                    |       | 1,147                 |       | 5,285                 |       |
| Other  long-term liabilities                                                                                                                 |       | 31,261                |       | 32,534                |       |
| Liabilities  held for sale, net of current portion                                                                                           |       | —                |       | 3,308                 |       |
|                                                                                                                                         |       |                  |       |                  |       |
| Commitments  and contingencies (note 19)                                                                                                     |       |                  |       |                  |       |
|                                                                                                                                         |       |                  |       |                  |       |
| Stockholders’  equity:                                                                                                                  |       |                  |       |                  |       |
| Preferred  stock, par value $0.01 per share, 7,500 shares authorized, 3,152 and 2,573  shares issued and outstanding, respectively           |       | 31                    |       | 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                                                                                                                  |       | 763,828               |       | 720,955               |       |
| Accumulated  other comprehensive loss                                                                                                        |       | (551                  | )          | (10,007               | )          |
| Accumulated  deficit                                                                                                                         |       | (534,242              | )          | (450,021              | )          |
| Total  NCO Group, Inc. stockholders’ equity                                                                                        |       | 229,100               |       | 260,986               |       |
| Noncontrolling  interests                                                                                                                    |       | 11,450                |       | 22,803                |       |
| Total  stockholders’ equity                                                                                                             |       | 240,550               |       | 283,789               |       |
| Total  liabilities and stockholders’ equity                                                                                             |       | $                     | 1,460,035  |                  | $          | 1,701,639 |   |

 

See accompanying notes.

 

F-3

----

Table of Contents

** **

**NCO GROUP, INC.**

**Consolidated Statements of Operations**

**(Amounts in thousands)**

 
| ** **                                                        | ** ** | **For the Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                        | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                              |       |                                      |       |   |   |   |   |
| Revenues:                                                         |       |                                      |       |   |   |   |   |
| Services                                                          |       | $                                         | 1,400,610  |   | $ | 1,466,318 |   | $ | 1,102,343 |   |
| Portfolio                                                         |       | 51,398                                    |       | 18,029 |   | 132,413 |   |
| Portfolio  sales                                                  |       | 361                                       |       | 3,002 |   | 21,093 |   |
| Reimbursable  costs and fees                                      |       | 111,549                                   |       | 25,792 |   | 29,581 |   |
| Total  revenues                                                   |       | 1,563,918                                 |       | 1,513,141 |   | 1,285,430 |   |
|                                                              |       |                                      |       |   |   |   |   |
| Operating  costs and expenses:                                    |       |                                      |       |   |   |   |   |
| Payroll  and related expenses                                     |       | 781,888                                   |       | 845,481 |   | 679,951 |   |
| Selling,  general and administrative expenses                     |       | 508,378                                   |       | 536,547 |   | 429,589 |   |
| Reimbursable  costs and fees                                      |       | 111,549                                   |       | 25,792 |   | 29,581 |   |
| Depreciation  and amortization expense                            |       | 119,570                                   |       | 121,324 |   | 102,349 |   |
| Impairment  of intangible assets                                  |       | 30,032                                    |       | 289,492 |   | — |   |
| Restructuring  charges                                            |       | 10,868                                    |       | 11,600 |   | — |   |
| Total  operating costs and expenses                               |       | 1,562,285                                 |       | 1,830,236 |   | 1,241,470 |   |
| Income  (loss) from operations                                    |       | 1,633                                     |       | (317,095 | ) | 43,960 |   |
|                                                              |       |                                      |       |   |   |   |   |
| Other  income (expense):                                          |       |                                      |       |   |   |   |   |
| Interest  and investment income                                   |       | 1,335                                     |       | 1,091 |   | 2,635 |   |
| Interest  expense                                                 |       | (99,212                                   | )          | (94,831 | ) | (95,294 | ) |
| Other  income (expense), net                                      |       | 6,936                                     |       | (16,468 | ) | 3,608 |   |
| Total  other income (expense)                                     |       | (90,941                                   | )          | (110,208 | ) | (89,051 | ) |
| Loss  before income taxes                                         |       | (89,308                                   | )          | (427,303 | ) | (45,091 | ) |
|                                                              |       |                                      |       |   |   |   |   |
| Income  tax benefit                                               |       | (1,166                                    | )          | (71,947 | ) | (16,104 | ) |
|                                                              |       |                                      |       |   |   |   |   |
| Net  loss                                                         |       | (88,142                                   | )          | (355,356 | ) | (28,987 | ) |
|                                                              |       |                                      |       |   |   |   |   |
| Less:  Net (loss) income attributable to noncontrolling interests |       | (3,921                                    | )          | (18,250 | ) | 2,735 |   |
|                                                              |       |                                      |       |   |   |   |   |
| Net  loss attributable to NCO Group, Inc.                    |       | $                                         | (84,221    | ) | $ | (337,106 | ) | $ | (31,722 | ) |

 

See accompanying notes.

 

F-4

----

Table of Contents

 

**NCO GROUP, INC.**

**Consolidated Statements ofStockholders’ Equity**

**(Amounts in 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, 2007**                                                 | ** ** | **$**         | **12**     | ** **       | **$**      | **4**            | ** ** | **$**          | **18**     | ** **        | **$**      | **502,756**      | ** ** | **$**                    | **(1,163** | **)**              | **$**      | **(81,193**            | **)**      | **$**             | **420,434** | ** ** | **$** | **55,628** | ** ** | **$** | **476,062** | ** ** | ** ** | ** ** |
|                                                                               |       |          |       |             |       |             |       |           |       |              |       |             |       |                     |       |               |       |                   |       |              |        |
| Preferred stock  dividends                                                         |       | 2             |       | —           |       | —           |       | (2             | )          | —            |       | —           |       | —                   |       | —             |       | —                 |       |              |        |
| Stock-based  compensation                                                          |       | —        |       | —           |       | —           |       | 394            |       | —            |       | —           |       | 394                      |       | —             |       | 394                    |       |              |        |
| Capital  contribution from JPM to SST                                              |       | —        |       | —           |       | —           |       | 14,941         |       | —            |       | —           |       | 14,941                   |       | —             |       | 14,941                 |       |              |        |
| Distributions to  noncontrolling interests                                         |       | —        |       | —           |       | —           |       | —         |       | —            |       | —           |       | —                   |       | (11,774            | )          | (11,774                | )          |              |        |
| Investment in  subsidiary by noncontrolling interests                              |       | —        |       | —           |       | —           |       | —         |       | —            |       | —           |       | —                   |       | 2,359              |       | 2,359                  |       |              |        |
| Comprehensive  income, net of tax:                                                 |       |          |       |             |       |             |       |           |       |              |       |             |       |                     |       |               |       |                   |       |              |        |
| Net (loss)  income                                                                 |       | —        |       | —           |       | —           |       | —         |       | —            |       | (31,722          | )          | (31,722                  | )          | 2,735              |       | (28,987                | )          | $                 | (28,987     | ) |
| Other  comprehensive income (loss):                                                |       |          |       |             |       |             |       |           |       |              |       |             |       |                     |       |               |       |                   |       |              |        |
| Foreign currency  translation adjustment                                           |       | —        |       | —           |       | —           |       | —         |       | 4,711             |       | —           |       | 4,711                    |       | —             |       | 4,711                  |       | 4,711             |        |
| Change in fair  value of cash flow hedges, net of taxes of $1,272                  |       | —        |       | —           |       | —           |       | —         |       | 2,362             |       | —           |       | 2,362                    |       | —             |       | 2,362                  |       | 2,362             |        |
| Net gains on  cash flow hedges reclassified into earnings, net of taxes of $1,656  |       | —        |       | —           |       | —           |       | —         |       | (3,075            | )          | —           |       | (3,075                   | )          | —             |       | (3,075                 | )          | (3,075            | )           |
| Total  comprehensive loss                                                          |       |          |       |             |       |             |       |           |       |              |       |             |       |                     |       |               |       |                   |       | (24,989           | )           |
| Less:  comprehensive income attributable to noncontrolling interests               |       |          |       |             |       |             |       |           |       |              |       |             |       |                     |       |               |       |                   |       | (2,735            | )           |
| Comprehensive  loss attributable to NCO Group, Inc.                           |       |          |       |             |       |             |       |           |       |              |       |             |       |                     |       |               |       |                   |       | $                 | (27,724     | ) |
|                                                                               |       |          |       |             |       |             |       |           |       |              |       |             |       |                     |       |               |       |                   |       |              |        |
| **Balance,  December 31, 2007**                                               | ** ** | **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          | )           |
| Less:  comprehensive loss attributable to noncontrolling interests                 |       |          |       |             |       |             |       |           |       |              |       |             |       |                     |       |               |       |                   |       | 18,250            |        |
| Comprehensive  loss attributable to NCO Group, Inc.                           |       |          |       |             |       |             |       |           |       |              |       |             |       |                     |       |               |       |                   |       | $                 | (349,948    | ) |
|                                                                               |       |          |       |             |       |             |       |           |       |              |       |             |       |                     |       |               |       |                   |       |              |        |
| **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 acquisition                                      |       | —        |       | —           |       | —           |       | 2,161          |       | —            |       | —           |       | 2,161                    |       | —             |       | 2,161                  |       |              |        |
| Preferred stock  dividends                                                         |       | 4             |       | —           |       | —           |       | (4             | )          | —            |       | —           |       | —                   |       | —             |       | —                 |       |              |        |
| Stock-based  compensation                                                          |       | —        |       | —           |       | 1                |       | 1,052          |       | —            |       | —           |       | 1,053                    |       | —             |       | 1,053                  |       |              |        |
| Distributions to  noncontrolling interests                                         |       | —        |       | —           |       | —           |       | —         |       | —            |       | —           |       | —                   |       | (7,432             | )          | (7,432                 | )          |              |        |
| Comprehensive  income, net of tax:                                                 |       |          |       |             |       |             |       |           |       |              |       |             |       |                     |       |               |       |                   |       |              |        |
| Net loss                                                                           |       | —        |       | —           |       | —           |       | —         |       | —            |       | (84,221          | )          | (84,221                  | )          | (3,921             | )          | (88,142                | )          | $                 | (88,142     | ) |
| Other  comprehensive income (loss):                                                |       |          |       |             |       |             |       |           |       |              |       |             |       |                     |       |               |       |                   |       |              |        |
| Foreign currency  translation adjustment                                           |       | —        |       | —           |       | —           |       | —         |       | 4,656             |       | —           |       | 4,656                    |       | —             |       | 4,656                  |       | 4,656             |        |
| 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 $3,147 |       | —        |       | —           |       | —           |       | —         |       | 5,519             |       | —           |       | 5,519                    |       | —             |       | 5,519                  |       | 5,519             |        |
| Total  comprehensive loss                                                          |       |          |       |             |       |             |       |           |       |              |       |             |       |                     |       |               |       |                   |       | (78,686           | )           |
| Less:  comprehensive loss attributable to noncontrolling interests                 |       |          |       |             |       |             |       |           |       |              |       |             |       |                     |       |               |       |                   |       | 3,921             |        |
| Comprehensive  loss attributable to NCO Group, Inc.                           |       |          |       |             |       |             |       |           |       |              |       |             |       |                     |       |               |       |                   |       | $                 | (74,765     | ) |
|                                                                               |       |          |       |             |       |             |       |           |       |              |       |             |       |                     |       |               |       |                   |       |              |        |
| **Balance,  December 31, 2009**                                               | ** ** | **$**         | **31**     | ** **       | **$**      | **4**            | ** ** | **$**          | **30**     | ** **        | **$**      | **763,828**      | ** ** | **$**                    | **(551**   | **)**              | **$**      | **(534,242**           | **)**      | **$**             | **229,100** | ** ** | **$** | **11,450** | ** ** | **$** | **240,550** | ** ** | ** ** | ** ** |

 

See accompanyingnotes.

 

F-5

----

Table of Contents

** **

**NCOGROUP, INC**

**Consolidated Statements of Cash Flows**

**(Amountsin thousands)**

 
| ** **                                                                                                   | ** ** | **For the Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                                   | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash  flows from operating activities:                                                                       |       |                                      |       |   |   |   |   |
| Net  loss                                                                                                    |       | $                                         | (88,142    | ) | $ | (355,356 | ) | $ | (28,987 | ) |
| Adjustments  to reconcile net loss from continuing operations to net cash provided by  operating activities: |       |                                      |       |   |   |   |   |
| Depreciation  and amortization                                                                               |       | 119,570                                   |       | 121,324 |   | 102,349 |   |
| Impairment  of intangible assets                                                                             |       | 30,032                                    |       | 289,492 |   | — |   |
| Amortization  of deferred training asset                                                                     |       | 2,185                                     |       | 2,886 |   | 2,402 |   |
| Provision  for doubtful accounts                                                                             |       | 2,797                                     |       | 3,030 |   | 4,806 |   |
| Impairment  of purchased accounts receivable and other                                                       |       | 26,514                                    |       | 98,892 |   | 24,962 |   |
| Noncash  interest                                                                                            |       | 3,674                                     |       | 1,517 |   | 8,605 |   |
| Noncash  net losses (gains) on derivative instruments                                                        |       | 43                                        |       | 6,241 |   | (3,494 | ) |
| Gain  on sale of purchased accounts receivable                                                               |       | (361                                      | )          | (3,002 | ) | (21,093 | ) |
| Parent  remittance on behalf of SST                                                                          |       | —                                    |       | — |   | 4,781 |   |
| Deferred  income taxes                                                                                       |       | (9,314                                    | )          | (75,015 | ) | (9,781 | ) |
| Gain  on sale of business                                                                                    |       | (4,441                                    | )          | — |   | — |   |
| Other                                                                                                        |       | 1,522                                     |       | 1,074 |   | 816 |   |
| Changes  in operating assets and liabilities, net of acquisitions:                                           |       |                                      |       |   |   |   |   |
| Accounts  receivable, trade                                                                                  |       | 43,863                                    |       | 11,765 |   | (28,632 | ) |
| Accounts  payable and accrued expenses                                                                       |       | (29,683                                   | )          | (23,172 | ) | 3,395 |   |
| Income  taxes payable                                                                                        |       | (307                                      | )          | 4,599 |   | (14,602 | ) |
| Other  assets and liabilities                                                                                |       | 522                                       |       | 9,458 |   | (1,532 | ) |
| Net  cash provided by operating activities                                                                   |       | 98,474                                    |       | 93,733 |   | 43,995 |   |
|                                                                                                         |       |                                      |       |   |   |   |   |
| Cash  flows from investing activities:                                                                       |       |                                      |       |   |   |   |   |
| Purchases  of accounts receivable                                                                            |       | (56,609                                   | )          | (126,547 | ) | (125,283 | ) |
| Collections  applied to principal of purchased accounts receivable                                           |       | 84,100                                    |       | 89,325 |   | 77,228 |   |
| Proceeds  from sales and resales of purchased accounts receivable                                            |       | 525                                       |       | 4,757 |   | 44,161 |   |
| Purchases  of property and equipment                                                                         |       | (32,142                                   | )          | (43,396 | ) | (26,041 | ) |
| Proceeds  from bonds and notes receivable                                                                    |       | 136                                       |       | 1,122 |   | 6,097 |   |
| Cash  received from sale of business                                                                         |       | 20,000                                    |       | — |   | — |   |
| Net  cash received (paid) related to acquisitions                                                            |       | 704                                       |       | (349,420 | ) | (8,881 | ) |
| Net  cash provided by (used in) investing activities                                                         |       | 16,714                                    |       | (424,159 | ) | (32,719 | ) |
|                                                                                                         |       |                                      |       |   |   |   |   |
| Cash  flows from financing activities:                                                                       |       |                                      |       |   |   |   |   |
| Repayment  of notes payable                                                                                  |       | (24,594                                   | )          | (35,476 | ) | (50,725 | ) |
| Borrowings  under notes payable                                                                              |       | —                                    |       | 21,691 |   | 47,116 |   |
| Net  (repayments of) borrowings under revolving credit facility                                              |       | (64,500                                   | )          | 34,500 |   | 11,000 |   |
| Repayment  of borrowings under senior term loan                                                              |       | (39,345                                   | )          | (10,745 | ) | (4,650 | ) |
| Borrowings  under senior term loan, net of fees                                                              |       | —                                    |       | 134,135 |   | — |   |
| Payment  of fees to obtain debt                                                                              |       | (2,477                                    | )          | (4,317 | ) | (1,035 | ) |
| Investment  in subsidiary by noncontrolling interests                                                        |       | —                                    |       | 2,436 |   | 2,359 |   |
| Return  of investment in subsidiary to noncontrolling interests                                              |       | (7,855                                    | )          | (12,242 | ) | (6,934 | ) |
| Issuance  of stock, net                                                                                      |       | 39,667                                    |       | 219,722 |   | — |   |
| Payment  of deemed dividend to JPM                                                                           |       | (8,049                                    | )          | (17,500 | ) | — |   |
| Net  cash (used in) provided by financing activities                                                         |       | (107,153                                  | )          | 332,204 |   | (2,869 | ) |
|                                                                                                         |       |                                      |       |   |   |   |   |
| Effect  of exchange rate on cash                                                                             |       | 1,306                                     |       | (3,181 | ) | 2,173 |   |
|                                                                                                         |       |                                      |       |   |   |   |   |
| Net  increase (decrease) in cash and cash equivalents                                                        |       | 9,341                                     |       | (1,403 | ) | 10,580 |   |
|                                                                                                         |       |                                      |       |   |   |   |   |
| Cash  and cash equivalents at beginning of the period                                                        |       | 29,880                                    |       | 31,283 |   | 20,703 |   |
|                                                                                                         |       |                                      |       |   |   |   |   |
| Cash  and cash equivalents at end of the period                                                              |       | $                                         | 39,221     |   | $ | 29,880 |   | $ | 31,283 |   |

 

See accompanyingnotes.

 

F-6

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Table of Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated Financial Statements**

 

**1.****             ****Nature of Operations and Basis ofPresentation:**

 

NCO Group, Inc. is a holdingcompany and conducts substantially all of its business operations through itssubsidiaries. NCO is an international provider of business process outsourcingsolutions, primarily focused on accounts receivable management (“ARM”) andcustomer relationship management (“CRM”). NCO provides services through over100 offices throughout North America, Asia, Europe and Australia. The Companyprovides services to more than 18,500 active clients, including many of theFortune 500, supporting a broad spectrum of industries, including financialservices, telecommunications, healthcare, retail and commercial, utilities,education and government, technology and transportation/logistics services.These clients are primarily located throughout North America, Europe andAustralia. The Company’s largest client during the year ended December 31,2009, was in the telecommunications sector and represented 9.6 percent of theCompany’s consolidated revenue excluding reimbursable costs and fees for theyear ended December 31, 2009. Historically, the Company has also purchasedand collected past due consumer accounts receivable from consumer creditors.During 2009, the Company significantly reduced its purchases of accountsfollowing declines in liquidation rates, competition for purchased accountsreceivable and the continued uncertainty of collectibility. The Company currentlyexpects to limit purchases in 2010 to certain of its non-cancelableforward-flow commitments. Additionally, the Company may opportunisticallypurchase accounts receivable that allow the Company to leverage meaningfulthird-party servicing contracts. The Company’s amended senior credit facility(note 12) limits purchases in 2010 to $20 million and purchases in 2011 andbeyond to $10 million.

 

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

 

**2.****             ****Accounting Policies:**

 

*Principlesof Consolidation:*

 

The consolidated financialstatements include the accounts of the Company and all subsidiaries andentities controlled by the Company. All intercompany accounts and transactionshave been eliminated.

 

On January 2, 2008, theCompany acquired Systems & Services Technologies, Inc. (“SST”), athird-party consumer receivable servicer. Prior to the acquisition, SST was awholly owned subsidiary of JPMorgan Chase & Co. (“JPM”). JPM alsowholly owns One Equity Partners and its affiliates (“OEP”), which is a privateequity investment fund that has had a controlling interest in the Company sincethe Company’s “going-private” transaction on November 15, 2006 (the “Transaction”).

 

Because the Company and SST wereunder common control at the time of the SST acquisition, the transfer of assetsand liabilities of SST were accounted for at historical cost in a mannersimilar to a pooling of interests. For financial accounting purposes, theacquisition was viewed as a change in reporting entity and, as a result,required restatement of the Company’s financial statements for all periodssubsequent to November 15, 2006, the date of the Transaction and the dateat which common control of the Company and SST by JPM commenced.

 

The Company also considers whetherany of its investments represent variable interest entities that are requiredto be consolidated by the primary beneficiary. The primary beneficiary is theentity that holds the majority of the beneficial interests in the variableinterest entity.  A variable interestentity is an entity for which the primary beneficiary’s interest in the entitycan change with changes in factors other than the amount of investment in theentity.

 

The Company owns 50 percent of entities that purchaseportfolios of purchased accounts receivable, which it consolidates. Based onits evaluation of these entities, the Company is the primary beneficiary.

 

*RevenueRecognition:*

 

Services:

 

ARMcontingency fee revenue is recognized upon collection of funds by NCO or itsclient. Fees for ARM contractual services are recognized as services areperformed and earned under service arrangements with clients where fees arefixed or determinable and collectibility is reasonably assured.

 

F-7

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Table of Contents

 

**NCOGROUP, INC.**

**Notes toConsolidated Financial Statements (continued)**

 

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

 

*RevenueRecognition (continued):*

 

CRMrevenue is recognized based on the billable hours of each representative asdefined in the client contract. The rate per billable hour charged is based ona predetermined contractual rate. The contractual rate can fluctuate based oncertain pre-determined objective performance criteria related to quality andperformance, reduced by any contractual performance penalties the client may beentitled to, both as measured on a monthly basis. The impact of the performancecriteria and penalties on the rate per billable hour is continually updated asrevenue is recognized.

 

UnderCRM performance-based arrangements, the Company is paid by its customers basedon achievement of certain levels of sales or other client-determined criteria.The Company recognizes performance-based revenue by measuring its actualresults against the performance criteria specified in the contracts.

 

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

 
| ** **                              | ** ** | **For the Year Ended  December 31,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| Balance at beginning of period          |       | $                                         | 46,016     |   | $ | 1,428 |   |
| Acquisitions                            |       | —                                    |       | 45,829 |   |
| Additions                               |       | 38,231                                    |       | 41,254 |   |
| Revenue recognized                      |       | (43,585                                   | )          | (42,392 | ) |
| Foreign currency translation adjustment |       | 13                                        |       | (103 | ) |
| Balance at end of period                |       | $                                         | 40,675     |   | $ | 46,016 |   |

 

Portfolio:

 

The Companyacquires accounts receivable in groups that are initially recorded at cost. Allacquired accounts receivable have experienced deterioration of credit qualitybetween origination and the Company’s acquisition of the accounts receivable,and the amount paid for the accounts receivable reflects the Company’sdetermination that it is probable the Company will be unable to collect allamounts due according to contractual terms of each receivable. The Companydetermines whether each purchase of accounts receivable is to be accounted foras an individual portfolio or whether multiple purchases will be combined basedon common risk characteristics into an aggregated portfolio. Once the Companyestablishes an individual purchase or aggregated purchases as a portfolio, thereceivables in the portfolio are not changed, unless replaced, returned orsold. The Company considers expected collections, and estimates the amount andtiming of undiscounted expected principal, interest, and other cash flows(expected at acquisition) for each portfolio of accounts receivable. TheCompany determines nonaccretable difference, or the excess of the portfolio’scontractual principal over all cash flows expected at acquisition as an amountthat should not be accreted. The excess of the portfolio’s cash flows expectedto be collected over the amount paid is accretable yield. Accretable yield isrecognized into earnings, as Portfolio revenue in the statement of operations,over the useful life of the portfolio, based on an effective interest ratemethod.

 

F-8

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Tableof Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

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

 

*RevenueRecognition (continued):*

 

Portfolio (continued):

 

At acquisition, theCompany derives an internal rate of return (“IRR”) based on the expectedmonthly collections over the estimated economic life of each portfolio ofaccounts receivable (typically up to seven years, based on the Company’scollection experience) compared to the original purchase price. Monthlycollections on the portfolios are allocated between revenue and carrying valuereduction based on applying each portfolio’s effective IRR for the quarter toits carrying value. Over the life of a portfolio, the Company continues toestimate cash flows expected to be collected. The Company evaluates at thebalance sheet date whether the present value of its portfolios determined usingthe effective interest rates for each portfolio has decreased, and if so,records a valuation allowance to maintain the original IRR. Any increase in actualor estimated cash flows expected to be collected is first used to reverse anyexisting valuation allowance for that portfolio, and any remaining increases incash flows are recognized prospectively through an increase in the IRR. Theupdated IRR then becomes the new benchmark for subsequent valuation allowancetesting.

 

Portfolio Sales:

 

Gains on sales are recognized asrevenue and represent the difference between the sales price and the presentvalue of the future cash collections expected from the receivables sold at theportfolio’s IRR at the time of sale.

 

Reimbursable Costs and Fees:

 

Reimbursable costs and fees consist of court costs,legal fees and repossession fees, representing out-of-pocket expenses that arereimbursed by the Company’s clients. Reimbursable costs and fees are recordedas both revenue and operating expenses on the statement of operations.

 

*CreditPolicy:*

 

Management monitors its client relationships in orderto minimize the Company’s credit risk and assesses the likelihood of collectionbased on a number of factors including the client’s collection history andcredit-worthiness. The Company maintains a reserve for potential collectionlosses when such losses are deemed to be probable.

 

The Company has two types of arrangements under whichit collects its ARM contingency fee revenue. For certain clients, the Companyremits funds collected on behalf of the client net of the related contingencyfees while, for other clients, the Company remits gross funds collected onbehalf of clients and bills the client separately for its contingency fees.

 

The Company generally does not require collateral andit does not charge finance fees on outstanding trade receivables. In manycases, in the event of collection delays from ARM clients, management may, atits discretion, change from the gross remittance method to the net remittancemethod. The Company also maintains a reserve for deposits on debtor accountsthat may ultimately prove to have insufficient funds. Trade accounts receivableare written off to the allowances when collection appears highly unlikely.

* *

*Cash andCash Equivalents:*

 

The Company considers allhighly liquid investments purchased with an initial maturity of three months orless to be cash equivalents. These financial instruments potentially subjectthe Company to concentrations of credit risk. The Company minimizes this riskby dealing with major financial institutions. The Company maintains depositaccounts with major financial institutions, and, at times, such deposits may exceedFDIC insurance limits.

 

F-9

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Tableof Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

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

 

*Propertyand Equipment:*

 

Property and equipment isstated at cost, less accumulated depreciation. Depreciation is provided overthe estimated useful life of each class of assets using the straight-linemethod. Expenditures for maintenance and repairs are charged to expense asincurred. Renewals and betterments are capitalized. When property is sold orretired, the cost and related accumulated depreciation are removed from thebalance sheet, and any gain or loss on the transaction is included in thestatement of operations. Certain expenditures for software that is purchased orinternally developed for use by the Company are capitalized in accordance withauthoritative guidance and amortized using the straight-line method over a periodof five years.

 

*Long-LivedAssets:*

 

The Company evaluates thenet realizable value of long-lived assets, including property and equipment,internal use software, and certain identifiable definite-lived intangibleassets, for impairment, based on the estimated undiscounted future cash flows,whenever events or changes in circumstances indicate that the carrying amountof the asset may not be recoverable.

 

*Goodwilland Other Intangible Assets:*

 

Goodwill represents theexcess of purchase price over the fair market value of net assets acquired,based on their respective fair values at the date of acquisition. Goodwill istested for impairment each year, and between annual tests if an event occurs orcircumstances change that would more likely than not reduce the fair value of areporting unit below its carrying amount. The goodwill impairment test isperformed at the reporting unit level and involves a two-step approach, thefirst step identifies any potential impairment and the second step measures theamount of impairment, if applicable. The first test for potential impairmentcompares the fair value of a reporting unit’s goodwill to its carrying amount;if the fair value is less than the carrying amount, the reporting unit’sgoodwill would be considered impaired and the second step would be performed.The second step measures the amount of impairment by comparing the implied fairvalue of the reporting unit’s goodwill with its carrying value. Fair valueestimates are based upon a combination of the market approach and incomeapproach.

 

Trade name includes theNCO trade name, representing the fair value of the NCO name, which is anindefinite-lived intangible asset and therefore not subject to amortization.Similar to goodwill, the NCO trade name is reviewed at least annually forimpairment. Trade name also includes certain trade names acquired in connectionwith the acquisition of Outsourcing Solutions, Inc. (“OSI”) (note 4). TheOSI trade names are not considered to have indefinite lives and therefore aresubject to amortization. The OSI trade names are amortized using thestraight-line method over a period of five years.

 

Other intangible assetsconsist primarily of customer relationships and non-compete agreements, whichare amortized over a range of five to seven years using the straight-linemethod (note 10).

 

*DeferredFinancing Fees:*

 

Deferred financing feesrelate to debt issuance costs incurred, which are capitalized and amortized tointerest expense over the term of the related debt using the effective interestmethod.

 

*IncomeTaxes:*

 

Deferred tax assets and liabilities are recognizedusing enacted tax rates for the effect of temporary differences between thebook and tax bases of recorded assets and liabilities. Deferred tax assets arereduced by a valuation allowance if it is more likely than not that someportion or all of the deferred tax asset will not be realized. Deferred taxeshave not been provided on the cumulative undistributed earnings of foreignsubsidiaries because such amounts are expected to be reinvested indefinitely.

 

F-10

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Table of Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

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

 

*IncomeTaxes (continued):*

 

The Companyaccounts for uncertain tax positions in accordance with authoritative guidance,which requires that the impact of a tax position, if that position is morelikely than not of being sustained on audit, based on the technical merits ofthe position, be recognized in the financial statements. The Companyapplies a more likely than not threshold to the recognition of uncertain taxpositions.  The Company recognizes theamount of a tax benefit that has a greater than 50 percent likelihood of beingultimately realized upon settlement. Change in judgment related to the expectedultimate resolution of uncertain tax positions are recognized in earnings inthe quarter of such change. The difference between a tax position taken orexpected to be taken in a tax return and the benefit recognized and measuredrepresents an unrecognized tax benefit. An unrecognized tax benefit is aliability that represents a potential future obligation to the taxing authorities.

 

*ForeignCurrency Translation:*

 

The Company has foreign subsidiaries whose localcurrency has been determined to be the functional currency for that subsidiary.The assets and liabilities of these foreign subsidiaries have been translatedusing the current exchange rates, and the income and expenses have beentranslated using average historical exchange rates. The adjustments resultingfrom translation have been recorded separately in stockholders’ equity as “Othercomprehensive income (loss)” and are not included in determining consolidatednet (loss) income. As of December 31, 2009 and 2008, “Accumulated othercomprehensive income (loss)” included $3.0 million of cumulative income and$(1.6) million of cumulative loss, respectively, from foreign currencytranslation.

 

*Derivative Financial Instruments:*

 

The Company selectivelyuses derivative financial instruments to manage interest costs and minimizecurrency exchange risk. The Company does not hold derivatives for tradingpurposes. While these derivative financial instruments are subject tofluctuations in value, these fluctuations are generally offset by the value ofthe underlying exposures being hedged. The Company minimizes the risk of creditloss by entering into these agreements with major financial institutions. TheCompany recognizes all of their derivative instruments as either assets orliabilities in the balance sheet at fair value.

 

The Company is exposed toforeign currency fluctuations relating to its operations in foreign countries.In order to partially hedge cash flow exposure, the Company periodically entersinto forward exchange contracts in order to minimize the impact of currencyfluctuations on transactions and cash flows. The forward exchange contracts arerecorded at their fair value on the accompanying balance sheets and may bedesignated as cash flow hedges. If the forward exchange contracts aredesignated as cash flow hedges, changes in the fair value, to the extent thatthe hedge was effective, are recorded, net of tax, in “Other comprehensiveincome (loss),” until earnings are affected by the variability of the hedgedcash flows.

 

Cash flow hedgeineffectiveness, defined as the extent that the changes in fair value of thederivative exceed the variability of cash flows of the forecasted transaction,is recorded in the statement of operations. If the forward exchange contractsare not designated as cash flow hedges, changes in their estimated fair valueare recorded in “Other income (expense)” in the statement of operations (note16).

 

F-11

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Table of Contents

 

**NCOGROUP, INC.**

**Notes toConsolidated Financial Statements (continued)**

 

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

 

*DerivativeFinancial Instruments (continued):*

 

The Company is alsoexposed to interest rate fluctuations relating to its floating rate long-termdebt. To manage this interest rate risk, the Company enters into interest rateswap agreements. The interest rate swap agreements may be designated as cashflow hedges and recorded at their fair value on the accompanying balancesheets. Changes in the fair value of a cash flow hedge, to the extent that thehedge is effective, are recorded, net of tax, in “Other comprehensive income(loss),” until earnings are affected by the variability of the hedged cashflows. Cash flow hedge ineffectiveness, defined as the extent that the changesin fair value of the derivative exceed the variability of cash flows of theforecasted transaction, is recorded in the statement of operations. If theinterest rate swap agreements are not designated as cash flow hedges, changesin their estimated fair value are recorded in “Interest expense” in thestatement of operations (note 16).

 

The Company also entersinto interest rate cap contracts to manage interest rate risk relating to itsfloating rate long-term debt. These contracts are not cash flow hedges and,accordingly, changes in their estimated fair value are recorded in “Otherincome (expense)” in the statement of operations.

 

The Company has certainnonrecourse debt relating to its purchased accounts receivable operations thatcontain embedded derivative instruments. The embedded derivatives are not cashflow hedges and, accordingly, changes in their estimated fair value arerecorded in “Interest expense” in the statement of operations. The embeddedderivatives are included in “Long-term debt” on the balance sheet because theyare not separable from the notes payable and they have the same counterparty(note 12).

 

*Allowancefor Doubtful Accounts:*

 

Allowances for doubtful accountsare determined based on estimates of losses related to customer receivablebalances. In establishing the appropriate provision for customer receivablesbalances, the Company makes assumptions with respect to their futurecollectibility. The Company’s assumptions are based on an individual assessmentof a customer’s credit quality as well as subjective factors and trends,including the aging of receivable balances. If the estimate is not sufficientto cover actual losses, the Company would be required to take additionalcharges to its earnings.

 

*Use ofEstimates:*

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the amounts reported in the financial statements and theaccompanying notes. Actual results could differ from those estimates.

 

The application of theauthoritative guidance for business combinations requires the measurement offair values of purchased assets and liabilities of an acquired entity. Inconnection with business combinations accounted for as a purchase, managementmakes additional estimates and assumptions in determining fair value thataffect amounts reported in the financial statements and accompanying notes. Themore significant financial statement items for which estimates and assumptionsmay be made include intangible assets, purchased accounts receivable, andnonrecourse debt.

 

In the ordinary course of accounting for purchasedaccounts receivable, estimates are made by management as to the amount andtiming of future cash flows expected from each portfolio. The estimated futurecash flow of each portfolio is used to compute the IRR for the portfolio, bothin the case of any increases in expected cash flows, or to compute impairmentor allowances in the case of decreases in expected cash flows. The IRR is usedto allocate collections between revenue and principal reduction of the carryingvalues of the purchased accounts receivable.

 

F-12

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Table of Contents

 

**NCO GROUP,INC.**

**Notes toConsolidated Financial Statements (continued)**

 

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

 

*Use ofEstimates (continued):*

 

On an ongoing basis, the Company compares thehistorical trends of each portfolio, or aggregated portfolios, to projected collections.Future projected collections are then increased or decreased based on theactual cumulative performance of each portfolio. Management reviews eachportfolio’s adjusted projected collections to determine if further upward ordownward adjustment is warranted. Management regularly reviews the trends incollection patterns and uses its reasonable best efforts to improve thecollections of under-performing portfolios. However, actual results will differfrom these estimates and a material change in these estimates could occurwithin one reporting period (note 7).

 

*Basis ofPresentation:*

 

Effective January 1, 2009, the Company adoptedthe authoritative guidance for consolidation, which amends the accounting andreporting standards for minority interests (now referred to as noncontrollinginterests) in subsidiaries. The Company now reports noncontrolling interest insubsidiaries as a separate component of equity, rather than as a liability. Theadoption of the authoritative guidance is being applied prospectively, exceptfor the presentation and disclosure requirements, which are appliedretrospectively (note 15).

 

*Reclassifications:*

 

Certain amounts in the consolidated balance sheet at December 31,2008, the statement of operations for the years ended December 31, 2008and 2007, and the statement of cash flows for the years ended December 31,2008 and 2007 have been reclassified for comparative purposes.

 

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

 

The Company has severalrestructuring plans under which it has recorded restructuring charges during2009, primarily in conjunction with the streamlining the cost structure of theCompany’s operations. These charges primarily related to the elimination ofcertain redundant facilities and severance costs. The Company currently expectsto pay the remaining balance through 2016. The restructuring charges recordedin 2008 related to streamlining the cost structure of the Company’s legacyoperations in conjuction with the acquisitions of OSI and SST (note 6).

 

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

 
| ** **                        | ** ** | **Leases** | ** ** | **Severance** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|------------|------------|---------------|------------|-----------|------------|
| Balance at December 31, 2007 |       | $          | 7,635      |          | $          | 971       |       | $ | 8,606 |   |
| Accruals                          |       | 6,474      |       | 5,126         |       | 11,600    |       |
| Cash payments                     |       | (6,812     | )          | (3,477        | )          | (10,289   | )          |
| Property and equipment write-offs |       | (615       | )          | —        |       | (615      | )          |
| Balance at December 31, 2008 |       | 6,682      |       | 2,620         |       | 9,302     |       |
| Accruals                          |       | 5,566      |       | 5,302         |       | 10,868    |       |
| Cash payments                     |       | (3,686     | )          | (4,925        | )          | (8,611    | )          |
| Balance at December 31, 2009 |       | $          | 8,562      |          | $          | 2,997     |       | $ | 11,559 |   |

 

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

 

On August 31, 2009,the Company acquired TSYS Total Debt Management, Inc. (“TDM”), a providerof accounts receivable management legal network solutions, for $4.5 million incash which included $1.3 million of acquired cash, subject to certain post-closingadjustments. The Company allocated $694,000 of the purchase price to thecustomer relationships and recorded goodwill of $1.4 million. During the yearended December 31, 2009, the Company incurred acquisition costs of$154,000, which were recorded in selling, general and administrative expenseson the statement of operations. The TDM acquisition was included in the ARMsegment.

 

F-13

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Tableof Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

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

 

On February 29,2008, the Company acquired OSI, a leading provider of business processoutsourcing services, specializing primarily in accounts receivable managementservices, for $334.0 million, which includes a $5.0 million purchase pricereduction due to the settlement, in the fourth quarter of 2009, of amounts heldin escrow. 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 12).

 

The Company allocated$117.0 million of the purchase price to customer relationships, $3.4 million totrade names, $634,000 to non-compete agreements, and recorded goodwill of $210.4million, which is non-deductible for tax purposes, in the ARM segment.

 

In connection with theOSI acquisition, the Company recorded liabilities of $15.3 million in purchaseaccounting, for an exit plan the Company began to formulate prior to theacquisition date. These liabilities principally relate to facilities leases,severance and other costs. The following presents the activity in the accrualsrecorded for restructuring related expenses (amounts in thousands); the Companyexpects to pay the remaining balance through 2012:

 
| ** **                         | ** ** | **Leases** | ** ** | **Severance** | ** ** | **Total** | ** ** |
|------------------------------------|------------|------------|------------|---------------|------------|-----------|------------|
| Accruals                           |       | $          | 6,268      |          | $          | 9,055     |       | $ | 15,323 |   |
| Cash payments                      |       | (2,062     | )          | (7,856        | )          | (9,918    | )          |
| Balance at  December 31, 2008 |       | 4,206      |       | 1,199         |       | 5,405     |       |
| Cash payments                      |       | (2,300     | )          | (1,199        | )          | (3,499    | )          |
| Balance at  December 31, 2009 |       | $          | 1,906      |          | $          | —    |       | $ | 1,906 |   |

 

The followingsummarizes the unaudited pro forma results of operations, assuming the OSIacquisition described above occurred as of January 1, 2008. The unauditedpro forma information does not include the TDM acquisition because it was notconsidered a significant business combination. The unaudited pro formainformation is provided for information purposes only. It is based onhistorical information, and does not necessarily reflect the actual resultsthat would have occurred, nor is it indicative of future results of operationsof the consolidated entities (amounts in thousands):

 
| ** **                   | ** ** | **For the Year Ended**     | ** ** |
|------------------------------|------------|----------------------------|------------|
| ** **                   | ** ** | **December 31, 2008** | ** ** |
| Revenue                      |       | $                          | 1,584,526  |   |
| Net loss attributable to NCO |       | (342,445                   | )          |
|                              |            |                            |            |  |

 

On January 2,2008, the Company acquired SST, a third-party consumer receivable servicer,from JPM for $18.4 million, including certain post-closing adjustments. Thepurchase price consisted of cash consideration of $11.3 million and theissuance of 29,884 shares of the Company’s Series A 14% PIK PreferredStock valued at $7.1 million. As described in note 2, since the Company and SSTwere under common control by JPM at the time of the SST acquisition, thetransfer of assets and liabilities of SST were accounted for at historical costin a manner similar to a pooling of interests. The cash consideration paid toJPM for SST and the return of $4.0 million of cash that was not acquired weretreated as dividends to JPM.

 

During the yearended December 31, 2008, the Company acquired several smaller companies,all of which were providers of ARM services, for an aggregate purchase price of$9.3 million, including an accrual for $886,000 for estimated earnout paymentswhich were subsequently paid during 2009, resulting in customer relationshipsof $1.2 million and goodwill of approximately $8.1 million. In addition, duringthe year ended December 31, 2008, the Company paid $6.2 million forearnout payments related to prior acquisitions.

 

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Table ofContents

 

**NCOGROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**5.****             ****Disposal of Business:**

 

In October 2009,the Company sold its print and mail business, from the ARM segment, forapproximately $20.0 million in cash, subject to certain post-closingadjustments. Approximately $18.3 million of net proceeds from the sale wereused to pay down the Company’s senior term loan. In connection with the sale,the Company recorded a gain of approximately $4.4 million, which is included inother income (expense) on the statement of operations, and a $2.2 milliondeferred gain, which will be amortized into earnings over the life of thecontract. The following presents the carrying amount of the assets and liabilitiessold, which are presented as held for sale at December 31, 2008 on theaccompanying balance sheet (amounts in thousands):

 
| ** **                                 | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|
|                                       |       |                       |       |
| Accounts  receivable, trade, net           |       | $                          | 8,606      |   |
| Prepaid  expenses and other current assets |       | 3,398                      |       |
| Total  current assets                      |       | $                          | 12,004     |   |
|                                       |       |                       |       |
| Property  and equipment, net               |       | $                          | 376        |   |
| Intangible  assets, net                    |       | 6,318                      |       |
| Other  assets                              |       | 70                         |       |
| Total  non-current assets                  |       | $                          | 6,764      |   |
|                                       |       |                       |       |
| Accounts  payable and accrued expenses     |       | $                          | 974        |   |
| Total  current liabilities                 |       | $                          | 974        |   |
|                                       |       |                       |       |
| Other  long-term liabilities               |       | $                          | 3,308      |   |
| Total  long-term liabilities               |       | $                          | 3,308      |   |

 

In connection withthe sale, the Company entered into a ten-year servicing arrangement with thebuyer, for the production of collection letters, which will create significantcontinuing cash flows for the disposed entity. Therefore, the sale did not meetthe requirements for “discontinued operations” treatment in the statement ofoperations.

 

For the yearsended December 31, 2009 and 2008, the disposed entity recorded revenue of$16.2 million and $13.6 million, respectively, for services provided to theCompany. These amounts have been eliminated in consolidation.

 

**6.****             ****Fair Value:**

 

*RecurringMeasurement:*

 

The Company usesvarious valuation techniques and assumptions when measuring fair value of itsassets and liabilities. The Company utilizes market data or assumptions thatmarket participants would use in pricing the asset or liability, includingassumptions about risk and the risks inherent in the inputs to the valuationtechnique. These inputs can be readily observable (“Level 1”), marketcorroborated (“Level 2”), or generally unobservable (“Level 3”). Thesignificant majority of the fair value amounts included in the Company’scurrent period earnings resulted from Level 2 fair value methodologies; thatis, the Company is able to value the assets and liabilities based on observablemarket data for similar instruments (the “market approach”). The Companyapplied an income approach to amounts included in its current period earningsresulting from Level 3 fair value methodologies.

 

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Table ofContents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

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

 

*RecurringMeasurement (continued):*

 

The financialassets and liabilities are classified in their entirety based on the lowestlevel of input that is significant to the fair value measurement. The Company’sassessment of the significance of a particular input to the fair valuemeasurement requires judgment and may affect the valuation of fair value assetsand liabilities and their placement within the fair value hierarchy levels. Thefollowing table sets forth, by level within the fair value hierarchy, theCompany’s financial assets and liabilities that were measured at fair value ona recurring basis (amounts in thousands):

 
| ** **                  | ** ** | **At Fair Value as of**    | ** ** |
|-----------------------------|------------|----------------------------|------------|
| ** **                  | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
| ** **                  | ** ** | **Level 1**                | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|                        |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Assets:                     |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Forward  exchange contracts |       | $                          | —     |   | $ | 2 |   | $ | — |   | $ | 2 |   | $ | — |   | $ | 923 |   | $ | — |   | $ | 923 |   |
| Interest  rate caps         |       | —                     |       | — |   | — |   | — |   | — |   | 1 |   | — |   | 1 |   |
|                        |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  rate swaps        |       | —                     |       | 9,104 |   | — |   | 9,104 |   | — |   | 13,180 |   | — |   | 13,180 |   |
| Forward  exchange contracts |       | —                     |       | 60 |   | — |   | 60 |   | — |   | 11,360 |   | — |   | 11,360 |   |
| Embedded  derivatives       |       | —                     |       | — |   | 3,306 |   | 3,306 |   | — |   | — |   | 4,457 |   | 4,457 |   |
|                        |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net liabilities             |       | $                          | —     |   | $ | 9,162 |   | $ | 3,306 |   | $ | 12,468 |   | $ | — |   | $ | 23,616 |   | $ | 4,457 |   | $ | 28,073 |   |

 

Derivativesinclude interest rate swaps and foreign currency forward exchange contracts. Tovalue these derivatives, the Company obtains 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.

 

For purposes ofvaluation adjustments to its interest rate swap derivative positions, theCompany has evaluated liquidity premiums that may be demanded by marketparticipants, as well as the credit risk of its counterparties and its owncredit. The Company has considered factors such as the likelihood of default byitself and counterparties, its net exposures and remaining maturities indetermining the appropriate fair value adjustment to record.

 

Embeddedderivatives include the contingent payment provision embedded in the Company’snonrecourse credit facility related to purchased accounts receivable and thesellers’ participation in collections that are in excess of minimum targets forcertain portfolios of purchased accounts receivables. The Company values theseembedded derivatives based on the present value of expected cash flows.  Inputs used to value these embedded derivativesare considered Level 3 measurements since they are unobservable. Changes in thefair market value of the embedded derivatives are recorded in interest expenseon the statement of operations.

 

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

 
| ** **                     | ** ** | **For the Year Ended  December 31,** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| Balance at beginning of period |       | $                                         | 4,457      |   | $ | 9,773 |   |
| Additions                      |       | 1,486                                     |       | 2,861 |   |
| Payments                       |       | (2,509                                    | )          | (3,142 | ) |
| Changes in fair value          |       | (128                                      | )          | (5,035 | ) |
| Balance at end of period       |       | $                                         | 3,306      |   | $ | 4,457 |   |

 

F-16

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Table ofContents

 

**NCO GROUP, INC.**

**Notes toConsolidated Financial Statements (continued)**

 

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

 

*Non-RecurringMeasurement:*

 

For the year ended December 31,2009, the Company performed its annual impairment test during the fourthquarter. Due to the expected impact of the economic environment on theCompany’s clients’ business in 2010, in the fourth quarter of 2009 the Companyreduced the budgeted volumes from certain of its clients in the CRM reportingunit. As a result, the Company’s 2009 annual impairment test for goodwillindicated that the carrying value of its CRM reporting unit exceeded its fairvalue. As a result of the annual impairment testing, the Company recordedgoodwill impairment charges of $24.7 million in the CRM segment in 2009. Referto note 10 for the assumptions used to determine fair values.

 

The following tablesummarizes the basis used to measure certain non-financial assets at fair valueon a nonrecurring basis in the balance sheet (amounts in thousands):

 
| ** **               | ** ** | **December 31, 2009** | ** ** |
|--------------------------|------------|----------------------------|------------|
| ** **               | ** ** | **Level 1**                | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|                     |       |                       |       |   |   |   |   |   |   |
| CRM:                     |       |                       |       |   |   |   |   |   |   |
| Goodwill                 |       | $                          | —     |   | $ | — |   | $ | 57,015 |   | $ | 57,015 |   |
| Other  intangible assets |       | $                          | —     |   | $ | — |   | $ | 47,100 |   | $ | 47,100 |   |

 

*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 CashEquivalents, Trade Accounts Receivable, and Accounts Payable:

 

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

 

Purchased AccountsReceivable:

 

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

 

Notes Receivable:

 

The Company had notesreceivable of $5.1 million and $8.4 million as of December 31, 2009 and2008, 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.

 

Long-Term Debt:

 

The following presents the carrying values and theestimated fair values of the Company’s long-term debt at December 31, 2009(amounts in thousands):

 
| ** **                        | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
|-----------------------------------|------------|--------------------|------------|----------------|------------|
| Senior  term loan                 |       | $                  | 549,260    |           | $          | 569,317 |   |
| Senior  revolving credit facility |       | 17,000             |       | 16,994         |       |
| Senior  subordinated notes        |       | 200,000            |       | 152,000        |       |
| Senior  notes                     |       | 165,000            |       | 132,990        |       |
| Nonrecourse  credit facility      |       | 14,322             |       | 14,322         |       |
|                                   |            |                    |            |                |            |  |  |

 

The fair values of the Company’s senior term loan andsenior revolving credit facility are based on market interest rates for debtwith similar terms and maturities. The fair values of the Company’s SeniorNotes and Senior Subordinated Notes are based on their trading prices at December 31,2009. The stated interest rates of the Company’s nonrecourse credit facilityapproximate market rates for debt with similar terms and maturities, and,accordingly, the carrying amounts approximate fair value.

 

**7.     Purchased Accounts Receivable:**

 

As of December 31,2009, the carrying value of Portfolio Management’s and ARM’s purchased accountsreceivable were $131.6 million and $6.8 million, respectively. The total outstandingbalance due, representing the original undiscounted contractual amount lesscollections since acquisition, was $55.2 billion and $52.4 billion at December 31,2009 and 2008, respectively.

 

F-17

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Table ofContents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

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

 

The followingsummarizes the changes in purchased accounts receivable (amounts in thousands):

 
| ** **                                                           | ** ** | **For the Year Ended  December 31,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                           | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                 |       |                                      |       |   |   |   |   |
| Balance at beginning of period                                       |       | $                                         | 185,659    |   | $ | 245,585 |   | $ | 244,100 |   |
| Purchases:                                                           |       |                                      |       |   |   |   |   |
| Cash purchases                                                       |       | 56,609                                    |       | 126,547 |   | 125,283 |   |
| Portfolios acquired in business combinations                         |       | —                                    |       | 3,630 |   | — |   |
| Collections                                                          |       | (155,342                                  | )          | (205,024 | ) | (232,316 | ) |
| Revenue recognized                                                   |       | 71,242                                    |       | 115,699 |   | 155,088 |   |
| Proceeds  from portfolio sales and resales applied to carrying value |       | (164                                      | )          | (1,755 | ) | (23,068 | ) |
| Allowance for impairment                                             |       | (21,467                                   | )          | (98,892 | ) | (24,962 | ) |
| Other                                                                |       | 1,892                                     |       | (131 | ) | 1,460 |   |
| Balance at end of period                                             |       | $                                         | 138,429    |   | $ | 185,659 |   | $ | 245,585 |   |

 

PortfolioManagement sells portfolios of accounts receivable based on a low probabilityof payment under the Company’s collection platform and other criteria. Proceedsfrom sales above the remaining carrying value are recorded as revenue. Thefollowing summarizes sales proceeds, carrying value and revenue recorded(amounts in thousands):

 
| ** **              | ** ** | **For the Year Ended  December 31,** | ** ** |
|-------------------------|------------|-------------------------------------------|------------|
| ** **              | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| Proceeds from sales     |       | $                                         | 525        |   | $ | 4,757 |   | $ | 36,876 |   |
| Less carrying value     |       | 164                                       |       | 1,755 |   | 15,783 |   |
| Portfolio sales revenue |       | $                                         | 361        |   | $ | 3,002 |   | $ | 21,093 |   |

 

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

 
| ** **                     | ** ** | **For the Year Ended  December 31,** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| Balance at beginning of period |       | $                                         | 123,804    |   | $ | 24,962 |   | $ | — |   |
| Additions                      |       | 26,347                                    |       | 99,593 |   | 25,422 |   |
| Recoveries                     |       | (4,880                                    | )          | (701 | ) | (460 | ) |
| Other                          |       | (874                                      | )          | (50 | ) | — |   |
| Balance at end of period       |       | $                                         | 144,397    |   | $ | 123,804 |   | $ | 24,962 |   |

 

F-18

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Table ofContents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

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

 

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 Year Ended  December 31,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                     | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| Balance at beginning of period                 |       | $                                         | 167,411    |   | $ | 366,584 |   | $ | 465,451 |   |
| Additions                                      |       | 57,088                                    |       | 125,750 |   | 105,490 |   |
| Revenue recognition                            |       | (71,242                                   | )          | (115,699 | ) | (155,088 | ) |
| Reclassifications  to nonaccretable difference |       | (40,729                                   | )          | (210,824 | ) | (49,109 | ) |
| Foreign currency translation adjustment        |       | (420                                      | )          | 1,600 |   | (160 | ) |
| Balance at end of period                       |       | $                                         | 112,108    |   | $ | 167,411 |   | $ | 366,584 |   |

 

During the years ended December 31,2009, 2008 and 2007, the Company purchased accounts receivable for a cost of$56.6 million, $126.5 million and $125.3 million, respectively, that hadcontractually required payments receivable at the date of acquisition of $2.9billion, $4.3 billion and $5.9 billion, respectively, and expected cash flowsat the date of acquisition of $113.7 million, $248.7 million and $229.7million, respectively.

 

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

 

In the course of theCompany’s regular business activities as a provider of accounts receivablemanagement services, the Company receives clients’ funds arising from thecollection of accounts placed with the Company. These funds are placed insegregated cash accounts and are generally remitted to clients within 30 days.Funds held on behalf of clients of $75.1 million and $77.1 million at December 31,2009 and 2008, respectively, have been shown net of their offsetting liabilityfor financial statement presentation.

 

**9.     Property and Equipment:**

 

Property andequipment, at cost, consisted of the following (amounts in thousands):

 
| ** **                     | ** ** | **Estimated  Useful Life** | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------|------------|----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Land                           |       |                       |       | $                           | 70         |                        | $          | 70 |   |
| Buildings                      |       | 15 to 30 years             |       | 6,701                       |       | 6,693                       |       |
| Computer  equipment            |       | 5 years                    |       | 130,085                     |       | 111,799                     |       |
| Computer  software             |       | 5 years                    |       | 86,779                      |       | 74,705                      |       |
| Leasehold  improvements        |       | 5 to 15 years              |       | 52,621                      |       | 41,640                      |       |
| Furniture  and fixtures        |       | 5 to 10 years              |       | 25,287                      |       | 23,773                      |       |
| Capital  leases                |       |                       |       | 5,420                       |       | 5,456                       |       |
|                           |       |                       |       | 306,963                     |       | 264,136                     |       |
| Less  accumulated depreciation |       |                       |       | (184,646                    | )          | (126,240                    | )          |
|                           |       |                       |       | $                           | 122,317    |                        | $          | 137,896 |   |

 

Accumulateddepreciation at December 31, 2009 and 2008, includes $682,000 and$364,000, respectively, of accumulated amortization related to capital leases.During the years ended December 31, 2009, 2008 and 2007, the Companyrecorded depreciation expense of $51.5 million, $56.2 million and $52.0million, respectively.

 

F-19

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**9.****             ****Property and Equipment(continued):**

 

The Company leases two real estate facilities undercapital leases. These leases have ten year terms, expiring in 2018. Thefollowing represents the future minimum lease payments, by year and in theaggregate, under capital leases and the present value of net minimum leasepayments as of December 31, 2009 (amounts in thousands):

 
| 2010                                         |   | $      | 703    |   |
|----------------------------------------------|--------|--------|--------|--------|
| 2011                                         |   | 724    |   |
| 2012                                         |   | 745    |   |
| 2013                                         |   | 768    |   |
| 2014                                         |   | 790    |   |
| Thereafter                                   |   | 2,844  |   |
| Total  minimum payments                      |   | 6,574  |   |
| Less  interest                               |   | (2,155 | )      |
| Present  value of net minimum lease payments |   | $      | 4,419  |   |

 

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

 

Goodwill isallocated and tested at the reporting unit level. Goodwill is tested forimpairment each year during the fourth quarter, and between annual tests if anevent occurs or circumstances change that would more likely than not reduce thefair value of a reporting unit below its carrying amount. NCO trade name is anindefinite-lived intangible asset and therefore not subject to amortization.Similar to goodwill, the trade name is reviewed at least annually forimpairment. The Company’s reporting units are ARM, CRM and PortfolioManagement.

 

Due to theexpected impact of the economic environment on the Company’s clients’ businessin 2010, in the fourth quarter of 2009 the Company reduced the budgeted volumesfrom certain of its clients in the CRM reporting unit. As a result, the Company’s2009 annual impairment test for goodwill indicated that the carrying value ofits CRM reporting unit exceeded its fair value. Fair values were determined byusing a combination of the market approach and income approach. The Company’sfair value calculations were based on projected financial results that wereprepared in connection with the Company’s annual budget and forecasting processthat included the expected impact of the reduction in CRM business volume. Thefair value calculations were also based on other assumptions includinglong-term growth rates of 3 percent and weighted average cost of capitalranging from 13 percent to 14 percent.

 

Late in 2008, theCompany’s ARM and Portfolio Management reporting units experienced asignificant reduction in the collectability of both customer-placed andpurchased accounts receivable resulting from deteriorating economic conditions.Due to the expected impact of the economic environment, the Company reduced its2009 budgeted expectations for each of its reporting units. As a result, theCompany’s 2008 annual impairment test for goodwill and trade name indicatedthat the carrying values of all of its reporting units exceeded their fairvalues. Fair values were determined by using a combination of the marketapproach and income approach. The Company’s fair value calculations were basedon projected financial results that were prepared in connection with theCompany’s annual budget and forecasting process that included the expectedimpact of the current economic environment. The fair value calculations werealso based on other assumptions including long-term growth rates of 4 percentand weighted average cost of capital ranging from 13 percent to 14 percent.

 

As a result of theannual impairment testing, the Company recorded goodwill impairment charges of$24.7 million in the CRM segment in 2009. The Company recorded goodwillimpairment charges of $275.5 million and trade name impairment charges of $14.0million in 2008. The Company was not required to record any impairment chargesbased upon the annual impairment tests in 2007.

 

F-20

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Table ofContents

 

**NCO GROUP, INC.**

**Notes toConsolidated Financial Statements (continued)**

 

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

 

The followingsummarizes the changes in the Company’s reporting units’ goodwill (amounts inthousands):

 
| ** **                              | ** ** | **ARM** | ** ** | **CRM** | ** ** | **Portfolio  Management** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------|------------|---------|------------|---------------------------|------------|-----------|------------|
| Balance at January 1, 2008:        |       |    |       |    |       |                      |       |      |       |
| Goodwill                                |       | $       | 330,933    |    | $          | 128,118                   |       | $         | 155,693    |   | $ | 614,744 |   |
|                                    |       |    |       |    |       |                      |       |      |       |
| Goodwill impairment                     |       | (73,205 | )          | (46,597 | )          | (155,693                  | )          | (275,495  | )          |
| OSI acquisition                         |       | 213,754 |       | —  |       | —                    |       | 213,754   |       |
| Other                                   |       | 11,367  |       | 247     |       | —                    |       | 11,614    |       |
| Balance at December 31, 2008:      |       |    |       |    |       |                      |       |      |       |
| Goodwill                                |       | 556,054 |       | 128,365 |       | 155,693                   |       | 840,112   |       |
| Accumulated impairment                  |       | (73,205 | )          | (46,597 | )          | (155,693                  | )          | (275,495  | )          |
|                                    |       | 482,849 |       | 81,768  |       | —                    |       | 564,617   |       |
| Goodwill impairment                     |       | —  |       | (24,753 | )          | —                    |       | (24,753   | )          |
| OSI acquisition                         |       | (3,369  | )          | —  |       | —                    |       | (3,369    | )          |
| TDM acquisition                         |       | 1,428   |       | —  |       | —                    |       | 1,428     |       |
| Foreign  currency translation and other |       | (2,066  | )          | —  |       | —                    |       | (2,066    | )          |
| Balance at December 31, 2009:      |       |    |       |    |       |                      |       |      |       |
| Goodwill                                |       | 552,047 |       | 128,365 |       | 155,693                   |       | 836,105   |       |
| Accumulated impairment                  |       | (73,205 | )          | (71,350 | )          | (155,693                  | )          | (300,248  | )          |
|                                    |       | $       | 478,842    |    | $          | 57,015                    |       | $         | —     |   | $ | 535,857 |   |

 

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 December 31,2009, the balance of the NCO trade name was $82.6 million.

 

In connection with theOSI acquisition, the Company allocated $3.4 million of the purchase price tothe fair value of certain trade names acquired, which are not considered tohave indefinite lives and are therefore subject to amortization. At December 31,2009 and 2008, accumulated amortization of the OSI trade names was $741,000 and$567,000, respectively.

 

Other intangible assetssubject to amortization consist of customer relationships and non-competeagreements. During 2009, the Company began to reduce its purchases of portfoliosof accounts receivable and has made a decision to minimize further investmentsin purchased accounts receivable in the future. This decision resultedprimarily from the continuation of the difficult collection environment, thecompetitive market for portfolio investments, as well as potential regulatorychanges affecting the purchased accounts receivable business. As a result ofthis decision, the Company recorded an impairment charge of $5.3 million forthe Portfolio Management reporting unit’s customer relationship intangibleassets.

 

Thefollowing represents the other intangible assets subject to amortization(amounts in thousands):

 
| ** **              | ** ** | **December 31, 2009**  | ** ** | **December 31, 2008**    | ** ** |
|-------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Customer  relationships |       | $                           | 437,412    |                          | $          | 180,379 |   | $ | 443,655 |   | $ | 118,555 |   |
| Non-compete  agreements |       | 3,955                       |       | 2,306                         |       | 4,006 |   | 1,473 |   |
| Total                   |       | $                           | 441,367    |                          | $          | 182,685 |   | $ | 447,661 |   | $ | 120,028 |   |

 

F-21

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

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

 

During the years ended December 31,2009, 2008 and 2007, the Company recorded amortization expense for these otherintangible assets of $67.3 million, $64.5 million and $50.3 million,respectively. The following represents the Company’s expected amortizationexpense for each of the next five years from these other intangible assets(amounts in thousands):

 
| **For the Years Ended** | ** ** | **Estimated**            | ** ** |
|-------------------------|------------|--------------------------|------------|
| **December 31,**   | ** ** | **Amortization Expense** | ** ** |
| 2010                    |       | $                        | 64,420     |   |
| 2011                    |       | 63,981                   |       |
| 2012                    |       | 59,718                   |       |
| 2013                    |       | 53,512                   |       |
| 2014                    |       | 15,725                   |       |
|                         |            |                          |            |  |

 

**11.  Accrued Expenses:**

 

Accrued expenses consistedof the following (amounts in thousands):

 
| ** **                                                                                          | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Derivative  instruments                                                                             |       | $                           | 9,164      |                        | $          | 24,540 |   |
| Accrued  rent and other related expense associated with the flood of the Fort  Washington locations |       | 11,100                      |       | 11,100                      |       |
| Accrued  interest                                                                                   |       | 9,293                       |       | 8,887                       |       |
| Book  overdrafts                                                                                    |       | 8,363                       |       | 6,609                       |       |
| Accrued  contract labor expenses                                                                    |       | 3,872                       |       | 5,449                       |       |
| Restructuring  costs                                                                                |       | 6,334                       |       | 4,733                       |       |
| Accrued  acquisition costs                                                                          |       | 1,796                       |       | 5,201                       |       |
| Customer  refundable fees                                                                           |       | 5,766                       |       | 4,312                       |       |
| Other  accrued expenses                                                                             |       | 51,562                      |       | 56,891                      |       |
|                                                                                                |       | $                           | 107,250    |                        | $          | 127,722 |   |

 

**12.  Long-Term Debt:**

 

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

 
| ** **                        | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Senior  term loan                 |       | $                           | 549,260    |                        | $          | 588,605 |   |
| Senior  revolving credit facility |       | 17,000                      |       | 81,500                      |       |
| Senior  subordinated notes        |       | 200,000                     |       | 200,000                     |       |
| Senior  notes                     |       | 165,000                     |       | 165,000                     |       |
| Nonrecourse  credit facility      |       | 14,322                      |       | 37,244                      |       |
| Capital  leases                   |       | 4,789                       |       | 5,232                       |       |
| Other                             |       | 1,159                       |       | 1,495                       |       |
| Less  current portion             |       | (41,699                     | )          | (30,559                     | )          |
|                              |       | $                           | 909,831    |                        | $          | 1,048,517 |   |

 

The followingsummarizes the Company’s required debt payments (amounts in thousands):

 
| 2010       |   | $       | 41,699  |   |
|------------|--------|---------|---------|--------|
| 2011       |   | 27,063  |    |
| 2012       |   | 6,533   |    |
| 2013       |   | 673,305 |    |
| 2014       |   | 200,529 |    |
| Thereafter |   | 2,401   |    |
|       |   | $       | 951,530 |   |

 

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

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

 

*SeniorCredit Facility:*

 

The Company has asenior credit facility (“Credit Facility”) with a syndicate of financialinstitutions that consists of a term loan ($549.3 million outstanding at December 31,2009) and a $100.0 million revolving    creditfacility. The Company is required to make quarterly principal repayments of$1.5 million on the term loan until its maturity in May 2013, at whichtime its remaining balance outstanding is due. The Company is also required tomake annual prepayments of 50 percent, 25 percent or zero percent of its excessannual cash flow, based on its leverage ratio. The revolving credit facilityrequires no minimum principal payments until its maturity in November 2011.The availability of the revolving credit facility is reduced by any unusedletters of credit ($11.8 million at December 31, 2009). As of December 31,2009, the Company had $71.2 million of remaining availability under therevolving credit facility.

 

All borrowingsbear interest at an annual rate equal to either, at the option of the Company, (i) thehigher of the prime rate (3.25 percent at December 31, 2009), the federalfunds rate (0.11 percent at December 31, 2009) plus 0.50 percent, or LIBOR(0.23 percent 30-day LIBOR at December 31, 2009) plus 1.00 percent, plus amargin of 2.25 percent to 2.75 percent in the case of the revolving creditfacility and 3.75 percent to 4.00 percent in the case of the term loan, basedon the Company’s funded debt to earnings before interest, taxes, depreciationand amortization (“EBITDA”) ratio, as defined; or (ii) LIBOR, but in noevent less than 2.50 percent, plus a margin of 3.25 percent to 3.75 percent inthe case of the revolving credit facility and 4.75 percent to 5.00 percent inthe case of the term loan, based on the Company’s funded debt to EBITDA ratio,as defined. The Company is charged a quarterly commitment fee on the unusedportion of the revolving credit facility at an annual rate of 0.50 percent. Forthe years ended December 31, 2009 and 2008, the effective interest rate onthe Credit Facility was approximately 8.61 percent and 7.92 percent,respectively. The Credit Facility also requires that the Company obtain certainlevels of interest rate protection.

 

Borrowings underthe Credit 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, and the failureto negotiate and obtain any required relief from our lenders, 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. Under these circumstances, the acceleration of the Company’s debt couldhave a material adverse effect on its business. Notwithstanding the foregoing,the Company may from time to time seek to amend its existing Credit Facility orobtain other funding or additional financing, which may result in additionalfees and higher interest rates. Amending the Company’s Credit Facility orobtaining other funding or additional financing prior to the expiration of thecurrent agreement will be essential as the remaining outstanding balance underthe term loan will be due upon the expiration of the Credit Facility in May 2013.At December 31, 2009, the Company’s leverage ratio was 4.59, compared tothe maximum of 5.50, and the interest coverage ratio was 2.30, compared to theminimum of 1.85. The Company was in compliance with all required financialcovenants and was not aware of any events of default as of December 31,2009.

 

Due to theexpected impact of the economic environment on the Company’s clients’ business,and the resulting expected impact of that on the Company’s 2010 results, as wellas financial covenant ratio adjustments required under the Credit Facility in2010, the Company became uncertain of its ability to remain in compliance withthe financial covenants through 2010. Therefore, on March 31, 2010, theCompany amended the Credit Facility to, among other things, adjust thefinancial covenants, including increasing maximum leverage ratios anddecreasing minimum interest coverage ratios, and adjust the required principalprepayments.

 

In 2010, theCompany’s amended Credit Facility requires a maximum leverage ratio of 5.75 anda minimum interest coverage ratio of 1.80. Management believes that over thenext 12 months the Company will continue to maintain compliance with thesecovenants. The Company’s ability to maintain compliance with the covenants willbe highly dependent on the Company’s results of operations and, to the extentnecessary, the Company’s ability to implement remedial measures such as furtherreductions in operating costs. If the Company were to enter into an agreementwith its lenders for future covenant compliance relief, such relief couldresult in additional fees and higher interest expense.

* *

The amended Credit Facility requires quarterlyprincipal repayments of $1.5 million on the term loan until its maturity in May2013, at which time its remaining balance outstanding is due. The revolvingcredit facility requires no minimum principal payments until its maturity inNovember 2011. The amended Credit Facility also requires quarterly prepaymentsof 75 percent of the excess cash flow from the Company’s purchased accountsreceivable, as well as annual prepayments of 75 percent or 50 percent of theCompany’s excess annual cash flow, based on its leverage ratio, less theamounts paid during the year from the purchased accounts receivable excess cashflow prepayments.

* *

*SeniorNotes and Senior Subordinated Notes:*

 

The Company has$165.0 million of floating rate senior notes due 2013 (“Senior Notes”) and$200.0 million 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).

 

F-23

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**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

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

 

*SeniorNotes and Senior Subordinated Notes (continued):*

 

The Senior Notesare senior unsecured obligations and are senior in right of payment to allexisting and future senior subordinated indebtedness, including the SeniorSubordinated Notes, and all future subordinated indebtedness. The Senior Notesbear interest at an annual rate equal to LIBOR plus 4.875 percent, resetquarterly.  For the years ended December 31,2009 and 2008, the effective interest rate of the Senior Notes wasapproximately 5.82 percent and 7.89 percent, respectively. The Company 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 SeniorSubordinated Notes are unsecured senior subordinated obligations and aresubordinated in right of payment to all existing and future seniorindebtedness, including the Senior Notes and borrowings under the CreditFacility. The Company may redeem the Senior Subordinated Notes, in whole or inpart, at any time on or after November 15, 2010 at varying redemptionprices depending on the redemption date, plus accrued and unpaid interest. TheCompany also may redeem some or all of the Senior Subordinated Notes at anytime prior to November 15, 2010, at a redemption price equal to 100percent of the principal amount of the respective Notes to be redeemed, plusaccrued and unpaid interest and an additional premium.

 

The indenturesgoverning the Notes contain a number of covenants that limit the Company’s andits restricted 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. As of December 31, 2009, the Companywas in compliance with all required covenants. In addition, upon a change ofcontrol, the Company is required to offer to repurchase all of the Notes thenoutstanding, at a purchase price equal to 101 percent of their principalamount, plus any accrued interest to the date of repurchase.

 

*Nonrecourse Credit Facility:*

 

The Company had arelationship with a lender to provide nonrecourse financing for certainpurchases of accounts receivable, at the discretion of the lender.  If the lender chose to participate in thefinancing of a portfolio of accounts receivable, the financing was structured,depending on the size and nature of the portfolio to be purchased, either as aborrowing arrangement or under various equity sharing arrangements. The lenderfinanced non-equity borrowings with floating interest at an annual rate equalto LIBOR (0.23 percent 30-day LIBOR at December 31, 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. There wereno non-equity borrowings under this relationship during 2009.

 

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

 

F-24

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

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

 

*Nonrecourse Credit Facility (continued):*

 

The totalnonrecourse debt outstanding was $14.3 million and $37.2 million as of December 31,2009 and 2008, respectively, which included $2.1 million and $3.7 million,respectively, of accrued residual interest. The effective interest rate onthese loans, including the residual interest component, was approximately 12.8percent and 10.0 percent for the years ended December 31, 2009 and 2008,respectively. The nonrecourse debt agreements contain certain covenants such asmeeting minimum cumulative collection targets. As of December 31, 2009,the Company was in compliance with all required covenants.

 

*Capital leases:*

 

The Company leases tworeal estate facilities under capital leases. These leases have ten year terms,expiring in 2018.

 

**13.  Operating Leases:**

 

The Company leases certain equipment and real estatefacilities under noncancelable operating leases. These leases expire between2010 and 2021, and most contain renewal options. The following represents thefuture minimum payments, by year and in the aggregate, under noncancelableoperating leases with initial or remaining terms of one year or more. Thefollowing future minimum payments have been reduced by minimum sublease rentalsof $731,000, due in the future under noncancelable subleases, and do notinclude the leases from the Company’s former Fort Washington locations (note19) (amounts in thousands):

 
| 2010       |   | $      | 49,557  |   |
|------------|--------|--------|---------|--------|
| 2011       |   | 39,433 |    |
| 2012       |   | 33,810 |    |
| 2013       |   | 26,034 |    |
| 2014       |   | 15,226 |    |
| Thereafter |   | 17,547 |    |
|       |   | $      | 181,607 |   |

 

For the years ended December 31,2009, 2008 and 2007, rent expense was $55.4 million, $51.0 million and $39.3million, respectively. The total amount of base rent payments is being chargedto expense on the straight-line method over the term of the lease.

 

**14.  Income Taxes:**

 

Income tax benefitconsisted of the following components (amounts in thousands):

 
| ** **         | ** ** | **For the Year Ended  December 31,** | ** ** |
|--------------------|------------|-------------------------------------------|------------|
| ** **         | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| Currently payable: |       |                                      |       |   |   |   |   |
| Federal            |       | $                                         | —     |   | $ | — |   | $ | (415 | ) |
| State              |       | 1,397                                     |       | 1,921 |   | 995 |   |
| Foreign            |       | 2,260                                     |       | 2,976 |   | 1,678 |   |
|               |       |                                      |       |   |   |   |   |
| Deferred:          |       |                                      |       |   |   |   |   |
| Federal            |       | (1,815                                    | )          | (73,596 | ) | (20,406 | ) |
| State              |       | (770                                      | )          | (3,333 | ) | 1,723 |   |
| Foreign            |       | (2,238                                    | )          | 85 |   | 321 |   |
| Income tax benefit |       | $                                         | (1,166     | ) | $ | (71,947 | ) | $ | (16,104 | ) |

 

F-25

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

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

 

Deferred taxassets (liabilities) consisted of the following (amounts in thousands):

 
| ** **                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2009**              | ** ** | **2008**              | ** ** |
| Deferred tax assets:            |       |                  |       |                  |       |
| Net operating loss carryfowards |       | $                     | 129,441    |                  | $          | 102,846 |   |
| Deferred contractual revenue    |       | 12,714                |       | 14,006                |       |
| Accrued acquisition costs       |       | 1,416                 |       | 3,501                 |       |
| Tax credits                     |       | 12,648                |       | 11,571                |       |
| Accrued expenses                |       | 20,544                |       | 25,352                |       |
| Total deferred tax assets       |       | 176,763               |       | 157,276               |       |
| Valuation allowance             |       | 68,416                |       | 31,351                |       |
| Net deferred tax assets         |       | 108,347               |       | 125,925               |       |
|                            |       |                  |       |                  |       |
| Deferred tax liabilities:       |       |                  |       |                  |       |
| Intangible assets               |       | 111,330               |       | 125,916               |       |
| Prepaid expenses                |       | 5,236                 |       | 3,411                 |       |
| Depreciation                    |       | 2,835                 |       | 8,772                 |       |
| Purchased accounts receivable   |       | 15,617                |       | 14,017                |       |
| Total deferred tax liabilities  |       | 135,018               |       | 152,116               |       |
| Net deferred tax liabilities    |       | $                     | (26,671    | )                     | $          | (26,191 | ) |

 

The Company had a$93.7 million deferred tax asset for federal net operating loss carryforwardsof $267.7 million at December 31, 2009, which are expiring through 2029.The Company had a $72.0 million deferred tax asset for federal net operatingloss carryforwards of $205.6 million at December 31, 2008.

 

At December 31,2009, approximately $132.7 million of the Company’s federal net operating losscarryforwards are subject to limitations as defined by Section 382 of theInternal Revenue Code.  Section 382 imposes limitations on acorporation’s ability to utilize its NOL carryforwards if it experiences an “ownershipchange.” In general terms, an ownership change results from transactionsincreasing the ownership of certain stockholders in the stock of a corporationby more than 50 percent over a three-year period.

 

The Company had a$5.0 million deferred tax asset for foreign net operating loss carryforwards of$18.1 million at December 31, 2009, which will not expire for ten or moreyears. The Company had $4.9 million of foreign net operating loss carryforwardsat December 31, 2008.

 

The Company haddeferred tax assets for state net operating loss carryforwards of $30.7 millionand $29.6 million at December 31, 2009 and December 31, 2008,respectively.

 

In assessing therealization of deferred tax assets, the Company’s management considers whetherit is more likely than not that some portion of the deferred tax assets willnot be realized. The ultimate realization of deferred tax assets isdependent upon the generation of future taxable income during the periods inwhich those temporary differences become deductible or the net operating lossescan be utilized. A valuation allowance of $36.5 million has been providedon federal and certain state deferred tax assets due to the uncertainty of realizingthe benefit of certain deferred tax assets. In addition, a valuationallowance of $31.9 million for a portion of deferred tax assets relating tocertain foreign and state net operating losses and state tax credits that basedon management’s assessment it is more likely than not that such amounts willnot be realized. This represents an increase of $37.1 million due to theincrease in federal and certain state deferred tax assets and additional stateand foreign net operating losses in 2009.

 

The deferred taxliability related to intangible assets arose primarily from theTransaction on November 15, 2006, as well as other subsequentacquisitions.

 

 

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

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

 

The portfolios ofpurchased accounts receivable are composed of distressed debt. Collectionresults are not guaranteed until received; accordingly, for tax purposes, anygain on a particular portfolio is deferred until the full cost of itsacquisition is recovered. Revenue for financial reporting purposes isrecognized ratably over the life of the portfolio. Deferred tax liabilitiesarise from deferrals created during the early stages of the portfolio. Thesedeferrals reverse after the cost basis of the portfolio is recovered.

 

A reconciliationof the U.S. statutory income tax rate to the effective rate was as follows:

 
| ** **                                      | ** ** | **For the Year Ended  December 31,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| U.S. statutory income tax rate                  |       | 35.0                                      | %          | 35.0 | % | 35.0 | % |
| State taxes, net of federal                     |       | (0.2                                      | )          | 0.5 |   | (0.2 | ) |
| Goodwill impairment                             |       | (7.8                                      | )          | (17.4 | ) | — |   |
| Valuation allowance                             |       | (30.1                                     | )          | — |   | — |   |
| Impact  of change in state laws, net of federal |       | —                                    |       | — |   | (3.5 | ) |
| Permanent items                                 |       | 3.0                                       |       | (0.1 | ) | 0.2 |   |
| Noncontrolling interest                         |       | (0.5                                      | )          | (2.1 | ) | 3.7 |   |
| Foreign                                         |       | (1.0                                      | )          | (0.2 | ) | 0.4 |   |
| Other, net                                      |       | 2.9                                       |       | 1.1 |   | 0.1 |   |
| Effective tax rate                              |       | 1.3                                       | %          | 16.8 | % | 35.7 | % |

 

Pre-tax income fromoperations included foreign subsidiary (loss) income of $(1.8) million and $7.1million for the years ended December 31, 2009 and 2008, respectively. The Company’s cumulative undistributed earnings of foreign subsidiariesof $41.9 million for the year ended December 31, 2009 are expected to bereinvested indefinitely, and accordingly no incremental U.S. or foreignwithholding taxes have been recorded.

 

The Company receivednotice of a reassessment from a foreign taxing authority relating to certainmatters occurring from 1998 through 2001 regarding one of its subsidiaries inthe amount of $16.2 million including interest and penalties. In order topursue an appeal of the reassessment, the Company paid a deposit of $8.5million in December 2006. In October 2009, the Company entered into asettlement agreement regarding the reassessment. In January 2010, theCompany received a refund of approximately $3.8 million (net of a $1.7 millionpayment due back to the taxing authority). Management has adjusted its reserveto cover any potential future exposure.

 

As of December 31,2009 and 2008, the Company had $4.9 million and $8.3 million in reserves foruncertain tax positions, including penalties that, if recognized, would affectthe effective tax rate.

 

The Company recognizesinterest related to uncertain tax positions in “Interest expense.” As of December 31,2009, 2008 and 2007, the Company had $4.5 million, $6.1 million and $4.1million, respectively, of accrued interest related to uncertain tax positions.The Company recognizes penalties related to uncertain tax positions in theprovision for income taxes.

 

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

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

 

The following is aroll-forward of the Company’s gross unrecognized tax benefits (amounts inthousands):

 
| Balance  at January 1, 2007   |   | $      | 9,752  |   |
|------------------------------------|--------|--------|--------|--------|
| Prior  year positions:             |   |   |   |
| Additions                          |   | 1,572  |   |
| Current  year positions:           |   |   |   |
| Additions                          |   | 28     |   |
| Settlements  with tax authorities  |   | (105   | )      |
| Reductions  due to statute lapse   |   | (1,630 | )      |
|                               |   |   |   |
| Balance  at January 1, 2008   |   | 9,617  |   |
| Prior  year positions:             |   |   |   |
| Additions                          |   | 1,407  |   |
| Change  in exchange rates          |   | (1,349 | )      |
| Reductions  due to statute lapse   |   | (852   | )      |
|                               |   |   |   |
| Balance  at January 1, 2009   |   | 8,823  |   |
| Prior  year positions:             |   |   |   |
| Additions                          |   | 6,510  |   |
| Reductions                         |   | (340   | )      |
| Current  year positions:           |   |   |   |
| Additions                          |   | 521    |   |
| Settlements  with tax authorities  |   | (4,394 | )      |
| Change  in exchange rates          |   | 734    |   |
| Reductions  due to statute lapse   |   | (148   | )      |
|                               |   |   |   |
| Balance  at December 31, 2009 |   | $      | 11,706 |   |

 

The Company issubject to federal, state and foreign income tax audits from time to time thatcould result in proposed assessments. The Company cannot predict with certaintyhow these audits will be resolved and whether the Company will be required tomake additional tax payments, which may or may not include penalties andinterest. As of December 31, 2009, the Company is no longer subject tofederal income tax examinations for years prior to 2005. For most statesand foreign countries where the Company conducts business, the Company issubject to examination for the preceding three to six years.  In certainstates and foreign countries, the period could be longer.

 

Managementbelieves that the Company has provided sufficient tax provisions for taxperiods within the statutory period of limitations not previously audited andthat are potentially open for examination by the taxing authorities. Potentialliabilities associated with these years will be resolved when an event occursto warrant closure, primarily through the completion of audits by taxingjurisdictions. To the extent audits or other events result in a materialadjustment to the accrued estimates, the effect would be recognized during theperiod of the event. There can be no assurance, however, that the ultimateoutcome of audits will not have a material adverse impact on the Company’sfinancial position, results of operations or cash flows.

 

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**15.****      ****Stockholders’ Equity:**

 

Thefollowing summarizes the Company’s share activity (shares in thousands):

 
| ** **                                         | ** ** | ** **    | ** ** | **Class L** | ** ** | **Class A** | ** ** |
|----------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                         | ** ** | **Preferred** | ** ** | **Common**       | ** ** | **Common**       | ** ** |
| Balance, January 1, 2007                      |       | 1,220         |       | 364              |       | 1,616            |       |
| Issuance of preferred stock dividends              |       | 188           |       | —           |       | —           |       |
| Issuance  of common stock, net of Cancelations     |       | —        |       | —           |       | 135              |       |
| Issuance of restricted stock                       |       | —        |       | —           |       | 71               |       |
| Balance, December 31, 2007                    |       | 1,408         |       | 364              |       | 1,822            |       |
| Issuance of preferred stock                        |       | 867           |       | —           |       | —           |       |
| Issuance of preferred stock dividends              |       | 298           |       | —           |       | —           |       |
| Issuance  of common stock, net of cancelations     |       | —        |       | 37               |       | 1,012            |       |
| Issuance  of restricted stock, net of cancelations |       | —        |       | —           |       | 103              |       |
| Balance, December 31, 2008                    |       | 2,573         |       | 401              |       | 2,937            |       |
| Issuance of preferred stock                        |       | 176           |       | —           |       | —           |       |
| Issuance of preferred stock dividends              |       | 403           |       | —           |       | —           |       |
| Issuance  of common stock, net of cancelations     |       | —        |       | (1               | )          | 24               |       |
| Balance, December 31, 2009                    |       | 3,152         |       | 400              |       | 2,961            |       |

 

*Capital 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. Series B-2 is entitled to a yield at an annual rate of 19 percentand Class L is entitled to a yield at an annual rate of 14 percent. Thedividends and yields are calculated on February 28, May 31, August 31,and November 30 of each year.  Theyields for Series B-2 and Class L are compounding and accumulate onthe unreturned initial investment but are not declared until payment. As of December 31,2009, the accumulated yield for shares of Series B-2 and Class L was$695,000 and $47.0 million, respectively.

 

The following presentsthe Series A and Series B-1 shares issued for the “paid-in-kind”dividends during the years ended December 31, 2009 and 2008:

 
| ** **      | ** ** | **November 30,** | ** ** | **August 31,** | ** ** | **May 31,** | ** ** | **February 28,** | ** ** |
|-----------------|------------|-----------------------|------------|---------------------|------------|------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2009**              | ** ** | **2008**            | ** ** | **2009**         | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Series A   |       | 98,241                |       | 85,150              |       | 95,935           |       | 83,159                |       | 92,665 |   | 80,879 |   | 87,211 |   | 49,108 |   |
| Series B-1 |       | 9,850                 |       | —              |       | 9,503            |       | —                |       | 7,225 |   | — |   | 1,725 |   | — |   |

 

On January 2, 2008,the Company issued 22,484 shares of Series A to JPM and in February 2009,the Company issued 7,400 shares of Series A to JPM, as partial considerationfor the acquisition of SST. Due to the related party nature of the acquisition(note 4), the remaining consideration of $8.1 million and the return of $4.0million of cash that was not acquired were deemed cash dividend payments in2008, and the remaining consideration of $3.2 million in addition to otherpost-closing adjustments resulted in a deemed investment of $2.2 million in2009.

 

In March 2008, inconnection with the OSI acquisition, the Company privately placed 802,262shares of Series A, 37,738 shares of Class L and 1,012,261 shares of Class Afor aggregate proceeds of $210.0 million. The entire amount of the proceeds wasused to acquire OSI.

 

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**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

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

 

*Capital Stock (continued):*

 

On December 8, 2008,the Company increased its authorized capital to the following amounts:7,500,000 shares of Preferred Stock; 800,000 shares of Class L; and4,500,000 shares of Class A. On December 9, 2008, the Companyprivately placed 41,026.6 shares of Series B-1 and 1,088.6 shares of Series B-2,for aggregate proceeds of $10.0 million.

 

On March 25,2009, the Company sold 148,463.6 shares of its Series B-1 Preferred Stockand 19,957.4 shares of its Series B-2 Preferred Stock to One EquityPartners, Michael J. Barrist and certain members of executive management, andother co-investors for an aggregate purchase price of $40.0 million. Theproceeds were used to pay down $15.0 million of term loan borrowings, and theremainder, net of expenses, of $22.5 million was used to repay borrowings underthe revolving credit facility.

 

Preferred Stock and Class L,in the aggregate, have a preference on distributions (excluding paid-in-kinddividends) allocated as follows: first to unpaid yield accruing on Class Lor Series A and the unreturned value of Series A issued in apaid-in-kind dividend, and second to the unreturned initial investment in Class L,excluding the portion of such investment that is attributable to the right of Class Lto share generally in distributions, and the unreturned initial investments in Series A.Once this preference has been paid in full, all remaining distributions arepayable to Class L and Class A on a pro-rata basis.

 

Preferred Stock is notentitled to vote, and Class L and Class A vote together as a singleclass, with each share entitled to one vote. In addition, the Company may notenter into an agreement or consummate a transaction that would result in achange of control or an initial public offering without the consent of theholders of a majority of the then outstanding shares of Series A and Class Lvoting as a single class.

 

*Noncontrolling Interests:*

 

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

 

Losses areattributed to noncontrolling interests even if they exceed the noncontrollinginterests’ equity. If the Company had not attributed such losses tononcontrolling interests, net loss attributable to NCO Group, Inc. wouldhave increased by $1.7 million for the year ended December 31, 2009.

 

*Stock-based Compensation:*

 

The Company has aRestricted Share Plan, as amended and restated that is administered by theCompensation Committee of the Board of Directors, which approves the grants toemployees recommended by the Company’s chief executive officer. Shares ofrestricted stock granted under the Restricted Share Plan vest in 25 percentincrements over a period of four years, provided that the recipient remainsemployed by the Company. At December 31, 2009, an aggregate of 333,011restricted shares of Class A common stock had been awarded and 3,656shares of Class A common stock were available for future awards under theRestricted Share Plan. Compensation expense recognized related to the awardsfor the years ended December 31, 2009, 2008 and 2007 was $1.1 million,$667,000 and $394,000, respectively. At December 31, 2009, there was $1.2million of unrecognized pre-tax compensation cost related to the non-vestedrestricted shares. The Company measures compensation expense based on the grantdate fair value, and has elected to recognize this compensation expense on astraight-line basis over the weighted-average service period, which is expectedto be four years.

 

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**16.****      ****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 323.2million Philippine pesos outstanding at December 31, 2009, which maturethroughout 2010.

 

The Company has interestrate swap agreements to minimize the impact of LIBOR fluctuations on interestpayments on the Company’s floating rate debt. The interest rate swaps may bedesignated as cash flow hedges. The interest rate swaps cover an aggregatenotional amount of $323.0 million. The Company is required to pay thecounterparties quarterly interest payments at a weighted average fixed rateranging from 3.41 percent to 3.44 percent, and receives from the counterpartiesvariable quarterly interest payments based on LIBOR. The net interest paid orreceived is included in interest expense. On March 25, 2009, the Companyamended its senior credit facility, which amendment included a minimum LIBOR of2.50 percent. This amendment caused the existing interest rate swaps to becomeineffective and, as of March 25, 2009, these interest rate swaps were notaccounted for as cash flow hedges. Accordingly, the fair value of the interestrate swaps at March 25, 2009 is being amortized to interest expense, usingthe effective interest rate method, over the remaining lives of the interestrate swap agreements, and future changes in the fair value of these interestrate swaps after March 25, 2009 are recorded in interest expense.

 

The Company has embedded derivatives relating to thecontingent payment provision in its nonrecourse credit facility relating topurchased accounts receivable, and relating to the sellers’ participation incollections that are in excess of minimum targets for certain portfolios ofpurchased accounts receivable.

 

The Company enters into interest rate cap contracts tominimize the impact of LIBOR fluctuations on transactions and cash flows. TheCompany had interest rate caps covering an aggregate notional amount of $57.0million at December 31, 2009, with a weighted average LIBOR cap rate of6.00 percent.

 

The following summarizes the fair value of the Company’sderivatives (amounts in thousands):

 
| ** **                                            | ** ** | **December 31, 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                 |       | $                          | 2          |   | Other current assets |   | $ | 923 |   |
| Interest  rate caps                                   |       |                                 |       |                       |       | Other current assets |   | 1 |   |
| Total  asset derivatives not designated as hedges     |       |                                 |       | $                          | 2          |   |   |   | $ | 924 |   |
|                                                  |       |                                 |       |                       |       |   |   |   |   |
| *Liability derivatives*                               |       |                                 |       |                       |       |   |   |   |   |
| Interest  rate swaps                                  |       | Accrued expenses                     |       | $                          | 9,104      |   |   |   |   |   |
| Forward  exchange contracts                           |       | Accrued expenses                     |       | 60                         |       | Accrued expenses |   | $ | 11,360 |   |
| Embedded  derivatives                                 |       | Long-term debt and  accrued expenses |       | 3,306                      |       | Long-term debt and  accrued expenses |   | 4,457 |   |
| Total  liability derivatives not designated as hedges |       |                                 |       | $                          | 12,470     |   |   |   | $ | 15,817 |   |

 

F-31

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

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

 

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

** **
| ** **                                          | ** ** | ** **                                                              | ** ** | **For the Year Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                          | ** ** | ** **                                                              | ** ** | **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       | ) | $ | (8,666 | ) | $ | (8,989 | ) | $ | (4,318 | ) |
|                                                |       |                                                                    |       |                                     |       |   |   |   |   |   |   |
| Forward  exchange contracts                         |       | Payroll and  related expenses, and selling, general and admin. expenses |       | —                                   |       | — |   | (4,829 | ) | (7,529 | ) |
|                                                |       |                                                                    |       |                                     |       |   |   |   |   |   |   |
| Total  derivatives designated as hedges             |       |                                                                    |       | $                                        | (719       | ) | $ | (8,666 | ) | $ | (13,818 | ) | $ | (11,847 | ) |

 
| ** **                                       | ** ** | ** **                  | ** ** | **For the Year Ended December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|------------------------------------------|------------|
| ** **                                       | ** ** | ** **                  | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | ** **                  | ** ** | **Amount of Gain**                       | ** ** | **Amount of Gain** | ** ** |
| ** **                                       | ** ** | **Location of Gain (Loss)** | ** ** | **(Loss) Recognized**                    | ** ** | **(Loss) Recognized** | ** ** |
| ** **                                       | ** ** | **Recognized in Earnings**  | ** ** | **in Earnings**                          | ** ** | **in Earnings** | ** ** |
| Derivatives  not designated as hedges:           |       |                        |       |                                     |       |   |   |
| Forward  exchange contracts                      |       | Other income (expense)      |       | $                                        | 7,014      |   | $ | (10,438 | ) |
| Interest  rate swaps (after March 25, 2009) |       | Interest expense            |       | (5,520                                   | )          | — |   |
| Embedded  derivatives                            |       | Interest expense            |       | 128                                      |       | 5,035 |   |
| Interest  rate caps                              |       | Other income (expense)      |       | (45                                      | )          | (91 | ) |
| Total  derivatives not designated as hedges      |       |                        |       | $                                        | 1,577      |   | $ | (5,494 | ) |

 

**17.****      ****Supplemental Cash Flow Information:**

 

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

 
| ** **                                     | ** ** | **For the Year Ended  December 31,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                     | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                           |       |                                      |       |   |   |   |   |
| Cash paid for interest                         |       | $                                         | 100,181    |   | $ | 99,265 |   | $ | 94,971 |   |
| Cash paid for income taxes                     |       | 1,504                                     |       | 4,276 |   | 3,325 |   |
| Noncash investing and financing activities:    |       |                                      |       |   |   |   |   |
| Fair value of assets acquired                  |       | 15,168                                    |       | 139,489 |   | 6,317 |   |
| Liabilities assumed from acquisitions          |       | 13,224                                    |       | 127,928 |   | 966 |   |
| Capital leases                                 |       | —                                    |       | 5,456 |   | — |   |
| Estimated earnout payment for acquisitions     |       | —                                    |       | — |   | 14,775 |   |
| General and admin. expenses paid by SST parent |       | —                                    |       | — |   | 4,781 |   |
| SST parent forgiveness of debt, net            |       | —                                    |       | — |   | 4,690 |   |
| Adjustment to acquired assets and liabilities  |       | —                                    |       | (62 | ) | (3,508 | ) |
| Disposal of fixed assets                       |       | —                                    |       | 13 |   | 916 |   |
|                                                |            |                                           |            |  |  |  |  |  |  |  |

 

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**18.****      ****Employee Benefit Plans:**

 

The Company has a savingsplan under Section 401(k) of the Internal Revenue Code, (the “Plan”),for its U.S. employees. The Plan allows all eligible employees to defer up to15 percent of their income on a pretax basis through contributions to the Plan,subject to limitations under Section 401(k) of the Internal RevenueCode. The Company will provide a matching contribution of 25 percent of thefirst six percent of an employee’s contribution. The Company also has similartype plans for its international employees. The charges to operations for thematching contributions were $ 2.3 million, $3.3 million and $2.3 million forthe years ended December 31, 2009, 2008 and 2007, respectively.

 

The Company has a deferredcompensation plan, (the “Deferred Compensation Plan”), to permit eligibleemployees of the Company to defer receipt and taxation of their compensationfrom the Company each year up to the limit in effect under Section 402(g) ofthe Internal Revenue Code, less amounts contributed to the DeferredCompensation Plan. The Company, at its discretion, may make a contribution thatwill be allocated among participants in proportion to their deferrals for suchyear. All executive officers and other key employees designated by the Companyare eligible to participate in the Deferred Compensation Plan. At December 31,2009 and 2008, the Company had a liability of $957,000 and $687,000,respectively, related to the Deferred Compensation Plan.

 

**19.****      ****Commitments and Contingencies:**

 

*PurchaseCommitments:*

 

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

 
| 2010   |   | $      | 29,562 |   |
|--------|--------|--------|--------|--------|
| 2011   |   | 19,427 |   |
| 2012   |   | 1,620  |   |
|   |   | $      | 50,609 |   |

 

The Company incurred$70.3 million, $52.6 million and $60.6 million of expense in connection withthese purchase commitments for the years ended December 31, 2009, 2008 and2007, respectively.

 

*Forward-FlowAgreements:*

 

The Company has severalfixed price agreements, or forward-flows, that obligate the Company topurchase, on a monthly basis, portfolios of charged-off accounts receivablemeeting certain criteria. The forward flow agreements expire throughout 2010.The estimated future forward-flow commitments in 2010 are approximately $10.4million.

 

*Litigationand Investigations:*

 

The Company is party, from time to time, to variouslegal proceedings, regulatory investigations and tax examinations incidental toits business. The Company continually monitors these legal proceedings,regulatory investigations and tax examinations to determine the impact and anyrequired accruals.

 

F-33

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Table of Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated Financial Statements(continued)**

 

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

 

*Litigationand Investigations (continued):*

 

Fort Washington Flood:

 

In June 2001, the first floor of the Company’s Fort Washington,Pennsylvania, headquarters was severely damaged by a flood caused by remnantsof Tropical Storm Allison. The Company subsequently decided to relocate itscorporate headquarters to Horsham, Pennsylvania. The Company filed a lawsuit onAugust 14, 2001 in the Court of Common Pleas, Montgomery County,Pennsylvania (Civil Action No. 01-15576) against the current landlord andthe former landlord of the Fort Washington facilities to terminate the leasesand to obtain other relief. The landlord and the former landlord filedcounter-claims against the Company. The Company maintains a reserve that itbelieves is adequate to address its exposure to this matter and plans to continueto contest this matter.

 

U.S. Department of Justice:

 

On February 24, 2006, the U.S. Department of Justice alleged certaincivil damages of approximately $5.0 million. The alleged damages relate to amatter the Company reported to federal authorities and the client in 2003involving three employees who engaged in unauthorized student loanconsolidations in connection with a client contract. The responsible employeeswere terminated at that time in 2003. The Company did not agree with theallegations regarding damages. In March 2010, the Company settled thismatter with the Department of Justice for $500,000 and full release of allliabilities with respect to the student loan consolidations. The amount paidwas partially covered by insurance.

 

Tax Matters:

 

The Company received notice of a reassessment from a foreign taxingauthority relating to certain matters occurring from 1998 through 2001regarding one of its subsidiaries in the amount of $16.2 million includinginterest and penalties. In order to pursue an appeal of the reassessment, theCompany paid a deposit of $8.5 million in December 2006. In October 2009,the Company entered into a settlement agreement regarding the reassessment. In January 2010,the Company received a refund of approximately $3.8 million (net of a $1.7million payment due back to the taxing authority). Management has adjusted itsreserve to cover any potential future exposure.

 

Attorneys General:

 

From time to time, the Company receives subpoenas or other similarinformation requests from various states’ Attorneys General, requestinginformation relating to its Company’s debt collection practices in such states.The Company responds to such inquires or investigations and provide certaininformation to the respective Attorneys General offices. The Company believesits in compliance with the laws of the states in which it does businessrelating to debt collection practices in all material respects. However, noassurance can be given that any such inquiries or investigations will not resultin a formal investigation or an enforcement action. Any such enforcementactions could result in fines as well as the suspension or termination of itsability to conduct business in such states.

 

Other:

 

The Company is involved in other legal proceedings, regulatoryinvestigations 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.

 

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Tableof Contents

 

**NCOGROUP, INC.**

**Notes toConsolidated Financial Statements (continued)**

 

**20.****      ****Segment Reporting:**

 

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

 

ARM provides accountsreceivable management services to consumer and commercial accounts for allmarket sectors including financial services, healthcare, retail and commercial,telecommunications, utilities, education, and government. ARM serves clients ofall sizes in local, regional and national markets in North America, Europe andAustralia through offices in North America, Asia, Europe and Australia. Inaddition to traditional accounts receivable collections, these services includedeveloping the client relationship beyond bad debt recovery and delinquencymanagement, and delivering cost-effective accounts receivable solutions to allmarket sectors. ARM also provides accounts receivable management services toPortfolio Management. ARM recorded service revenue of $60.5 million, $82.8million and $109.1 million from these services for the years ended December 31,2009, 2008 and 2007.

 

The following tablepresents the amount ARM received from customers by country (amounts in thousands):

 
| ** ** | ** ** | **For the Year Ended  December 31,** | ** ** |
|------------|------------|-------------------------------------------|------------|
| ** ** | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| U.S.       |       | $                                         | 1,087,006  |   | $ | 1,033,796 |   | $ | 724,102 |   |
| Canada     |       | 40,872                                    |       | 46,831 |   | 43,406 |   |
| Australia  |       | 23,079                                    |       | 19,244 |   | 14,654 |   |
| U.K.       |       | 22,353                                    |       | 25,751 |   | 24,331 |   |
| Mexico     |       | 12,745                                    |       | 10,928 |   | — |   |
|            |            |                                           |            |  |  |  |  |  |  |  |

 

CRM provides customerrelationship management services to clients in North America through offices inNorth America and Asia. CRM also provides certain services to ARM. CRM recordedrevenue of $5.2 million and $2.9 million for these services for the years endedDecember 31, 2009 and 2008, respectively.

 

The following tablepresents the amount CRM received from customers by country (amounts inthousands):

 
| ** ** | ** ** | **For the Year Ended  December 31,** | ** ** |
|------------|------------|-------------------------------------------|------------|
| ** ** | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| U.S.       |       | $                                         | 330,401    |   | $ | 351,671 |   | $ | 311,019 |   |
| Canada     |       | 2,536                                     |       | 7,985 |   | 16,590 |   |
| Panama     |       | 1,555                                     |       | 1,440 |   | 951 |   |
|            |            |                                           |            |  |  |  |  |  |  |  |

 

Portfolio Management purchases and manages defaultedconsumer accounts receivable from consumer creditors such as banks, financecompanies, retail merchants, utilities, healthcare companies and other consumeroriented companies. Portfolio Management’s revenue was impacted by impairmentcharges recorded for a valuation allowance against the carrying value ofportfolios of $21.5 million and $98.9 million for the year ended December 31,2009 and 2008, respectively.

 

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

 
| ** **           | ** ** | **December 31,** | ** ** |
|----------------------|------------|-----------------------|------------|
| ** **           | ** ** | **2009**              | ** ** | **2008** | ** ** | **2007** | ** ** |
| ARM                  |       | $                     | 1,079,180  |   | $ | 1,220,399 |   | $ | 913,711 |   |
| CRM                  |       | 239,373               |       | 283,328 |   | 340,893 |   |
| Portfolio Management |       | 141,482               |       | 197,912 |   | 423,395 |   |
| Total assets         |       | $                     | 1,460,035  |   | $ | 1,701,639 |   | $ | 1,677,999 |   |

 

F-35

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Table ofContents

 

**NCOGROUP, INC.**

**Notes to Consolidated Financial Statements(continued)**

 

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

 

The following tablespresent the revenue, payroll and related expenses, selling, general andadministrative expenses, restructuring charges, income from operations beforedepreciation and amortization (including impairment of intangible assets),total assets, net of any intercompany balances and capital expenditures foreach segment (amounts in thousands):

 
| ** **                                                   | ** ** | **For the Year Ended December 31, 2009** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                   | ** ** | **ARM**                                       | ** ** | **CRM** | ** ** | **Portfolio  Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenues                                                     |       | $                                             | 1,246,555  |   | $ | 334,492 |   | $ | 48,482 |   | $ | (65,611 | ) | $ | 1,563,918 |   |
| Payroll  and related expenses                                |       | 542,919                                       |       | 238,836 |   | 5,244 |   | (5,111 | ) | 781,888 |   |
| Selling,  general and admin. expenses                        |       | 443,040                                       |       | 59,892 |   | 62,779 |   | (57,333 | ) | 508,378 |   |
| Reimbursable  costs and fees                                 |       | 114,716                                       |       | — |   | — |   | (3,167 | ) | 111,549 |   |
| Restructuring  charges                                       |       | 10,644                                        |       | (635 | ) | 859 |   | — |   | 10,868 |   |
|                                                         |       |                                          |       |   |   |   |   |   |   |   |   |
| Income  from operations before depreciation and amortization |       | $                                             | 135,236    |   | $ | 36,399 |   | $ | (20,400 | ) | $ | — |   | $ | 151,235 |   |
|                                                         |       |                                          |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                        |       | $                                             | 19,144     |   | $ | 12,998 |   | $ | — |   | $ | — |   | $ | 32,142 |   |

 
| ** **                                                   | ** ** | **For the Year Ended December 31, 2008** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                   | ** ** | **ARM**                                       | ** ** | **CRM** | ** ** | **Portfolio Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenues                                                     |       | $                                             | 1,219,348  |   | $ | 361,096 |   | $ | 18,389 |   | $ | (85,692 | ) | $ | 1,513,141 |   |
| Payroll  and related expenses                                |       | 583,658                                       |       | 256,895 |   | 7,822 |   | (2,894 | ) | 845,481 |   |
| Selling,  general and admin. Expenses                        |       | 463,083                                       |       | 61,723 |   | 86,533 |   | (74,792 | ) | 536,547 |   |
| Reimbursable  costs and fees                                 |       | 33,798                                        |       | — |   | — |   | (8,006 | ) | 25,792 |   |
| Restructuring  charges                                       |       | 7,631                                         |       | 3,969 |   | — |   | — |   | 11,600 |   |
|                                                         |       |                                          |       |   |   |   |   |   |   |   |   |
| Income  from operations before depreciation and amortization |       | $                                             | 131,178    |   | $ | 38,509 |   | $ | (75,966 | ) | $ | — |   | $ | 93,721 |   |
|                                                         |       |                                          |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                        |       | $                                             | 24,134     |   | $ | 19,262 |   | $ | — |   | $ | — |   | $ | 43,396 |   |

 
| ** **                                                   | ** ** | **For the Year Ended December 31, 2007** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                   | ** ** | **ARM**                                       | ** ** | **CRM** | ** ** | **Portfolio  Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenues                                                     |       | $                                             | 915,603    |   | $ | 328,560 |   | $ | 150,909 |   | $ | (109,642 | ) | $ | 1,285,430 |   |
| Payroll  and related expenses                                |       | 426,177                                       |       | 246,655 |   | 7,651 |   | (532 | ) | 679,951 |   |
| Selling,  general and admin. expenses                        |       | 362,242                                       |       | 54,323 |   | 112,708 |   | (99,684 | ) | 429,589 |   |
| Reimbursable  costs and fees                                 |       | 39,007                                        |       | — |   | — |   | (9,426 | ) | 29,581 |   |
|                                                         |       |                                          |       |   |   |   |   |   |   |   |   |
| Income  from operations before depreciation and amortization |       | $                                             | 88,177     |   | $ | 27,582 |   | $ | 30,550 |   | $ | — |   | $ | 146,309 |   |
|                                                         |       |                                          |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                        |       | $                                             | 16,226     |   | $ | 9,813 |   | $ | 2 |   | $ | — |   | $ | 26,041 |   |

 

F-36

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Tableof Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**21.****      ****Related Party Transactions:**

 

The Company pays OEP amanagement fee of $3.0 million per year, plus reimbursement of expenses, formanagement, advice and related services. These fees are included in selling,general and administrative expenses.

 

OEP is managed by OEPHolding Corporation, a wholly owned indirect subsidiary of JPMorgan Chase &Co. (“JPM”), and JPM is a client of the Company. For the years ended December 31,2009, 2008 and 2007, the Company received fees for providing services to JPM of$12.6 million, $14.8 million and $10.0 million, respectively. At December 31,2009, the Company had no accounts receivable due from JPM. At December 31,2008 and 2007, the Company had accounts receivable of $9,000 and $138,000,respectively, due from JPM. Additionally, affiliates of Citigroup areco-investors of the Company, and Citigroup is a client of the Company. For theyears ended December 31, 2009, 2008 and 2007, the Company received feesfor providing services to Citigroup of $57.5 million, $69.5 million and $33.5million, respectively.  At December 31,2009, 2008 and 2007, the Company had accounts receivable of $5.8 million, $3.3million and $1.9 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.

 

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

 

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

 

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

 

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

 

In October 2009, theFASB issued amended guidance for revenue recognition related tomultiple-deliverable revenue arrangements. This guidance, among other things, creates a hierarchy for determiningthe selling price of a deliverable, which will now include an estimated sellingprice if neither vendor-specific objective evidence nor third-party evidenceexist. This may result in more instances of separating consideration inmultiple-deliverable arrangements. Disclosures related to multiple-deliverablerevenue arrangements have also been expanded. This guidance is effective forthe Company for revenue arrangements entered into or materially modified on orafter January 1, 2011, with early adoption permitted.  The Company is currently reviewing theguidance to assess the impact of adoption.

 

F-37

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Tableof Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**23.****      ****Allowance for Doubtful Accounts:**

 

The following table presentsthe activity in the allowance for doubtful accounts (amounts in thousands):

 
| ** **                         | ** ** | ** **     | ** ** | **Additions**  | ** ** | ** **   | ** ** | ** **        | ** ** |
|------------------------------------|------------|----------------|------------|----------------|------------|--------------|------------|-------------------|------------|
| ** **                         | ** ** | **Balance at** | ** ** | **Charged to** | ** ** | **Charged**  | ** ** | ** **        | ** ** | **Balance at** | ** ** |
| ** **                         | ** ** | **beginning**  | ** ** | **costs and**  | ** ** | **to other** | ** ** | ** **        | ** ** | **end of** | ** ** |
| ** **                         | ** ** | **of year**    | ** ** | **expenses**   | ** ** | **accounts** | ** ** | **Deductions(1)** | ** ** | **year** | ** ** |
| * *                           |       |           |       |           |       |         |       |              |       |   |   |
| Year ended December 31, 2009: |       |           |       |           |       |         |       |              |       |   |   |
| Allowance for doubtful accounts    |       | $              | 5,008      |           | $          | 2,797        |       | $                 | 500        |   | $ | (2,481 | ) | $ | 5,824 |   |
|                               |       |           |       |           |       |         |       |              |       |   |   |
| Year ended December 31, 2008: |       |           |       |           |       |         |       |              |       |   |   |
| Allowance for doubtful accounts    |       | $              | 3,137      |           | $          | 3,030        |       | $                 | 3,786      |   | $ | (4,945 | ) | $ | 5,008 |   |
|                               |       |           |       |           |       |         |       |              |       |   |   |
| Year ended December 31, 2007: |       |           |       |           |       |         |       |              |       |   |   |
| Allowance for doubtful accounts    |       | $              | —     |           | $          | 4,806        |       | $                 | —     |   | $ | (1,669 | ) | $ | 3,137 |   |

 

----

(1)         Uncollectible accounts written off, netof recoveries.

 

**24.****      ****Subsidiary Guarantor FinancialInformation:**

 

The Notes are fully and unconditionally guaranteed,jointly and severally, by certain domestic 100 percent owned subsidiaries ofthe Company (collectively, the “Guarantors”). Non-guarantors consist of allnon-domestic subsidiaries, certain subsidiaries engaged in financing thepurchase of delinquent accounts receivable portfolios, portfolio joint ventures(which are engaged in portfolio financing transactions) and certain immaterialsubsidiaries (collectively, the “Non-Guarantors”). The following tables presentthe consolidating financial information for the Company (Parent), theGuarantors and the Non-Guarantors, together with eliminations, as of and forthe periods indicated.

 

F-38

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Table of Contents

 

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

 

**NCOGROUP, INC.**

**ConsolidatingBalance Sheet**

**December 31,2009**

**(Amountsin thousands)**

 
| ** **                                                                           | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current assets:                                                                      |       |       |       |           |       |               |       |             |       |             |       |
| Cash and cash  equivalents                                                           |       | $          | —     |           | $          | 18,984             |       | $                | 20,237     |             | $          | — |   | $ | 39,221 |   |
| Accounts receivable,  trade, net of allowance for doubtful accounts                  |       | —     |       | 156,600        |       | 21,467             |       | —           |       | 178,067          |       |
| Purchased accounts  receivable, current portion                                      |       | —     |       | 22,406         |       | 28,554             |       | —           |       | 50,960           |       |
| Deferred income taxes                                                                |       | (28,808    | )          | 29,327         |       | 1,234              |       | —           |       | 1,753            |       |
| Prepaid expenses and  other current assets                                           |       | 1,358      |       | 29,741         |       | 30,882             |       | —           |       | 61,981           |       |
| Total current assets                                                                 |       | (27,450    | )          | 257,058        |       | 102,374            |       | —           |       | 331,982          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Property and equipment,  net                                                         |       | —     |       | 89,347         |       | 32,970             |       | —           |       | 122,317          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Other assets:                                                                        |       |       |       |           |       |               |       |             |       |             |       |
| Goodwill                                                                             |       | —     |       | 470,621        |       | 65,236             |       | —           |       | 535,857          |       |
| Trade name, net of  accumulated amortization                                         |       | —     |       | 81,065         |       | 2,847              |       | —           |       | 83,912           |       |
| Customer relationships  and other intangible assets, net of accumulated amortization |       | —     |       | 239,393        |       | 19,289             |       | —           |       | 258,682          |       |
| Purchased accounts  receivable, net of current portion                               |       | —     |       | 52,966         |       | 34,503             |       | —           |       | 87,469           |       |
| Investment in subsidiaries                                                           |       | 729,604    |       | 19,005         |       | —             |       | (748,609         | )          | —           |       |
| Deferred income taxes                                                                |       | —     |       | —         |       | 3,548              |       | —           |       | 3,548            |       |
| Other assets                                                                         |       | 12,852     |       | 45,492         |       | (22,076            | )          | —           |       | 36,268           |       |
| Total other assets                                                                   |       | 742,456    |       | 908,542        |       | 103,347            |       | (748,609         | )          | 1,005,736        |       |
| Total assets                                                                         |       | $          | 715,006    |           | $          | 1,254,947          |       | $                | 238,691    |             | $          | (748,609 | ) | $ | 1,460,035 |   |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| ** **                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                       | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Current liabilities:                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt, current  portion                                                     |       | $          | 29,334     |           | $          | 583                |       | $                | 11,782     |             | $          | — |   | $ | 41,699 |   |
| Intercompany  (receivable) payable                                                   |       | (953       | )          | (109,273       | )          | 110,226            |       | —           |       | —           |       |
| Income taxes payable                                                                 |       | —     |       | —         |       | 2,838              |       | —           |       | 2,838            |       |
| Accounts payable                                                                     |       | —     |       | 13,387         |       | 2,478              |       | —           |       | 15,865           |       |
| Accrued expenses                                                                     |       | 14,367     |       | 67,538         |       | 25,345             |       | —           |       | 107,250          |       |
| Accrued compensation  and related expenses                                           |       | —     |       | 26,225         |       | 11,869             |       | —           |       | 38,094           |       |
| Deferred revenue,  current portion                                                   |       | —     |       | 39,101         |       | 427                |       | —           |       | 39,528           |       |
| Total current  liabilities                                                           |       | 42,748     |       | 37,561         |       | 164,965            |       | —           |       | 245,274          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Long-term liabilities:                                                               |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt, net of  current portion                                              |       | 517,521    |       | 388,531        |       | 3,779              |       | —           |       | 909,831          |       |
| Deferred income taxes                                                                |       | (82,653    | )          | 108,563        |       | 6,062              |       | —           |       | 31,972           |       |
| Deferred revenue, net  of current portion                                            |       | —     |       | 1,147          |       | —             |       | —           |       | 1,147            |       |
| Other long-term  liabilities                                                         |       | 8,290      |       | 9,153          |       | 13,818             |       | —           |       | 31,261           |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Stockholders’ equity:                                                           |       |       |       |           |       |               |       |             |       |             |       |
| Total NCO  Group, Inc. stockholders’ equity                                |       | 229,100    |       | 709,992        |       | 38,617             |       | (748,609         | )          | 229,100          |       |
| Noncontrolling  interests                                                            |       | —     |       | —         |       | 11,450             |       | —           |       | 11,450           |       |
| Total stockholders’  equity                                                     |       | 229,100    |       | 709,992        |       | 50,067             |       | (748,609         | )          | 240,550          |       |
| Total liabilities and  stockholders’ equity                                     |       | $          | 715,006    |           | $          | 1,254,947          |       | $                | 238,691    |             | $          | (748,609 | ) | $ | 1,460,035 |   |

 

F-39

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Table of Contents

 

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

 

**NCOGROUP, INC.**

**ConsolidatingBalance Sheet**

**December 31,2008**

**(Amountsin thousands)**

 
| ** **                                                                           | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current assets:                                                                      |       |       |       |           |       |               |       |             |       |             |       |
| Cash and cash  equivalents                                                           |       | $          | —     |           | $          | 15,334             |       | $                | 14,546     |             | $          | — |   | $ | 29,880 |   |
| Accounts receivable,  trade, net of allowance for doubtful accounts                  |       | —     |       | 202,011        |       | 8,032              |       | —           |       | 210,043          |       |
| Purchased accounts  receivable, current portion                                      |       | —     |       | 19,191         |       | 50,815             |       | —           |       | 70,006           |       |
| Deferred income taxes                                                                |       | 4,057      |       | 29,908         |       | 251                |       | —           |       | 34,216           |       |
| Prepaid expenses and  other current assets                                           |       | 2,027      |       | 47,721         |       | 13,449             |       | —           |       | 63,197           |       |
| Assets held for sale,  current portion                                               |       | —     |       | 11,869         |       | 135                |       | —           |       | 12,004           |       |
| Total current assets                                                                 |       | 6,084      |       | 326,034        |       | 87,228             |       | —           |       | 419,346          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Property and equipment,  net                                                         |       | —     |       | 101,077        |       | 36,819             |       | —           |       | 137,896          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Other assets:                                                                        |       |       |       |           |       |               |       |             |       |             |       |
| Goodwill                                                                             |       | —     |       | 500,272        |       | 64,345             |       | —           |       | 564,617          |       |
| Trade name, net of  accumulated amortization                                         |       | —     |       | 82,619         |       | 2,847              |       | —           |       | 85,466           |       |
| Customer relationships  and other intangible assets, net of accumulated amortization |       | —     |       | 304,738        |       | 22,895             |       | —           |       | 327,633          |       |
| Purchased accounts  receivable, net of current portion                               |       | —     |       | 46,401         |       | 69,252             |       | —           |       | 115,653          |       |
| Investment in  subsidiaries                                                          |       | 828,883    |       | 24,771         |       | —             |       | (853,654         | )          | —           |       |
| Other assets                                                                         |       | 15,002     |       | 51,698         |       | (22,436            | )          | —           |       | 44,264           |       |
| Assets held for sale,  net of current portion                                        |       | —     |       | 6,711          |       | 53                 |       | —           |       | 6,764            |       |
| Total other assets                                                                   |       | 843,885    |       | 1,017,210      |       | 136,956            |       | (853,654         | )          | 1,144,397        |       |
| Total assets                                                                         |       | $          | 849,969    |           | $          | 1,444,321          |       | $                | 261,003    |             | $          | (853,654 | ) | $ | 1,701,639 |   |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| ** **                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                       | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Current liabilities:                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt, current  portion                                                     |       | $          | 6,054      |           | $          | 594                |       | $                | 23,911     |             | $          | — |   | $ | 30,559 |   |
| Intercompany  (receivable) payable                                                   |       | (30,025    | )          | 10,812         |       | 98,188             |       | (78,975          | )          | —           |       |
| Income taxes payable                                                                 |       | —     |       | —         |       | 3,543              |       | —           |       | 3,543            |       |
| Accounts payable                                                                     |       | —     |       | 26,927         |       | (8,909             | )          | —           |       | 18,018           |       |
| Accrued expenses                                                                     |       | 30,440     |       | 88,702         |       | 8,580              |       | —           |       | 127,722          |       |
| Accrued compensation  and related expenses                                           |       | —     |       | 33,959         |       | 12,293             |       | —           |       | 46,252           |       |
| Deferred revenue,  current portion                                                   |       | —     |       | 40,392         |       | 339                |       | —           |       | 40,731           |       |
| Liabilities held for  sale, current portion                                          |       | —     |       | 955            |       | 19                 |       | —           |       | 974              |       |
| Total current  liabilities                                                           |       | 6,469      |       | 202,341        |       | 137,964            |       | (78,975          | )          | 267,799          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Long-term liabilities:                                                               |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt, net of  current portion                                              |       | 644,646    |       | 389,902        |       | 13,969             |       | —           |       | 1,048,517        |       |
| Deferred income taxes                                                                |       | (64,958    | )          | 113,703        |       | 11,662             |       | —           |       | 60,407           |       |
| Deferred revenue, net  of current portion                                            |       | —     |       | 5,285          |       | —             |       | —           |       | 5,285            |       |
| Other long-term  liabilities                                                         |       | 2,826      |       | 19,106         |       | 10,602             |       | —           |       | 32,534           |       |
| Liabilities held for  sale, net of current portion                                   |       | —     |       | 3,253          |       | 55                 |       | —           |       | 3,308            |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Stockholders’ equity:                                                           |       |       |       |           |       |               |       |             |       |             |       |
| Total NCO  Group, Inc. stockholders’ equity                                |       | 260,986    |       | 710,731        |       | 63,948             |       | (774,679         | )          | 260,986          |       |
| Noncontrolling  interests                                                            |       | —     |       | —         |       | 22,803             |       | —           |       | 22,803           |       |
| Total stockholders’  equity                                                     |       | 260,986    |       | 710,731        |       | 86,751             |       | (774,679         | )          | 283,789          |       |
| Total liabilities and  stockholders’ equity                                     |       | $          | 849,969    |           | $          | 1,444,321          |       | $                | 261,003    |             | $          | (853,654 | ) | $ | 1,701,639 |   |

 

F-40

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Tableof Contents

 

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

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

**For theYear Ended December 31, 2009**

**(Amountsin thousands)**

 
| ** **                                               | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                 |       | $          | —     |           | $          | 1,407,142          |       | $                | 292,661    |             | $          | (299,193 | ) | $ | 1,400,610 |   |
| Portfolio                                                |       | —     |       | 23,810         |       | 27,588             |       | —           |       | 51,398           |       |
| Portfolio sales                                          |       | —     |       | 83             |       | 278                |       | —           |       | 361              |       |
| Reimbursable costs and  fees                             |       | —     |       | 111,303        |       | 246                |       | —           |       | 111,549          |       |
| Total revenues                                           |       | —     |       | 1,542,338      |       | 320,773            |       | (299,193         | )          | 1,563,918        |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Operating costs and  expenses:                           |       |       |       |           |       |               |       |             |       |             |       |
| Payroll and related  expenses                            |       | 16         |       | 822,506        |       | 185,043            |       | (225,677         | )          | 781,888          |       |
| Selling, general and  administrative expenses            |       | 4,273      |       | 456,016        |       | 121,605            |       | (73,516          | )          | 508,378          |       |
| Reimbursable costs and  fees                             |       | —     |       | 111,303        |       | 246                |       | —           |       | 111,549          |       |
| Depreciation and  amortization expense                   |       | —     |       | 92,035         |       | 27,535             |       | —           |       | 119,570          |       |
| Impairment of  intangible assets                         |       | —     |       | 30,032         |       | —             |       | —           |       | 30,032           |       |
| Restructuring charges                                    |       | —     |       | 4,204          |       | 6,664              |       | —           |       | 10,868           |       |
| Total operating costs  and expenses                      |       | 4,289      |       | 1,516,096      |       | 341,093            |       | (299,193         | )          | 1,562,285        |       |
| (Loss) income from  operations                           |       | (4,289     | )          | 26,242         |       | (20,320            | )          | —           |       | 1,633            |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Other income (expense):                                  |       |       |       |           |       |               |       |             |       |             |       |
| Interest and investment  income                          |       | 44         |       | 1,784          |       | (493               | )          | —           |       | 1,335            |       |
| Interest expense                                         |       | (68,219    | )          | (31,621        | )          | 628                |       | —           |       | (99,212          | )          |
| Interest (expense)  income to affiliate                  |       | (6,047     | )          | 12,703         |       | (6,656             | )          | —           |       | —           |       |
| Subsidiary (loss)  income                                |       | (18,687    | )          | (12,164        | )          | —             |       | 30,851           |       | —           |       |
| Other income (expense),  net                             |       | 7,014      |       | (449           | )          | 371                |       | —           |       | 6,936            |       |
|                                                     |       | (85,895    | )          | (29,747        | )          | (6,150             | )          | 30,851           |       | (90,941          | )          |
| (Loss) income before  income taxes                       |       | (90,184    | )          | (3,505         | )          | (26,470            | )          | 30,851           |       | (89,308          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Income tax (benefit)  expense                            |       | (5,963     | )          | 12,528         |       | (7,731             | )          | —           |       | (1,166           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss) income                                        |       | (84,221    | )          | (16,033        | )          | (18,739            | )          | 30,851           |       | (88,142          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Less: Net loss  attributable to noncontrolling interests |       | —     |       | —         |       | (3,921             | )          | —           |       | (3,921           | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss) income  attributable to NCO Group, Inc.  |       | $          | (84,221    | )              | $          | (16,033            | )          | $                | (14,818    | )                | $          | 30,851 |   | $ | (84,221 | ) |

 

F-41

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Table ofContents

 

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

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

**For theYear Ended December 31, 2008**

**(Amountsin thousands)**

 
| ** **                                               | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                 |       | $          | —     |           | $          | 1,461,589          |       | $                | 345,138    |             | $          | (340,409 | ) | $ | 1,466,318 |   |
| Portfolio                                                |       | —     |       | 20,994         |       | (2,965             | )          | —           |       | 18,029           |       |
| Portfolio sales                                          |       | —     |       | 563            |       | 2,439              |       | —           |       | 3,002            |       |
| Reimbursable costs and  fees                             |       | —     |       | 25,632         |       | 160                |       | —           |       | 25,792           |       |
| Total revenues                                           |       | —     |       | 1,508,778      |       | 344,772            |       | (340,409         | )          | 1,513,141        |       |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Operating costs and  expenses:                           |       |       |       |           |       |               |       |             |       |             |       |
| Payroll and related  expenses                            |       | 15         |       | 868,516        |       | 222,085            |       | (245,135         | )          | 845,481          |       |
| Selling, general and  administrative expenses            |       | 4,200      |       | 491,496        |       | 136,125            |       | (95,274          | )          | 536,547          |       |
| Reimbursable costs and  fees                             |       | —     |       | 25,632         |       | 160                |       | —           |       | 25,792           |       |
| Depreciation and  amortization expense                   |       | —     |       | 92,176         |       | 29,148             |       | —           |       | 121,324          |       |
| Impairment of  intangible assets                         |       | —     |       | 268,908        |       | 20,584             |       | —           |       | 289,492          |       |
| Restructuring charges                                    |       | —     |       | 6,050          |       | 5,550              |       | —           |       | 11,600           |       |
| Total operating costs  and expenses                      |       | 4,215      |       | 1,752,778      |       | 413,652            |       | (340,409         | )          | 1,830,236        |       |
| Loss from operations                                     |       | (4,215     | )          | (244,000       | )          | (68,880            | )          | —           |       | (317,095         | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Other income (expense):                                  |       |       |       |           |       |               |       |             |       |             |       |
| Interest and investment  income                          |       | (10,396    | )          | 11,848         |       | (361               | )          | —           |       | 1,091            |       |
| Interest expense                                         |       | (65,080    | )          | (29,183        | )          | (568               | )          | —           |       | (94,831          | )          |
| Interest (expense)  income to affiliate                  |       | (2,660     | )          | 9,239          |       | (6,579             | )          | —           |       | —           |       |
| Subsidiary (loss)  income                                |       | (281,167   | )          | (49,538        | )          | —             |       | 330,705          |       | —           |       |
| Other expense, net                                       |       | —     |       | (16,468        | )          | —             |       | —           |       | (16,468          | )          |
|                                                     |       | (359,303   | )          | (74,102        | )          | (7,508             | )          | 330,705          |       | (110,208         | )          |
| (Loss) income before  income taxes                       |       | (363,518   | )          | (318,102       | )          | (76,388            | )          | 330,705          |       | (427,303         | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Income tax benefit                                       |       | (26,412    | )          | (37,315        | )          | (8,220             | )          | —           |       | (71,947          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss) income                                        |       | (337,106   | )          | (280,787       | )          | (68,168            | )          | 330,705          |       | (355,356         | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Less: Net loss  attributable to noncontrolling interests |       | —     |       | —         |       | (18,250            | )          | —           |       | (18,250          | )          |
|                                                     |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss) income  attributable to NCO Group, Inc.  |       | $          | (337,106   | )              | $          | (280,787           | )          | $                | (49,918    | )                | $          | 330,705 |   | $ | (337,106 | ) |

 

F-42

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Table ofContents

 

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

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

**For theYear Ended December 31, 2007**

**(Amountsin thousands)**

 
| ** **                                                 | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                                  |       |       |       |           |       |               |       |             |       |             |       |
| Services                                                   |       | $          | —     |           | $          | 1,112,373          |       | $                | 348,696    |             | $          | (358,726 | ) | $ | 1,102,343 |   |
| Portfolio                                                  |       | —     |       | 32,804         |       | 99,609             |       | —           |       | 132,413          |       |
| Portfolio sales                                            |       | —     |       | 6,474          |       | 14,619             |       | —           |       | 21,093           |       |
| Reimbursable costs and  fees                               |       | —     |       | 29,581         |       | —             |       | —           |       | 29,581           |       |
| Total revenues                                             |       | —     |       | 1,181,232      |       | 462,924            |       | (358,726         | )          | 1,285,430        |       |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Operating costs and  expenses:                             |       |       |       |           |       |               |       |             |       |             |       |
| Payroll and related  expenses                              |       | 13         |       | 694,199        |       | 234,121            |       | (248,382         | )          | 679,951          |       |
| Selling, general and  administrative expenses              |       | 3,883      |       | 361,734        |       | 174,316            |       | (110,344         | )          | 429,589          |       |
| Reimbursable costs and  fees                               |       | —     |       | 29,581         |       | —             |       | —           |       | 29,581           |       |
| Depreciation and  amortization expense                     |       | —     |       | 76,492         |       | 25,857             |       | —           |       | 102,349          |       |
| Total operating costs  and expenses                        |       | 3,896      |       | 1,162,006      |       | 434,294            |       | (358,726         | )          | 1,241,470        |       |
| (Loss) income from  operations                             |       | (3,896     | )          | 19,226         |       | 28,630             |       | —           |       | 43,960           |       |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Other income (expense):                                    |       |       |       |           |       |               |       |             |       |             |       |
| Interest and investment  income                            |       | (10        | )          | 1,835          |       | 810                |       | —           |       | 2,635            |       |
| Interest expense                                           |       | (65,638    | )          | (21,098        | )          | (8,558             | )          | —           |       | (95,294          | )          |
| Interest (expense)  income to affiliate                    |       | (5,923     | )          | 12,655         |       | (6,732             | )          | —           |       | —           |       |
| Subsidiary income  (loss)                                  |       | 5,631      |       | 3,405          |       | —             |       | (9,036           | )          | —           |       |
| Other income, net                                          |       | —     |       | 3,608          |       | —             |       | —           |       | 3,608            |       |
|                                                       |       | (65,940    | )          | 405            |       | (14,480            | )          | (9,036           | )          | (89,051          | )          |
| (Loss) income before  income taxes                         |       | (69,836    | )          | 19,631         |       | 14,150             |       | (9,036           | )          | (45,091          | )          |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Income tax (benefit)  expense                              |       | (38,114    | )          | 17,973         |       | 4,037              |       | —           |       | (16,104          | )          |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss) income                                          |       | (31,722    | )          | 1,658          |       | 10,113             |       | (9,036           | )          | (28,987          | )          |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Less: Net income  attributable to noncontrolling interests |       | —     |       | —         |       | 2,735              |       | —           |       | 2,735            |       |
|                                                       |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss) income  attributable to NCO Group, Inc.    |       | $          | (31,722    | )              | $          | 1,658              |       | $                | 7,378      |             | $          | (9,036 | ) | $ | (31,722 | ) |

 

F-43

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Table of Contents

 

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

 

**NCOGROUP, INC**

**ConsolidatingStatement of Cash Flows**

**For theYear Ended December 31, 2009**

**(Amountsin thousands)**

 
| ** **                                                         | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** |
| Net cash (used in)  provided by operating activities               |       | $          | (28,783    | )              | $          | 123,770            |       | $                | 3,487      |   | $ | 98,474 |   |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from  investing activities:                             |       |       |       |           |       |               |       |             |       |
| Purchases of accounts receivable                                   |       | —     |       | (54,196        | )          | (2,413             | )          | (56,609          | )          |
| Collections applied to  principal of purchased accounts receivable |       | —     |       | 36,443         |       | 47,657             |       | 84,100           |       |
| Proceeds from sales and  resales of purchased accounts receivable  |       | —     |       | 124            |       | 401                |       | 525              |       |
| Purchases of property  and equipment                               |       | —     |       | (23,939        | )          | (8,203             | )          | (32,142          | )          |
| Proceeds from bonds and  notes receivable                          |       | —     |       | 136            |       | —             |       | 136              |       |
| Cash received from sale  of business                               |       | —     |       | 20,000         |       | —             |       | 20,000           |       |
| Net cash received  (paid) related to acquisitions                  |       | —     |       | 1,728          |       | (1,024             | )          | 704              |       |
| Net cash (used in)  provided by investing activities               |       | —     |       | (19,704        | )          | 36,418             |       | 16,714           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from  financing activities:                             |       |       |       |           |       |               |       |             |       |
| Repayment of notes  payable                                        |       | —     |       | (360           | )          | (24,234            | )          | (24,594          | )          |
| Net repayments of  revolving credit facility                       |       | (64,500    | )          | —         |       | —             |       | (64,500          | )          |
| Repayment of borrowings  under senior term loan                    |       | (39,345    | )          | —         |       | —             |       | (39,345          | )          |
| Borrowings under  (repayments of) intercompany notes payable       |       | 103,487    |       | (100,056       | )          | (3,431             | )          | —           |       |
| Payment of fees to  obtain debt                                    |       | (2,477     | )          | —         |       | —             |       | (2,477           | )          |
| Return of investment in  subsidiary to noncontrolling interests    |       | —     |       | —         |       | (7,855             | )          | (7,855           | )          |
| 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               |       | 28,783     |       | (100,416       | )          | (35,520            | )          | (107,153         | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Effect of exchange rate  on cash                                   |       | —     |       | —         |       | 1,306              |       | 1,306            |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Net increase in cash  and cash equivalents                         |       | —     |       | 3,650          |       | 5,691              |       | 9,341            |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash  equivalents at beginning of the period              |       | —     |       | 15,334         |       | 14,546             |       | 29,880           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash  equivalents at end of the period                    |       | $          | —     |           | $          | 18,984             |       | $                | 20,237     |   | $ | 39,221 |   |

 

F-44

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Table ofContents

 

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

 

**NCOGROUP, INC**

**ConsolidatingStatement of Cash Flows**

**For theYear Ended December 31, 2008**

**(Amountsin thousands)**

 
| ** **                                                         | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** |
| Net cash (used in)  provided by operating activities               |       | $          | (7,991     | )              | $          | 55,591             |       | $                | 46,133     |   | $ | 93,733 |   |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from  investing activities:                             |       |       |       |           |       |               |       |             |       |
| Purchases of accounts  receivable                                  |       | —     |       | (64,651        | )          | (61,896            | )          | (126,547         | )          |
| Collections applied to  principal of purchased accounts receivable |       | —     |       | 16,634         |       | 72,691             |       | 89,325           |       |
| Proceeds from sales and  resales of purchased accounts receivable  |       | —     |       | 1,274          |       | 3,483              |       | 4,757            |       |
| Purchases of property  and equipment                               |       | —     |       | (34,756        | )          | (8,640             | )          | (43,396          | )          |
| Proceeds from bonds and  notes receivable                          |       | —     |       | 1,122          |       | —             |       | 1,122            |       |
| Net cash paid for  acquisitions and related costs                  |       | —     |       | (324,207       | )          | (25,213            | )          | (349,420         | )          |
| Net cash used in  investing activities                             |       | —     |       | (404,584       | )          | (19,575            | )          | (424,159         | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from  financing activities:                             |       |       |       |           |       |               |       |             |       |
| Repayment of notes  payable                                        |       | —     |       | (215           | )          | (35,261            | )          | (35,476          | )          |
| Borrowings under notes  payable                                    |       | —     |       | —         |       | 21,691             |       | 21,691           |       |
| Net borrowings under  revolving credit facility                    |       | 34,500     |       | —         |       | —             |       | 34,500           |       |
| Repayment of borrowings  under senior term loan                    |       | —     |       | (10,745        | )          | —             |       | (10,745          | )          |
| Borrowings under senior  term loan, net of fees                    |       | —     |       | 134,135        |       | —             |       | 134,135          |       |
| Borrowings under  (repayments of) intercompany notes payable       |       | (228,721   | )          | 227,704        |       | 1,017              |       | —           |       |
| Payment of fees to  obtain debt                                    |       | (10        | )          | (4,307         | )          | —             |       | (4,317           | )          |
| Investment in  subsidiary by noncontrolling interests              |       | —     |       | —         |       | 2,436              |       | 2,436            |       |
| Return of investment in  subsidiary to noncontrolling interests    |       | —     |       | —         |       | (12,242            | )          | (12,242          | )          |
| Issuance of stock, net                                             |       | 219,722    |       | —         |       | —             |       | 219,722          |       |
| Payment of deemed  dividend to JPM                                 |       | (17,500    | )          | —         |       | —             |       | (17,500          | )          |
| Net cash provided by  (used in) financing activities               |       | 7,991      |       | 346,572        |       | (22,359            | )          | 332,204          |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Effect of exchange rate  on cash                                   |       | —     |       | —         |       | (3,181             | )          | (3,181           | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Net (decrease) increase  in cash and cash equivalents              |       | —     |       | (2,421         | )          | 1,018              |       | (1,403           | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash  equivalents at beginning of the period              |       | —     |       | 17,755         |       | 13,528             |       | 31,283           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash  equivalents at end of the period                    |       | $          | —     |           | $          | 15,334             |       | $                | 14,546     |   | $ | 29,880 |   |

 

F-45

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Table ofContents

 

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

 

**NCOGROUP, INC**

**ConsolidatingStatement of Cash Flows**

**For theYear Ended December 31, 2007**

**(Amountsin thousands)**

 
| ** **                                                         | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** |
| Net cash (used in)  provided by operating activities               |       | $          | (35,328    | )              | $          | 63,695             |       | $                | 15,628     |   | $ | 43,995 |   |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from  investing activities:                             |       |       |       |           |       |               |       |             |       |
| Purchases of accounts  receivable                                  |       | —     |       | (7,955         | )          | (117,328           | )          | (125,283         | )          |
| Collections applied to  principal of purchased accounts receivable |       | —     |       | 8,196          |       | 69,032             |       | 77,228           |       |
| Proceeds from sales and  resales of purchased accounts receivable  |       | —     |       | 11,318         |       | 32,843             |       | 44,161           |       |
| Purchases of property  and equipment                               |       | —     |       | (17,658        | )          | (8,383             | )          | (26,041          | )          |
| Proceeds from bonds and  notes receivable                          |       | —     |       | 6,097          |       | —             |       | 6,097            |       |
| Net cash paid for  acquisitions and related costs                  |       | —     |       | (4,408         | )          | (4,473             | )          | (8,881           | )          |
| Net cash used in  investing activities                             |       | —     |       | (4,410         | )          | (28,309            | )          | (32,719          | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from  financing activities:                             |       |       |       |           |       |               |       |             |       |
| Repayment of notes  payable                                        |       | —     |       | (5,102         | )          | (45,623            | )          | (50,725          | )          |
| Borrowings under notes  payable                                    |       | —     |       | 5,782          |       | 41,334             |       | 47,116           |       |
| Net borrowings under  revolving credit facility                    |       | 11,000     |       | —         |       | —             |       | 11,000           |       |
| Repayment of borrowings  under senior term loan                    |       | (4,650     | )          | —         |       | —             |       | (4,650           | )          |
| Borrowings under  (repayments of) intercompany notes payable       |       | 28,839     |       | (49,458        | )          | 20,619             |       | —           |       |
| Payment of fees to  obtain debt                                    |       | (200       | )          | (835           | )          | —             |       | (1,035           | )          |
| Investment in  subsidiary by noncontrolling interests              |       | —     |       | —         |       | 2,359              |       | 2,359            |       |
| Return of investment in  subsidiary to noncontrolling interests    |       | —     |       | —         |       | (6,934             | )          | (6,934           | )          |
| Net cash provided by  (used in) financing activities               |       | 34,989     |       | (49,613        | )          | 11,755             |       | (2,869           | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Effect of exchange rate  on cash                                   |       | —     |       | —         |       | 2,173              |       | 2,173            |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Net (decrease) increase  in cash and cash equivalents              |       | (339       | )          | 9,672          |       | 1,247              |       | 10,580           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash  equivalents at beginning of the period              |       | 339        |       | 8,083          |       | 12,281             |       | 20,703           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash  equivalents at end of the period                    |       | $          | —     |           | $          | 17,755             |       | $                | 13,528     |   | $ | 31,283 |   |

 

F-46

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