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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(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, 2011

 

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. 333-173514; 333-165975; 333-158745; 333-150885

 

EXPERT GLOBAL SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Registrant’s telephone number, including area code  (215) 441-3000

 

Securities registered pursuant to Section 12(b) of the Act:  None

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

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

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

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

 

 

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

 

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

 

The number of shares of each of the registrant’s classes of common stock outstanding as of March 30, 2012 was: 2,839,830 shares of Class A common stock, $0.01 par value, and 460,350 shares of Class L common stock, $0.01 par value.

 

 

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TABLE OF CONTENTS

 

				Page
PART I
Item 1.		Business		2
Item 1A.		Risk Factors		13
Item 1B.		Unresolved Staff Comments		23
Item 2.		Properties		23
Item 3.		Legal Proceedings		23
Item 4.		Mine Safety Disclosures		24
PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities		25
Item 6.		Selected Financial Data		26
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 7A.		Quantitative and Qualitative Disclosures about Market Risk		38
Item 8.		Financial Statements and Supplementary Data		38
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		38
Item 9A.		Controls and Procedures		38
Item 9B.		Other Information		39
PART III
Item 10.		Directors, Executive Officers and Corporate Governance		40
Item 11.		Executive Compensation		43
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		59
Item 13.		Certain Relationships and Related Transactions, and Director Independence		61
Item 14.		Principal Accounting Fees and Services		62
PART IV
Item. 15.		Exhibits, Financial Statement Schedules		64
		Signatures		72
		Index to Consolidated Financial Statements		F-1

 

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As used in this Annual Report on Form 10-K, unless the context otherwise requires, “we,” “us,” “our,” “Company” or “NCO” refers to Expert Global Solutions, Inc. (f/k/a NCO Group, Inc.) and its subsidiaries.

 

Forward-Looking Statements

 

Certain statements included in this Annual Report on Form 10-K, other than historical facts, are forward-looking statements (as such term is defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the regulations thereunder), which are intended to be covered by the safe harbors created thereby. Forward-looking statements include, without limitation, statements as to:

 

·                  the Company’s expected future results of operations;

·                  economic conditions;

·                  the Company’s business and growth strategy;

·                  fluctuations in quarterly operating results;

·                  the integration of acquisitions;

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

·                  statements as to liquidity and compliance with debt covenants;

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

·                  expected increases in operating efficiencies;

·                  anticipated trends in the business process outsourcing industry;

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

·                  the effects of legal proceedings, regulatory investigations and tax examinations;

·                  the effects of changes in accounting guidance; and

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

 

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

 

·                  risks related to the instability in the financial markets;

·                  risks related to adverse capital and credit market conditions;

·                  the ability of governmental and regulatory bodies to stabilize the financial markets;

·                  risks related to the domestic and international economies;

·                  risks related to derivative transactions;

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

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

·                  risks related to the Company’s substantial indebtedness, its ability to service such debt and its ability to comply with debt covenants;

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

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

·                  risks associated with growth and acquisitions;

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

·                  fluctuations in quarterly operating results;

·                  risks related to the timing of contracts;

·                  risks related to possible impairment of goodwill and other intangible assets;

·                  the Company’s dependence on senior management;

·                  risks related to security and privacy breaches;

·                  risks associated with technology;

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

·                  risks related to litigation, regulatory investigations and tax examinations;

·                  risks related to possible future terrorist attacks;

 

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

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

·                  risks related to the Company’s international operations;

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

·                  risks related to currency fluctuations;

·                  risks related to reliance on independent telecommunications service providers;

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

·                  risks related to the possible loss of key clients or loss of significant volumes from key clients; and

·                  risks related to changes in government regulations.

 

The Company can give no assurance that any of the events anticipated by the forward-looking statements will occur or, if any of them does, what impact they will have on our results of operations and financial condition. The Company disclaims any intent or obligation to publicly update or revise any forward-looking statements, regardless of whether new information becomes available, future developments occur or otherwise. For additional information concerning the risks that affect us, see “Part I. — Item 1A. Risk Factors” of this Report on Form 10-K.

 

PART I

 

Item 1.         Business

 

General

 

Expert Global Solutions, Inc. (f/k/a NCO Group, Inc.) is a holding company and conducts substantially all of its business operations through its subsidiaries. NCO is an international provider of business process outsourcing services, referred to as BPO, primarily focused on accounts receivable management, referred to as ARM, and customer relationship management, referred to as CRM. We provide a wide range of ARM services to our clients by utilizing an extensive technological infrastructure. Although traditional ARM services have focused on the recovery of delinquent accounts, we also engage in the recovery of current accounts receivable and early stage delinquencies (generally, accounts that are 180 days or less past due). Our CRM services allow our clients to strengthen their customer relationships by providing a high level of support to their customers and generate incremental sales by acquiring new customers. We support essential business functions across key portions of the customer lifecycle including acquisition, growth, care, resolution and retention. The primary market sectors we support in our BPO business are financial services, telecommunications, healthcare, retail and commercial, education and government, utilities, transportation/logistics services and technology.

 

On April 3, 2012, we consummated a series of related transactions, referred to as the “Merger Transactions,” pursuant to which the businesses of NCO and APAC were combined, NCO’s new indirect holding company was recapitalized and we engaged in certain refinancing transactions that resulted in the repayment of our existing senior credit facility and our outstanding $165.0 million of floating rate senior notes and $200.0 million of 11.875 percent senior subordinated notes and the replacement of such indebtedness with new indebtedness consisting of (a) a $795 million senior secured first lien credit facility, comprised of a term loan of $675 million that matures in 2018 and a revolving credit line of $120 million that matures in 2017, and (b) a $200 million secured second lien credit facility that matures in 2018.

 

Pursuant to an agreement and plan of merger, we became an indirect wholly-owned subsidiary of EGS Holdings, Inc. Pursuant to the merger, our existing stockholders received, as merger consideration, newly issued shares of EGS Holdings, Inc. in exchange for their issued and outstanding shares of NCO immediately prior to the merger. The exact amount of shares of EGS Holdings, Inc. capital stock received by each holder of NCO Group, Inc. capital stock was dependent upon the base amount and unpaid yield of the issued and outstanding shares of NCO Group, Inc. capital stock held by such stockholders immediately prior to the effective time of the merger. Concurrently with the consummation of the merger, the businesses of NCO and APAC were combined through a series of related reorganization transactions and EGS Holdings, Inc. was recapitalized and NCO and EGS Holdings, Inc. consummated certain refinancing transactions that resulted in the repayment in full of all of NCO’s and APAC’s then outstanding indebtedness and the replacement of such indebtedness with new indebtedness. In connection with the Merger Transactions, all of the Company’s Class A Common Stock issued and outstanding immediately prior to the merger, including shares of restricted stock, were cancelled in the merger and no consideration was paid therefor. Upon the consummation of the merger, NCO’s name was changed to Expert Global Solutions, Inc. As a result of the merger, APAC became an indirect wholly-owned subsidiary of ours through a contribution of APAC’s equity by our parent company.

 

Historically, our Portfolio Management business (“Portfolio Management”) had also purchased and collected past due consumer accounts receivable from consumer creditors. Beginning in 2009, we significantly reduced our purchases of accounts receivable and made a decision to minimize further investments in the future. In April and August 2011, Portfolio Management sold substantially all of its portfolios of purchased accounts receivable. The sold portfolios and related results are presented as discontinued operations on the consolidated statements of operations and cash flows.

 

We operate our business in two segments: ARM and CRM.

 

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Our extensive industry knowledge, technological expertise, management depth, international scale, broad service offerings and long-standing client relationships enable us to deliver customized solutions that help our clients reduce their operating costs, increase cash flow, and improve their customers’ experience. We provide our services through our customer-driven model that provides optimal performance, leading-edge technology, proven efficiency and quality, to a wide range of clients in North America and abroad. We currently have approximately 32,400 full and part-time employees (including approximately 1,600 non-employee personnel utilized through subcontractors) who provide our services through our network of approximately 100 offices in 12 countries, or through in-home “virtual” offices.

 

Our website is www.ncogroup.com. We make available on our website, free of charge, our annual report 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 such material is electronically filed with or furnished to the SEC.

 

In addition, we will provide to our investors, at no cost, paper or electronic copies of our reports and other filings (excluding exhibits) made with the SEC. Requests should be directed to:

 

NCO Group, Inc.

507 Prudential Road

Horsham, PA  19044

Attention:  Investor Relations

 

The information on the website listed above, is not and should not be considered part of this Annual Report on Form 10-K and is not incorporated by reference in this document. This website is, and is only intended to be, an inactive textual reference.

 

Industry Background

 

Companies are outsourcing many essential, non-core business functions in order to focus on revenue-generating activities and core competencies, reduce costs and improve productivity and service levels. In particular, many large corporations are recognizing the advantages of outsourcing accounts receivable management and customer service and support. This trend is being driven by a number of industry-specific factors, including:

 

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

·                  the lack of expertise, resources and infrastructure necessary to provide optimal customer support due to the growing scope and complexity of such activities;

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

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

 

Although the BPO industry is highly fragmented in the U.S., the leading providers of BPO services are generally large, multinational companies. We believe that many smaller competitors have insufficient capital to expand and invest in technology and are unable to meet the geographic coverage, regulatory requirements and quality standards demanded by businesses seeking to outsource their essential, non-core business functions.

 

The BPO industry has grown significantly in recent years and we believe attractive industry dynamics will allow this trend to continue. IDC, a global provider of market intelligence, estimates that the global market for BPO services grew from approximately $111 billion in 2005 to $147 billion in 2010, representing a five-year CAGR of 6%, and projects the market to grow to $191 billion by 2015, representing a 5% five-year CAGR for the 2010 to 2015 period.

 

Business Strategy

 

Our primary business strategy is to strengthen our global position in the ARM and CRM markets, and to opportunistically expand and improve our service offerings within these core markets.

 

Combination with APAC Customer Services, Inc. — As discussed above, on April 3, 2012, the businesses of NCO and APAC were combined, to build market leadership in business process outsourcing and customer care solutions. The combined entity was renamed Expert Global Solutions, Inc., and NCO and APAC will both continue as leading brands in the global BPO market. APAC is a leading provider of customer care services and solutions to clients in the healthcare, communications, business services, media & publishing, travel &

 

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entertainment, technology and financial services industries. APAC delivers highly customized customer care services and solutions that involve communicating with customers and managing situations that are unique to each core industry.

 

A key component of our business strategy is to capitalize on the growth, cost savings and other strategic opportunities created by the combination of NCO and APAC by executing on our integration plan. We believe that the NCO and APAC combination will provide the following benefits:

 

·                  Create one of the largest CRM platforms in the market with the APAC premium brand name;

·                  Allow us to leverage our infrastructure and realize significant cost savings;

·                  Provide significant benefits of scale and increase business development opportunities;

·                  Provide a more balanced and diversified revenue stream; and,

·                  Improve our credit profile.

 

Continue to improve our capabilities under a strengthened platform — We believe that we will better serve clients’ needs by sharing best practices and leveraging our global presence, extensive technology infrastructure and human capital investments. Additionally, our depth of industry knowledge and expanded client base allow us to cost-effectively create solutions customized to client objectives while our global BPO infrastructure supports execution, efficiency, compliance and quality.

 

Expand our relationships with clients — An integral component of our growth strategy is focused on broadening our existing client relationships. We intend to leverage our leading and respected brand names within the ARM and CRM sectors to cross-sell our services to existing clients. Clients in both business lines operate in similar end-markets and are accustomed to outsourcing their non-core functions to BPO providers. Additionally, as client relationships have evolved from pure vendor relationships, we are well-positioned as we form strategic partnerships with our clients and deliver long-term, goal-oriented services.

 

Increase new client wins. — Following the combination with APAC, we believe our increased scale, capabilities and leading brands will allow us to compete for increased and larger CRM revenue opportunities. In the past, certain potential clients have not utilized NCO or APAC due to their perceived size, capacity or capability restraints. With the combination, we are better positioned to compete for more business due to the increased size, scale and geographic footprint. Additionally, we believe that our leading brands, strengthened financial profile, expertise across multiple client industries, and long-tenured client relationships will drive new client wins.

 

Enhance our operating margins — We intend to continue pursuing the following initiatives to increase profitability:

 

·                  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 and reduce operating expenses;

·                  use of segmentation strategy to improve profitability; and

·                  leveraging our international size and presence.

 

Pursue strategic acquisition opportunities — We have developed a disciplined approach to acquisitions. We believe our approach enables us to efficiently integrate acquired businesses, personnel and facilities into our existing technology platform, personnel matrix and facilities. By leveraging our shared services and infrastructure, we facilitate the realization of cost synergies and growth of sales and earnings. We intend to evaluate and pursue strategic acquisitions on an opportunistic basis as they become available.

 

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We acquired the following companies during the past three years:

 

Date		Acquired Company		Description
April 2012		APAC Customer Services, Inc.		Customer care services
May 2011		Protocol Direct Marketing, Inc.		Provider of BPO solutions
September 2010		Health Blueprints, Inc.		Healthcare Consulting
August 2009		TSYS Total Debt Management		Attorney network receivables management
May 2009		Complete Credit Management, Ltd.		Receivables management in the U.K.

 

Our Services

 

We provide the following BPO services:

 

Accounts Receivable Management

 

We provide a wide range of ARM services to our clients by utilizing an extensive technological infrastructure. Although traditional ARM services have focused on the recovery of delinquent accounts (third-party), we also engage in the recovery of current accounts receivable and early stage delinquencies (generally, accounts that are 180 days or less past due) (first-party). We generate ARM revenue from the recovery of delinquent accounts receivable on a contingency fee basis and from contractual collection services and other related services.

 

ARM services typically include the following activities:

 

Engagement Planning.  We customize solutions for our clients based on a number of factors, including account size and demographics, the client’s specific requirements and our management’s estimate of the collectibility of the account. We integrate our standard processes for accounts receivable management, developed from decades of accumulated experience, to create a customized recovery solution. In many instances, the approach will evolve and change as the relationship with the client develops, and both parties evaluate the most effective means of recovering accounts receivable. Our systematic approach to accounts receivable management removes most decision making from the recovery staff and is designed to ensure uniform, cost-effective performance.

 

Once the approach has been defined, we electronically or manually transfer pertinent client data into our information system. When the client’s records have been established in our system, we begin the recovery process.

 

Account Notification.  We initiate the recovery process by forwarding a preliminary letter that is designed to seek 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 customer of his or her rights as required by the Federal Fair Debt Collection Practices Act. We continue the recovery process with a series of mail and telephone notifications. Telephone representatives remind the client’s customer of their obligation, inform them that their account has been placed for collection with us and begin a dialogue to develop a payment program.

 

Skip Tracing.  In cases where the client’s customer’s contact information is unknown, we systematically search the U.S. Post Office National Change of Address service, consumer databases, electronic telephone directories, credit agency reports, tax assessor and voter registration records, motor vehicle registrations, military records, and other sources. The geographic expansion of banks, credit card companies, national and regional telecommunications companies, and national and regional hospital chains, along with the mobility of consumers, has increased the demand for locating the client’s customers. Once we have located the client’s customer, the notification process can begin.

 

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

 

We typically conduct reminder calls to recently past due customers and courtesy collection calls to more seriously delinquent customers. Our representatives leave courteous messages if telephone contact attempts are unsuccessful after the second day.

 

Third Party Collection Services.  The most common challenges encountered by companies are how to prompt seriously delinquent customers to make payment before they are charged off as uncollectible or to collect the full

 

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

 

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

 

Payment Processing.  After we receive payment from the client’s customer, depending on the terms of our contract with the client, we can either remit the amount received minus our fee to the client or remit the entire amount received to the client and subsequently bill the client for our collection services.

 

Attorney Network Services.  We coordinate and implement legal collection solutions undertaken on behalf of our clients through the management of nationwide legal resources specializing in collection litigation. Our collection support staff manages the attorney relationships and facilitates the transfer of necessary documentation.

 

Agency Management.  We help our clients manage their accounts receivable management vendors. We establish consistent performance reporting and hold agencies to rigorous performance standards. We monitor and audit all of the agencies in our clients’ network for quality to ensure they are meeting all performance standards.

 

NCOePayments.  We provide our clients’ customers with multiple secure payment options, accessible via the telephone and the Internet, 24 hours a day, 365 days a year. We also provide contact center solutions utilizing our extranet technology, allowing representatives to take payments directly from the customer.

 

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

 

Transworld Systems.  Our subsidiary, Transworld Systems Inc., provides first- and third-party early stage and past due account recovery services for small, medium and large businesses through a demand letter series, reminder calls, or a customized program to fit individual business needs.

 

University Accounting Services.  Our subsidiary, University Accounting Service, LLC, provides student loan billing and related services for institutions of higher education.

 

Healthcare Services.  We provide revenue cycle management and several specialty services for healthcare providers such as:

 

·                  Consulting and Management Services — includes assistance in designing and managing a broad spectrum of revenue cycle management and back office services targeted to our clients’ specific needs.

·                  Patient Access Services— includes scheduling, insurance verification, pre-registration, eligibility screening, financial counseling, etc.

·                  Health Information Management — includes clinical documentation integrity, coding, transcription, etc.

·                  Accounts Receivable Management — includes claims management and electronic billing, denial and remittance management, collection services, etc.

·                  Customer Care — includes patient satisfaction and physician satisfaction.

 

Customer Relationship Management

 

Our CRM services allow our clients to strengthen their customer relationships by providing a high level of support to their customers and generate incremental sales by acquiring new customers. We design and implement customized outsourced customer care solutions including the following:

 

Customer Care and Retention.  Our representatives specialize in developing and maintaining the relationships that our clients value. Customer care programs vary depending upon each client’s specific goals, but often include services such as customer development and outbound and inbound calling campaigns. Our representatives handle customer care inquiries such as billing questions, product and service inquiries, and complaint resolution. We also place calls on behalf of clients in welcoming new customers, retaining current customers, delivering notifications and conducting market research or satisfaction surveys. Our programs include specialized training in order to ensure that each representative is a seamless extension of our clients’ businesses.

 

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

 

Product and Technical Support.  In support of the increasing dependence of customers and businesses on technology, prompt and accurate responses to technology inquires, product-related support issues, and service related concerns has become a cornerstone to maintaining high customer satisfaction and achieving retention goals. Our product support services include help desk, troubleshooting, warranty, recall, and upgrade support. We strive for first call resolution and are committed to meeting client service level requirements. We believe that our highly trained customer contact staff is knowledgeable in all components of technical support and help desk related service requirements, and is adept at troubleshooting, evaluation and escalation procedures and resolving complaints quickly and effectively to increase our clients’ customer retention and loyalty.

 

Interactive Voice Response.  We use interactive voice response (IVR) technology to cost-effectively facilitate customer care for our clients. Customers can efficiently obtain account balance information, transfer funds, place an order, check status of an order, pay a bill, or answer a survey. Incoming calls are routed to representatives through systematic call transfer protocols or as a result of a toll-free number being included on customer correspondence. The process is completely automated, and if the caller wants to speak to a representative they can choose to be connected to a live NCO customer service professional. This combination of live and recorded telephone interaction benefits the customer through efficient, 24-hour service, and decreased operating costs.

 

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

 

Web Chat.  We have the ability to communicate with clients’ customers through our live Web chat service. Faster than email, our Web chat solution allows customers to interact with agents in real time. We can leverage our Web chat technology to provide customer care, answer product questions, or offer technical support.

 

Text Messaging Services.  Using text messaging, we can relay a wide variety of information, including information about new services, promotions, or important information like confirmation numbers.

 

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

 

Order Processing.  We support multiple phases of order processing, including answering product-related questions and making sale presentations, up selling and cross selling, order entry, and providing post-sale support.

 

Technology and Infrastructure

 

We have implemented a scalable technical infrastructure that can flexibly support growing client volume while delivering a high level of reliability and service. Our customer contact centers feature advanced technologies, including predictive dialers, automated call distribution systems, digital switching, Voice over Internet Protocol (“VoIP”) technologies, digital recording, workforce management systems and customized software solutions, including the NCO SYSTEM INTEGRATOR Interface Manager. This is a graphical user interface we developed for use in large-scale outsourcing engagements that enables better data integration, enhanced reporting, representative productivity, implementation speed, and security. As a result, we believe we are able to address outsourced business process activities more reliably and more efficiently than our competitors. Our IT staff is comprised of approximately 400 professionals. We provide our services through the operation of approximately 100 call centers that are linked through an international wide area network.

 

We maintain disaster recovery contingency plans and have implemented procedures to protect against the loss of data resulting from power outages, fire and other casualties. We believe fast recovery and near continuous operation are ensured with multiple redundancies, uninterruptible power supplies and contracted backup and recovery services. We have implemented security systems to protect the integrity and confidentiality of our computer systems and data, and we maintain comprehensive business interruption and critical systems insurance on our telecommunications and computer systems. Our systems also permit secure remote network access to enable clients to establish real time communications

 

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with call centers and their systems and monitor operational activity. We employ a variety of industry leading physical and system security measures including advanced firewalls, data encryption, role specific access permissions, and site security to ensure data remains safe and secure.

 

We continue to be an early adopter of the Credit Card Industry best practices and compliance for data protection. A Level I, audit/assessment is conducted annually by an outside third-party firm, resulting in the satisfactory compliance with the Payment Card Industry (“PCI”), VISA Cardholder Information Security Program (“CISP”), MasterCard Site Data Protection (“SDP”) Program and American Express Data Security System (“DSS”) requirements. VISA and MasterCard have validated NCO as a Level I provider, which is the most stringent level in the PCI schema. We also undergo an annual review and certification process to ensure we comply with the Federal Information Security Management Act (“FISMA”).

 

Our ARM call centers utilize both virtual and onsite predictive dialers to address our low-balance, high-volume accounts, and our CRM centers utilize predictive dialers to conduct our clients’ outbound calling campaigns. These systems scan our databases, simultaneously initiate calls on dedicated predictive dialers, and determine if a live connection is made. Upon determining that a live connection has been made, the computer immediately switches the call to an available representative and instantaneously displays the associated account record on the representative’s workstation. Calls that reach other signals, such as a busy signal, telephone company intercept or no answer, are tagged for statistical analysis and placed in priority recall queues or multiple-pass calling cycles. NCO systems also automate almost all record keeping and workflow activities including letter and report generation. We believe that our automated method of operations dramatically improves the productivity of our staff.

 

Quality Assurance and Client Service

 

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

 

We maintain a client service department to promptly address client issues and questions and alert senior executives of potential problems that require their attention. In addition to addressing specific issues, a team of client service representatives contact clients on a regular basis in order to establish a close relationship, determine clients’ overall level of satisfaction, and identify practical methods of improving their satisfaction.

 

Additionally, we provide a consumer help website designed to allow our clients’ customers to communicate with us 24 hours a day, seven days a week, 365 days a year. Consumers can choose to contact us via email or telephone, or they can choose to have one of our representatives call them. We have a dedicated team of representatives to support this website.

 

Client Relationships

 

Our active client base currently includes over 14,000 companies in the financial services, telecommunications, healthcare, retail and commercial, education and government, utilities, transportation/logistics and technology sectors. Our 10 largest clients in 2011 accounted for approximately 36.1 percent of our consolidated revenue excluding reimbursable costs and fees. Our largest client during the year ended December 31, 2011, was in the telecommunications sector and represented 8.0 percent of our consolidated revenue, excluding reimbursable costs and fees, for the year ended December 31, 2011. In 2011, we derived 24.5 percent of our revenue from financial services (which includes the banking and insurance sectors), 19.0 percent from telecommunications companies, 14.5 percent from healthcare organizations, 13.1 percent from retail and commercial entities, 10.3 percent from education and government organizations, 8.5 percent from utilities, 2.7 percent from transportation/logistics companies and 6.7 percent from technology and other sectors.

 

Our ARM contracts generally define, among other things, fee arrangements, scope of services and termination provisions. Clients may usually terminate such contracts on 30 or 60 days notice. In the event of termination, however, clients typically do not withdraw accounts referred to us prior to the date of termination, thus providing us with an

 

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ongoing stream of revenue from such accounts, which diminishes over time. Under the terms of our contracts, clients are not required to place accounts with us but do so on a discretionary basis.

 

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

 

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

 

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

 

Personnel and Training

 

Our success in recruiting, hiring and training a large number of employees is critical to our ability to provide high quality BPO services to our clients. We seek to hire personnel with previous experience in the industry or with experience as telephone representatives. We generally offer internal promotion opportunities and competitive compensation and benefits.

 

All of our call center personnel receive comprehensive training that consists of three stages: introduction training, behavioral training and functional training. These programs are conducted through a combination of classroom and role-playing sessions. Prior to customer contact, new employees receive one week of training in our operating systems, procedures and telephone techniques and instruction in applicable federal and state regulatory requirements. Our personnel also receive a wide variety of continuing professional education and on-going refresher training, as well as additional product training on an as-needed basis.

 

As of December 31, 2011, we had a total of approximately 29,300 full-time employees and 1,500 part-time employees, of which approximately 24,200 were telephone representatives. In addition, as of December 31, 2011, we utilized approximately 1,600 non-employee personnel on a contract basis. We believe that our relations with our employees are good.

 

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

 

Sales and Marketing

 

Our sales force is organized to best match our sales professionals’ experience and expertise with the appropriate target market. Our core sales force is organized by industry and BPO offering to ensure the highest level of focus and service to potential and existing business partners. This group is focused on forming and cultivating strategic, long-term partnerships with large, multinational firms in order to maximize outsourcing opportunities via our full suite of BPO services. Additionally, we have a sales force focused on selling account recovery services for small, medium and large businesses.

 

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

 

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Competition

 

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

 

Regulation

 

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

 

Accounts Receivable Management

 

The ARM industry in the United States is regulated both at the federal and state level. The Federal Fair Debt Collection Practices Act, referred to as the FDCPA, regulates any person who regularly collects or attempts to collect, directly or indirectly, consumer debts owed or asserted to be owed to another person. The FDCPA establishes specific guidelines and procedures that debt collectors must follow in communicating with consumer debtors, including the time, place and manner of such communications. Further, it prohibits harassment or abuse by debt collectors, including the threat of violence or criminal prosecution, obscene language or repeated telephone calls made with the intent to abuse or harass. The FDCPA also places restrictions on communications with individuals other than consumer debtors in connection with the collection of any consumer debt and sets forth specific procedures to be followed when communicating with such third parties for purposes of obtaining location information about the consumer. Additionally, the FDCPA contains various notice and disclosure requirements and prohibits unfair or misleading representations by debt collectors. We are also subject to the Fair Credit Reporting Act, which regulates the consumer credit reporting industry and which may impose liability on us to the extent that the adverse credit information reported on a consumer to a credit bureau is false or inaccurate. The Federal Trade Commission, referred to as the FTC, has the authority to investigate consumer complaints against debt collection companies and to recommend enforcement actions and seek monetary penalties.

 

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) became law. The Dodd-Frank Act restructures the regulation and supervision of the financial services industry. Many of the provisions of the Dodd-Frank Act have extended implementation periods and delayed effective dates and will require extensive rulemaking by regulatory authorities. As a result, the ultimate impact of the Dodd-Frank Act on our business cannot be determined at this time.

 

The new Consumer Financial Protection Bureau (“CFPB”) was formed as part of the Dodd-Frank Act. The CFPB has authority to regulate and bring enforcement action against various types of financial service businesses including collection agencies. Despite the creation of this new agency, none of the enforcement authority was taken from the FTC, meaning that these two government agencies will have dual enforcement authority over the debt collection industry.

 

The ARM business is also subject to state regulation. Some states require that we be licensed as a debt collection company. We believe that we currently hold applicable state licenses from all states where required.

 

We provide services to healthcare clients that are considered “covered entities” under the Health Insurance Portability and Accountability Act of 1996, referred to as HIPAA. As covered entities, our clients must comply with the standards for privacy, transaction and code sets, and data security. Under HIPAA, we are considered a “business associate,” which requires that we protect the security and privacy of “protected health information” provided to us by our clients for the collection of payments for healthcare services. We believe that we operate in compliance with all applicable standards under HIPAA in all material respects.

 

The collection of accounts receivable by collection agencies in Canada is regulated at the provincial and territorial level in substantially the same fashion as is accomplished by federal and state laws in the United States. The manner in which we conduct the business of collecting accounts is subject, in all provinces and territories, to established rules of common law or civil law and statute. Such laws establish rules and procedures governing the tracing, contacting and

 

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dealing with debtors in relation to the collection of outstanding accounts. These rules and procedures prohibit debt collectors from engaging in intimidating, misleading and fraudulent behavior when attempting to recover outstanding debts. In Canada, our collection operations are subject to licensing requirements and periodic audits by government agencies and other regulatory bodies. Generally, such licenses are subject to annual renewal. We believe that we hold all necessary licenses in those provinces and territories that require them.

 

In Australia, debt collection and debt purchasing activities are regulated by legislation and regulation at a state and federal level, with licenses required for corporations and individuals with varying effect at a state level. The Trade Practices Act, The Privacy Act and the Anti Money Laundering legislation are the primary federal laws, and the Commercial Agents legislation is the state level legislation. NCO’s Australian operations are licensed across all required jurisdictions. We believe that we hold all necessary licenses in those jurisdictions that require them.

 

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

 

Several of the industries served by us are also subject to varying degrees of government regulation. Although compliance with these regulations is generally the responsibility of our clients, we could be subject to various enforcement or private actions for our failure or the failure of our clients to comply with such regulations.

 

Customer Relationship Management

 

In the United States, there are two major federal laws that specifically address telemarketing, 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 Consumer Fraud and Abuse Prevention Act, referred to as the Fraud Prevention Act, which authorized the FTC, to adopt the Telemarketing Sales Rule, referred to as the TSR, which includes restrictions on telemarketing activities. These laws have been amended several times since their inception. In addition, the states have various regulatory restrictions and requirements for telemarketing companies.

 

The TCPA places restrictions on unsolicited automated telephone calls to residential telephone subscribers by means of automatic telephone dialing systems, prerecorded or artificial voice messages and telephone fax machines. It provides requirements for caller identification and call abandonment. In addition, the regulations require CRM firms to develop and maintain an internal “Do Not Call” list, to comply with the rules regarding the national “Do-Not-Call” registry, as discussed below, and to train their CRM personnel to comply with these restrictions. We train our service representatives to comply with all of these regulations of the TCPA.

 

The FTC regulates both general sales practices and telemarketing specifically and has broad authority to prohibit a variety of advertising or marketing practices that may constitute “unfair or deceptive acts or practices.” The FTC administers the Fraud Prevention Act under which the FTC has issued the TSR prohibiting a variety 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 services offered by telephone solicitation or of refund, cancellation or exchange policies. The rules also require that a telemarketer identify promptly and clearly the seller on whose behalf the CRM representative is calling, the purpose of the call, the nature of the goods or services offered and that no purchase or payment is necessary to win a prize. Service providers are required to maintain records on various aspects of their businesses. The TSR also established the national “Do Not Call” registry, where consumers could register once to stop all unwanted telemarketing calls. A consumer who receives a telemarketing call despite being on the registry can file a complaint with the FTC. In addition, the TSR restricts call abandonment (with certain safe harbors) and unauthorized billing, and it requires telemarketers to transmit their telephone numbers and, if possible, their names to consumers’ caller identification services.

 

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

 

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Additionally, some states have enacted laws and others are considering enacting laws targeted at direct telephone sales practices. Some examples include laws regulating electronic monitoring of telephone calls and laws prohibiting any interference by direct telephone sales with caller identification services.

 

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

 

Canada’s Personal Information Protection and Electronic Documents Act, referred to as the Federal Act requires all commercial enterprises to obtain consent for the collection, use, and disclosure of an individual’s personal information. The Federal Act permits any Province of Canada to enact substantially similar legislation governing the subject matter of the Federal Act, in which case the legislation of the Province will override the provisions of the Federal Act. Our Canadian operations are located primarily in the Provinces of Ontario, British Columbia and New Brunswick. British Columbia has enacted legislation, referred to as the B.C. Act, governing the subject matter of the Federal Act. The federal government of Canada has not yet declared the B.C. Act substantially similar to the Federal Act. Until such time as the federal government of Canada makes such declaration, both the B.C. Act and the Federal Act will apply concurrently to our operations in British Columbia. Though neither has yet enacted legislation that is substantially similar to the Federal Act, both Ontario and New Brunswick have indicated that they may enact legislation governing the subject matter of the Federal Act.

 

Canada’s Competition Act contains a number of provisions that regulate the conduct of telemarketers in Canada, in particular the manner in which outbound calls are to be conducted.

 

The industries we serve are also subject to government regulation, and, from time to time, bills are introduced in Congress, which, if enacted, could affect our operations. We, and our employees who sell insurance products, are required to be licensed by various state and Canadian provincial insurance commissions for the particular type of insurance product to be sold and are required to participate in regular continuing education programs.

 

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

 

Our representatives undergo an extensive training program, part of which is aimed to ensure their compliance with all such laws and regulations affecting the telemarketing industry. We also program our call management system to avoid initiating telephone calls during restricted hours or to individuals maintained on our “Do Not Call” list.

 

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Segment and Geographical Financial Information

 

See Note 20 in our Notes to Consolidated Financial Statements for the year ended December 31, 2011 for disclosure of financial information regarding our segments. The following table presents revenues and total assets, net of any intercompany balances, by geographic location (amounts in millions):

 

		For the Years Ended December 31,
		2011			2010			2009
Revenues:
U.S.		$	1,436.3		$	1,468.8		$	1,426.5
Canada		44.1			48.9			43.4
Australia		33.0			27.3			23.1
U.K.		15.9			15.8			22.4
Mexico		10.7			10.1			12.7
Panama		1.7			1.7			1.6
Total assets:
U.S.		$	783.6		$	1,089.8		$	1,284.7
Canada		39.5			40.8			29.2
Australia		30.0			36.3			33.3
U.K.		19.2			19.8			27.5
Philippines		20.5			17.9			18.4
Panama		11.4			12.3			46.9
Mexico		3.9			10.9			11.5
Other		8.6			9.9			8.5

 

Item 1A.                                                Risk Factors

 

You should carefully consider the following risk factors. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties 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 Recent Developments

 

Recent instability in the financial markets and global economy may affect our access to capital and the success of our collection efforts which could have a material adverse effect on our results of operations and revenue.

 

The stress experienced by global capital markets began in the second half of 2007, substantially increased during the second half of 2008, and has continued throughout 2009, 2010 and 2011. Concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining real estate market in the U.S. have contributed to increased volatility and diminished expectations for the economy and the markets going forward. These factors, combined with low business and consumer confidence and high unemployment, have created a challenging economic environment. This challenging environment has adversely affected the ability and willingness of consumers to pay their debts and resulted in a weaker collection environment in 2009, 2010 and 2011. The ability and willingness of consumers to pay their debts could continue to be adversely affected, which could have a material adverse effect on our results of operations, collections and revenue.

 

Further deterioration in economic conditions in the United States may also lead to higher rates of personal bankruptcy filings. Defaulted consumer loans that we service or purchase are generally unsecured, and we may be unable to collect these loans in the case of personal bankruptcy of a consumer. Increases in bankruptcy filings could have a material adverse effect on our results of operations, collections and revenue.

 

Continued or further credit market dislocations or sustained market downturns may also reduce the ability of lenders to originate new credit, limiting our ability to service defaulted consumer loans in the future. We are currently in compliance with all of our debt covenants, but the future impact on our operations and financial projections from the challenging economic and business environment may impact our ability to meet our debt covenants in the future. Further, increased financial pressure on the distressed consumer may result in additional regulatory restrictions on our operations and increased litigation filed against us. We are unable to predict the likely duration or severity of the current

 

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disruption in financial markets and adverse economic conditions and the effects they may have on our business, financial condition and results of operations.

 

Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs and access capital.

 

The current status of global financial and credit markets exposes us to a variety of risks. The capital and credit markets have been experiencing volatility and disruption for a couple of years. Disruptions in the credit markets make it harder and more expensive to obtain funding.  In some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for certain issuers.

 

We need liquidity to pay our operating expenses and debt service obligations. Without sufficient liquidity, we could be forced to limit our investment in growth opportunities or curtail operations. The principal sources of our liquidity are cash flows from operations, bank borrowings, and equity and debt offerings. As a result of the global financial crisis, there is a risk that one or more lenders in our senior credit facility syndicate could be unable to meet contractually obligated borrowing requests in the future. In the event current resources do not satisfy our needs, we may have to seek additional financing. The availability of additional financing will depend on a variety of factors such as market conditions and the general availability of credit. If current levels of market disruption and volatility continue or worsen, we may not be able to successfully obtain additional financing on favorable terms, or at all.

 

Concerns regarding the downgrade of the U.S. credit rating and the sovereign debt crisis in Europe could have a material adverse effect on our business, financial condition and liquidity.

 

On August 5, 2011, Standard & Poor’s lowered its long term sovereign credit rating on the United States of America from AAA to AA+. While U.S. lawmakers reached agreement to raise the federal debt ceiling on August 2, 2011, the downgrade reflected Standard & Poor’s view that the fiscal consolidation plan within that agreement fell short of what would be necessary to stabilize the U.S. government’s medium term debt dynamics. This downgrade could have material adverse impacts on financial markets and economic conditions in the United States and throughout the world and, in turn, the market’s anticipation of these impacts could have a material adverse effect on our business, financial condition and liquidity. Because of the unprecedented nature of negative credit rating actions with respect to U.S. government obligations, the ultimate impacts on global markets and our business, financial condition and liquidity are unpredictable and may not be immediately apparent.

 

In addition, global markets and economic conditions have been negatively impacted by the ability of certain European Union (“EU”) member states to service their sovereign debt obligations. The continued uncertainty over the outcome of the EU governments’ financial support programs and the possibility that other EU member states may experience similar financial troubles could further disrupt global markets and negatively impact our business, financial condition and liquidity.

 

There can be no assurance that actions of the U.S. Government, Federal Reserve and other governmental and regulatory bodies for the purpose of stabilizing the financial markets will achieve the intended effect.

 

In response to the financial crisis affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, the Federal Government, Federal Reserve and other governmental and regulatory bodies have taken actions and may take further actions to address the financial crisis. There can be no assurance as to what impact such actions will have on the financial markets.

 

Risks Related to our Business

 

Our business is dependent on our ability to grow internally.

 

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

 

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

· our ability to attract new clients.

 

Our ability to retain existing clients and expand those relationships is subject to a number of risks, including the risk that:

 

· we fail to maintain the quality of services we provide to our clients;

 

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

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

· we fail to provide competitively priced services.

 

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

 

· the market acceptance of our service offerings;

· the quality and effectiveness of our sales force; and

· the competitive factors within the BPO industry.

 

If our efforts to retain and expand our client relationships and to attract new clients do not prove effective, it could have a materially adverse effect on our business, results of operations and financial condition.

 

We compete with a large number of providers in the ARM and CRM industries. This competition could have a materially adverse effect on our future financial results.

 

We compete with a large number of companies in the industries in which we provide services. In the ARM industry, we compete with other sizable corporations in the U.S. and abroad such as iQor, Inc., Alliance One and GC Services LP, as well as many regional and local firms. In the CRM industry, we compete with large customer care outsourcing providers such as Convergys Corporation, Sitel Worldwide Corporation, Sykes Enterprises, Inc., TeleTech Holdings, Inc., and West Corporation. We may lose business to competitors that offer more diversified services, have greater financial and other resources and/or operate in broader geographic areas than we do. We may also lose business to regional or local firms who are able to use their proximity to or contacts at local clients as a marketing advantage. In addition, many companies perform the BPO services offered by us in-house. Many larger clients retain multiple BPO providers, which exposes us to continuous competition in order to remain a preferred provider. Because of this competition, in the future we may have to reduce our fees to remain competitive and this competition could have a materially adverse effect on our future financial results.

 

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

 

For the year ended December 31, 2011, we derived 24.5 percent of our revenue from clients in the financial services sector, 19.0 percent of our revenue from clients in the telecommunications industry, 14.5 percent of our revenue from clients in the healthcare sector, and 13.1 percent from clients in the retail and commercial sector. If any of these sectors 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 are any trends in any of these sectors to reduce or eliminate the use of third-party BPO service providers, it could harm our business and results of operations.

 

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 6% of our 2011 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

 

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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.

 

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.

 

We are dependent on our employees and a higher turnover rate would have a material adverse effect on us.

 

We are dependent on our ability to attract, hire and retain qualified employees. The BPO industry, by its nature, is labor intensive and experiences a high employee turnover rate. Many of our employees receive modest hourly wages and some of these employees are employed on a part-time basis. A higher turnover rate among our employees would increase our recruiting and training costs and could materially adversely impact the quality of services we provide to our clients. If we were unable to recruit and retain a sufficient number of employees, we would be forced to limit our growth or possibly curtail our operations. Growth in our business will require us to recruit and train qualified personnel at an accelerated rate from time to time. We cannot assure that we will be able to continue to hire, train and retain a sufficient number of qualified employees to meet the needs of our business or to support our growth. If we are unable to do so, our results of operations could be harmed. Any increase in hourly wages, costs of employee benefits or employment taxes could also have a materially adverse affect on our results of operations.

 

If the employees at any of our offices voted to join a labor union, it could increase our costs and possibly result in a loss of customers.

 

Although there have been efforts in the past, we are currently not aware of any union organizing efforts at any of our facilities. However, if our employees are successful in organizing a labor union at any of our locations, it could further increase labor costs, decrease operating efficiency and productivity in the future, result in office closures, and result in a loss of customers.

 

If we are not able to respond to technological changes in telecommunications and computer systems in a timely manner, we may not be able to remain competitive.

 

Our success depends in large part on our sophisticated telecommunications and computer systems. We use these systems to identify and contact large numbers of debtors and record the results of our collection efforts, as well as to provide customer service to our clients’ customers. If we are not able to respond to technological changes in telecommunications and computer systems in a timely manner, we may not be able to remain competitive. We have made a significant investment in technology to remain competitive and we anticipate that it will be necessary to continue to do so in the future. Telecommunications and computer technologies are changing rapidly and are characterized by short product life cycles, so we must anticipate technological developments. If we are not successful in anticipating, managing, or adopting technological changes on a timely basis or if we do not have the capital resources available to invest in new technologies, our business could be materially adversely affected.

 

We are highly dependent on our telecommunications and computer systems.

 

As noted above, our business is highly dependent on our telecommunications and computer systems. These systems could be interrupted by terrorist acts, natural disasters, power losses, computer viruses, or similar events. Our business is also materially dependent on services provided by various local and long distance telephone companies. If our equipment or systems cease to work or become unavailable, or if there is any significant interruption in telephone services, we may be prevented from providing services. Because we generally recognize revenue and generate operating cash flow primarily through ARM collections and providing CRM services, any failure or interruption of services and collections would mean that we would continue to incur payroll and other expenses without any corresponding income.

 

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An increase in communication rates or a significant interruption in communication service could harm our business.

 

Our ability to offer services at competitive rates is highly dependent upon the cost of communication services provided by various local and long distance telephone companies. Any change in the telecommunications market that would affect our ability to obtain favorable rates on communication services could harm our business. Moreover, any significant interruption in communication service or developments that could limit the ability of telephone companies to provide us with increased capacity in the future could harm existing operations and prospects for future growth.

 

We may seek to make strategic acquisitions of companies. Acquisitions involve additional risks that may adversely affect us.

 

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

 

We may have to borrow money, incur liabilities, or sell or issue stock to pay for future acquisitions and we may not be able to do so on terms favorable to us, or at all. Additional borrowings and liabilities may have a materially adverse effect on our liquidity and capital resources. If we issue stock for all or a portion of the purchase price for future acquisitions, our stockholders’ ownership interest may be diluted. Our common stock is not publicly traded and potential sellers may be unwilling to accept equity in a privately held company as payment for the sale of their business. If potential sellers are not willing to accept our common stock as payment for the sale of their business, we may be required to use more of our cash resources, if available, in order to continue our acquisition strategy.

 

Completing acquisitions involves a number of risks, including diverting management’s attention from our daily operations, other additional management, operational and financial resources, system conversions and the inability to maintain key pre-acquisition relationships with customers, suppliers and employees. We might not be able to successfully integrate future acquisitions into our business or operate the acquired businesses profitably, and we may be subject to unanticipated problems and liabilities of acquired companies.

 

Our success depends on our senior management team and if we are not able to retain them, it could have a materially adverse effect on us.

 

We are highly dependent upon the continued services and experience of our senior management team. We depend on the services of the members of our senior management team to, among other things, continue the development and implementation of our growth strategies, and maintain and develop our client relationships.

 

Goodwill and other intangible assets represented 56.8 percent of our total assets at December 31, 2011. If the goodwill or the other intangible assets, primarily our customer relationships and trade names, are deemed to be impaired, we may need to take a charge to earnings to write-down the goodwill or other intangibles to their fair value.

 

Our balance sheet includes goodwill, which represents the excess of the purchase price over the fair market value of the net assets of acquired businesses based on their respective fair values at the date of acquisition. Trade names primarily represent the fair value of the NCO name, which is an indefinite-lived intangible asset. Other intangibles are composed of customer relationships, which represent the information and regular contact we have with our clients, and non-compete agreements.

 

Goodwill is tested at least annually for impairment. The test for impairment uses a fair value based approach, whereby if the implied fair value of a reporting unit’s goodwill is less than its carrying amount, goodwill would be considered impaired. The trade name intangible asset is also reviewed for impairment on an annual basis.

 

As a result of the annual impairment testing, we recorded goodwill impairment charges of $176.1 million in the ARM segment and trade name impairment charges of $7.6 million in 2011. In 2010 and 2009, we recorded goodwill impairment charges of $57.0 million and $24.8 million, respectively, in the CRM segment. 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 to write-down the asset to its fair value.

 

We make significant assumptions to estimate the future revenue and cash flows used to determine the fair value of our reporting units. These assumptions include future growth rates, profitability, discount factors, market comparables, future tax rates, and other factors. Variations in any of these assumptions could result in materially different calculations

 

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of impairment amounts. If the expected revenue and cash flows are not realized, additional impairment losses may be recorded in the future.

 

Our other intangible assets, consisting of customer relationships and non-compete agreements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. For example, the loss of a larger client could require a review of the customer relationship for impairment. We made significant assumptions to estimate the future cash flows used to determine the fair value of the customer relationship.  If we lost a significant customer relationship, the future cash flows expected to be generated by the customer relationship would be less than the carrying amount, and an impairment loss may be recorded.

 

As of December 31, 2011, our balance sheet included goodwill, trade name and other intangibles that represented 33.8 percent, 8.2 percent and 14.8 percent of total assets, respectively.

 

Unauthorized disclosure of sensitive or confidential client and customer data could expose us to protracted and costly litigation, penalties and may cause us to lose clients.

 

Our business involves access to and transmission of information about our employees, our clients and customers of our clients. We are reliant on information technology networks and systems to process, transmit and store such electronic data. Security breaches of this infrastructure could lead to shutdowns or disruptions of our systems and potential unauthorized disclosure of confidential information. We are also required at times to manage, utilize and store sensitive or confidential client or customer data. As a result, we are subject to numerous federal and state laws and regulations designed to protect this information. While we take measures to protect the security and privacy of this information and to prevent unauthorized access, it is possible that our security controls over personal data and other practices we follow may not prevent the improper access to or disclosure of personally identifiable information. If any person, including any of our employees, negligently disregards or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates that data, we could be subject to monetary damages, fines and/or criminal prosecution. Unauthorized disclosure of sensitive or confidential client or customer data, whether through system failure, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose clients. Similarly, unauthorized access to or through our information systems, whether by our employees or third parties, could result in negative publicity, legal liability and damage to our reputation, business, financial condition, results of operations and cash flows.

 

If we fail to maintain an effective system of internal control over financial reporting and disclosure controls and procedures, we may be unable to accurately report our financial results and comply with the reporting requirements under the Securities Exchange Act of 1934. As a result, investors may lose confidence in our financial reporting and disclosure required under the Securities Exchange Act of 1934, which could adversely affect our business and could subject us to regulatory scrutiny.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, referred to as Section 404, we are required to include in our Annual Reports on Form 10-K, our management’s report on internal control over financial reporting. Currently, we are not required to include a report of our independent registered public accounting firm on our internal controls because we are a “non-accelerated filer” under SEC rules; therefore, you do not have the benefit of an independent review of our internal controls. While we have reported no “material weaknesses” in the Form 10-K for the fiscal year ended December 31, 2011, we cannot guarantee that we will not have any “material weaknesses” in the future. Compliance with the requirements of Section 404 is expensive and time-consuming. If in the future we fail to complete this evaluation in a timely manner, we could be subject to regulatory scrutiny and a loss of public confidence in our internal control over financial reporting. In addition, any failure to establish an effective system of disclosure controls and procedures could cause our current and potential investors and customers to lose confidence in our financial reporting and disclosure required under the Securities Exchange Act of 1934, which could adversely affect our business.

 

Terrorist attacks, war and threats of attacks and war may adversely impact our results of operations, revenue and profitability.

 

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

 

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Derivative transactions may expose us to unexpected risk and potential losses.

 

From time to time, we may be party to certain derivative transactions, such as interest rate swap contracts and foreign exchange contracts, with financial institutions to hedge against certain financial risks. Changes in the fair value of these derivative financial instruments that are not cash flow hedges are reported in income, and accordingly could materially affect our reported income in any period. Moreover, in the light of current economic uncertainty and potential for financial institution failures, we may be exposed to the risk that our counterparty in a derivative transaction may be unable to perform its obligations as a result of being placed in receivership or otherwise. In the event that a counterparty to a material derivative transaction is unable to perform its obligations thereunder, we may experience material losses that could materially adversely affect our results of operations and financial condition.

 

Risks Related to our ARM Business

 

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

 

Most of our ARM contracts do not require clients to place accounts with us, may be terminated on 30 or 60 days notice, and are on a contingent fee basis. We cannot guarantee that existing clients will continue to use our services at historical levels, if at all.

 

Under the terms of most of our ARM contracts, clients are not required to give accounts to us for collection and usually have the right to terminate our services on 30 or 60 days notice. Accordingly, we cannot guarantee that existing clients will continue to use our services at historical levels, if at all. In addition, most of these contracts provide that we are entitled to be paid only when we collect accounts. Therefore, for these contracts, we can only recognize revenues upon the collection of funds on behalf of clients.

 

If we fail to comply with government regulation of the collections industry, it could result in the suspension or termination of our ability to conduct business.

 

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

 

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

 

Recently enacted regulatory reform may have a material impact on our operations.

 

On July 21, 2010, the Dodd-Frank Act became law. The Dodd-Frank Act restructures the regulation and supervision of the financial services industry, including the formation of the new Consumer Financial Protection Bureau. Many of the provisions of the Dodd-Frank Act have extended implementation periods and delayed effective dates and will require extensive rulemaking by regulatory authorities. As a result, the ultimate impact of the Dodd-Frank Act on our business cannot be determined at this time. The Dodd-Frank Act may have a material impact on our operations, particularly through increased regulatory burden and compliance costs.

 

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The costs and management time and attention associated with litigation could result in a negative impact to our financial results.

 

We are subject to lawsuits, claims and governmental investigations arising out of the normal conduct of our business. We cannot predict whether any material lawsuits, claims, or investigations may arise in the future. Regardless of the outcome of any future actions, claims, or investigations, we may incur substantial defense costs and such actions may cause a disruption of management’s attention to the day-to-day operations of the business. Also, it is possible that we may be required to pay substantial damages or settlement costs which could have a material adverse effect on our business, results of operations, liquidity, or financial condition.

 

Risks Related to our CRM Business

 

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

 

The CRM division relies on a few key clients for a significant portion of its revenues. The loss of any of these clients or their failure to pay us could reduce revenues and adversely affect results of operations.

 

The CRM division is characterized by substantial revenues from a few key clients. While no individual CRM client represented more than 10 percent of our consolidated revenue, we are exposed to customer concentration within this division. Most of these clients are not contractually obligated to continue to use our services at historic levels or at all. If any of these clients were to significantly reduce the amount of service, for example due to business volume fluctuations, mergers and acquisitions and/or performance issues, fail to pay, or terminate the relationship altogether, our CRM business could be harmed.

 

Government regulation of the CRM industry and the industries we serve may increase our costs and restrict the operation and growth of our CRM business.

 

The CRM services industry is subject to an increasing amount of regulation in the United States and Canada. In the United States, the FCC places restrictions on unsolicited automated telephone calls to residential telephone subscribers by means of automatic telephone dialing systems, prerecorded or artificial voice messages and 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. The FTC regulates both general sales practices and telemarketing specifically and has broad authority to prohibit a variety of advertising or marketing practices that may constitute “unfair or deceptive acts or practices.” Most of the statutes and regulations in the United States allow a private right of action for the recovery of damages or provide for enforcement by the FTC, state attorneys general or state agencies permitting the recovery of significant civil or criminal penalties, costs and attorneys’ fees in the event that regulations are violated. The Canadian Radio-Television and Telecommunications Commission enforces rules regarding unsolicited communications using automatic dialing and announcing devices, live voice and fax. We cannot assure you 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 affect or limit our current or future operations.

 

Several of the industries we serve, particularly the insurance, financial services and telecommunications industries, are subject to government regulation. We could be subject to a variety of private actions or regulatory enforcement for our failure or the failure of our clients to comply with these regulations. Our results of operations could be adversely impacted if the effect of government regulation of the industries we serve is to reduce the demand for our CRM services or expose us to potential liability. We, and our employees who sell insurance products, are required to be licensed by various state insurance commissions for the particular type of insurance product sold and to participate in regular continuing education programs. Our participation in these insurance programs requires us to comply with certain state regulations, changes in which could materially increase our operating costs associated with complying with these regulations.

 

Risks Related to our Debt Structure

 

Our substantial leverage and significant debt service obligations could adversely affect our financial condition and our ability to fulfill our obligations and operate our business.

 

We are highly leveraged and have significant debt service obligations. Our financial performance could be affected by our substantial leverage. At December 31, 2011, our total indebtedness was $865.6 million, and we had $21.8 million of borrowing capacity under the revolving portion of our senior credit facility. On April 3, 2011, we entered into a $795 million senior secured first lien credit facility, consisting of a $675 million term loan that matures in 2018 and a $120 million revolving credit facility that matures in 2017 (the “First Lien Facility”) and a $200 million second lien term loan that matures in 2018 (the “Second Lien Facility” and, collectively with the First Lien Facility, the “New Facilities”). Borrowings under the New Facilities were used to repay our existing senior credit facility and our existing senior and subordinated notes. We may also incur additional

 

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indebtedness in the future.

 

This high level of indebtedness could have important negative consequences to us, including:

 

·                  we may have difficulty obtaining financing in the future for working capital, capital expenditures, acquisitions or other purposes;

·                  we will need to use all, or a substantial portion, 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 and other business activities;

·                  our borrowings under our New Facilities have variable rates of interest, which exposes us to the risk of increased interest rates;

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

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

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

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

·                  our failure to comply with the financial and other restrictive covenants in our debt instruments which, among other things, require us to maintain specified financial ratios and limit our ability to incur debt and sell assets, could result in an event of default that, if not cured or waived, could have a material adverse effect on our business or prospects.

 

Our high level of indebtedness requires that we use a substantial portion of our cash flow from operations to pay principal of, and interest on, our indebtedness, which will reduce the availability of cash to fund working capital requirements, capital expenditures or other general corporate or business activities, including future acquisitions.

 

In addition, all of our indebtedness under the New Facilities bears interest at variable rates. If market interest rates increase, debt service on our variable-rate debt will rise, which would adversely affect our cash flow. We may employ hedging strategies to help reduce the impact of fluctuations in interest rates. The portion of our variable rate debt that is not hedged will be subject to changes in interest rates.

 

We may be unable to generate sufficient cash to service all of our indebtedness and meet our other ongoing liquidity needs and may be forced to take other actions to satisfy our obligations under our indebtedness, which may be unsuccessful.

 

Our ability to make scheduled payments or to refinance our debt obligations and to fund our planned capital expenditures and other ongoing liquidity needs, depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. Our business may not generate sufficient cash flow from operations or future borrowings may not be available to us under our First Lien Facility or otherwise in an amount sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our debt on or before maturity. We may be unable to refinance any of our debt on commercially reasonable terms.

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, seek additional capital or seek to restructure or refinance our indebtedness. These alternative measures may be unsuccessful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. Our New Facilities restrict our ability to use the proceeds from certain asset sales. We may be unable to consummate those asset sales to raise capital or sell assets at prices that we believe are fair and proceeds that we do receive may be inadequate to meet any debt service obligations then due.

 

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Despite our current leverage, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks that we and our subsidiaries face.

 

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the New Facilities do not fully prohibit us or our subsidiaries from doing so. The revolving credit portion of our First Lien Facility provides commitments of up to $120 million. If new debt is added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.

 

Our New Facilities contain a number of restrictive covenants which will limit our ability to finance future operations or capital needs or engage in other business activities that may be in our interest.

 

Our New Facilities, and the terms of any future indebtedness may impose, operating and other restrictions on us and our subsidiaries. Such restrictions affect or will affect, and in many respects limit or prohibit, among other things, our ability and the ability of our restricted subsidiaries to:

 

·                  incur additional indebtedness;

·                  create liens;

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

·                  redeem our capital stock;

·                  make certain investments or certain other restricted payments;

·                  sell certain kinds of assets;

·                  enter into certain types of transactions with affiliates; and

·                  effect mergers or consolidations.

 

In addition, our New Facilities include other more restrictive covenants. The New Facilities also require us to achieve certain financial and operating results and maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control.

 

The restrictions contained in our New Facilities could:

 

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

·                  adversely affect our ability to finance our operations, acquisitions, investments or strategic alliances or other capital needs or to engage in other business activities that would be in our interest.

 

A breach of any of these covenants or our inability to comply with the required financial ratios could result in a default under the New Facilities. If an event of default occurs under the New Facilities, the lenders could elect to:

 

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

·                  require us to apply all of our available cash to repay the borrowings.

 

The lenders will also have the right in these circumstances to terminate any commitments they have to provide further financing.

 

If we were unable to repay or otherwise refinance these borrowings when due, our lenders could sell the collateral securing the New Facilities, which constitutes substantially all of our and our domestic subsidiaries’ assets.

 

We are a holding company and we depend upon cash from our subsidiaries to service our debt. If we do not receive cash distributions, dividends or other payments from our subsidiaries, we may be unable to meet out debt service obligations.

 

We are a holding company and 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 funds necessary to meet our debt service obligations. If we do not receive such cash distributions, dividends or other payments from our subsidiaries, we may be unable to pay the principal or interest on our outstanding debt.

 

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Item 1B.               Unresolved Staff Comments

 

Not Applicable

 

Item 2.                        Properties

 

The following table summarizes the locations of our facilities by segment, excluding Sales offices. Certain of our facilities are used for both ARM and CRM operations. We lease all but one of these facilities. The leases expire between 2012 and 2021, and most contain renewal options.

 

		ARM Only		CRM Only		ARM and CRM		Total
U.S.		48		7		3		58
Canada		7		3		—		10
Philippines		—		4		3		7
Australia		5		—		—		5
Mexico		5		—		—		5
Panama		—		2		2		4
United Kingdom		2		—		—		2
Barbados		—		—		1		1
Antigua		—		—		1		1
Puerto Rico		1		—		—		1
Guatemala		—		1		—		1
Total		68		17		10		95

 

We believe that our facilities are adequate for our current operations, but additional facilities may be required to support growth. We believe that suitable additional or alternative space will be available as needed on commercially reasonable terms.

 

Item 3.                        Legal Proceedings

 

Barrist Complaint:

 

On December 21, 2011, Michael Barrist and certain affiliated parties filed a lawsuit against NCO, OEP, certain individual members of the NCO board of directors, Murray, Devine & Company (“Murray Devine”), and other defendants in the Court of Common Pleas, Philadelphia County, Pennsylvania.  Plaintiffs alleged that the Defendants caused the valuation of Plaintiffs’ put options to be lower than their true value and, as a result, Plaintiffs were deprived of the full value of their put rights under the Stockholders Agreement under which Plaintiffs obtained the put options.  Plaintiffs asserted claims against NCO and others for conspiracy relating to the valuation of Plaintiffs’ shares and for violations of the Pennsylvania Wage Payment and Collection Act for a bonus allegedly owed to Barrist under his employment agreement.

 

NCO and the defendants who serve on the NCO Board of Directors believe this lawsuit is without merit and intend to defend against it vigorously.

 

Fort Washington Flood:

 

In June 2001, the first floor of our Fort Washington, Pennsylvania, headquarters was severely damaged by a flood caused by remnants of Tropical Storm Allison. We subsequently decided to relocate our corporate headquarters to Horsham, Pennsylvania. We filed a lawsuit on August 14, 2001 in the Court of Common Pleas, Montgomery County, Pennsylvania (Civil Action No. 01-15576) against the current landlord and the former landlord of the Fort Washington facilities to terminate the leases and to obtain other relief. The landlord and former landlord filed counter-claims against us. We maintain a reserve that we believe is adequate to address our exposure to this matter and we plan to continue to contest this matter.

 

FTC and Attorneys General:

 

From time to time, we receive subpoenas or other similar information requests from the FTC and from various states’ Attorneys General, requesting information relating to NCO’s debt collection practices. We respond to such inquiries or investigations and provide certain information to the FTC and the respective Attorneys General offices. We believe we are in compliance with federal laws and the laws of the states in which we do business relating to debt collection practices in all material respects. However, no assurance can be given that any such inquiries or investigations will not result in a formal investigation or an enforcement action. Any such enforcement actions could

 

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result in fines as well as the suspension or termination of our ability to conduct business in such states.

 

Other:

 

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

 

Item 4.                        Mine Safety Disclosures

 

Not Applicable.

 

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PART II

 

Item 5.                        Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

There was no established public trading market for each of our Class A common stock and our Class L common stock, and all of our outstanding common equity is privately held.  As of March 30, 2012, there were 55 holders of record of our Class A common stock (including holders of our restricted stock) and 24 holders of record of our Class L common stock. In connection with the April 3, 2012 merger and related reorganization transactions relating to the combination of the businesses of NCO and APAC, all of our then outstanding capital stock, including our Class A Common Stock and Class L Common Stock, was cancelled in the merger. Following the merger, Expert Global Solutions, LLC was the sole holder of record of our capital stock.

 

Our ability to pay cash dividends on our capital stock was limited by the terms of our senior credit facility and the indentures governing the terms of our prior notes and is limited by the terms of our new first and second lien credit facilities.  There were no cash dividends declared or paid during 2010 and 2011. We do not anticipate paying a cash dividend on our capital stock in the near future. See Note 15 in our Notes to Consolidated Financial Statements included elsewhere in this Report on Form 10-K for disclosure of information regarding the payment of dividends.

 

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

 

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Item 6.                        Selected Financial Data

 

SELECTED FINANCIAL DATA (1)

(Amounts in thousands)

 

		For the years ended December 31,
		2011(2)			2010(3)			2009(4)			2008(5)			2007
Statement of Operations Data:
Revenues		$	1,216,346		$	1,229,464		$	1,402,735		$	1,468,580		$	1,104,611
Reimbursable costs and fees		325,363			343,101			126,992			25,792			29,581
Total revenues		1,541,709			1,572,565			1,529,727			1,494,372			1,134,192
Operating costs and expenses:
Payroll and related expenses		695,892			692,919			767,251			825,648			659,830
Selling, general and administrative expenses		380,324			406,905			468,125			483,901			362,373
Reimbursable costs and fees		325,363			343,101			126,992			25,792			29,581
Depreciation and amortization expense		102,999			108,743			117,211			118,489			99,523
Impairment of intangible assets		183,777			57,015			24,754			125,028			—
Restructuring charges		28,713			17,068			10,009			11,600			—
(Loss) income from continuing operations		(175,359		)	(53,186		)	15,385			(96,086		)	(17,115		)
Other income (expense), net		(82,593		)	(84,758		)	(89,117		)	(111,114		)	(82,569		)
Loss from continuing operations before income taxes		(257,952		)	(137,944		)	(73,732		)	(207,200		)	(99,684		)
Income tax (benefit) expense		(9,358		)	6,625			(1,509		)	(62,826		)(6)	(34,126		)
Net loss from continuing operations		(248,594		)	(144,569		)	(72,223		)	(144,374		)	(65,558		)
Net loss from discontinued operations		(33,128		)	(11,144		)	(15,919		)	(210,982		)(6)	36,571
Net loss		(281,722		)	(155,713		)	(88,142		)	(355,356		)	(28,987		)
Less: Net (loss) income attributable to noncontrolling interests		(3,329		)	(713		)	(3,921		)	(18,250		)	2,735
Net loss attributable to NCO Group, Inc.		$	(278,393	)	$	(155,000	)	$	(84,221	)	$	(337,106	)	$	(31,722	)
Statement of Cash Flows Data:
Net cash provided by operating activities		$	22,643		$	43,124		$	98,474		$	93,733		$	43,995
Net cash (used in) provided by investing activities		(9,056		)	22,344			16,714			(424,159		)	(32,719		)
Net cash (used in) provided by financing activities		(29,100		)	(71,389		)	(107,153		)	332,204			(2,869		)

 

		December 31,
		2011			2010			2009			2008			2007
Balance Sheet Data:
Cash and cash equivalents		$	17,723		$	33,077		$	39,221		$	29,880		$	31,283
Working capital		81,386			87,844			86,708			151,547			162,471
Total assets		916,677			1,237,713			1,460,035			1,701,639			1,677,999
Long-term debt		865,596			889,353			951,530			1,079,076			927,696
Noncontrolling interests		3,769			6,520			11,450			22,803			48,948
Stockholders’ (deficit) equity		(194,949		)	86,926			240,550			283,789			408,045

 

(1)    This data should be read in conjunction with the consolidated financial statements, including the accompanying notes, included elsewhere in this Annual Report on Form 10-K.

(2)    Includes $183.8 million of impairment charges to goodwill and trade names, and $30.0 million of restructuring charges and expenses related to the APAC combination and the refinancing of the Company’s debt.

(3)    Includes $57.0 million of impairment charges to goodwill, and $17.1 million of restructuring charges.

(4)    Includes $24.8 million of impairment charges to goodwill and $11.6 million of restructuring, integration and acquisition costs.

(5)    The Company acquired Outsourcing Solutions, Inc. on February 29, 2008. Includes $125.0 million of impairment charges to goodwill and trade name, and $15.2 million of merger, restructuring and integration costs.

(6)    2008 Income tax benefit, net loss from continuing operations, and net loss from discontinued operations differ from amounts previously reported due to the correction of an error. The correction results in the reclassification of an income tax benefit in the amount of $9.5 million previously reported as a component of continuing operations to discontinued operations.

 

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

 

Overview

 

We are a holding company and conduct substantially all of our business operations through our subsidiaries. We are an international provider of business process outsourcing services, referred to as BPO, primarily focused on accounts receivable management, referred to as ARM, and customer relationship management, referred to as CRM, serving a wide range of clients in North America and abroad through our global network of approximately 100 offices.

 

We operate our business in two segments: ARM and CRM.

 

On April 3, 2012, we consummated a series of related transactions, referred to as the “Merger Transactions,” pursuant to which the businesses of NCO and APAC were combined, NCO’s new indirect holding company was recapitalized and we engaged in certain refinancing transactions that resulted in the repayment of our existing senior credit facility and our outstanding $165.0 million of floating rate senior notes and $200.0 million of 11.875 percent senior subordinated notes and the replacement of such indebtedness with new indebtedness consisting of (a) a $795 million senior secured first lien credit facility, comprised of a term loan of $675 million that matures in 2018 and a revolving credit line of $120 million  that matures in 2017, and (b) a $200 million secured second lien credit facility that matures in 2018.

 

Pursuant to an agreement and plan of merger, we became an indirect wholly-owned subsidiary of EGS Holdings, Inc. Pursuant to the merger, our existing stockholders received, as merger consideration, newly issued shares of EGS Holdings, Inc. in exchange for their issued and outstanding shares of NCO immediately prior to the merger. The exact amount of shares of EGS Holdings, Inc. capital stock received by each holder of NCO Group, Inc. capital stock was dependent upon the base amount and unpaid yield of the issued and outstanding shares of NCO Group, Inc. capital stock held by such stockholders immediately prior to the effective time of the merger. Concurrently with the consummation of the merger, the businesses of NCO and APAC were combined through a series of related reorganization transactions and EGS Holdings, Inc. was recapitalized. In connection with the Merger Transactions, all of the Company’s Class A Common Stock issued and outstanding immediately prior to the merger, including shares of restricted stock, were cancelled in the merger and no consideration was paid therefor. Upon the consummation of the merger, NCO’s name was changed to Expert Global Solutions, Inc. As a result of the merger, APAC became an indirect wholly-owned subsidiary of ours through a contribution of APAC’s equity by our parent company.

 

APAC is a leading provider of customer care services and solutions to clients in the healthcare, communications, business services, media & publishing, travel & entertainment, technology and financial services industries. APAC delivers highly customized customer care services and solutions that involve communicating with customers and managing situations that are unique to each core industry.

 

Historically, our Portfolio Management business participated in the purchased accounts receivable business on an opportunistic basis. Beginning in 2009, we significantly reduced our purchases of accounts receivable. This decision resulted from declines in liquidation rates, competition for purchased accounts receivable and the continued uncertainty of collectability, as well as potential regulatory changes affecting the purchased accounts receivable business.

 

In April and August 2011, our Portfolio Management segment sold portfolios of purchased accounts receivable with an aggregate book value of $18.8 million. This book value includes the impact of write-downs of the value of the purchased accounts receivable of $29.4 million recorded during the year ended December 31, 2011, which were recorded in connection with the dispositions.

 

Subsequent to the August sale, which constituted a significant portion of Portfolio Management’s remaining purchased accounts receivable portfolio, the results of the Portfolio Management business have been presented as discontinued operations on the consolidated statements of operations and statements of cash flows, and prior periods have been restated. The remaining portfolios of purchased accounts receivable are not significant and are included as part of ARM.

 

During 2011, we generated approximately 65 percent of our ARM revenue from the recovery of delinquent accounts receivable on a contingency fee basis. Our ARM contingency fees range from approximately five percent for the management of accounts placed early in the accounts receivable cycle to approximately 50 percent for accounts that have been serviced extensively by the client or by third-party providers. Our average fee for ARM contingency-based revenue across all industries was approximately 16 percent during 2011, 17 percent during 2010 and 18 percent during 2009. The slight decrease in our average fees from 2009 to 2011 is primarily due to a change in our business mix resulting from a decline in our higher rate services and an increase in services charged at a lower rate. In addition, we generate revenue from certain contractual ARM services. Generally, revenue is earned and recognized upon collection of accounts receivable for contingency fee services and as work is performed for contractual services. We enter into contracts with most of our clients that define, among other things, fee arrangements, scope of services, and termination provisions. Clients typically have the right to terminate their contracts on 30 or 60 days’ notice. Approximately 35

 

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percent of our ARM revenue is generated from contractual collection services, where fees are based on a monthly rate or a per service charge, and other ARM services.

 

During 2011, approximately 97 percent of our CRM revenue was generated from inbound services, which consist primarily of customer service and technical support programs, and to a lesser extent acquisition and retention services. Inbound services involve the processing of incoming calls, often placed by our clients’ customers using toll-free numbers, to a customer service representative for service, order fulfillment or information. During 2011, outbound services, which consist of customer acquisition and customer retention services, represented approximately three percent of our CRM revenue.

 

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

 

Our 2011 annual impairment test for goodwill indicated that the carrying value of the ARM reporting unit exceeded its fair value, primarily due to the impact of the economic environment on our ARM business and reduced volumes from our ARM clients, as well as lower public company valuations used in the impairment analysis, and we recorded goodwill impairment charges of $176.1 million in the ARM segment in 2011. We recorded goodwill impairment charges of $57.0 million and $24.8 million in 2010 and 2009, respectively, in the CRM segment. We also recorded a trade name impairment of $7.6 million, also due to the impact of the economic environment, as well as an increase in the discount rate.

 

The challenging economic environment in the U.S. has impacted our business over the course of 2009, 2010 and 2011. Factors such as reduced availability of credit for consumers, a depressed real estate market, high unemployment and other factors have had a negative impact on the ability and willingness of consumers to pay their debts and a negative impact on our clients’ businesses, which has adversely affected our results of operations, collections and revenue.

 

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

 

·                  further impairment charges to our goodwill, trade name and other intangible assets;

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

·                  volume fluctuations in our ARM fixed fee based services; and

·                  volume fluctuations in our CRM services.

 

We have grown through both acquisitions as well as internal growth. The following table lists the companies we have acquired in the recent past (purchase price in millions):

 

Date		Acquired Company		Description		Purchase Price
April 2012		APAC Customer Services, Inc. (merger)		Customer care services		N/A
May 2011		Protocol Direct Marketing, Inc.		Provider of BPO solutions		$	20.8
September 2010		Health Blueprints, Inc.		Healthcare Consulting		$	1.6
August 2009		TSYS Total Debt Management (“TDM”)		Attorney network receivables management		$	4.5
May 2009		Complete Credit Management, Ltd.		Receivables management in the U.K.		$	0.7

 

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

 

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Critical Accounting Policies and Estimates

 

General

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. We believe the following accounting policies and estimates are the most critical and could have the most impact on our results of operations. For a discussion of these and other accounting policies, see note 2 in our Notes to Consolidated Financial Statements.

 

Goodwill, Other Intangible Assets and Purchase Accounting

 

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

 

As of December 31, 2011, our balance sheet included goodwill, trade names and other intangibles that represented 33.8 percent, 8.2 percent and 14.8 percent of total assets, respectively.

 

Goodwill and indefinite-lived trade names are tested for impairment at least annually and as triggering events occur. The test for impairment is performed at the reporting unit level and involves a two-step approach, the first step identifies any potential impairment and the second step measures the amount of the impairment, if applicable. The first test for potential impairment compares 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’s goodwill would be considered impaired and we could be required to take a charge to earnings, which could be material.

 

Fair values are determined by using a combination of the market approach and income approach. Our fair value calculations are based on projected financial results that are prepared in connection with our annual budget and forecasting process. The fair value calculations are also based on other assumptions including long-term growth rates and weighted average cost of capital. For 2011, 2010 and 2009, the fair value calculations assumed long-term growth rates of 3 percent and weighted average cost of capital ranging from approximately 14 percent, 14 percent to 18 percent, and 13 percent to 14 percent, respectively.

 

Our 2011 annual impairment test for goodwill indicated that the carrying value of our ARM reporting unit exceeded its fair value, primarily due to the impact of the economic environment on our ARM business and reduced volumes from our ARM clients, as well as lower public company valuations used in the impairment analysis, and we recorded goodwill impairment charges of $176.1 million in the ARM segment in 2011. We also recorded a trade name impairment of $7.6 million, also due to the impact of the economic environment, as well as an increase in the discount rate.

 

As a result of the annual impairment testing, we recorded goodwill impairment charges of $57.0 million and $24.7 million in the CRM reporting unit in 2010 and 2009, respectively. We were not required to record any trade name impairment charges in 2010 or 2009.

 

We make significant assumptions to estimate the future revenue and cash flows used to determine the fair value of our reporting units. These assumptions include future growth rates, profitability, discount factors, market comparables, future tax rates, and other factors. Variations in any of these assumptions could result in materially different calculations of impairment amounts. If the expected revenue and cash flows are not realized, additional impairment losses may be recorded in the future.

 

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

 

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Income Taxes

 

Deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance, if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Deferred taxes have not been provided on the cumulative undistributed earnings of foreign subsidiaries because such amounts are expected to be reinvested indefinitely.

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible or the net operating losses can be utilized. As a result of incurring cumulative losses over the past several years, we have provided for a full valuation allowance of $130.7 million on the total federal and certain state and foreign net deferred tax assets as of December 31, 2011. In addition, a valuation allowance of $23.3 million has been provided on a portion of deferred tax assets relating to certain foreign and state net operating losses and state tax credit carryforwards based on management’s assessment that it is more likely than not that such amounts will not be realized. This represents a total increase in the valuation allowance of $43.2 million over the prior year, due primarily to an increase in federal and certain state net deferred tax assets and additional state and foreign net operating losses in 2011. The utilization of net operating loss carryforwards and tax credits is an estimate based on a number of factors beyond our control, including the level of taxable income available from successful operations in the future.

 

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

 

As of December 31, 2011 and 2010, we had $10.8 million and $11.1 million, respectively, in reserves for uncertain tax positions, including penalties, that, if recognized, would affect the effective tax rate. We recognize interest related to uncertain tax positions in interest expense. As of December 31, 2011 and 2010, we had approximately $4.2 million and $4.0 million, respectively, of accrued interest related to uncertain tax positions. We recognize penalties related to uncertain tax positions in the provision for income taxes. As of December 31, 2011 and 2010, we had accrued penalties related to uncertain tax positions of $1.3 million and $1.1 million, respectively.

 

We are subject to federal, state and foreign income tax audits from time to time that could result in proposed assessments. We cannot predict with certainty how these audits will be 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, 2011, we are no longer subject to federal income tax examinations for years prior to 2006. For most states and foreign countries where we conduct business, we are subject to examination for the preceding three to six years. In certain states and foreign countries, the period could be longer.

 

Allowance for Doubtful Accounts

 

Allowances for doubtful accounts are determined based on estimates of losses related to customer receivable balances. In establishing the appropriate provision for customer receivables balances, we make assumptions with respect to their future collectibility. Our assumptions are based on an individual assessment of a customer’s credit quality as well as subjective factors and trends, including the aging of receivable balances. Generally, these individual credit assessments occur at regular reviews during the life of the exposure and consider factors such as a customer’s ability to meet and sustain their financial commitments, a customer’s current financial condition and historical payment patterns. Our level of reserves for our customer accounts receivable fluctuates depending upon all of the factors mentioned above, in addition to any contractual rights that allow us to reduce outstanding receivable balances through the application of future collections. If our estimate is not sufficient to cover actual losses, we would be required to take additional charges to our earnings.

 

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Results of Operations

 

The following table sets forth selected historical statement of operations data (amounts in thousands):

 

		For the Years Ended December 31,
		2011					2010					2009
		Amount			% of  Revenue		Amount			% of  Revenue		Amount			% of  Revenue
Revenues		$	1,216,346		78.9	%	$	1,229,464		78.2	%	$	1,402,735		91.7	%
Reimbursable costs and fees		325,363			21.1		343,101			21.8		126,992			8.3
Total revenues		1,541,709			100.0		1,572,565			100.0		1,529,727			100.0
Payroll and related expenses		695,892			45.1		692,919			44.1		767,251			50.2
Selling, general and administrative expenses		380,324			24.7		406,905			25.9		468,125			30.6
Reimbursable costs and fees		325,363			21.1		343,101			21.8		126,992			8.3
Depreciation and amortization		102,999			6.7		108,743			6.9		117,211			7.7
Impairment of intangible assets		183,777			11.9		57,015			3.6		24,754			1.6
Restructuring charges		28,713			1.9		17,068			1.1		10,009			0.6
(Loss) income from operations		(175,359		)	(11.4	)	(53,186		)	(3.4	)	15,385			1.0
Other income (expense), net		(82,593		)	(5.4	)	(84,758		)	(5.4	)	(89,117		)	(5.8	)
Income tax (benefit) expense		(9,358		)	(0.6	)	6,625			0.4		(1,509		)	(0.1	)
Net loss from continuing operations		(248,594		)	(16.2	)	(144,569		)	(9.2	)	(72,223		)	(4.7	)
Net loss from discontinued operations		(33,128		)	(2.1	)	(11,144		)	(0.7	)	(15,919		)	(1.0	)
Net loss		(281,722		)	(18.3	)	(155,713		)	(9.9	)	(88,142		)	(5.7	)
Less: Net loss attributable to noncontrolling interests		(3,329		)	(0.2	)	(713		)	—		(3,921		)	(0.3	)
Net loss attributable to NCO		$	(278,393	)	(18.1	)%	$	(155,000	)	(9.9	)%	$	(84,221	)	(5.4	)%

 

Year ended December 31, 2011 Compared to Year ended December 31, 2010

 

Revenue.  (dollars in thousands):

 

		For the Year Ended December 31,
					% of					% of
		2011			Revenue		2010			Revenue		$ Change		% Change
ARM		$	1,203,106		78.0	%	$	1,292,213		82.2	%	(89,107	)	(6.9	)%
CRM		338,603			22.0	%	280,352			17.8	%	58,251		20.8	%
Total		$	1,541,709		100.0	%	$	1,572,565		100.0	%	(30,856	)	(2.0	)%

 

ARM’s revenue for 2011 and 2010 included $325.4 million and $343.1 million, respectively, of reimbursable costs and fees (discussed in more detail below), which resulted in a $17.7 million decrease in ARM’s revenue in 2011. The remaining decrease in ARM’s revenue was primarily attributable to lower volumes in the first-party and third-party collections business during 2011, attributable to the impact of the economy on our clients’ business.

 

The increase in CRM’s revenue was primarily due to the acquisition of Protocol in May 2011, which contributed $42.8 million of revenue, as well as increased client volume related to the implementation of new contracts during 2011, partially offset by lower volumes from certain existing clients attributable to the impact of the economy on the clients’ business.

 

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Payroll and related expenses.  (dollars in thousands):

 

		For the Year Ended December 31,
					% of					% of
		2011			Revenue		2010			Revenue		$ Change			% Change
ARM		$	447,596		37.2	%	$	480,091		37.2	%	$	(32,495	)	(6.8	)%
CRM		248,296			73.3	%	212,828			75.9	%	35,468			16.7	%
Total		$	695,892		45.1	%	$	692,919		44.1	%	$	2,973		0.4	%

 

ARM’s payroll and related expenses as a percentage of revenue was unchanged compared to the prior year, primarily due to the impact of lower revenue from reimbursable costs and fees in 2011 being offset by cost savings initiatives, including off-shoring of back-office functions and ongoing restructuring.

 

The decrease in CRM’s payroll and related expenses as a percentage of revenue was also primarily a result of cost savings initiatives, as well as moving new business to offshore locations that have a lower cost structure.

 

Selling, general and administrative expenses.  (dollars in thousands):

 

		For the Year Ended December 31,
					% of					% of
		2011			Revenue		2010			Revenue		$ Change			% Change
ARM		$	316,592		26.3	%	$	349,886		27.1	%	$	(33,294	)	(9.5	)%
CRM		63,732			18.8	%	57,019			20.3	%	6,713			11.8	%
Total		$	380,324		24.7	%	$	406,905		25.9	%	$	(26,581	)	(6.5	)%

 

The decrease in ARM’s selling, general and administrative expenses as a percentage of revenue was primarily due to the impact of lower revenue from reimbursable costs and fees in 2011 being offset by cost saving initiatives, including ongoing restructuring of facilities.

 

The decrease in CRM’s selling, general and administrative expenses as a percentage of revenue was primarily attributable to leveraging its infrastructure over the higher revenue base and to costs savings initiatives, including ongoing restructuring of facilities.

 

Reimbursable costs and fees.  Reimbursable costs and fees consist of court costs, legal fees and repossession fees, representing out-of-pocket expenses that are reimbursed by our clients. Reimbursable costs and fees of $325.4 million and $343.1 million for 2011 and 2010, respectively, are recorded as both revenue and operating expenses on the statement of operations.

 

Depreciation and amortization.  Depreciation and amortization decreased to $103.0 million in 2011, from $108.7 million in 2010. This decrease was primarily attributable to lower depreciation expense resulting from more assets becoming fully depreciated, as well as lower amortization of customer relationships and other intangible assets due to certain intangible assets becoming fully amortized during 2010.

 

Impairment of intangible assets.  During the fourth quarter of 2011, the Company recorded goodwill impairment charges of $176.1 million and trade name impairment charges of $7.6 million. During the fourth quarter of 2010, the Company recorded goodwill impairment charges of $57.0 million in the CRM segment.

 

Restructuring charges.  We incurred restructuring charges of $28.7 million in 2011, which related to streamlining the cost structure of our operations. The charges consisted primarily of costs associated with the closing of redundant facilities, severance and professional fees. This compares to $17.1 million of restructuring charges in 2010, which also related to the streamlining of our cost structure. The severance accrual recorded for 2011 included approximately $3.4 million related to termination benefits provided to our former President and Chief Executive Officer, who remains as our Chairman of the Board of Directors.

 

Other income (expense).  Interest expense decreased to $85.1 million for 2011, from $88.1 million for 2010. Interest expense for 2011 included $616,000 of losses, compared to $7.1 million of losses in 2010, from interest rate swap agreements. Other income, net for 2011 and 2010 included approximately $313,000 of net losses and $1.2 million of net gains, respectively, resulting from the settlement of certain foreign exchange contracts.

 

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Income tax expense (benefit).  For 2011, we recorded an income tax benefit of $9.4 million on a pre-tax loss from continuing operations of $258.0 million, or an effective income tax rate of 3.6 percent. For 2010, we recorded income tax expense of $6.6 million on a pre-tax loss from continuing operations of $137.9 million, or an effective income tax rate of (4.8) percent. The change in the effective income tax rate was due primarily to the recognition of a valuation allowance on certain domestic net deferred tax assets, and income tax expense to be paid in state and foreign jurisdictions.

 

Year ended December 31, 2010 Compared to Year ended December 31, 2009

 

Revenue.  (dollars in thousands):

 

		For the Year Ended December 31,
					% of					% of
		2010			Revenue		2009			Revenue		$ Change			% Change
ARM		$	1,292,213		82.2	%	$	1,200,346		78.4	%	$	91,867		7.7	%
CRM		280,352			17.8	%	334,492			21.9	%	(54,140		)	(16.2	)%
Eliminations		—			—		(5,111		)	(0.3	)%	5,111			(100.0	)%
Total		$	1,572,565		100.0	%	$	1,529,727		100.0	%	$	42,838		2.8	%

 

CRM’s revenue for 2009 included $5.1 million of intercompany revenue earned on services performed for ARM, which was eliminated upon consolidation. CRM did not perform services for ARM in 2010.

 

ARM’s revenue for 2010 and 2009 included $343.1 million and $127.0 million of reimbursable costs and fees (discussed in more detail below), which resulted in a $216.1 million increase in ARM’s revenue in 2010. This increase was partially offset by decreases primarily attributable to lower volumes and the weaker collection environment during 2010 and a $43.9 million decrease resulting from the sale of our print and mail business in October 2009.

 

The decrease in CRM’s revenue was primarily due to lower volumes from certain existing clients attributable to the impact of the economy on the clients’ business, partially offset by increased client volumes related to the implementation of new contracts during 2010.

 

Payroll and related expenses.  (dollars in thousands):

 

		For the Year Ended December 31,
					% of					% of
		2010			Revenue		2009			Revenue		$ Change			% Change
ARM		$	480,091		37.2	%	$	533,526		44.4	%	$	(53,435	)	(10.0	)%
CRM		212,828			75.9	%	238,836			71.4	%	(26,008		)	(10.9	)%
Eliminations		—			—		(5,111		)	100.0	%	5,111			(100.0	)%
Total		$	692,919		44.1	%	$	767,251		50.2	%	$	(74,332	)	(9.7	)%

 

The decrease in ARM’s payroll and related expenses as a percentage of revenue was primarily due to higher revenue from reimbursable costs and fees. Included in ARM’s payroll and related expenses for 2009 was $5.1 million of intercompany expense to CRM, for services provided to ARM.

 

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

 

Selling, general and administrative expenses.  (dollars in thousands):

 

		For the Year Ended December 31,
					% of					% of
		2010			Revenue		2009			Revenue		$ Change			% Change
ARM		$	349,886		27.1	%	$	408,233		34.0	%	$	(58,347	)	(14.3	)%
CRM		57,019			20.3	%	59,892			17.9	%	(2,873		)	(4.8	)%
Total		$	406,905		25.9	%	$	468,125		30.6	%	$	(61,220	)	(13.1	)%

 

The decrease in ARM’s selling, general and administrative expenses as a percentage of revenue was primarily due

 

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