NCO Group Announces Lower Second Quarter Results

NCO Group (Nasdaq: NCOG) reported lower earnings for the second quarter of 2006 on special charges related to acquisitions and legacy systems restructuring.

It reported net income of $10.0 million, or $0.31 per diluted share; including special charges of $1.4 million, net of taxes, or $0.04 per diluted share. This compares to net income of $14.1 million, or $0.42 per diluted share, in the second quarter of 2005. Guidance for the second quarter was $0.26 to $0.31 per diluted share, including special charges of $0.04 per diluted share.

The special charges are associated with the previously announced restructuring of the Company’s legacy operations to streamline the Company’s cost structure, the integration of recent acquisitions, and costs associated with the Company’s proposed merger. The restructuring charges are included as a separate line item under operating costs and expenses, and the integration and merger charges are included in payroll and related expenses, and selling, general and administrative expenses. The Company continues to evaluate the timing of the activities associated with the special charges in order to maximize the benefits to the Company.

NCO is organized into four divisions that include Accounts Receivable Management North America (“ARM North America”), Customer Relationship Management (“CRM”), Portfolio Management, and Accounts Receivable Management International (“ARM International”).

Overall revenue in the second quarter of 2006 was $296.2 million, an increase of 17.3%, or $43.8 million, from revenue of $252.4 million in the second quarter of 2005.

For the second quarter of 2006, ARM North America’s revenue was $211.8 million as compared to $192.5 million in the second quarter of 2005. The increase was primarily attributable to the acquisition of Risk Management Alternatives, Inc. (“RMA”), which was completed on September 12, 2005, and an $8.8 million increase in inter-company revenue from Portfolio Management, which is eliminated in consolidation. During the quarter, this division recorded approximately $1.3 million, net of taxes, of restructuring charges, costs associated with integration of the Company’s recent acquisitions, and merger costs.

For the second quarter of 2006, CRM’s revenue was $60.1 million as compared to $43.8 million in the second quarter of 2005. The increase was primarily attributable to new clients ramping up business during the second half of 2005 and the first half of 2006. While these new contracts will allow this division to expand its revenue base in 2006, the deployment of large numbers of seats on an expedited schedule adversely impacts near-term profitability because the operating expenses are incurred in advance of the revenue growth. Partially offsetting the revenue from new clients was the previously discussed reduction in revenue from a major client where NCO ceased providing certain services when the client exited the consumer long-distance business due to changes in telecommunications laws.

For the second quarter of 2006, Portfolio Management’s revenue was $47.6 million compared to $33.0 million in the second quarter of 2005. The increase included additional revenue from portfolio assets acquired as part of two business combinations during the third quarter of 2005. Portfolio Management recorded $4.0 million of revenue during the second quarter of 2006 from the sale of portions of several older portfolios with little or no remaining carrying value, as compared to $5.3 million during the second quarter of 2005.

For the second quarter of 2006, ARM International’s revenue was approximately $6.0 million compared to $3.3 million in the second quarter of 2005. The increase in revenue was primarily attributable to the acquisition of the international operations of RMA. During the quarter this division recorded approximately $133,000, net of taxes, of restructuring and integration charges, net of taxes.

The Company will not host an investor conference call following the earnings release.

As previously announced, on July 21, 2006, the Company entered into a definitive agreement to be acquired by One Equity Partners (“OEP”) and Michael J. Barrist, Chairman, President and Chief Executive Officer of the Company, in a transaction valued at approximately $1.26 billion. Other members of executive management will be given an opportunity to invest in the surviving company and Mr. Barrist will continue as Chief Executive Officer.

Under the terms of the agreement, NCO shareholders will receive $27.50 in cash for each share of NCO common stock they hold as of the effective date of the merger. The price represents a 44 percent premium to the closing price of the stock prior to the Company’s May 16, 2006 announcement of the receipt of the proposal from Mr. Barrist.

The merger agreement was negotiated on behalf of NCO by a special committee of the Board of Directors composed entirely of independent members of the Board. Upon the unanimous recommendation of the special committee, the Board of Directors has approved the merger agreement and has recommended to NCO’s shareholders that they adopt the agreement.

The transaction is expected to be completed in the fourth quarter of 2006, subject to receipt of shareholder approval, closing of the debt financing and customary regulatory approvals as well as the satisfaction of other customary closing conditions.