<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 7, 1998
REGISTRATION NO. 333-57429
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
NATIONWIDE CREDIT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
GEORGIA 7322 58-1900192
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
MICHAEL LORD
CHIEF FINANCIAL OFFICER
6190 POWERS FERRY ROAD, 4TH FLOOR,
ATLANTA, GEORGIA 30339
(770) 644-7452
(NAME, ADDRESS, INCLUDING ZIP
CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT
FOR SERVICE)
COPIES TO:
STEPHEN M. BESEN, ESQ. ROD D. MILLER, ESQ.
WEIL, GOTSHAL & MANGES LLP WEIL, GOTSHAL & MANGES LLP
767 FIFTH AVENUE 100 CRESCENT COURT, SUITE 1300
NEW YORK, NEW YORK 10153 DALLAS, TEXAS 75201
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
----------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(A) REGISTRATION FEE(B)
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<S> <C> <C>
10 1/4% Senior Notes due 2008.................. $100,000,000 $29,500
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</TABLE>
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(a) Estimated solely for the purpose of calculating the registration fee.
(b) Calculated in accordance with Rule 457(f) under the Securities Act of
1933, as amended. Fee previously paid in connection with initial filing.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. THESE +
+SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE +
+TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT +
+CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL +
+THERE BE ANY SALE OF THESE SECURITIES IN AND STATE IN WHICH SUCH OFFER, +
+SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION +
+UNDER THE SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION DATED OCTOBER 7, 1998
OFFER TO EXCHANGE ALL OUTSTANDING 10 1/4% SENIOR NOTES DUE 2008
FOR
10 1/4% SERIES A SENIOR NOTES DUE 2008
OF
NATIONWIDE CREDIT, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON , 1998, UNLESS EXTENDED.
Nationwide Credit, Inc. ("NCI" or the "Company") hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus and the
accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange an aggregate principal amount of up to $100,000,000 of 10
1/4 % Series A Senior Notes due 2008 (the "New Notes") of the Company, which
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), for a like principal amount of the issued and outstanding 10
1/4 % Senior Notes due 2008 (the "Old Notes") of the Company from the
registered holders thereof (the "Holders"). The terms of the New Notes are
identical in all material respects to the Old Notes, except for certain
transfer restrictions relating to the Old Notes. The new Notes will evidence
the same class of debt as the Old Notes and will be issued pursuant to, and
entitled to the benefits of, the Indenture governing the Old Notes (the
"Indenture"). As used herein, the term "Notes" means the Old Notes and the New
Notes, treated as a single class.
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 P.M., New York City time, on , 1998, unless
extended (as so extended, the "Expiration Date"). Tenders of Old Notes may be
withdrawn at any time prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange pursuant to the Exchange Offer. The Exchange Offer is subject to
certain other customary conditions. See "The Exchange Offer."
On January 28, 1998, the Company issued $100,000,000 principal amount of Old
Notes (the "Offering") pursuant to exemptions from, or transactions not subject
to, the registration requirements of the Securities Act and applicable state
securities laws.
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after January 15, 2003, at the redemption prices set
forth herein, plus accrued and unpaid interest and Liquidated Damages (as
defined), if any, to the date of redemption. In addition, at any time prior to
January 15, 2001, the Company may, at its option, redeem up to 35% of the
aggregate principal amount of the Notes at a redemption price equal to 110.25%
of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of redemption, with the net
proceeds of an initial public offering of common stock of the Company or a
capital contribution to the Company's common equity of the net cash proceeds of
an initial public offering of the Company's direct parent; provided that at
least $50.0 million of the aggregate principal amount of Notes remains
outstanding immediately after the occurrence of such redemption. See
"Description of Notes--Optional Redemption."
Upon the occurrence of a Change of Control (as defined), the holders of the
Notes will have the right to require the Company to repurchase their Notes, in
whole or in part, at a price equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase. See "Description of New Notes--Repurchase at
the Option of Holders--Change of Control."
The New Notes will constitute, and the Old Notes currently constitute,
general unsecured obligations of the Company, rank senior in right of payment
to all subordinated Indebtedness (as defined) of the Company and rank pari
passu in right of payment with all current and future unsecured senior
Indebtedness of the Company, including all borrowings under the Credit
Agreement (as defined). However, all borrowings under the Credit Agreement are
secured by a first priority Lien (as defined) on substantially all of the
assets of the Company and its Domestic Subsidiaries (as defined). The Company
currently has no Domestic Subsidiaries; however, all of the Company's future
Domestic Subsidiaries, if any, will jointly and severally guarantee the Notes
on a senior basis. As of July 31, 1998, approximately $24.9 million was
outstanding under the Credit Agreement. See "Capitalization" and "Description
of New Notes." The Company presently has no indebtedness, and has no firm
arrangements or intention to incur any significant indebtedness, ranking junior
to the Notes, although the Company does have certain capital lease obligations.
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on the
Old Notes, from January 28, 1998. Old Notes accepted for exchange will cease to
accrue interest from and after the date of consummation of the Exchange Offer.
Holders of Old Notes whose Old Notes are accepted for exchange will not receive
any payment in respect of accrued interest on such Old Notes.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement (as
defined). Based on interpretations by the staff of the U.S. Securities and
Exchange Commission (the "SEC" or the "Commission") as set forth in no-action
letters issued to third parities, the Company believes that New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by Holders thereof (other than any
Holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such Holders' business and such
Holders have no arrangement with any person to engage in a distribution of such
New Notes. However, the SEC has not considered the Exchange Offer in the
context of a no-action letter and there can be no assurance that the staff of
the SEC would make a similar determination with respect to the Exchange Offer
as in such other circumstances. Each Holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of such New Notes and has no arrangement or understanding to
participate in a distribution of New Notes. Each broker-dealer that receives
New Notes for its own account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. Broker-dealers who did not acquire Old Notes as a result of market-
making or other trading activities may not participate in the Exchange Offer.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of New Notes received in exchange for Old
Notes where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company had agreed
that, for a period of one year after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. In the event
the Company terminates the Exchange Offer and does not accept for exchange any
Old Notes, the Company will promptly return the Old Notes to the Holders
thereof. See "The Exchange Offer."
There is no existing trading market for the New Notes, and there can be no
assurance regarding the future development of a market for the New Notes.
Lehman Brothers Inc. (the "Initial Purchaser") has advised the Company that it
currently intends to make a market in the New Notes. The Initial Purchaser is
not obligated to do so, however, and any market-making with respect to the New
Notes may be discontinued at any time without notice. The Company does not
intend to apply for listing or quotation of the New Notes on any securities
exchange or stock market.
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 OF THIS PROSPECTUS FOR A DESCRIPTION
OF CERTAIN RISKS TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD NOTES IN THE
EXCHANGE OFFER.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the SEC a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the New
Notes offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain parts
of which are omitted in accordance with the rules and regulations of the SEC.
For further information with respect to the Company and the New Notes offered
hereby, reference is made to the Registration Statement. Any statements made
in this Prospectus concerning the provisions of certain documents are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement otherwise
filed with the SEC.
As of the date of the effectiveness of the Registration Statement, the
Company will become subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will file reports, proxy statements and other information
with the SEC. The Registration Statement, the exhibits forming a part thereof
and the reports, proxy statements and other information filed by the Company
with the SEC in accordance with the Exchange Act may be inspected, without
charge, at the Public Reference Section of the SEC located at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the SEC
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60601-
2511. Copies of all or any portion of the material may be obtained from the
Public Reference Section of the SEC upon payment of the prescribed fees. The
SEC also maintains a Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC.
The Company will furnish holders of the New Notes offered hereby with annual
reports containing, among other information, audited financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited financial information for the first three quarters of
each fiscal year. The Company will also furnish such other reports as it may
determine or as may be required by law. In addition, in the event that the
Company is not required to be subject to the reporting requirements of the
Exchange Act in the future, the Company will be required under the Indenture,
pursuant to which the Old Notes were, and the New Notes will be, issued, to
continue to file with the SEC, and to furnish Holders of the New Notes with,
the information, documents and other reports specified in Sections 13 and
15(d) of the Exchange Act.
------------------
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). ALTHOUGH THE SAFE HARBOR
PROTECTION AFFORDED BY SECTION 27A OF THE SECURITIES ACT IS NOT APPLICABLE TO
THE FORWARD-LOOKING STATEMENTS MADE IN THIS PROSPECTUS, ALL STATEMENTS (OTHER
THAN STATEMENTS OF HISTORICAL FACT) MADE IN THIS PROSPECTUS, INCLUDING,
WITHOUT LIMITATION, THE STATEMENTS UNDER "PROSPECTUS SUMMARY," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"BUSINESS" AND LOCATED ELSEWHERE HEREIN REGARDING INDUSTRY PROSPECTS AND THE
COMPANY'S FINANCIAL POSITION, ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE
COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS
WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY
STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION,
THE FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS UNDER "RISK FACTORS."
CERTAIN FACTORS THAT MAY CAUSE SUCH MATERIAL DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO: (1) INCREASED COMPETITION, (2) INCREASED COSTS, (3) INABILITY TO
CONSUMMATE ACQUISITIONS ON ATTRACTIVE TERMS, (4) INCREASES IN THE COMPANY'S
COST OF BORROWINGS OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL ON
TERMS CONSIDERED REASONABLE BY MANAGEMENT, (5) ADVERSE STATE, FEDERAL OR
FOREIGN LEGISLATION OR ECONOMIC CONDITIONS IN THE MARKETS IN WHICH THE COMPANY
MAY COMPETE AND (6) THE ABILITY TO IMPLEMENT THE OPERATING IMPROVEMENT PLAN
(AS DEFINED). MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE COMPANY
AND ITS MANAGEMENT. FOR FURTHER INFORMATION OR OTHER FACTORS THAT COULD AFFECT
THE FINANCIAL RESULTS OF THE COMPANY AND SUCH FORWARD-LOOKING STATEMENTS, SEE
"RISK FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY, OR PERSONS ACTING ON ITS BEHALF, ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
i
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read with, and is qualified in its entirety
by, the more detailed information and financial statements (and notes thereto)
appearing elsewhere in this Prospectus. As used in this Prospectus, unless the
context requires otherwise, all references to either "NCI" or the "Company"
mean Nationwide Credit, Inc., a Georgia corporation, its predecessors and its
subsidiaries, after giving effect to the transactions described below under "--
The Transactions."
THE COMPANY
OVERVIEW
The Company is among the largest independent providers of accounts receivable
management services in the United States, as measured by the aggregate
principal value of consumer debt placed by credit grantors for collection
(i.e., "placement volume"). The Company offers contingent fee collection, pre-
chargeoff accounts receivable management and on-site collection management
services, primarily to financial institutions, government agencies,
telecommunications companies and healthcare providers. The Company provides
sophisticated, customized past-due account collection and accounts receivable
management services to its clients through a nationwide network of 15 call
centers. Pro forma for the Transactions (as defined), the Company had revenues
of $121.3 million, Adjusted EBITDA (as defined) of $22.4 million and a net loss
of $18.7 million for the year ended December 31, 1997 and actual revenue of
$54.6 million, Adjusted EBITDA of $9.6 million and a net loss of $10.7 million
for the six months ended June 30, 1998. See "Unaudited Condensed Consolidated
Pro Forma Financial Information."
The Company has historically generated substantially all of its revenue from
contingent fees received for collection services provided to a wide variety of
credit grantors. Contingent fee services, which are the traditional services
provided in the accounts receivable management industry, involve collecting
delinquent consumer debt placed with the collection services provider in
exchange for a percentage of realized collections. The Company has a client
base that includes American Express, AT&T, BellSouth, the U.S. Department of
Education (the "DOE"), First Union, General Motors Acceptance Corporation
("GMAC"), the U.S. General Services Administration (the "GSA"), MCI, Mobil,
NationsBank, Novus (issuer of DISCOVER Card) and Texaco.
In order to provide more comprehensive collection solutions for its clients,
the Company has begun providing pre-chargeoff accounts receivable management
services, in which the Company contacts debtors earlier in the collection cycle
in an effort to bring the account current before the credit grantor formally
charges off the past-due balance. For these services, the Company is typically
paid a monthly fee for each account it manages and, in certain circumstances,
additional performance-based fees. The Company has also begun contracting with
credit grantors to provide on-site accounts receivable management, collections
personnel and related services. The Company believes that there is significant
growth potential in these service areas, primarily due to increased outsourcing
of accounts receivable management services by credit grantors.
In the first quarter of 1997, a new senior management team, led by Jerrold
Kaufman as President and Chief Executive Officer, implemented a business
strategy focused on increasing revenues with existing clients and developing
new relationships with other large credit grantors while improving the
Company's cost structure and customer service through an operating improvement
plan (the "Operating Improvement Plan"). The Operating Improvement Plan
includes (i) reducing the number of information systems utilized by the
Company, (ii) reducing overhead expense by reducing corporate staff headcount
through attrition and (iii) significantly reducing the number of unprofitable
and lower margin clients. In connection with the merger of NCI Merger
Corporation, a Georgia corporation ("Merger Sub") and a wholly owned subsidiary
of NCI Acquisition Corporation, a Delaware corporation ("NAC"), with and into
NCI, with NCI as the surviving entity (the "Merger"), on December 31, 1997,
management, along with the Investor Group (as defined) and NAC, approved a
modification to the Operating Improvement Plan to rationalize the Company's
operating facilities which will result in additional headcount reduction and
relocation of personnel.
1
<PAGE>
Through its demonstrated collection performance and improved customer
service, the Company has recently received new contracts with the DOE, MCI,
Chrysler and the GSA. In addition, the Company is experiencing growth in its
revenue from pre-chargeoff services. For example, the Company recently
successfully completed a pilot pre-chargeoff program for a significant client
that is being implemented on a larger scale in 1998 with the Company as a key
service provider.
The Company's principal executive offices are located at 6190 Powers Ferry
Road, 4th Floor, Atlanta, Georgia 30339, and its telephone number is (770) 644-
7452.
INDUSTRY TRENDS
The total amount of revenue generated by all contingent fee collection
companies grew approximately 10% in 1996 to approximately $5.5 billion,
according to M. Kaulkin & Associates, an industry advisory firm. The Company
believes that it will benefit from the following trends:
INCREASE IN CONSUMER DEBT AND DELINQUENCIES. Consumer debt has grown in the
United States from $3.8 trillion in 1991 to $5.4 trillion in 1996, representing
a compound annual growth rate of 7.3%. This increase in consumer debt has been
accompanied by higher levels of delinquencies. From 1991 to 1997, bank card
delinquency rates ranged from a low of 3.3% in 1994 to an estimated 4.9% in
1997. Largely as a result of these trends, placements to contingent fee
companies have grown from approximately $43.7 billion in 1990 to approximately
$122.3 billion in 1996, a compound annual growth rate of 18.7%, according to
the American Collectors Association ("ACA"), an industry trade association.
CORPORATE OUTSOURCING. Increasing numbers of companies are outsourcing non-
core functions that can be more efficiently conducted by specialized firms. By
outsourcing these functions, companies are able to focus on core revenue
generating activities and reducing costs, thereby improving productivity. In
particular, the Company believes many credit grantors are recognizing the
advantages of outsourcing accounts receivable management as a result of factors
including (i) the increasing complexity of such functions, (ii) rapid growth in
consumer debt levels and an increase in delinquencies, (iii) changing
regulations applicable to debt collection practices and (iv) the development of
sophisticated call management centers requiring substantial capital investment,
technical information systems capabilities and human resource commitments. The
Company believes that outsourcing these services provides value to clients
through lower delinquencies, improved customer relations and reduced
chargeoffs.
GOVERNMENT OUTSOURCING. Government agencies on the federal, state and local
levels are also increasing their use of private collection agencies. A 1995
study by the Mercer Group, an independent industry research firm, showed that
from 1985 to 1995 local governments had significantly increased their use of
private collection agencies. Similarly, an estimated 32 of the 52 federal
government agencies currently utilize private collection agencies to assist in
the collection of a portion of the approximately $200 billion of non-tax
related debt owed to the federal government. Private agencies have also
demonstrated a greater effectiveness in debt collection, as evidenced by a 1994
study by the General Accounting Office which found that the average collection
rate of private collection agencies was 45% higher than that of state
government agencies.
INDUSTRY CONSOLIDATION. The accounts receivable management industry is highly
fragmented, consisting of approximately 6,300 collection agencies as of 1997,
according to the ACA. According to M. Kaulkin & Associates, the ten largest
agencies accounted for approximately 17% and 20% of the total 1995 and 1996
contingent revenue, respectively, for the industry. The Company believes that
the industry is entering a period of consolidation driven by a number of
factors, including (i) the economies of scale available to larger operators,
(ii) new technology which facilitates the collection process, (iii) the ability
of large operators to provide services nationally and (iv) increased licensing
and regulatory requirements.
2
<PAGE>
CLIENT CONSOLIDATION. The largest credit-granting industries, including
financial services, telecommunications, healthcare and retail, are experiencing
continued consolidation. As a result, the operations of many credit grantors
are becoming increasingly complex and the Company believes such credit grantors
are shifting account placements to accounts receivable management companies
that have the ability to service a large volume of placements on a national
basis.
BUSINESS STRATEGY
The Company believes it has the following competitive strengths: (i)
reputation as an industry leader, (ii) collection performance, (iii) national
presence, (iv) strong executive and call center management and (v) a
distinguished client base. See "Business--Competitive Strengths." The Company's
senior management team has developed a business strategy emphasizing the
following key components:
FOCUS ON CORE COLLECTION ACTIVITIES. The Company believes it has a
competitive advantage in the marketplace based on its reputation and
performance as a leading collection services provider serving a wide range of
credit grantors. Due to favorable industry trends, the Company believes that
the contingent placement market will continue to experience attractive growth,
and the Company intends to rely on its strong collection performance to attract
a greater share of contingent placements from existing clients and to develop
new contingent placement relationships.
EXPAND PRE-CHARGEOFF SERVICES. The Company intends to further expand its pre-
chargeoff services to provide more comprehensive collection solutions for its
clients. In response to significantly higher delinquencies, credit grantors are
increasingly outsourcing their pre-chargeoff accounts receivable management
functions. Growth in the pre-chargeoff business is expected to complement and
diversify the Company's existing revenue base by creating a more predictable
revenue stream through the establishment of additional longer-term, fixed-fee
contracts.
IMPLEMENT OPERATING IMPROVEMENT PLAN. In the first quarter of 1997, the
Company's new management team began implementing its Operating Improvement Plan
designed to improve productivity, further integrate the Company's various
acquired businesses and reduce costs. This plan includes (i) reducing the
number of information systems utilized by the Company, (ii) reducing overhead
expense by reducing corporate staff headcount through attrition and (iii)
significantly reducing the number of unprofitable and lower margin clients. In
connection with the Merger on December 31, 1997, management, along with the
Investor Group and NAC, approved a modification to the Operating Improvement
Plan to rationalize the Company's operating facilities which will result in
additional headcount reduction and relocation of personnel.
LEVERAGE SIZE AND NATIONAL REACH. The Company believes that its national
presence, infrastructure and operating expertise allow it to provide superior
accounts receivable management for large national credit grantors, including
the federal government. The Company intends to capitalize on its ability to
manage large national placements by taking advantage of opportunities that
arise from consolidation among credit grantors and by extending its non-
traditional services to clients located throughout the United States.
UTILIZE TECHNOLOGY TO INCREASE COLLECTIONS. Since the beginning of 1994, the
Company has made capital expenditures of over $15 million in its
telecommunications equipment, software and computer systems. These investments
enable the Company to operate more efficiently and manage large accounts
receivable programs. The Company is able to customize procedures and reports to
meet the varying needs of its clients. The Company believes that these capital
expenditures and technological capabilities will continue to enhance its
competitive position.
GROW THROUGH ACQUISITIONS. The Company has completed acquisitions of other
collection service providers to expand its client base, acquire new service
capabilities and enter new market segments. For example,
3
<PAGE>
the Company acquired Consolidated Collection Co. ("Consolidated") in February
1997, to expand its telecommunications business. The Company intends to review
acquisition candidates on an ongoing basis and will seek to make opportunistic
acquisitions to further solidify its market position. The Company does not
currently have any agreements with respect to future acquisitions.
Management's strategic focus on increasing revenues with existing clients and
developing new relationships with large credit grantors has begun to show
positive results. The Company has recently consummated several significant
contracts, including contracts with a major telecommunications company,
contracts with two large healthcare providers, additional contracts with
existing clients in the banking sector and a contract with a new client in the
banking sector.
COMPANY HISTORY
On December 31, 1997, NAC, Merger Sub, the Company, First Data Corporation
("First Data") and its wholly owned subsidiary, First Financial Management
Corporation ("FFMC"), entered into an Agreement and Plan of Merger (the "Merger
Agreement") pursuant to which Merger Sub merged with and into the Company, with
the Company as the surviving corporation. The merger consideration consisted of
$155.2 million in cash and up to an additional $3.7 million, to be paid
pursuant to the terms of an earn-out agreement in the event the Company
achieves certain performance targets for the year ended December 31, 1998. The
Company has reached an agreement with First Data with respect to various
matters relating to the acquisition of the Company by its current shareholders
in December 1997. The settlement includes a cash payment of $10.9 million to
the Company. The Company intends to use the cash payment to reduce indebtedness
under its credit facility by approximately $6.0 million, pay approximately $2.9
million in various expenses relating to the Company's operations under First
Data management prior to January 1998, including obligations to the Federal
Trade Commission (the "FTC") and the DOE, and to increase cash available for
working capital and other corporate operations by approximately $2.0 million.
The Merger and related fees were initially financed through borrowings of
$125.0 million against a $133.0 million senior credit facility (the
"Acquisition Facilities") provided by Lehman Commercial Paper Inc. and a
contribution of $40.2 million of equity capital. The Acquisition Facilities,
including the fees and expenses related thereto, were refinanced through (i)
$60.0 million of senior secured debt (the "Senior Credit Facilities"), of which
$25.0 million was drawn concurrent with the consummation of the Offering, (ii)
the proceeds of the Offering and (iii) cash on hand.
The Merger, the Acquisition Facilities, the Senior Credit Facilities and the
Offering, together with the application of the proceeds from the Acquisition
Facilities, the Senior Credit Facilities and the Offering, are collectively
referred to as the "Transactions."
THE EQUITY INVESTORS
NAC and Merger Sub were formed by affiliates of Centre Partners Management
LLC ("Centre Partners"), affiliates of Weiss, Peck & Greer, L.L.C. ("WPG") and
Avalon Investment Partners, LLC ("Avalon" and, together with Centre Partners
and WPG, the "Investor Group"). Centre Partners is a private investment firm
that manages the commitments and assets of Centre Capital Investors II, L.P.
and related entities. Centre Capital Investors II, L.P. is a $450 million
private equity fund raised in 1995. Since its inception in 1986, Centre
Partners and its predecessors have invested more than $1.8 billion in nearly 50
separate investments. Weiss, Peck & Greer, L.L.C. is an investment firm that
manages over $16 billion in public equity and fixed income securities for
institutional and individual investors. Since its inception in 1970, Weiss,
Peck & Greer, L.L.C. and its affiliates have managed 12 private equity and
venture capital funds with $1.2 billion in aggregate committed capital and more
than 240 investments. Avalon, formed in 1997, is a private investment firm
specializing in transactions in the financial services and related industries.
4
<PAGE>
THE EXCHANGE OFFER
On January 28, 1998, the Company issued $100.0 million principal amount of
Old Notes. The Old Notes were sold pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. Lehman Brothers Inc. (the "Initial
Purchaser"), as a condition to its purchase of the Old Notes, required that the
Company agree to commence the Exchange Offer following the offering of the Old
Notes. The New Notes will evidence the same class of debt as the Old Notes and
will be issued pursuant to, and entitled to the benefits of the Indenture.
SECURITIES OFFERED.......... Up to $100.0 million aggregate principal amount
of the Company's 10 1/4% Series A Senior Notes
due 2008, which have been registered under the
Securities Act (the "New Notes"). The terms of
the New Notes and the Old Notes are identical in
all material respects, except for certain
transfer restrictions relating to the Old Notes.
THE EXCHANGE OFFER.......... The New Notes are being offered in exchange for a
like principal amount of Old Notes. The issuance
of the New Notes is intended to satisfy
obligations of the Company contained in the
Registration Rights Agreement, dated January 28,
1998, between the Company and the Initial
Purchaser (the "Registration Rights Agreement").
For procedures for tendering the Old Notes
pursuant to the Exchange Offer, see "The Exchange
Offer."
TENDERS, EXPIRATION DATE;
WITHDRAWAL.................
The Exchange Offer will expire at 5:00 P.M., New
York City time, on , 1998, or such later
date and time to which it is extended (as so
extended, the "Expiration Date"). A tender of Old
Notes pursuant to the Exchange Offer my be
withdrawn at any time prior to the Expiration
Date. Any Old Note not accepted for exchange for
any reason will be returned without expense to
the tendering Holder thereof as promptly as
practicable after the expiration or termination
of the Exchange Offer.
FEDERAL INCOME TAX The exchange pursuant to the Exchange Offer
CONSEQUENCES................ should not result in any income, gain or loss to
the holders or the Company for federal income tax
purposes. See "Certain U.S. Income Tax
Consequences."
USE OF PROCEEDS............. There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer.
EXCHANGE AGENT.............. State Street Bank and Trust Company is serving as
the Exchange Agent in connection with the
Exchange Offer.
SHELF REGISTRATION Under certain circumstances described in the
STATEMENT................... Registration Rights Agreements, certain holders
of Notes (including holders who are not permitted
to participate in the Exchange Offer or who may
not freely resell New Notes received in the
Exchange Offer) may require the Company to file,
and use best efforts to cause to become
effective, a shelf registration statement under
the Securities Act, which would cover resales of
Notes by such holders. See "Description of New
Notes--Exchange Offer; Registration Rights."
5
<PAGE>
CONDITIONS TO THE EXCHANGE The Exchange Offer is not conditioned on any
OFFER....................... minimum principal amount of Old Notes being
tendered for exchange. The Exchange Offer is
subject to certain other customary conditions,
each of which may be waived by the Company. See
"The Exchange Offer--Conditions."
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate
that it will register Old Notes under the Securities Act. See "Description of
New Notes--Exchange Offer, Registration Rights." Based on interpretations by
the staff of the SEC, as set forth in no-action letters issued to third
parties, the Company believes that New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold or otherwise
transferred by holders thereof (other than any holder which is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders, other than broker-dealers,
have no arrangement with any person to participate in the distribution of such
New Notes. However, the SEC has not considered the Exchange Offer in the
context of a no-action letter and there can be no assurance that the staff of
the SEC would not make a similar determination with respect to the Exchange
Offer as in such other circumstances. Each Holder, other than a broker-dealer,
must acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of such New Notes and has no arrangement or understanding to
participate in a distribution of New Notes. Each broker-dealer that receives
New Notes for its own account in exchange for Old Notes must acknowledge that
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities and that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution." In
addition, to comply with the securities laws of certain jurisdictions, it may
be necessary to qualify for sale or register thereunder the New Notes prior to
offering or selling such New Notes. The Company has agreed, pursuant to the
Registration Rights Agreement, subject to certain limitations specified
therein, to register or qualify the New Notes for offer or sale under the
securities laws of such jurisdictions as any holder reasonably requests in
writing. Unless a holder so requests, the Company does not intend to register
or qualify the sale of the New Notes in any such jurisdictions. See "Risk
Factors-- Consequences of Failure to Exchange" and "The Exchange Offer--
Consequences of Exchanging Old Notes."
6
<PAGE>
SUMMARY DESCRIPTION OF NEW NOTES
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions relating to the Old Notes.
The New Notes will bear interest from the most recent date to which interest
has been paid on the Old Notes or, if no interest has been paid on the Old
Notes, from January 28, 1998. Accordingly, registered holders of New Notes on
the relevant record date for the first interest payment date following the
consummation of the Exchange Offer will receive interest accruing from the most
recent date to which interest has been paid on the Old Notes or, if no interest
has been paid, from January 28, 1998. Old Notes accepted for exchange will
cease to accrue interest from after the date of consummation of the Exchange
Officer. Holders whose Old Notes are accepted for exchange will not receive any
payment in respect of interest on such Old Notes otherwise payable on any
interest payment date the record date for which occurs on or after consummation
of the Exchange Offer.
SECURITIES OFFERED.......... $100.0 million in aggregate principal amount of
10 1/4% Series A Senior Notes due 2008 of the
Company.
MATURITY DATE............... January 15, 2008.
INTEREST PAYMENT DATES...... January 15 and July 15, commencing July 15, 1998.
MANDATORY REDEMPTION........ The Company will not be required to make
mandatory redemption or sinking fund payments
with respect to the Notes.
OPTIONAL REDEMPTION......... The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or
after January 15, 2003 at the redemption prices
set forth herein, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon
to the date of redemption. In addition, at any
time prior to January 15, 2001, the Company may,
at its option, redeem up to 35% of the aggregate
principal amount of the Notes at a redemption
price equal to 110.25% of the principal amount
thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date
of redemption, with the net cash proceeds of an
initial public offering of common stock of the
Company or a capital contribution to the
Company's common equity of the net cash proceeds
of an initial public offering of the Company's
direct parent; provided that at least $50.0
million in aggregate principal amount of Notes
remains outstanding immediately after the
occurrence of such redemption. See "Description
of New Notes -- Optional Redemption."
CHANGE OF CONTROL........... Upon the occurrence of a Change of Control, each
holder of Notes will have the right to require
the Company to purchase all or any part of such
holder's Notes at an offer price in cash equal to
101% of the aggregate principal amount thereof,
plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase.
See "Description of New Notes--Repurchase at the
Option of Holders--Change of Control."
RANKING..................... The New Notes will be, and the Old Notes
currently are, general unsecured obligations of
the Company, will rank senior in right of payment
to all subordinated Indebtedness of the Company
and will
7
<PAGE>
rank pari passu in right of payment with all
current and future unsecured senior Indebtedness
of the Company, including all borrowings under
the Credit Agreement. However, all borrowings
under the Credit Agreement are secured by a first
priority Lien on substantially all of the assets
of the Company and its Domestic Subsidiaries. As
of July 31, 1998, approximately $24.9 million was
outstanding under the Credit Agreement. See
"Description of New Notes." The Company presently
has no indebtedness, and has no firm arrangements
or intention to incur any significant
indebtedness, ranking junior to the Notes,
although the Company does have certain capital
lease obligations.
GUARANTEES.................. The Company currently has no Domestic
Subsidiaries; however, all of the Company's
future Domestic Subsidiaries, if any, will
jointly and severally guarantee (the "Subsidiary
Guarantees") the Company's payment obligations
under the Notes on a senior basis. The Subsidiary
Guarantees will rank senior to all existing and
future subordinated Indebtedness of the
Guarantors and pari passu with all other
unsecured senior Indebtedness of the Guarantors,
including the guarantees of Indebtedness under
the Credit Agreement. Any Guarantor's obligations
under the Credit Agreement, however, will be
secured by a first priority Lien on substantially
all of the assets of such Guarantor, and the
Indenture restricts, but does not prohibit, the
Guarantors from incurring additional secured
Indebtedness. Accordingly, such secured
Indebtedness will rank prior to the Subsidiary
Guarantees with respect to such assets. See "Risk
Factors--Effective Subordination" and
"Description of New Notes--Certain Covenants--
Subsidiary Guarantees."
CERTAIN COVENANTS........... The Indenture contains certain covenants that,
among other things, limit the ability of the
Company and its subsidiaries to (i) incur
additional Indebtedness and issue preferred
stock, (ii) pay dividends or make other
restricted payments, (iii) engage in sale and
leaseback transactions, (iv) create certain
liens, (v) enter into certain transactions with
affiliates, (vi) sell assets of the Company or
its subsidiaries or (vii) enter into certain
mergers and consolidations. In addition, under
certain circumstances, the Company will be
required to offer to purchase the Notes with the
net cash proceeds of certain sales and other
dispositions of assets at a price equal to 100%
of the principal amount of the Notes, plus
accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase.
See "Description of New Notes--Certain
Covenants."
EXCHANGE OFFER; Pursuant to the Registration Rights Agreement,the
REGISTRATION RIGHTS......... Company agreed to file a registration statement
(the "Exchange Offer Registration Statement")
with respect to the Exchange Offer. The
Registration Statement of which this Prospectus
is a part constitutes the Exchange Offer
Registration Statement. If, among other things,
any holder of the Transfer Restricted Securities
(as defined) notifies the Company that such
holder (A) is prohibited by law or Commission
8
<PAGE>
policy from participating in the Exchange Offer,
(B) may not resell the Exchange Notes acquired by
it in the Exchange Offer to the public without
delivering a prospectus, and the prospectus
contained in the Exchange Offer Registration
Statement is not appropriate or available for
such resales, or (C) is a broker-dealer and holds
Notes acquired directly from the Company or an
affiliate of the Company, then the Company will
be required to provide a shelf registration
statement (the "Shelf Registration Statement") to
cover resales of the Notes by the holders
thereof. If the Company fails to satisfy these
registration obligations, it will be required to
pay Liquidated Damages to the holders of the
Notes under certain circumstances. See
"Description of New Notes--Registration Rights;
Liquidated Damages."
SEE "RISK FACTORS" OF THIS PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISKS TO
BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER.
9
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
In the Transactions, the Company was acquired by NAC. The Company was
previously a wholly owned subsidiary of FFMC, a wholly owned subsidiary of
First Data. The Company was acquired in June 1990 by FFMC. First Data's October
1995 merger with FFMC, accounted for under the pooling of interests method,
resulted in the combination of First Data's accounts receivable management
company, ACB, with the Company. ACB was primarily the result of two businesses
purchased and combined by First Data in 1993. The following table presents
summary consolidated historical and unaudited consolidated pro forma financial
and other data of the Company, as of the dates and for the periods indicated.
The summary historical financial data should be read in conjunction with the
consolidated financial statements and related notes for these periods and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The summary historical
financial information for each of the years ended December 31, 1995, 1996 and
1997 has been derived from the consolidated financial statements of the
Company, which have been audited by Ernst & Young LLP, independent auditors.
The summary historical financial information for each of the years ended
December 31, 1993 and 1994 and the six months ended June 30, 1997 and 1998 has
been derived from unaudited consolidated financial statements of the Company
and, in the opinion of management, includes all adjustments (consisting of
normal, recurring, and other adjustments, which are primarily purchase
accounting adjustments associated with the two business acquisitions by First
Data in 1993, purchase accounting adjustments associated with the acquisition
of the Company by NAC and adjustments related to the extinguishment of debt in
January 1998), necessary for a fair presentation of financial position and
results of operations and cash flows as of the dates and for the periods
indicated. Consolidated results of operations for interim periods are not
necessarily indicative of results to be expected for the full year. The
unaudited pro forma consolidated income statement data and other operating data
give effect to the Transactions, the acquisition of Consolidated and the
settlement with First Data as if they had occurred at January 1, 1997. The
consolidated pro forma financial information is unaudited and does not purport
to represent what the Company's results of operations would actually have been
if the Transactions had occurred on January 1, 1997 and do not project the
Company's financial position or results of operations for any future periods.
See "Unaudited Condensed Consolidated Pro Forma Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------ ---------------------
PRO FORMA PREDECESSOR SUCCESSOR
1993 1994 1995 1996 1997 1997(1)(2) 1997 1998
------- -------- -------- -------- -------- ----------- ----------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue................. $91,672 $143,376 $154,506 $138,905 $119,013 $121,315 $61,268 $ 54,577
Expenses:
Salaries and benefits.. 49,824 74,353 81,114 73,636 66,376 67,143 34,540 32,751
Telecommunication...... 6,431 10,075 9,539 7,341 6,236 6,333 3,286 2,769
Occupancy.............. 3,473 4,959 5,148 4,602 5,014 5,061 2,396 2,123
Other operating and
administrative........ 17,531 22,963 27,102 26,586 22,516 23,969 10,790 7,332
Depreciation and
amortization.......... 7,467 10,002 11,893 12,021 14,364 24,483 6,865 12,256
Provision for merger
costs, employee
severance and office
closure (3)........... -- -- 13,562 4,323 679 679 679 --
Overhead charges from
First Data............ 917 1,434 1,545 1,389 1,190 -- 613 --
------- -------- -------- -------- -------- -------- ------- --------
Operating income
(loss)................. 6,029 19,590 4,603 9,007 2,638 (6,353) 2,099 (2,654)
Interest expense, net.. 526 680 501 241 122 12,334 63 7,175
------- -------- -------- -------- -------- -------- ------- --------
Income (loss) before
income taxes and
extraordinary item..... 5,503 18,910 4,102 8,766 2,516 (18,687) 2,036 (9,829)
Provision for income
taxes (4).............. 3,008 8,438 2,611 4,449 2,423 -- 1,274 --
------- -------- -------- -------- -------- -------- ------- --------
Income (loss) before
extraordinary item..... 2,495 10,472 1,491 4,317 93 (18,687) 762 (9,829)
Extraordinary loss on
debt extinguishment.... -- -- -- -- -- -- -- 869
------- -------- -------- -------- -------- -------- ------- --------
Net Income (loss)....... $ 2,495 $ 10,472 $ 1,491 $ 4,317 $ 93 $(18,687) $ 762 $(10,698)
======= ======== ======== ======== ======== ======== ======= ========
OTHER DATA:
Ratio of earnings to
fixed charges (5)...... 4.8x 10.2x 3.1x 6.2x 2.4x -- 3.4x --
Adjusted EBITDA (6)..... $13,496 $ 29,592 $ 30,058 $ 25,351 $ 21,169 $ 22,402 $11,196 $ 9,602
Adjusted EBITDA margin
(6).................... 14.7% 20.6% 19.5% 18.3% 17.8% 18.5% 18.3% 17.6%
Net cash provided (used)
by:
Operating activities... N/A N/A 20,973 23,898 14,624 N/A 6,083 9,176
Investing activities... N/A N/A (7,748) (7,824) (29,626) N/A (28,808) (2,049)
Financing activities... N/A N/A (14,488) (18,197) 12,281 N/A 19,627 (250)
Capital expenditures.... N/A $ 5,800 $ 5,016 $ 7,005 5,465 5,465 4,739 2,049
Pro Forma ratio of
Adjusted EBITDA to cash
interest expense (7)... 1.8x
Pro Forma ratio of total
indebtedness to
Adjusted EBITDA........ 5.6x
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
AS OF AS OF
DECEMBER 31, JUNE 30,
1997 1998
------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash.................................................... $ 1,388 $ 8,265
Total assets............................................ 190,865 169,859
Total indebtedness (8).................................. 113,901 124,875
Stockholder's equity.................................... 63,879 28,277
</TABLE>
- --------
(1) Assumes the acquisition of Consolidated and the consummation of the
Transactions (see "Prospectus Summary--the Transactions") occurred on
January 1, 1997, and gives pro forma effect to the consummation of the
Transactions and the application of the estimated net proceeds therefrom as
if each had occurred on January 1, 1997.
(2) In February 1997, the Company acquired certain assets of Consolidated for
$23.3 million. The acquisition was accounted for under the purchase method
of accounting and, accordingly, the operating results of Consolidated are
included in the Company's consolidated financial statements from the date
of acquisition.
(3) The provision for merger costs, employee severance and office closure
represents charges incurred as a result of integrating the operations of
the Company and ACB, which resulted from First Data's 1995 merger with
FFMC.
(4) On a pro forma basis, the Company's assumed effective tax rate is 42%. The
Company has provided a valuation allowance on the entire pro forma tax
benefit, as it is not "more likely than not" that the benefit will be
realized by the Company.
(5) For purposes of the ratio of earnings to fixed charges, (i) earnings
include earnings before income taxes and fixed charges and (ii) fixed
charges consist of interest on all indebtedness, amortization of deferred
financing costs and that portion of rental expense (one-third) that the
Company believes to be representative of interest expense. On a pro forma
basis, the Company's earnings were insufficient to cover fixed charges by
$18.6 million for the year ended December 31, 1997 and, on an historical
basis, $9.8 million for the six month period ended June 30, 1998.
(6) Adjusted EBITDA is earnings before interest, taxes, depreciation,
amortization, provision for merger costs, employee severance and office
closure, a non-recurring contract settlement expense of approximately $1.6
million, a non-recurring settlement expense with the Federal Trade
Commission ("FTC") and a non-recurring expense related to DOE chargebacks
aggregating to approximately $1.9 million during the year ended December
31, 1997. Adjusted EBITDA reconciles to net income as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------- ----------------------------
PRO FORMA PREDECESSOR SUCCESSOR
1993 1994 1995 1996 1997 1997 1997 1998
------- ------- ------- ------- ------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income (loss) $ 2,495 $10,472 $ 1,491 $ 4,317 $ 93 $(18,687) $ 762 $ (10,698)
Add: Depreciation and
amortization 7,467 10,002 11,893 12,021 14,364 24,483 6,865 12,256
Provision for merger
costs, employee
severance and office
closure -- -- 13,562 4,323 679 679 679 --
Elimination of
salaries and benefits
paid to former
executives of
Consolidated 105
Non-recurring contract
settlement -- -- -- -- 1,553 1,553 1,553 --
Non-recurring
settlement expense
with the FTC and
expenses associated
with DOE chargebacks -- -- -- -- 1,935 1,935 -- --
Interest expense, net 526 680 501 241 122 12,334 63 7,175
Provision for income
taxes 3,008 8,438 2,611 4,449 2,423 -- 1,274 --
Extraordinary loss on
debt extinguishment -- -- -- -- -- -- -- 869
------- ------- ------- ------- ------- -------- ------------ -------------
Adjusted EBITDA $13,496 $29,592 $30,058 $25,351 $21,169 $ 22,402 $ 11,196 $ 9,602
</TABLE>
The Company believes that Adjusted EBITDA presents a more meaningful
discussion than EBITDA since Adjusted EBITDA excludes non-recurring expenses
for which First Data has indemnified the Company, and for which the Company
will have no on-going cash requirements and which are expected to have no
impact on the on-going operations of the Company. Adjusted EBITDA does not
represent cash flows as defined by generally accepted accounting principles
and does not necessarily indicate that cash flows are sufficient to fund all
of the Company's cash needs. Adjusted EBITDA should not be considered in
isolation or as a substitute for net income (loss), cash flows from
operating activities or other measures of liquidity determined in accordance
with generally accepted accounting principles. The Adjusted EBITDA margin
represents Adjusted EBITDA as a percentage of revenue. Management believes
that these ratios should be reviewed by prospective investors because the
Company uses them as one means of analyzing its ability to service its debt,
the Company's lenders use them for the purpose of analyzing the Company's
performance and the Company understands that they are used by certain
investors as one measure of a company's historical ability to service its
debt. Not all companies calculate EBITDA in the same fashion and therefore
these ratios as presented may not be comparable to other similarly titled
measures of other companies.
(7) Cash interest expense includes an assumed commitment fee of 0.375% on the
unused portion of the Revolving Credit Facility and excludes approximately
$0.5 million of amortization of deferred financing charges for the year
ended December 31, 1997.
(8) Actual total indebtedness as of December 31, 1997 includes a $112.5 million
non-interest bearing note payable to First Data.
11
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following risk factors
before purchasing the Notes offered hereby. Certain statements in this
Prospectus that are not factual constitute "forward-looking statements." Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors, many of which are beyond the Company's control, that may cause
the actual results of the Company to be materially different from results
expressed or implied by such forward-looking statements. Such risks,
uncertainties and other factors include, but are not limited to, the
following:
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE OUTSTANDING INDEBTEDNESS
The Company is highly leveraged. As of July 31, 1998, the Company's total
debt was approximately $124.9 million and its total stockholder's equity was
approximately $28.3 million. The Company's fixed charges for the year ended
December 31, 1997, on a pro forma basis after giving effect to the
Transactions, would have exceeded its earnings by approximately $18.6 million.
The Company's operating results will be affected by significant fixed charges
related to its debt. See "Capitalization" and "Unaudited Condensed
Consolidated Pro Forma Financial Information" and "Selected Historical
Financial Information and Other Data."
The Company's ability to make scheduled payments of the principal of, or to
pay the interest on, or to refinance, its debt (including the Notes) is
dependent upon its future performance, which, to a certain extent, is subject
to general economic, financial, competitive, legislative, regulatory and other
factors beyond its control. Management believes that, based on current levels
of operations and anticipated improvements in operating results, cash flows
from operations and borrowings available under the Senior Credit Facilities
will be adequate to allow for anticipated capital expenditures for the next
several years, to fund working capital requirements and to make required
payments of principal and interest on its debt for the next several years.
However, if the Company is unable to generate sufficient cash flows from
operations in the future, it may be necessary for the Company to refinance all
or a portion of its debt or to obtain additional financing, but there can be
no assurance that the Company will be able to effect such refinancing or
obtain additional financing on commercially reasonable terms or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The degree to which the Company is leveraged could have important
consequences to the Company and the holders of Notes, including, but not
limited to, the following: (i) the Company's ability to obtain additional
financing in the future for acquisitions, working capital, capital
expenditures, general corporate or other purposes may be impaired, (ii) a
substantial portion of the Company's cash flow from operations will be
dedicated to debt service and unavailable for other purposes, (iii) certain of
the Company's borrowings may be at variable rates of interest, which could
result in higher interest expense in the event of increases in interest rates
and (iv) the Company is subject to a variety of restrictive covenants,
including, without limitation, significant financial and operating covenants
under the Senior Credit Facilities, the failure to comply with which could
result in events of default that, if not cured or waived, could restrict the
Company's ability to make payments of principal of, and interest on, the
Notes. See "Description of Senior Credit Facilities" and "Description of New
Notes."
EFFECTIVE SUBORDINATION
The New Notes will be, and the Old Notes are, general unsecured obligations
of the Company, rank senior in right of payment to all existing and future
subordinated Indebtedness of the Company and rank pari passu in right of
payment with all current and future unsecured senior Indebtedness of the
Company, including all borrowings under the Credit Agreement. The Company
currently has no Domestic Subsidiaries, however all of the Company's future
Domestic Subsidiaries, if any, will jointly and severally guarantee the Notes
on a senior unsecured basis. However, all borrowings under the Credit
Agreement are secured by a first priority lien on substantially all of the
assets of the Company and its Domestic Subsidiaries. The Subsidiary Guarantees
will
12
<PAGE>
rank senior to all existing and future subordinated Indebtedness of the
Guarantors and pari passu with all other unsecured senior Indebtedness of the
Guarantors, including guarantees of Indebtedness under the Credit Agreement.
Any Guarantor's obligations under the Credit Agreement, however, will be
secured by a lien on substantially all of the assets of such Guarantor, and
the Indenture restricts, but does not prohibit, the Guarantors from incurring
additional secured Indebtedness. The Credit Agreement is secured by
substantially all of the assets of the Company and its Domestic Subsidiaries.
Although the Notes constitute senior Indebtedness of the Company, the holders
of secured Senior Indebtedness would have a prior claim to the assets securing
such Indebtedness. In the event of any insolvency proceeding involving the
Company, the obligations of the Company under the Notes would be effectively
subordinated to any secured Senior Indebtedness of the Company. As of June 30,
1998, the aggregate principal amount of Indebtedness under the Credit
Agreement was approximately $24.9 million. See "Description of Senior Credit
Facilities."
RESTRICTIVE DEBT COVENANTS
The Indenture and the Senior Credit Facilities contain certain covenants
that restrict, among other things, the Company's ability to incur additional
Indebtedness, incur liens, pay dividends or make certain other restricted
payments, make investments, consummate certain asset sales, enter into certain
transactions with affiliates, impose restrictions on the ability of a
subsidiary to pay dividends or make certain payments to the Company, merge or
consolidate with any other person or sell, assign, transfer, lease, convey, or
otherwise dispose of all or substantially all of the assets of the Company. In
addition, the Senior Credit Facilities contain certain other and more
restrictive covenants including restrictions on prepaying Indebtedness, such
as the Notes, and also require the Company to maintain specified financial
ratios and to satisfy certain financial condition tests. The Company's ability
to meet these financial ratio and financial condition tests can be affected by
events beyond its control and there can be no assurance that the Company will
meet those tests. A breach of any of these covenants could result in a default
under the Senior Credit Facilities or the Indenture. If an event of default
under the Senior Credit Facilities should occur, the lenders thereunder could
elect to declare all amounts outstanding thereunder, together with accrued
interest, to be immediately due and payable. If the Company were unable to pay
those amounts, the lenders thereunder could proceed against the collateral
granted to them to secure that Indebtedness. Substantially all the assets of
the Company and its Domestic Subsidiaries will be pledged as collateral to
secure the Company's obligations under the Senior Credit Facilities. If the
indebtedness under the Senior Credit Facilities were to be accelerated, there
can be no assurance that the assets of the Company would be sufficient to
repay in full that Indebtedness and the other Indebtedness of the Company,
including the Notes. See "Description of New Notes--Certain Covenants" and
"Description of Senior Credit Facilities."
CLIENT CONCENTRATION
Revenue from American Express for the three months ended June 30, 1998 and
the years ended December 31, 1995, 1996 and 1997 accounted for approximately
34%, 27%, 30% and 28% of the Company's revenue, respectively. Revenue from the
DOE for six months ended June 30, 1998 and the years ended December 31, 1995,
1996 and 1997 accounted for approximately 11%, 26%, 23% and 17% of the
Company's revenue, respectively. In addition, the Company's ten largest
clients accounted for approximately 66% of the Company's revenue for the
fiscal year 1996, for approximately 63% of the Company's revenue for the year
ended December 31, 1997, and for approximately 67% of the Company's revenue
for the six months ended June 30, 1998. The loss of, significant curtailment
of placements by, or change in placement or compensation practices of one or
more of these clients could have a material adverse effect on the Company. See
"Business--Customers."
COMPETITION
The Company is engaged in a highly fragmented and competitive industry. The
Company competes with many local, regional and national accounts receivable
management companies in the markets which it serves. Some of the Company's
principal competitors may have greater financial and operating flexibility.
See "Business--Competition." In addition, despite what the Company believes to
be a trend among credit grantors to outsource their accounts receivable
functions, many of the Company's clients and prospective clients internally
13
<PAGE>
satisfy varying portions of their accounts receivable management requirements.
Moreover, the Company has recently expanded its services to include pre-
chargeoff accounts receivable and on-site collection management services,
which certain of the Company's competitors have previously undertaken. There
can be no assurance that the Company's clients and potential clients will not
decide to increase their reliance on internal accounts receivable capabilities
or the Company's competitors to provide these services.
CONTRACT RISKS
The Company enters into contracts with most of its clients which define,
among other things, fee arrangements, scope of services and termination
provisions. Clients may usually terminate such contracts on 30 or 60 days
notice. Accordingly, there can be no assurance that existing clients will
continue to use the Company's services at the historical level, if at all.
Under the terms of these contracts, clients are not required to place accounts
receivable with the Company but do so on a discretionary basis. In addition,
substantially all of the Company's contracts are on a contingent fee basis in
which the Company recognizes revenue only as accounts receivable are
recovered. See "Business."
RATIONALIZATION OF OPERATIONS
The Company intends to improve its financial results through the
rationalization of operations pursuant to the Operating Improvement Plan. In
connection with the Operating Improvement Plan, the Company expects to reduce
operating expenses, close certain facilities and enlarge certain other
facilities. Although the Company believes that its strategies are reasonable,
there can be no assurance that it will be able to implement its plans without
delay or that it will not encounter unanticipated problems in connection with
the rationalization of operations or that, when implemented, its efforts will
result in the reduction of operating expenses that is currently anticipated.
GOVERNMENT REGULATION
Certain of the Company's operations are subject to compliance with the
federal Fair Debt Collection Practices Act ("FDCPA") and comparable statutes
in many states. Under the FDCPA, a third-party collection company is
restricted in the methods it uses in contacting consumer debtors and eliciting
payments with respect to placed accounts. Requirements under state collection
agency statutes vary, with most requiring compliance similar to that required
under the FDCPA. In addition, most states and certain municipalities require
collection agencies to be licensed with the appropriate regulatory body before
operating in such jurisdictions. The Company believes that it is in
substantial compliance with the FDCPA and comparable state statutes and that
it maintains licenses in all jurisdictions in which its operations require it
to be licensed. See "--Litigation."
CONTROL OF COMPANY
All of the capital stock of the Company is owned by NAC. As of May 31, 1998,
47.8% and 45.4% of NAC's Common Stock was beneficially owned by affiliates of
Centre Partners and WPG, respectively. The holders of a majority of NAC's
Common Stock can, indirectly, elect all of the directors of the Company and
approve or disapprove certain fundamental corporate transactions, including
mergers and the sale of substantially all of the Company's assets. By reason
of such stock ownership, Centre Partners and WPG, may have interests which
could be in conflict with the holders of the Notes. In addition, pursuant to a
Stockholders Agreement entered into on December 31, 1997, certain of NAC's
stockholders have veto rights over significant corporate transactions. See
"Management" and "Stock Ownership and Certain Transactions."
LITIGATION
Due to the nature of its operations, the Company is regularly a defendant in
various legal proceedings involving claims for damages. The Company is
currently a defendant in two class action lawsuits filed in the U.S. District
Court for the Northern District of Illinois, in which it is alleged that the
Company violated certain
14
<PAGE>
provisions of the FDCPA. The Company expects to settle one of these class
actions for an amount less than $150,000 and is continuing to defend the
remaining putative class action suit. The FDCPA sets the maximum liability for
such class action suits at the lesser of $0.5 million or 1% of the defendants'
net worth. The Company believes that such proceedings constitute ordinary and
routine litigation incidental to its business. The costs associated with
defending such lawsuits (including payments made in connection with settlement
and judgments) have not historically had a material adverse effect on the
Company's financial condition. There can be no assurance that the costs
associated with existing or future claims against the Company will not have a
material adverse effect on the Company's financial condition. In 1992, the
Company reached a settlement with the Federal Trade Commission (the "FTC") in
an action commenced by the FTC in which it alleged the Company had violated
the FDCPA. The matter was resolved with a Consent Decree, in which the
Company, without admitting any liability, agreed to take additional steps to
ensure compliance with the FDCPA and paid a penalty of $100,000. The FTC
recently completed an investigation regarding the Company's compliance with
the Consent Decree from January 1, 1994 to date. Without admitting liability
for any of the alleged violations of the FDCPA, the Company has settled the
matter by agreeing to pay a civil penalty of $1.0 million and implementing
certain procedures in connection with the operation of the business,
consisting primarily of disclosure to debtors of their rights and enhanced
training and compliance reporting requirements. In connection with the Merger,
First Data agreed to indemnify the Company for any monetary penalty and
expenses incurred in connection with the FTC investigation. The settlement was
filed with the court on October 6, 1998 in the form originally proposed.
United States v. Nationwide Credit, Inc. Civ. Act. No. 1:98-CV-2929 (N.D. Ga.,
Atlanta Div.). The Company believes that compliance by the Company with the
provisions of the Consent Decree, as well as with the additional provisions
related to the proposed settlement of the FTC investigation, will not
materially affect the Company's financial condition or ongoing operations. See
"Business--Litigation."
CHANGE OF CONTROL
Upon the occurrence of any Change of Control, the Company will be required
to make an offer to purchase all of the Notes issued and then outstanding
under the Indenture at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to
the date of purchase. However, there can be no assurance that sufficient funds
will be available to the Company to purchase any of the Notes tendered
pursuant to such a Change of Control offer. Moreover, restrictions in the
Senior Credit Facilities prohibit the Company from making such required
repurchases. Therefore, any such repurchases would constitute an event of
default under the Senior Credit Facilities. See "Description of Senior Credit
Facilities."
FRAUDULENT CONVEYANCE
Under applicable provisions of the United States Bankruptcy Code or
comparable provisions of state fraudulent transfer or conveyance laws, if the
Company or any Guarantor, as the case may be, at the time it issues the Notes
or the guarantees, as the case may be, (a) incurs such Indebtedness with the
intent to hinder, delay or defraud creditors, or (b)(i) receives less than
reasonably equivalent value or fair consideration for incurring such
Indebtedness and (ii)(A) is insolvent at the time of the incurrence, (B) is
rendered insolvent by reason of such incurrence (after the application of the
proceeds of the Offering), (C) is engaged or is about to engage in a business
or transaction for which the assets that will remain with the Company or such
Guarantor, as the case may be, constitute unreasonably small capital to carry
on its business, or (D) intends to incur, or believes that it will incur,
debts beyond its ability to pay such debts as they mature, then, in each such
case, a court of competent jurisdiction could avoid, in whole or in part, the
Notes. The measure of insolvency for purposes of the foregoing will vary
depending upon the law applied in such case. Generally, however, the Company
would be considered insolvent if the sum of its debts, including contingent
liabilities, was greater than all of its assets at fair valuation or if the
present fair saleable value of its assets was less than the amount that would
be required to pay the probable liability on its existing debts, including
contingent liabilities, as they become absolute and matured.
Based upon financial and other information currently available to it, the
Company believes that, for purposes of the United States Bankruptcy Code and
state fraudulent transfer or conveyance laws, (a) the Notes are being issued
without the intent to hinder, delay or defraud creditors and for proper
purposes and in good faith, (b) the Company has received reasonably equivalent
value or fair consideration for incurring such Indebtedness and (c) the
Company, after the issuance of the Notes and the application of the net
proceeds of the Notes, will be solvent,
15
<PAGE>
will have sufficient capital for carrying on its businesses and will be able
to pay its debts as they mature. There can be no assurance, however, that a
court passing on such questions would agree with the Company's view. See "--
Substantial Leverage; Ability to Service Outstanding Indebtedness,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Description of New Notes" and "Description of Senior Credit
Facilities."
In addition, although there are currently no Subsidiary Guarantees, any
future Subsidiary Guarantees may be subject to review under relevant federal
and state fraudulent conveyances and similar statutes in a bankruptcy or
reorganization case or a lawsuit by or on behalf of creditors of any of the
Subsidiary Guarantors. In such a case, the analysis set forth above would
generally apply, except that the Subsidiary Guarantees could also be subject
to the claim that the Subsidiary Guarantees were incurred for the benefit of
the Company (and only indirectly for the benefit of the Subsidiary
Guarantors), and therefore the obligations of the Subsidiary Guarantors
thereunder were incurred for less than reasonably equivalent value or fair
consideration. A court could void a Subsidiary Guarantor's obligation under
its Subsidiary Guarantee, subordinate its Subsidiary Guarantee to other
indebtedness of a Subsidiary Guarantor or take other action detrimental to the
holders of the Notes.
LACK OF PUBLIC MARKET
The New Notes are being offered to the Holders of the Old Notes. The Old
Notes constitute a new class of securities with no established trading market.
The Old Notes are eligible for trading in the Private Offerings, Resales and
Trading through Automated Linkages ("PORTAL") market. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
the remaining untendered Old Notes could be adversely affected. There is no
existing trading market for the New Notes, and there can be no assurance
regarding the future development of a market for the New Notes, or the ability
of Holders of the New Notes to sell their New Notes or the price at which such
Holders may be able to sell their New Notes. If such a market were to develop,
the New Notes could trade at prices that may be higher or lower than their
principal amount or purchase price, depending on many factors, including
prevailing interest rates, the Company's operating results and the market for
similar securities. The Initial Purchaser has advised the Company that it
currently intends to make a market in the New Notes. The Initial Purchaser is
not obligated to do so, however, and any market-making with respect to the New
Notes may be discontinued at any time without notice. Therefore, there can be
no assurance as to the liquidity of any trading market for the New Notes or
that an active public market for the New Notes will develop. The Company does
not intend to apply for listing or quotation of the New Notes on any
securities exchange or stock market.
Historically, the market for noninvestment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the New Notes will
not be subject to similar disruptions. Any such disruptions may have an
adverse effect on Holders of the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes pursuant to the
Exchange Offer will continue to be subject to the provisions in the Indenture
regarding transfer and exchange of the Old Notes and the restrictions on
transfer of such Old Notes as set forth in the legend thereon as a consequence
of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register Old Notes under the Securities Act. See "Description of the Notes--
Exchange Offer, Registration Rights." Based on interpretations by the staff of
the SEC, as set forth in no-action letters issued to third parties, the
Company believes that New Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold or otherwise
transferred by holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New
16
<PAGE>
Notes are acquired in the ordinary course or such holders' business and such
holders, other than broker-dealers, have no arrangement or understanding with
any person to participate in the distribution of such New Notes. However, the
SEC has not considered the Exchange Offer in the context of a no-action letter
and there can be no assurance that the staff of the SEC would make a similar
determination with respect to the Exchange Offer as in such other
circumstances. Each holder, other than a broker-dealer, must acknowledge that
it is not engaged in, and does not intend to engage in, a distribution of such
New Notes and has no arrangement or understanding to participate in a
distribution of New Notes. If any Holder is an affiliate of the Company or is
engaged in or intends to engage in or has any arrangement or understanding
with respect to the distribution of the New Notes to be acquired pursuant to
the Exchange Offer, such Holder (i) may not rely on the applicable
interpretations of the
staff of the SEC and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale of
such New Notes. Each broker-dealer that receives New Notes for its own account
in exchange for Old Notes pursuant to the Exchange Offer must acknowledge that
such Old Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities and that it will deliver a
prospectus in connection with any resale transaction. The letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." In addition, to comply with the securities laws of
certain jurisdictions, if applicable, the New Notes may not be offered or sold
unless they have been registered or qualified for sale in such jurisdictions
or an exemption from registration or qualification is available and is
complied with. The Company has agreed, pursuant to the Registration Rights
Agreement, subject to certain limitations specified therein, to register or
qualify the New Notes for offer or sale under the securities laws of such
jurisdiction as any holder reasonably requests in writing. Unless a holder so
requests, the Company does not currently intend to register or qualify the
sale of the New Notes in any such jurisdictions. See "The Exchange Offer."
17
<PAGE>
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes as described
in this Prospectus, the Company will receive in exchange Old Notes in like
principal amount, the terms of which are identical in all material respects to
those of the New Notes, except that the New Notes have been registered under
the Securities Act and are issued free of any covenant regarding registration,
including the payment of additional interest upon a failure to file or have
declared effective an exchange offer registration statement or to consummate
the Exchange Offer by certain dates. The Old Notes surrendered in exchange for
the New Notes will be retired and canceled and cannot be reissued.
Accordingly, the issuance of the New Notes will not result in any change in
the indebtedness of the Company.
The net proceeds from the Offering of Old Notes were approximately $96.4
million, and, together with borrowings under the Senior Credit Facilities and
cash on hand, were used to repay the Acquisition Facilities and certain of the
fees and expenses incurred in connection with the Transactions. The
Acquisition Facilities consisted of a $125.0 million term loan facility and an
$8.0 million revolving credit facility. The interest rate on the Acquisition
Facilities was calculated as one of the following two rates at the Company's
option: (A) 1.50% plus the "Base Rate," which is the greater of (i) the prime
rate, as defined therein (the "Prime Rate"), (ii) the secondary market rate
for three-month certificates of deposit (adjusted for statutory reserve
requirements) plus 1.0% and (iii) the federal funds effective rate from time
to time plus 0.50% ("Base Rate Loan") or (B) 2.50% plus the Eurodollar Rate,
as defined ("Eurodollar Loan"). Interest on a Base Rate Loan was payable upon
the maturity date and interest on a Eurodollar Loan was payable on the last
day of the interest period.
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company as of June 30, 1998 on a pro forma basis adjusted to give effect
to the First Data settlement. This table should be read in conjunction with
the consolidated financial statements of the Company and notes thereto, and
the pro forma financial statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA AS OF
JUNE 30, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Cash..................................................... $ 10,260
=========
Total debt (including current maturities):
Senior Credit Facilities:
Term Loan............................................. $ 18,891
Revolving Credit Facility (1)......................... --
Notes.................................................. 100,000
---------
Total debt............................................... 118,891
Total stockholder's equity............................... 28,277
---------
Total capitalization..................................... $ 147,168
=========
</TABLE>
18
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION AND OTHER DATA
In the Transactions, the Company was acquired by NAC. The Company was
previously a wholly owned subsidiary of FFMC, a wholly owned subsidiary of
First Data. The Company was acquired in June 1990 by FFMC. First Data's
October 1995 merger with FFMC, accounted for under the pooling of interests
method, resulted in the combination of First Data's accounts receivable
management company, ACB, with the Company. ACB was primarily the result of two
businesses purchased and combined by First Data in 1993. The following table
presents selected historical consolidated financial information of the
Company, as of the dates and for the periods indicated. The selected
consolidated historical financial information should be read in conjunction
with the consolidated financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The historical consolidated financial
information for each of the years ended December 31, 1995, 1996 and 1997, has
been derived from the consolidated financial statements of the Company which
have been audited by Ernst & Young LLP, independent auditors. The historical
consolidated financial information for each of the years ended December 31,
1993 and 1994 and the six months ended June 30, 1997 and 1998 has been derived
from unaudited consolidated financial statements of the Company and, in the
opinion of management, includes all adjustments (consisting of normal,
recurring, and other adjustments, which are primarily purchase accounting
adjustments associated with the two business acquisitions by First Data in
1993, purchase accounting adjustments associated with the acquisition of the
Company by NAC and adjustments related to the extinguishment of debt in
January 1998.) necessary for a fair presentation of financial position and
results of operations and cash flows as of the dates and for the periods
indicated. Consolidated results of operations for interim periods are not
necessarily indicative of results to be expected for the full year.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- ---------------------
PREDECESSOR SUCCESSOR
1993 1994 1995 1996 1997 1997 1998
------- -------- -------- -------- -------- ----------- ---------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue................. $91,672 $143,376 $154,506 $138,905 $119,013 $61,268 $ 54,577
Expenses
Salaries and benefits.. 49,824 74,353 81,114 73,636 66,376 34,540 32,751
Telecommunication...... 6,431 10,075 9,539 7,341 6,236 3,286 2,769
Occupancy.............. 3,473 4,959 5,148 4,602 5,014 2,396 2,123
Other operating and ad-
ministrative.......... 17,531 22,963 27,102 26,586 22,516 10,790 7,332
Depreciation and amor-
tization.............. 7,467 10,002 11,893 12,021 14,364 6,865 12,256
Provision for merger
costs, employee sever-
ance and office clo-
sure (2).............. -- -- 13,562 4,323 679 679 --
Overhead charges from
First Data ........... 917 1,434 1,545 1,389 1,190 613 --
------- -------- -------- -------- -------- ------- --------
Operating income
(loss)................ 6,029 19,590 4,603 9,007 2,638 2,099 (2,654)
Interest expense, net.. 526 680 501 241 122 63 7,175
------- -------- -------- -------- -------- ------- --------
Income (loss) before
income taxes and ex-
traordinary item...... 5,503 18,910 4,102 8,766 2,516 2,036 (9,829)
Provision for income
taxes................. 3,008 8,438 2,611 4,449 2,423 1,274 --
------- -------- -------- -------- -------- ------- --------
Income (loss) before
extraordinary item.... 2,495 10,472 1,491 4,317 93 762 (9,829)
Extraordinary loss on
debt extinguishment... -- -- -- -- -- -- 869
------- -------- -------- -------- -------- ------- --------
Net income (loss)...... $ 2,495 $ 10,472 $ 1,491 $ 4,317 $ 93 $ 762 $(10,698)
======= ======== ======== ======== ======== ======= ========
OTHER DATA:
Ratio of earnings to
fixed charges (3)..... 4.8x 10.2x 3.1x 6.2x 2.4x 3.4x --
Adjusted EBITDA (4).... $13,496 $ 29,592 $ 30,058 $ 25,351 $ 21,169 $11,196 $ 9,602
Adjusted EBITDA margin
(4)................... 14.7% 20.6% 19.5% 18.3% 17.8% 18.3% 17.6%
NET CASH PROVIDED (USED)
BY:
Operating activities... N/A N/A 20,973 23,898 14,624 6,083 9,176
Investing activities... N/A N/A (7,748) (7,824) (29,626) (28,808) (2,049)
Financing activities... N/A N/A (14,488) (18,197) 12,281 19,627 (250)
Capital expenditures... N/A $ 5,800 $ 5,016 $ 7,005 $ 5,465 4,739 2,049
BALANCE SHEET DATA:
Cash....................................................... $ 1,388 $ 8,265
Total assets............................................... 190,865 169,859
Total indebtedness (5)..................................... 113,901 124,875
Stockholder's equity....................................... 63,879 28,277
</TABLE>
19
<PAGE>
(1) In February 1997, the Company acquired certain assets of Consolidated for
$23.3 million. The acquisition was accounted for under the purchase method
of accounting and, accordingly, the operating results of Consolidated are
included in the Company's consolidated financial statements from the date
of acquisition.
(2) The provision for merger costs, employee severance and office closure
represents charges incurred as a result of integrating the operations of
the Company and ACB, which resulted from First Data's 1995 merger with
FFMC.
(3) For purposes of the ratio of earnings to fixed charges, (i) earnings
include earnings before income taxes and fixed charges and (ii) fixed
charges consist of interest on all indebtedness, amortization of deferred
financing costs and that portion of rental expense (one-third) that the
Company believes to be representative of interest expense. The Company's
earnings were insufficient to cover fixed charges by $9.8 million for the
six months ended June 30, 1998.
(4) Adjusted EBITDA is earnings before interest, taxes, depreciation,
amortization and provision for merger costs, employee severance and office
closure, a non-recurring contract settlement expense of approximately $1.6
million, a non-recurring settlement expense with the FTC and a non-
recurring expense related to DOE chargebacks aggregating to approximately
$1.9 million during the year ended December 31, 1997. Adjusted EBITDA
reconciles to net income as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- ----------------------------
PREDECESSOR SUCCESSOR
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income (loss) $ 2,495 $10,472 $ 1,491 $ 4,317 $ 93 $ 762 $ (10,698)
Add: Depreciation and
amortization 7,467 10,002 11,893 12,021 14,364 6,865 12,256
Provision for merger
costs, employee
severance and office
closure -- -- 13,562 4,323 679 679 --
Non-recurring contract
settlement -- -- -- -- 1,553 1,553 --
Non-recurring
settlement expense
with the FTC and
expenses associated
with DOE chargebacks -- -- -- -- 1,935 -- --
Interest expense, net 526 680 501 241 122 63 7,175
Provision for income
taxes 3,008 8,438 2,611 4,449 2,423 1,274 --
Extraordinary loss on
debt extinguishment -- -- -- -- -- -- 869
------- ------- ------- ------- ------- ------------ -------------
Adjusted EBITDA $13,496 $29,592 $30,058 $25,351 $21,169 $ 11,196 $ 9,602
</TABLE>
The Company believes that Adjusted EBITDA presents a more meaningful
discussion than EBITDA since Adjusted EBITDA excludes non-recurring
expenses for which First Data has indemnified the Company, and for which
the Company will have no on-going cash requirements and which are expected
to have no impact on the on-going operations of the Company. Adjusted
EBITDA does not represent cash flows as defined by generally accepted
accounting principles and does not necessarily indicate that cash flows are
sufficient to fund all of the Company's cash needs. Adjusted EBITDA should
not be considered in isolation or as a substitute for net income (loss),
cash flows from operating activities or other measures of liquidity
determined in accordance with generally accepted accounting principles. The
Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of
revenue. Management believes that these ratios should be reviewed by
prospective investors because the Company uses them as one means of
analyzing its ability to service its debt, the Company's lenders use them
for the purpose of analyzing the Company's performance and the Company
understands that they are used by certain investors as one measure of a
company's historical ability to service its debt. Not all companies
calculate EBITDA in the same fashion and therefore these ratios as
presented may not be comparable to other similarly titled measures of other
companies.
(5) Total indebtedness as of December 31, 1997 includes a $112.5 million non-
interest bearing payable to First Data.
20
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA FINANCIAL INFORMATION
The following unaudited condensed consolidated pro forma statement of
operations for the year ended December 31, 1997 gives effect to the
Transactions and the acquisition of Consolidated Collection Co. (acquired
February 28, 1997) as though they had occurred on January 1, 1997. The Merger,
the Acquisition Facilities, the Senior Credit Facilities and the Offering,
together with the application of the proceeds from the Acquisition Facilities,
the Senior Credit Facilities and the Offering, are collectively referred to as
the "Transactions." The unaudited condensed consolidated pro forma balance
sheet of the Company at June 30, 1998 was prepared as if the settlement with
First Data had occurred on such date.
The unaudited condensed consolidated pro forma balance sheet is based on the
historical consolidated financial statements for the Company, and the
assumptions and adjustments described in the accompanying notes. The unaudited
condensed consolidated pro forma statement of operations does not purport to
represent what the Company's results of operations would have been if the
events described above had occurred as of the date indicated or what results
will be for any future periods. The unaudited condensed consolidated pro forma
financial information is based upon the assumptions that the Company believes
are reasonable and should be read in conjunction with the consolidated
financial statements and accompanying notes thereto and "Use of Proceeds"
included elsewhere in this Prospectus.
The acquisition of the Company by NAC has been accounted for on a pro forma
basis by the purchase method of accounting, and accordingly the purchase price
of $157.2 million (including estimated fees and expenses of approximately $2.0
million) has been preliminarily allocated to the assets acquired and
liabilities assumed based upon the estimated fair values as of December 31,
1997. The final allocation of such purchase price, and the resulting
amortization expense in the accompanying unaudited condensed consolidated pro
forma statements of operations, may differ from the preliminary estimates
pending the completion of appraisal studies and management's evaluation of the
assets and liabilities of the Company. Management does not believe that either
adjustments to the preliminary allocation of the purchase price or the
resolution of any known contingencies will have a material impact on the
unaudited condensed consolidated pro forma financial information presented.
The excess of such purchase price over the estimated fair values of
identifiable tangible and intangible net assets has been recorded as goodwill,
which is amortized over 30 years on a straight-line basis.
21
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO
FORMA
AS
HISTORICAL ADJUSTMENTS ADJUSTED
---------- ----------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,265 $ 1,995(a) $ 10,260
Cash held for clients 779 -- 779
Accounts receivable, net 12,387 -- 12,387
Prepaid expenses and other current assets 1,031 -- 1,031
-------- ------- --------
Total current assets 22,462 1,995 24,457
Property and equipment, net 11,393 -- 11,393
Goodwill and other intangible assets, net 131,422 (7,979)(b) 123,443
Deferred financing costs 4,384 -- 4,384
Other assets 198 -- 198
-------- ------- --------
Total assets $169,859 $(5,984) $163,875
======== ======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Collections due to clients 779 -- 779
Accrued compensation 3,490 -- 3,490
Accounts payable 1,784 -- 1,784
Accrued severance and office closure costs 929 -- 929
Other accrued liabilities 7,325 -- 7,325
Current maturities of long-term debt 250 -- 250
-------- ------- --------
Total current liabilities 14,557 -- 14,557
Accrued severance and office closure costs 2,400 -- 2,400
Long-term debt:
Term loan facility 24,625 (5,984)(c) 18,641
10.25% Senior notes due 2008 100,000 -- 100,00
Stockholder's equity 28,277 -- 28,277
-------- ------- --------
Total liabilities and stockholder's equity $169,859 $(5,984) $163,875
======== ======= ========
</TABLE>
22
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
BALANCE SHEET
(a)Reflects the net increase in cash due to the settlement with First Data.
(b)Reflects the decrease in goodwill due to the settlement with First Data.
(c)Reflects the pay-down of the Term Loan Facility with excess cash received as
part of the settlement with First Data.
23
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS AND
OTHER DATA FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED
FOR THE
CONSOLIDATED CONSOLIDATED PRO FORMA
CONSOLIDATED COLLECTION CO. COLLECTION CO. TRANSACTION PURCHASE PRICE AS
HISTORICAL COLLECTION CO.(A) ADJUSTMENTS ACQUISITION ADJUSTMENT ADJUSTMENTS ADJUSTED
---------- ----------------- -------------- -------------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $119,013 $2,302 $ -- $121,315 $ -- $ -- $121,315
Expenses:
Salaries and benefits.. 66,376 767 -- 67,143 -- -- 67,143
Telecommunication...... 6,236 97 -- 6,333 -- -- 6,333
Occupancy.............. 5,014 47 -- 5,061 -- -- 5,061
Other operating and
administrative........ 22,516 633 -- 23,149 820 (c) -- 23,969
Depreciation and
amortization.......... 14,364 4 306 (b) 14,674 10,075 (d) (266)(i) 24,483
Provision for merger
costs, employee
severance and office
closure............... 679 -- -- 679 -- -- 679
Overhead charges from
First Data............ 1,190 -- -- 1,190 (1,190)(e) -- --
-------- ------ ----- -------- -------- ----- --------
Total expenses.......... 116,375 1,548 306 118,229 9,705 (266) 127,668
-------- ------ ----- -------- -------- ----- --------
Operating income
(loss)................. 2,638 754 (306) 3,086 (9,705) 266 (6,353)
Interest expense
(income)............... 122 (31) -- 91 12,707 (h) (464)(j) 12,334
-------- ------ ----- -------- -------- ----- --------
Income (loss) before
income taxes........... 2,516 785 (306) 2,995 (22,412) 730 (18,687)
Provision (benefit) for
income taxes........... 2,423 -- 203 2,626 (2,668)(i) -- --
-------- ------ ----- -------- -------- ----- --------
Net income (loss)....... $ 93 $ 785 $(509) $ 369 $(19,744) $ 730 $(18,687)
======== ====== ===== ======== ======== ===== ========
OTHER DATA
Pro forma ratio of
earnings to fixed
charges (i)............ --
</TABLE>
24
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
AND OTHER DATA FOR THE YEAR ENDED DECEMBER 31, 1997
(a) Represents the unaudited historical results of operations of Consolidated
for the period from January 1, 1997 to February 28, 1997 (date of
acquisition).
(b) Represents an increase in amortization and depreciation resulting from the
acquisition of Consolidated.
(c) Represents an increase in other operating and administrative expenses
based on the estimated current value of services required to replace those
activities included in "Overhead charges from First Data."
(d) Represents an increase in amortization resulting from the acquisition of
the company by NAC, as follows: (in thousands)
<TABLE>
<S> <C>
Amortization of covenant not to compete.......................... $ 1,425
Amortization of the value attributable to future revenue from ex-
isting placements at the date of acquisition, less the direct
costs of collection............................................. 14,500
Amortization of goodwill attributable to the acquisition......... 4,100
Elimination of existing goodwill and other intangible amortiza-
tion............................................................ (9,644)
Elimination of pro forma goodwill and other intangible
amortization relating to Consolidated........................... (306)
-------
$10,075
=======
(e) Represents the elimination of the overhead cost allocation from First
Data.
(f) To reflect interest expense (and amortization of deferred financing fees)
on a pro forma basis as if the Transactions had been completed on January
1, 1997. Details of the adjustment are summarized below:
(in thousands)
Interest expense on the New Notes................................ $10,250
Interest expense on the term loan facility (1)................... 1,938
Amortization of deferred financing fees related to the New Notes
and the Credit Agreement........................................ 479
Commitment fee for revolving credit facility under the Credit
Agreement(2).................................................... 131
Elimination of historical interest expense....................... (91)
-------
$12,707
</TABLE>
(1) The term loan facility bears interest at a rate determined at the
Company's option, based on the Eurodollar base rate (as defined in
the credit agreement) plus 2.125% or the Base Rate, as defined, plus
1.125%. The interest expense has been calculated based on a
Eurodollar rate of 5.625%.
(2) The assumed commitment fee on the unused portion of the revolving
credit facility is 0.375% per annum.
(g) The Company's assumed effective tax rate is 42%. The Company has provided
a valuation allowance on the entire tax benefit, as it is not "more likely
than not" that the benefit will be realized by the Company.
(h) For purposes of the pro forma ratio of earnings to fixed charges, (i)
earnings include earnings before income taxes and fixed charges and (ii)
fixed charges consist of interest on all debt, amortization of deferred
financing costs and that portion of rental expense (one-third) that the
Company believes to be representative of interest. On a pro forma basis,
the Company's earnings were insufficient to cover fixed charges by $18.6
million.
(i) Represents the decrease in amortization and depreciation resulting from
the settlement with First Data.
(j) Represents the decrease in interest expense due to the pay-down on the
Term Loan Facility (as defined) resulting from the settlement with First
Data.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is based upon and should be read in conjunction
with "Selected Consolidated Financial Data" and the consolidated financial
statements of the Company, including the notes thereto, included elsewhere in
this Prospectus.
OVERVIEW
The Company was acquired from First Data by NAC on December 31, 1997, in
connection with the Transactions. The Company was previously a wholly owned
subsidiary of FFMC, which is a wholly owned subsidiary of First Data. The
Company was acquired in June 1990 by FFMC. First Data's October 1995 merger
with FFMC, accounted for under the pooling of interests method, resulted in
the combination of First Data's accounts receivable management company, ACB,
with the Company. ACB was primarily the result of two business combinations
consummated by First Data in 1993 accounted for under the purchase method of
accounting. The Company has historically relied on First Data for certain
general and administrative functions and cash management needs.
On February 28, 1997, the Company acquired certain assets of Consolidated, a
telecommunications accounts receivable management company based in Denver,
Colorado. The acquisition was accounted for under the purchase method of
accounting. The historical results of operations of the Company include the
revenue and expenses of Consolidated from the date of acquisition. Total
consideration for the purchase was $23.3 million. See "Unaudited Condensed
Consolidated Pro Forma Financial Information."
GENERAL
The Company is the among the largest independent providers of accounts
receivable management services in the United States, as measured by the
aggregate principal value of consumer debt placed by credit grantors for
collection. The Company offers contingent fee collection, pre-chargeoff
accounts receivable management and on-site collection management services,
primarily to financial institutions, government agencies, telecommunications
companies and healthcare providers. The Company provides sophisticated,
customized past-due account collection and accounts receivable management
services to its clients through a nationwide network of 15 call centers.
The Company has historically generated substantially all of its revenue from
the recovery of delinquent accounts receivable on a contingency fee basis. In
addition, the Company has begun providing pre-chargeoff accounts receivable
management services, in which the Company contacts debtors earlier in the
collection cycle in an effort to bring the account current before the credit
grantor formally charges off the past-due balance. Revenue is earned and
recognized upon collection of the accounts receivable for contingent fee
services and as work is performed for fixed fee services. The Company enters
into contracts with most of its clients which define, among other things, fee
arrangements, scope of services and termination provisions. Generally, the
contracts may be terminated by either party on 30 to 90 days' notice.
The Company's costs consist principally of payroll and related personnel
costs, telecommunication, occupancy and other operating and administrative
costs, and depreciation and amortization. Payroll and related personnel costs
consist of wages and salaries, commissions, bonuses and benefits. Other
operating and administrative costs include postage and mailing costs,
equipment maintenance, marketing, data processing and professional fees.
26
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- ----------------------------------
1997 1998
1995 % 1996 % 1997 % PREDECESSOR % SUCCESSOR %
-------- ----- -------- ----- -------- ----- ----------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $154,506 100.0 $138,905 100.0 $119,013 100.0 $61,268 100.0 $ 54,577 100.0
Expenses:
Salaries and benefits.. 81,114 52.5 73,636 53.0 66,376 55.8 34,540 56.4 32,751 60.0
Telecommunication...... 9,539 6.2 7,341 5.3 6,236 5.2 3,286 5.4 2,769 5.1
Occupancy.............. 5,148 3.3 4,602 3.3 5,014 4.2 2,396 3.9 2,123 3.9
Other operating and ad-
ministrative.......... 27,102 17.5 26,586 19.1 22,516 18.9 10,790 17.6 7,332 13.4
Depreciation and amor-
tization.............. 11,893 7.7 12,021 8.7 14,364 12.1 6,865 11.2 12,256 22.5
Provision for merger
costs, employee
severance and office
closure............... 13,562 8.8 4,323 3.1 679 0.6 679 1.1 -- --
Overhead charges from
First Data............ 1,545 1.0 1,389 1.0 1,190 1.0 613 1.0 -- --
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
Total expenses.......... 149,903 97.0 129,898 93.5 116,375 97.8 59,169 96.6 57,231 104.9
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
Operating income
(loss)................. 4,603 3.0 9,007 6.5 2,638 2.2 2,099 3.4 (2,654) (4.9)
Interest expense, net... 501 0.3 241 0.2 122 0.1 63 0.1 7,175 13.1
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
Income (loss) before in-
come taxes and
extraordinary loss..... 4,102 2.7 8,766 6.3 2,516 2.1 2,036 3.3 (9,829) (18.0)
Provision for income
taxes.................. 2,611 1.7 4,449 3.2 2,423 2.0 1,274 2.1 -- --
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
Income (loss) before ex-
traordinary items...... 1,491 1.0 4,317 3.1 93 0.1 762 1.2 (9,829) (18.0)
Extraordinary loss on
debt
extinguishment......... -- -- -- -- -- -- -- -- 869 1.6
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
Net income (loss)....... $ 1,491 1.0 $ 4,317 3.1 $ 93 0.1 $ 762 1.2 $(10,698) (19.6)
======== ===== ======== ===== ======== ===== ======= ===== ======== =====
</TABLE>
Six Months ended June 30, 1998 Compared to Six Months ended June 30, 1997.
Revenue. Total revenue was $54.6 million for the six months ended June 30,
1998, as compared to $61.3 million for the six months ended June 30, 1997, a
decrease of $6.7 million or 10.9%. The decline in revenue was primarily the
result of (i) a decrease in revenue earned of $5.8 million from the
cancellation of the old DOE contract and delayed placements under the new GSA
and DOE contracts, (ii) a decrease in revenue from banking and retail
businesses of $1.3 million primarily from lower placements on gas credit
cards, (iii) a decrease in revenue from healthcare account placements of
approximately $0.8 million primarily caused by a strategic shift away from
less profitable lines of business and (iv) an increased expense to allow for
revenue that will not be collected of approximately $0.3 million. These
decreases were partially offset by the impact of the February 28, 1997
acquisition of Consolidated, improved revenue of $0.9 million from American
Express and from on site services of $0.6 million.
Expenses. Salaries and benefits expense was $32.8 million for the six months
ended June 30, 1998, as compared to $34.5 million for the six months ended
June 30, 1997 a decrease of $1.7 million or 4.9%. While placements were
delayed from the DOE and GSA, it was not prudent to eliminate trained
personnel who would be required for DOE contracts that were later received,
hence payroll was not reduced proportionately in relation to the decrease in
revenue.
Telecommunications expense was $2.8 million for the six months ended June
30, 1998, as compared to $3.3 million for the six months ended June 30, 1997 a
decrease of $0.5 million or 15.2%. The decrease was primarily the result of
lower rates as well as lower levels of activity.
Occupancy expense was $2.1 million for the six months ended June 30, 1998,
as compared to $2.4 million for the six months ended June 30, a decrease of
$0.3 million or 12.5%, a consequence of scaling back one facility in the
second quarter. Other operating and administrative expense was $7.3 million
for the six months ended June 30, 1998, as compared to $10.8 million for the
six months ended June 30, 1997 a decrease of $3.5 million
27
<PAGE>
or 32.4%. In 1997 the Company incurred a one time contract settlement expense
of $1.6 million and a charge of $0.9 million to correct for out of balance
conditions explained in the section on the results for 1997. The rest of the
savings were generated by general expense controls.
There were no provisions for severance or office closures in the six months
ended June 30, 1998, nor were there any overhead charges from First Data.
These two items amounted to $1.3 million in the six months ended June 30,
1997.
Depreciation and amortization expense was $12.3 million for the six months
ended June 30, 1998, as compared to $6.9 million for the six months ended June
30, 1997, an increase of $5.4 million or 78.3%. This increase reflects the
amortization associated with the intangibles arising from the Transactions.
Operating Income (Loss). Operating income was a loss of $2.7 million for the
six months ended June 30, 1998, as compared to a profit of $2.1 million for
the six months ended June 30, 1997, a reduction in income of $4.8 million. The
decrease in revenue of $6.7 million was more than offset by the savings on
operating expenses of $7.3 million, however, the increase in depreciation and
amortization expense of $5.4 million caused the $4.8 million change in
operating income.
Interest Expense. As a consequence of the form of the financing of the
Transactions, interest expense was $7.2 million for the six months ended June
30, 1998 an increase of $7.1 million from the six months ended June 30, 1997.
Extraordinary Loss. The extraordinary loss on debt extinguishment of $0.9
million represents the write off of deferred debt issuance costs related to
the interim financing for the Merger.
Net Income (Loss). The Company incurred a net loss for the six months ended
June 30, 1998 of $10.7 million, as compared to a profit of $0.8 million in the
same period of 1997.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996.
Revenue. Total revenue was $119.0 million for the year ended December 31,
1997, as compared to $138.9 million for the year ended December 31, 1996, a
decrease of $19.9 million, or 14.3%. The decline in revenue was primarily the
result of (i) a decrease in the Company's revenue from federal, state and
local governmental agencies, caused primarily by (a) the DOE's decision in
June 1996 to reduce the contingency fee rates paid to all vendors, inducing
the Company, and (b) the DOE's decision in April 1997 to temporarily
discontinue placements while conducting a bidding process for new contracts,
both of which in turn caused revenue from the DOE to decrease from $31.6
million in the year ended December 31, 1996 to $20.7 million in the year ended
December 31, 1997, (ii) a decrease in the Company's revenue from American
Express from $41.8 million in the year ended December 31, 1996 to $33.7
million in the year ended December 31, 1997, caused primarily by a decline in
the contingency fee rates paid by American Express to all vendors, including
the Company, and a change in the composition of accounts receivable placed by
American Express with the Company and (iii) a strategic reduction in
healthcare account placements by the Company to eliminate a significant number
of unprofitable clients. The Company believes that these factors may continue
to affect revenues going forward. These decreases were partially offset by
revenue increases of approximately $10.2 million associated with the
acquisition of Consolidated in February 1997.
Expenses. Salaries and benefits expense was $66.4 million for the year ended
December 31, 1997 as compared to $73.6 million for the year ended December 31,
1996, a decrease of $7.2 million or 9.9%. Salaries and benefits expense, which
largely comprises variable costs, decreased due to the lower volume of account
placements and lower contingency fee rates during 1997 as compared to 1996.
Salaries and benefits expense, as a percent of revenue, increased primarily
due to the revenue decline associated with the Company's contract with the
DOE.
28
<PAGE>
Telecommunications expense was $6.2 million for the year ended December 31,
1997 as compared to $7.3 million for the year ended December 31, 1996, a
decrease of $1.1 million or 15.1%. The decrease resulted from a lower volume
of account placements during 1997 as compared to 1996.
Occupancy expense was $5.0 million for the year ended December 31, 1997, as
compared to $4.6 million for the year ended December 1996, an increase of $0.4
million or 9.0%. The increase resulted primarily from the acquisition of
Consolidated in February 1997.
Other operating and administrative expense was $22.5 million for the year
ended December 31, 1997, as compared to $26.6 million for the year ended
December 31, 1996, a decrease of $4.1 million or 15.3%. The decrease resulted
primarily from operational costs incurred in 1996 associated with the
integration and consolidation of ACB and the Company and operational
improvements gained during 1997 as a result of certain efficiencies gained
from the merger of the Company and ACB, and cost savings resulting from the
Operating Improvement Plan. In addition, a significant portion of the decrease
relates to an expense provision to correct for certain out of balance
conditions that occurred during the 1996 integration of the ACB and Company
operations resulting from the October 1995 merger of First Data and FFMC. This
expense provision amounted to $3.0 million in 1996 and $0.9 million for the
first six months of 1997. These decreases were partially offset by (i) a non-
recurring contract settlement expense of approximately $1.6 million and (ii) a
non-recurring litigation settlement expense with the FTC and a non-recurring
expense related to DOE charge backs aggregating to approximately $1.9 million.
Other operating and administrative expenses included a $2.1 million charge for
the year ended December 31, 1997 for doubtful accounts, compared to a charge
of $2.4 million for the year ended December 31, 1996. During the course of
preparing the December 31, 1997 financial statements, management, as a
consequence of performing analyses and studies, concluded that, on average,
1.87% of its 1997 billings were not collectible. This situation is created by
a number of factors including, but not limited to, billing disputes which
arise when certain customers believe that the Company is not entitled to the
commission it has billed. The charge of $2.1 million was recorded in the year
ended December 31, 1997 to reflect the billings that the Company had
determined were not collectible. The Company believes that these disputes have
been recurring in nature and has instituted policies and procedures that it
believes will be adequate to resolve this issue.
Depreciation and amortization expense was $14.4 million for the year ended
December 31, 1997, as compared to $12.0 million for the year ended December,
1996, an increase of $2.4 million or 19.5%. The increase resulted primarily
from the amortization expense of the goodwill and other intangibles associated
with the Consolidated acquisition in February 1997.
The provision for merger costs, employee severance and office closure was
$0.7 million for the year ended December 31, 1997 as compared to $4.3 million
for the year ended December 31, 1996, a decrease of $3.6 million or 84.3%. The
charges resulted from the integration of the operations of the Company and ACB
and relate to employee severance and branch office closure costs.
Overhead charges from First Data were $1.2 million for the year ended
December 31, 1997, as compared to $1.4 million for the year ended December 31,
1996, a decrease of $0.2 million or 14.3%. First Data allocated general
corporate overhead based on 1.0% of the Company's revenue, therefore, the
decrease in overhead charges results from the decrease in revenue in 1997 as
compared to 1996. These overhead charges are not necessarily indicative of
actual or future costs. Management further believes that the incremental
general and administrative costs that will result from the Company being a
stand-alone entity will not exceed the 1% of revenue charge from First Data.
Operating Income. Operating income was $2.6 million for the year ended
December 31, 1997, as compared to $9.0 million for the year ended December 31,
1996. The $6.4 million or 71.4% decrease is caused by a number of factors each
of which are mentioned above. To summarize, revenues declined by $19.9 million
or 14.3% even after including the $10.2 million increase associated with the
February 1997 acquisition of Consolidated. Salaries and benefits, which
represents the Company's most significant expense, declined by $7.2 million or
9.8%. As a percentage of revenue, salaries and benefits increased from 53.0%
in 1996 to 55.8% in
29
<PAGE>
1997. The resulting net impact which the decreases in revenues and salaries
and benefits had on operating income was a decrease of $12.7 million. In
addition, the acquisition of Consolidated generated a $2.4 increase in
depreciation and amortization expense. Partially offsetting this aggregate
$15.1 million decrease in operating income were reductions of $4.1 million in
other operating and administrative expenses, $3.6 million in severance and
office closure costs and $1.0 million in telecommunications and occupancy
costs and overhead charges from First Data.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Revenue. Total revenue was $138.9 million for the year ended December 31,
1996 as compared to $154.5 million for the year ended December 31, 1995, a
decrease of $15.6 million, or 10.1%. The decline in revenue resulted primarily
from the aforementioned decision by the DOE in June 1996 to reduce the
contingency fees paid to all vendors, including the Company, which in turn
caused the revenue from the DOE to decrease from $40.3 million for the year
ended December 31, 1995 to $31.6 million for the year ended December 31, 1996.
The remaining revenue decline resulted from a decrease in the volume of
account placements from clients within both the healthcare and financial
services industries.
Expenses. Salaries and benefits expense was $73.6 million for the year ended
December 31, 1996, as compared to $81.1 million for the year ended December
31, 1995, a decrease of $7.5 million or 9.2%. The decrease resulted primarily
from the reduction of employee headcount and related benefit costs as part of
the restructuring following the merger of First Data and FFMC and lower
commission payments resulting from decreased revenue.
Telecommunication expense was $7.3 million for the year ended December 31,
1996, as compared to $9.5 million for the year ended December 31, 1995, a
decrease of $2.2 million or 23.0%. The decrease resulted primarily from cost
reductions and improved operating efficiencies derived from the consolidation
of telecommunication systems associated with the 1995 merger of First Data and
FFMC. These efficiencies also contributed to the reduction in
telecommunication expense as a percentage of revenue from 1995 to 1996.
Occupancy expense was $4.6 million for the year ended December 31, 1996, as
compared to $5.1 million for the year ended December 31, 1995, a decrease of
$0.5 million or 10.6%. The decrease was attributable to lease cancellations
and office closings as part of the corporate restructuring during 1995.
Other operating and administrative expenses were $26.6 million for the year
ended December 31, 1996, as compared to $27.1 million for the year ended
December 31, 1995, a decrease of $0.5 million or 1.9%. The decrease resulted
primarily from certain operating efficiencies realized in 1996 with the
consolidation of operations of the Company and ACB in 1995. Offsetting this
efficiency related decrease was a $3.0 million provision in 1996 to correct
for certain system related out of balance conditions that occurred during the
1996 integration of the ACB and Company operations resulting from the October
1995 Merger of First Data and FFMC.
Depreciation and amortization expense was $12.0 million for the year ended
December 31, 1996 as compared to $11.9 million for the year ended December 31,
1995, an increase of $0.1 million or 1.1%. Amortization expense resulted
primarily from the amortization of the goodwill and other intangible assets
recognized in connection with the June 1990 acquisition of the Company by FFMC
and the acquisitions consummated by First Data in 1993 accounted for under the
purchase method of accounting.
The provision for merger costs was $4.3 million for the year ended December
31, 1996, as compared to $13.6 million for the year ended December 31, 1995, a
decrease of $9.3 million or 68.1%. The Company's 1995 provision included a
$5.9 million impairment charge related primarily to the write-off of the ACB
trade name and a $3.0 million charge related to an estimated payment to the
former owners of a business acquired by First Data in 1993.
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Overhead charges from First Data were $1.4 million for the year ended
December 31, 1996, as compared to $1.5 million for the year ended December 31,
1995, a decrease of $0.1 million or 10.1%. First Data allocates general
corporate overhead based on 1.0% of the Company's revenues, therefore, the
decrease in overhead charges results from the decrease in revenue from 1995 to
1996. These overhead charges are not necessarily indicative of actual or
future costs. Management further believes that the incremental general and
administrative costs that would result from the Company being a stand-alone
entity would not exceed the 1% of revenue charge from First Data.
Operating Income. Operating income was $9.0 million for the year ended
December 31, 1996, as compared to $4.6 million for the year ended December 31,
1995, an increase of $4.4 million, due primarily to a decrease in the
provision for merger costs, employee severance and office closures, partially
offset by a decrease in revenue.
LIQUIDITY AND CAPITAL RESOURCES
During the period of ownership by FFMC and subsequently First Data, the
Company's principal sources of cash were from operations and intercompany
borrowings from FFMC and First Data. Cash has been used for purchases of
property and equipment, investments in technology, acquisitions of accounts
receivable management companies, and repayment of intercompany debt. Cash
provided by operating activities was $14.6 million, $23.9 million and $21.0
million for the years ended December 31, 1997, 1996 and 1995, respectively.
The decrease in cash provided by operating activities for the year ended
December 31, 1997, versus the year ended December 31, 1996, was primarily due
to (i) a decrease in net income of $4.2 million and (ii) a decrease in working
capital items of $2.8 million in the year ended December 31, 1996 versus an
increase of $1.9 million in the year ended December 31, 1997.
Cash provided by operating activities was $9.2 million for the six months
ended June 30, 1998 as compared to $6.1 million for the six months ended June
30, 1997. Net income before extraordinary items and after adding back
depreciation, amortization, taxes and interest (EBITDA) generated $9.6 million
as compared to $9.0 million in the 1997 period. Apart from the improvement in
operating cash flows caused by the increase in EBITDA, net working capital
items, excluding accrued interest of $4.3 million, decreased by $1.1 million
in the six months ended June 30, 1998, as compared to their increasing by $3.6
million in the six months ended June 30, 1998.
Cash used in investing activities for the six months ended June 30, 1998 was
$2.0 million, consisting entirely of purchases of equipment and software, as
compared to $28.8 million in the six months ended June 30, 1997. Investing
activities in 1997 included $24.1 million for the acquisition of Consolidated.
Cash used in investing activities was $29.6 million, $7.8 million and $7.7
million for the years ended December 31, 1997, 1996 and 1995, respectively.
The increase was primarily due to the acquisition of Consolidated in February
1997 for $23.3 million. Cash provided by First Data was used to fund this
acquisition. Other than cash used for the Consolidated acquisition in February
1997, the Company's principal use of cash in investing activities has been for
capital expenditures primarily for new computer and telecommunication
equipment. As a result of the acquisition of the Company by NAC and the
implementation of the modified Operating Improvement Plan, the Company has
accrued estimated costs of approximately $4.0 million associated with closing
certain offices and call centers ($1.8 million), severance payments to
employees ($0.9 million) and relocation costs ($0.7 million) and other costs
primarily associated with the write-down of leasehold improvements ($0.6
million). Of the $4.0 million, $1.6 million is expected to be paid in 1998,
$1.5 million is expected to be paid in 1999 and $0.9 million is expected to be
paid in 2000. Specifically, the Company is closing and/or reducing branches
which are not operating at full capacity, or whose operations can be
consolidated with other branches. Any costs to be paid in 1999 and 2000 are
primarily associated with lease commitments on facilities to be closed during
1998 and 1999. Cash used in investing activities for the six months ended June
30, 1998 amounted to $2.0 million, consisting entirely of equipment purchases,
as compared to $4.7 million of equipment purchases in the six months ended
June 30, 1997. Investing activities for the 1997 period also include $24.2
million related primarily to the February 1997 acquisition of Consolidated.
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In connection with the Transactions, the Company implemented a financing
plan which includes the $133.0 million Acquisition Facilities, comprised of an
$8.0 million revolving credit facility and a $125.0 million term loan facility
and the net proceeds of $39.0 million from the sale of Common Stock by NAC,
which in turn had been contributed to the Company. The Acquisition Facilities
were refinanced through: (i) $60.0 million of senior secured facilities (the
"Senior Credit Facilities"), comprised of a $35.0 million six-year revolving
credit facility (the "Revolving Credit Facility"), and a $25.0 million seven-
year term loan facility (the "Term Loan Facility"), and (ii) the issuance of
the Notes.
Amounts outstanding under the Term Loan Facility and the Revolving Credit
Facility bear interest at the Company's option of either (A) the Base Rate
plus the Applicable Margin or (B) the Eurodollar Rate plus the Applicable
Margin. The Applicable Margin on loans under the Revolving Credit Facility
ranges from 0.375% to 2.50% and the Applicable Margin on the Term Loan
Facility ranges from 0.75% to 2.75%; provided, that the Applicable Margin on
loans under the Revolving Credit Facility was initially 1.875% for a
Eurodollar Loan and 0.875% for a Base Rate Loan and the Applicable Margin on
loans under the Term Loan Facility was initially 2.125% for loans utilizing
the Eurodollar Rate and 1.125% for loans utilizing the Base Rate. The Term
Loan Facility is repayable in quarterly installments in an aggregate annual
principal amount of $0.25 million for each of the first six years and the
remaining $23.5 million in the last year of the facility. The Company has
approximately $35.0 million of unborrowed availability under the Revolving
Credit Facility at June 30, 1998.
Substantially all the agreements relating to the Company's outstanding
indebtedness contain covenants that impact the Company's liquidity and capital
resources, including financial covenants and restrictions on the incurrence of
indebtedness and liens and asset sales. The Company has also negotiated an
amendment to the Senior Credit Facility that revises the cumulative EBITDA and
related ratio covenants to reflect the Company's revised EBITDA expectations.
The Company was in compliance with the revised covenants as of June 30, 1998.
The ability of the Company to meet its debt service obligations and to
comply with the restrictive and financial covenants contained in the Senior
Credit Facility and under the Notes in the future will be dependent on the
future operating and financial performance of the Company, which will be
subject in part to a number of factors beyond the control of the Company, such
as prevailing economic conditions, interest rates and demand for credit
collection services. See "Risk Factors--Substantial Leverage."
The Company has reached an agreement with First Data with respect to various
matters relating to the acquisition of the Company by its current shareholders
in December 1997. The settlement includes a cash payment of $10.9 million to
the Company. The Company intends to use the cash payment to reduce
indebtedness under its Term Loan Facility by approximately $6.0 million, pay
approximately $2.9 million in various expenses relating to the Company's
operations under First Data management prior to January 1998, including
obligations to the FTC and the DOE, and to increase cash available for working
capital and other corporate operations by approximately $2.0 million.
Management believes that, based on current levels of operations and
anticipated improvements in operating results, cash flows from operations and
borrowings available under the Senior Credit Facilities will be adequate to
allow for anticipated capital expenditures for the next several years, to fund
working capital requirements and to make required payments of principal and
interest on its debt for the next several years. However, if the Company is
unable to generate sufficient cash flows from operations in the future, it may
be necessary for the Company to refinance all or a portion of its debt or to
obtain additional financing, but there can be no assurance that the Company
will be able to effect such refinancing or obtain additional financing on
commercially reasonable terms or at all. See "Risk Factors."
INCOME TAXES
The Company's effective tax rates for the years ended December 31, 1997,
1996 and 1995 were 96.3%, 50.8% and 63.7%, respectively. The effective rate
differed from the federal statutory rate of 35% due to state taxes and non-
deductible goodwill and a decrease in income before income taxes, without any
corresponding decrease in non-deductible goodwill. The 1996 effective tax rate
differs from the 1995 tax rate due to the increase in taxable income in 1996
without any corresponding increases in state taxes and non-deductible
goodwill. The
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Company has not recorded any tax benefit on its loss before income taxes for
the six months ended June 30, 1998 as it is not "more likely than not" that
the Company will be able to realize such benefits.
The Company's results of operations have been included in the consolidated
federal income tax returns of First Data. The Company's historical income tax
expense is presented as if the Company had not been eligible to be included in
the consolidated tax returns of First Data. Under the terms of the Merger
Agreement, all of the goodwill and other intangible assets recorded in
connection with the acquisition are expected to be deductible for federal
income tax purposes over fifteen years.
YEAR 2000
Until recently computer programs were written to store only two digits of
date-related information in order to more efficiently handle and store data.
Thus the programs were unable to properly distinguish between the year 1900
and the year 2000. This is frequently referred to as the "Year 2000 Problem."
In 1997, the Company initiated a company-wide Year 2000 project to address
this problem. Utilizing both internal and external resources, the Company is
in the process of defining, assessing and converting, or replacing, various
programs and hardware to make them Year 2000 compatible. The Year 2000 Problem
goes beyond the Company's internal computer systems and requires coordination
with clients, vendors, government entities and other third parties to assure
that their systems and related interface are compliant.
The total Year 2000 remediation cost is estimated at approximately $1.5
million, which includes $0.4 million for the purchase of new software that
will be capitalized and $1.1 million that will be expensed as incurred. To
date, the Company has incurred and expensed approximately $0.2 million,
primarily for assessment of the Year 2000 issue, the development of a
modification plan and programming costs.
The project is estimated to be completed by the end of 1998. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 problem will not pose significant operational problems
for its computer systems. However, if such modifications and conversions are
not made, or are not completed in a timely fashion, the Year 2000 problem
could have a material impact on the operations and financial results of the
Company.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, the Company's business tends to be slower in the third and
fourth quarter of the year due to the summer and the holiday seasons. However,
the Company could experience quarterly variations in revenue and operating
income as a result of many factors, including the timing of clients' referrals
of accounts, the timing of the hiring of personnel, the timing of operating
expenses incurred to support new business, and changes with certain contracts
as the Company could incur costs in periods prior to recognizing revenue under
those contracts.
IMPACT OF INFLATION
There was no significant impact on the Company's operations as a result of
inflation during the six months ended June 30, 1998 or the years ended
December 31, 1997, 1996 or 1995.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement No.
129, "Disclosure of Information about Capital Structure," which is applicable
to all companies. Statement No. 129 consolidates the
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existing guidance in authoritative literature relating to a company's capital
structure. The Statement is effective for financial statements for periods
ending after December 15, 1997. The Company does not believe the adoption of
this standard will have any impact on the Company's financial statements.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," and Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information." Both Statements become effective for fiscal periods
beginning after December 15, 1997, with early adoption permitted. The Company
is evaluating the additional disclosure requirements these Statements are
expected to have on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131, establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 is effective for financial statements for fiscal years beginning
after December 15, 1997. The Company is currently evaluating the impact SFAS
No. 131's additional disclosure requirements are expected to have on its
consolidated financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". The SOP is
effective for the Company beginning on January 1, 1999; however, earlier
adoption is permitted. The SOP will require the capitalization of certain
costs incurred after the date of adoption in connection with developing or
obtaining software for internal use. The Company currently expenses internal
development costs for internal use software as incurred. The Company is
evaluating the impact of the SOP on the Company's future earnings and
financial position, but does not expect it to be material.
In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-Up
Activities". The SOP is effective beginning on January 1, 1999, and requires
that start-up costs capitalized prior to January 1, 1999 be written-off and
any future start-up costs be expensed as incurred. The Company is evaluating
the impact of the SOP on the Company's future earnings and financial position.
In June 1998, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 133 "Accounting for Derivative and Hedging
Activities" (SFAS 133). SFAS 133 requires companies to record derivatives on
the balance sheet as assets or liabilities at fair value. It is effective for
financial statements for fiscal years beginning after June 15, 1999. The
Company is evaluating the impact of SFAS 133 on the Company's future earnings
and financial position, but does not expect it to be material.
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BUSINESS
INDUSTRY OVERVIEW
The accounts receivable management industry has experienced rapid growth
since 1990. According to the ACA, account placements to servicers increased
from $43.7 billion in 1990 to $122.3 billion in 1996, a compounded annual
growth rate of 19%. According to M. Kaulkin & Associates, an industry advisory
firm, the total amount of revenue generated by all contingent fee companies
was approximately $5.5 billion in 1996 versus approximately $5.0 billion in
1995.
Two significant trends in the consumer credit industry are primarily
responsible for this industry growth. First, consumer debt and delinquencies
(leading indicators of current and future business for accounts receivable
management companies) have increased in recent years. Second, in an effort to
focus on core activities and to take advantage of certain economies of scale,
better performance and a lower cost structure offered by accounts receivable
management companies, many credit grantors, including government agencies,
have chosen to outsource some or all aspects of the accounts receivable
management process. In addition, this outsourcing trend has been accelerated
by the rapid consolidation of certain credit granting industries, including
financial services, telecommunications and healthcare, as companies have
focused on core business activities. Such consolidation is creating larger
national clients seeking to place accounts with accounts receivable management
companies that offer national, rather than local or regional, services.
The Company believes the collections industry has attractive growth
potential. Industry volume is driven by the level of consumer debt and
consumer delinquency rates, outsourcing trends and industry consolidation. The
Company believes that the current outlook for these industry drivers suggests
that the collections industry will continue to demonstrate strong growth in
the coming years.
COLLECTION PROCESS. Contingent fee services are the traditional services
provided in the accounts receivable management industry. Creditors typically
place non-performing accounts with outside agencies, usually when the
receivable is 180 to 270 days past due. The contingent fee is generally based
on the estimated collectability of the receivable in terms of the costs that
the contingent fee servicer must incur to effect repayment. The earlier the
placement (i.e., the less elapsed time between the past-due date of the
receivable and the date on which the debt is placed with the contingent fee
servicer), the higher the probability of making a recovery.
There are three main types of placements in the contingent fee business,
each representing a different stage in the cycle of accounts receivable
collection that are placed with outside agencies. Primary placements are
accounts, typically 180 to 270 days past due, that are placed with outside
agencies for the first time and usually result in a lower average contingency
fee rate. Secondary and tertiary placements are accounts receivable, typically
over 360 days past due, that have previously been placed with an outside
agency as a primary placement and are then reassigned to another agency for
further processing, including asset searches, obtaining judgments, and other
legal remedies, in an effort to obtain repayment. In addition, credit grantors
are increasingly placing accounts with accounts receivable management
companies earlier in the collection cycle, often prior to the 180 days past
due typical in primary placements, either on a contingent fee or fixed fee
basis.
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The following chart illustrates the collection process utilized by the
Company for bank credit card debt:
[CHART APPEARS HERE]
The most widely used fee arrangement utilized by credit grantors in
recovering charged off accounts receivable is contingency fee. Recently,
certain credit grantors have sought to reduce their portfolios of charged off
accounts receivable by selling such portfolios. These portfolios are comprised
of accounts often two to three years past due that previously have been placed
with an outside agency, but remain uncollected. The largest percentage of
purchased portfolios originate from credit card receivables. These portfolios
are typically purchased at a discount to the aggregate principal value of the
accounts, with an inverse correlation between the purchase price and the age of
the delinquent accounts. Traditional collection techniques are subsequently
employed to obtain payment of charged off accounts. As a result of the
Company's strategy of focusing on servicing clients earlier in the collection
cycle, the Company has no current intention to engage in material acquisitions
of debt portfolios.
The accounts receivable management industry has become increasingly efficient
with the implementation of new technology. Today, leading companies in this
industry use proprietary databases, automated power dialers, automatic call
distributors and computerized skiptracing capabilities to increase the number
of contacts with debtors. These technological advances contribute to industry
consolidation and facilitate the provision of related accounts receivable
management outsourcing services. The Company believes that firms with the most
efficient operating systems typically generate higher recovery rates at lower
cost.
INCREASE IN CONSUMER DEBT AND DELINQUENCIES. Consumer debt has grown in the
United States from $3.8 trillion in 1991 to $5.4 trillion in 1996, representing
a compound annual growth rate of 7.3%. This increase in consumer debt has been
accompanied by higher levels of delinquencies. From 1991 to 1997, bank card
delinquency rates ranged from a low of 3.3% in 1994 to a high of an estimated
4.9% for year end 1997. Largely as a result of these trends, placements to
contingent fee companies have grown from approximately $43.7 billion in 1990 to
approximately $122.3 billion in 1996, a compound annual growth rate of 18.7%,
according to the ACA, an industry trade association.
CORPORATE OUTSOURCING. Increasing numbers of companies are outsourcing non-
core functions that can be more efficiently conducted by specialized firms. By
outsourcing these functions, companies are able to focus on core revenue
generating activities and reducing costs, thereby improving productivity. In
particular, the Company
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believes many credit grantors are recognizing the advantages of outsourcing
accounts receivable management as a result of factors including (i) the
increasing complexity of such functions, (ii) rapid growth in consumer debt
levels and the increase in delinquencies, (iii) changing regulations
applicable to debt collection practices and (iv) the development of
sophisticated call management centers requiring substantial capital
investment, technical information systems capabilities and human resource
commitments. The Company believes that outsourcing these services provides
value to clients through lower delinquencies, improved customer relations and
reduced chargeoffs.
GOVERNMENT OUTSOURCING. Government agencies on the federal, state and local
levels are also increasing their use of private collection agencies. A 1995
study by the Mercer Group, an independent industry research firm, showed that
from 1985 to 1995 local governments had significantly increased their use of
private collection agencies. Similarly, an estimated 32 of the 52 federal
government agencies currently utilize private collection agencies to assist in
the collection of a portion of the approximately $200 billion of non-tax
related debt owed to the federal government. Private agencies have also
demonstrated a greater effectiveness in debt collection, as evidenced by a
1994 study by the General Accounting Office which found that the average
collection rate of private collection agencies was 45% higher than that of
state government agencies.
INDUSTRY CONSOLIDATION. The accounts receivable management industry is
highly fragmented, consisting of approximately 6,300 collection agencies as of
1996, according to ACA. According to M. Kaulkin & Associates, the ten largest
agencies accounted for approximately 17% and 20% of the total 1995 and 1996
contingent revenue, respectively, for the industry. The Company believes that
the industry is entering a period of consolidation driven by a number of
factors, including (i) the economies of scale available to larger operators,
(ii) new technology which facilitates the collection process, (iii) the
ability of large operators to provide services nationally and (iv) increased
licensing and regulatory burdens.
CLIENT CONSOLIDATION. The largest credit-granting industries, including fi-
nancial services, telecommunications, healthcare and retail, are experiencing
continued consolidation. As a result, the operations of many credit grantors
are becoming increasingly complex and the Company believes such credit grant-
ors are shifting account placements to accounts receivable management compa-
nies that have the ability to service a large volume of placements on a na-
tional basis.
COMPANY HISTORY
In the Merger, the Company was acquired from First Data by NAC on December
31, 1997. The Company was previously a wholly owned subsidiary of FFMC, which
is a wholly owned subsidiary of First Data. The Company was acquired in June
1990 by FFMC. First Data's October 1995 merger with FFMC, accounted for under
the pooling of interests method, resulted in the combination of First Data's
accounts receivable management company, ACB, with the Company. ACB was
primarily the result of two acquisitions consummated by First Data in 1993,
accounted for under the purchase method of accounting.
THE COMPANY
Overview
The Company is among the largest independent providers of accounts
receivable management services in the United States, as measured by the
aggregate principal value of placement volume. The Company offers contingent
fee collection, pre-chargeoff accounts receivable management and on-site
collection management services, primarily to financial institutions,
government agencies, telecommunications companies and healthcare providers.
The Company provides sophisticated, customized past-due account collection and
accounts receivable management services to its clients through a nationwide
network of 15 call centers.
The Company has historically generated substantially all of its revenue from
contingent fees received for collection services provided to a wide variety of
credit grantors. Contingent fee services, which are the traditional
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services provided in the accounts receivable management industry, involve
collecting delinquent consumer debt placed with the collection services
provider in exchange for a percentage of realized collections. The Company has
a client base that includes American Express, AT&T, BellSouth, the DOE, First
Union, GMAC, the GSA, MCI, Mobil, NationsBank, Novus (issuer of DISCOVER Card)
and Texaco.
In order to provide more comprehensive collection solution for its clients,
the Company has also begun providing pre-chargeoff accounts receivable
management services, in which the Company contacts debtors earlier in the
collection cycle in an attempt to bring the account current before the credit
grantor formally charges off the past-due balance. For these services, the
Company is typically paid a monthly fee for each account it manages and, in
certain circumstances, additional performance-based fees. The Company has also
begun contracting with credit grantors to provide on-site accounts receivable
management, collections personnel and related services. The Company believes
that there is significant growth potential in these service areas, primarily
due to increased outsourcing of accounts receivable management services by
credit grantors.
In the first quarter of 1997, a new senior management team, led by Jerrold
Kaufman as President and Chief Executive Officer, implemented a business
strategy focused on increasing revenues with existing clients and developing
new relationships with other large credit grantors while implementing the
Operating Improvement Plan. The Operating Improvement Plan includes (i)
reducing the number of information systems utilized by the Company, (ii)
reducing overhead expense by reducing corporate staff headcount through
attrition and (iii) significantly reducing the number of unprofitable and
lower margin clients. In connection with the Merger on December 31, 1997,
management, along with the Investor Group and NAC, approved a modification to
the Operating Improvement Plan to rationalize the Company's operating
facilities which will result in additional headcount reduction and relocation
of personnel.
Through its demonstrated collection performance and improved customer
service, the Company has recently received new contracts with the DOE, MCI,
Chrysler and the GSA. In addition, the Company is experiencing growth in its
revenue from pre-chargeoff services. For example, the Company recently
successfully completed a pilot pre-chargeoff program for a significant client
that is being implemented on a larger scale in 1998 with the Company as a key
service provider.
COMPETITIVE STRENGTHS
The Company believes that it has the following competitive strengths:
REPUTATION AS AN INDUSTRY LEADER. The Company has been in the accounts
receivable management business since 1947. The Company has grown to become
among the largest independent providers of accounts receivable management
services in the United States, as measured by placement volume and has long
standing relationships with many of its clients.
COLLECTION PERFORMANCE. Most clients utilize multiple accounts receivable
management providers and choose these providers based upon overall collection
results. The Company has developed a disciplined approach to collections that
effectively utilizes technology and personnel training programs in a way that
management believes is unique in the industry. As a result of its historical
collections performance, the Company is often one of the largest providers of
accounts receivable management services to its major clients.
NATIONAL PRESENCE. The Company operates in all 50 states through 15 call
centers and three corporate offices. The Company believes its ability to
collect nationally provides a competitive advantage when servicing large,
national credit grantors and positions it well to benefit from the industry's
ongoing consolidation.
STRONG MANAGEMENT. Beginning with the appointment of Jerrold Kaufman as
president and chief executive officer in September of 1996, the Company has
assembled an executive management team with
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extensive experience in the collections industry, call center management and
labor intensive operations. In addition, the Company has a very experienced
team of line managers at the call center level. These managers have worked an
average of over nine years with the Company.
DISTINGUISHED CLIENT BASE. The Company services a large and diverse client
base, and its more than 400 clients include American Express, AT&T, BellSouth,
the DOE, First Union, the GSA, GMAC, MCI, Mobil, NationsBank, Novus (issuer of
DISCOVER Card) and Texaco. Moreover, the Company (or its predecessors) has
been in the collection business since 1947 and has had relationships with some
of its clients for more than 25 years, including Texaco (47 years), Mobil (35
years) and American Express (27 years).
BUSINESS STRATEGY
The Company's experience, performance and market share contribute to its
success and position as an industry leader. In order to generate increased
revenue and reduce costs, the Company's senior management team has developed a
business strategy emphasizing the following key components:
FOCUS ON CORE COLLECTION ACTIVITIES. The Company believes it has a
competitive advantage in the marketplace based on its reputation and
performance as a leading collection services provider serving a wide range of
credit grantors. Due to favorable industry trends, the Company believes that
the contingent placement market will continue to experience attractive growth,
and the Company intends to rely on its strong collection performance to
attract a greater share of contingent placements from existing clients and to
develop new contingent placement relationships.
EXPAND PRE-CHARGEOFF SERVICES. The Company intends to further expand its
pre-chargeoff services to provide more comprehensive collection solutions for
its clients. In response to significantly higher delinquencies, credit
grantors are increasingly outsourcing their pre-chargeoff accounts receivable
management functions. Growth in the pre-chargeoff business is expected to
complement and diversify the Company's existing revenue base by creating a
more predictable revenue stream through the establishment of additional
longer-term fixed-fee contracts.
IMPLEMENT OPERATING IMPROVEMENT PLAN. In the first quarter of 1997, the
Company's new management team began implementing its Operating Improvement
Plan designed to improve productivity, further integrate the Company's various
acquired businesses and reduce costs. This plan includes (i) reducing the
number of information systems utilized by the Company, (ii) reducing overhead
expense by reducing corporate staff headcount through attrition and (iii)
significantly reducing the number of unprofitable and lower margin clients. In
connection with the Merger on December 31, 1997, management, along with the
Investor Group and NAC, approved a modification to the Operating Improvement
Plan to rationalize the Company's operating facilities which will result in
additional headcount reduction and relocation of personnel.
LEVERAGE SIZE AND NATIONAL REACH. The Company believes that its national
presence, infrastructure and operating expertise allow it to provide superior
accounts receivable management for large national credit grantors, including
the federal government. The Company intends to capitalize on its ability to
manage large national placements by taking advantage of opportunities that
arise from consolidation among credit grantors and by extending its non-
traditional services to clients located throughout the United States.
UTILIZE TECHNOLOGY TO INCREASE COLLECTIONS. Since the beginning of 1994, the
Company has made capital expenditures of over $15 million in its
telecommunications equipment, software and computer systems. These investments
enable the Company to operate more efficiently and manage large accounts
receivable programs. The Company is able to customize procedures and reports
to meet the varying needs of its clients. The Company believes that these
capital expenditures and technological capabilities will continue to enhance
its competitive position.
GROW THROUGH ACQUISITIONS. The Company has completed acquisitions of other
collection service providers to expand its client base, acquire new service
capabilities, and enter new market segments. For
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example, the Company acquired Consolidated in February 1997, to expand its
telecommunications business. The Company intends to review acquisition
candidates on an ongoing basis and will seek to make opportunistic
acquisitions to further solidify its market position. The Company does not
currently have any agreements with respect to future acquisitions.
SERVICES
In order to achieve its objective of becoming the accounts receivables
manager of choice for its clients, the Company has developed specialized and
cost-effective services. The Company's wide range of programs and products
allows its clients to customize services received in ways that meet their
outsourcing objectives. These services range from traditional, post-chargeoff
contingency collection services to complete on-site management of all stages
of a client's accounts receivable process.
Following is a description of the services offered by the Company:
CONTINGENT FEE SERVICES. The Company is among the largest independent
providers of contingent fee services in the United States and offers a full
range of contingent fee collection services to consumer and commercial credit
grantors. The Company utilizes sophisticated management information systems to
leverage its experience with locating, contacting and effecting payment from
delinquent account holders. The Company specializes in servicing consumer
creditors but maintains a growing presence in the commercial collections
business. With 15 call centers in 14 states and approximately 2,050 employees,
the Company has the ability to service a large volume of accounts with
national coverage. The Company generated approximately 95%, 93% and 89% of its
revenue through contingent fee services for the year ended December 31, 1996,
the year ended December 31, 1997, and the six months ended June 30, 1998,
respectively.
PRE-CHARGEOFF RECEIVABLE MANAGEMENT SERVICES. In addition to traditional
contingent fee services, the Company has developed pre-chargeoff programs. In
these programs, the Company receives accounts from credit grantors before
chargeoff and earns a fixed fee per account rather than a percentage of
realized collections. With its operational expertise in managing receivables,
the Company offers credit grantors a variety of pre-chargeoff outsourcing
options including (i) staff augmentation, (ii) inbound and outbound calling
programs, (iii) skiptracing and (iv) total outsource. Account follow-up is an
extension of the client's existing procedures utilizing experienced customer
service collection personnel to fully collect balances of delinquent accounts.
The Company believes that outsourcing these services allows credit grantors to
reduce collections costs while also achieving lower delinquencies, improved
customer retention and reduced chargeoffs.
ON-SITE MANAGEMENT SERVICES. The Company has expanded its services to
include on-site accounts receivable management for credit grantors whereby the
Company manages the client's internal collection efforts by providing
management, collection personnel and related services at the customer's
location. This program allows clients to outsource their accounts receivable
collection activities, while maintaining supervisor oversight. The Company's
management directs the efforts of the entire collection staff and, through its
expertise, provides efficient use of the customer's technology and creative
collection techniques. The Company expects to offer these services across all
of its markets in the future.
OPERATIONS
The Company provides collection services to credit grantors on a national
basis. Clients typically place accounts with the Company daily or weekly by
electronic data transfer. Account collection procedures are either specified
contractually by the credit grantor or designed by the Company to meet
performance and productivity goals. These procedures are designed to increase
recoveries based on the account's age and balance, the debtor's payment and
credit history and the effort required to locate the debtor.
The Company has developed sophisticated collection procedures for account
treatment. Automated processes allow collection representatives to access
personal and credit information necessary to make early contact with debtors.
After account preparation, the Company employs complex telephone and
correspondence strategies designed to initiate contact, perhaps the most
difficult task in the process. The Company seeks to
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maximize collections and minimize expense through the use of automated dialing
programs as well as manual calling efforts. The Company has also designed
account flow processes whereby accounts are automatically transferred to
specialized branch locations at prescribed time periods. These branch
locations utilize targeted collection efforts to increase the chance of
recovery.
Upon contact with a debtor and in accordance with account collection
procedures agreed upon with the client, collection representatives attempt to
negotiate a settlement, which may include immediate payment in full, mutually
agreed upon payment terms or, in some cases, a reduction in principal. In some
instances, legal action is required to effect collection from delinquent
debtors. Once the Company receives permission from the creditor to pursue
legal action, the Company forwards the account to its independent network of
attorneys.
CUSTOMERS
The Company services a large and recognized client base which includes
American Express, AT&T, BellSouth, the DOE, First Union, the GSA, GMAC, MCI,
Mobil, NationsBank, Novus (issuer of DISCOVER card) and Texaco. Many of these
clients have used the Company or its predecessors for more than 25 years
including Texaco (47 years), Mobil (35 years), and American Express (27
years).
The Company categorizes its clients by industry. The Company's revenue from
the following industries for the six months ended June 30, 1998, are:
<TABLE>
<S> <C>
Financial Services.................... 48.5%
Telecommunication..................... 14.5%
Retail................................ 14.0%
Institutional (1)..................... 13.7%
Healthcare............................ 8.5%
Other................................. 0.8%
------
Total............................... 100.0%
======
</TABLE>
- --------
(1) Institutional revenue consists primarily of revenue from local, state and
federal government entities.
SALES AND MARKETING
The Company's sales and marketing activities are coordinated by the
Company's President and managed by the senior vice president of sales,
supported by a sales force of five professionals. The President is directly
responsible for the Company's largest account, American Express. The Company's
marketing strategy is to (i) attract a greater share of placements by
strengthening relationships with targeted clients, (ii) expand the services it
provides to its existing clients by offering end-to-end receivable management
services and (iii) target new clients in high-growth markets.
In its sales efforts, the Company emphasizes its industry experience,
reputation, collection performance and national presence, which the Company
believes are the four key factors considered by large credit grantors when
selecting an accounts receivable service provider. The Company will
increasingly focus on cross-selling its full range of outsourcing services to
its existing clients and will use its product breadth as a selling point in
developing new business.
TECHNOLOGY
The Company utilizes a variety of management information and
telecommunication systems to enhance productivity in all areas of its
business. The Company has two primary software systems dedicated to its core
business. One system is a program developed and used primarily for one of its
largest clients. The other system
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was developed by a third party and the Company believes it to be the most
advanced commercially available collection software. Both systems have been
tailored to meet the specific needs of the Company's customers and, in many
cases, to integrate smoothly into their accounts receivable management
processes. These systems also interface with certain commercially available
data bases, which provide information used for debtor evaluation and contacts.
Both systems utilize a mainframe configuration and are designed to provide
maximum flexibility to the call centers while providing the centralized
controls necessary for effective management and for client interfaces. These
systems allow each collections facility to function independently.
In addition, the Company utilizes sophisticated telecommunications
equipment, including automated call distribution systems and power dialers,
which significantly increase account representative productivity over
conventional manual dialing. Since the beginning of 1994, the Company has made
capital expenditures of over $15 million in its telecommunications equipment,
software and computer systems. The Company is in the process of upgrading its
systems and hardware to allow for anticipated growth.
A key component of the Company's Operating Improvement Plan has been the
reduction of its collection operating system platforms from nine to three.
This reduction has resulted in significant cost savings due to reduced
personnel and other costs associated with programming, data processing and
other administrative functions.
FACILITIES
As of June 30, 1998, the Company operated 15 branches and three corporate
offices in 14 states across the United States, all of which are leased. The
Company's facilities are strategically located to provide more cost-effective
services to its clients.
COMPETITION
The accounts receivable management industry is highly competitive. The
Company competes with approximately 6,300 providers, including national
corporations such as Equifax Inc., National Revenue Corp., NCO Group, Inc.,
Outsourcing Solutions Inc., The Union Corporation and many regional and local
firms. Most larger clients retain multiple accounts receivable management and
recovery providers and periodically evaluate collections performance. As a
result of its historical collections performance, the Company is often one of
the largest providers of accounts receivable management services to its major
clients.
EMPLOYEES AND TRAINING
As of June 30, 1998, the Company had a total of approximately 2,050
employees, of which approximately 1,550 were collectors. None of the Company's
employees is represented by a labor union. The Company believes that its
relations with its employees are good.
The Company's success in recruiting, hiring and training a large number of
employees is important to its ability to provide high quality accounts
receivable management and collections services to its clients. The Company
believes that the experience and depth of its call center management personnel
afford it a significant competitive advantage compared to other collection
agencies. These personnel have worked with the Company for an average of over
nine years. The Company recognizes the significant role these line managers
play in the Company's success and, to assist in their retention, the Company
compensates them at levels it believes to be
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above the industry standard. The Company does not limit hiring to those with
previous collection experience. Generally, the Company hires a mix of people
with previous experience in collections or accounts receivable management, as
well as people whom the Company believes possess the necessary skills to be
successful collectors.
All new employees are required to successfully complete the Company's
extensive training program. The Company designed its training program to
foster competency and proficiency in the employee's collection activities,
including negotiating skills and account procedures. The instructors for the
training program are all certified by the ACA. All collector training provides
full and in-depth coverage of compliance with the FDCPA and other laws
governing the industry. To the extent required, all collectors are licensed
and registered for states where their debtors reside. Only after licensing,
registration, and training are collectors assigned an account for collection.
LEGAL
The Company is a defendant in various legal proceedings involving claims for
damages, which constitute ordinary routine litigation incidental to its
business. The Company is currently a defendant in two class action lawsuits
filed in the U.S. District Court for the Northern District of Illinois, in
which it is alleged that the Company violated certain provisions of the FDCPA.
The Company expects to settle one of these class actions for an amount less
than $150,000 and is continuing to defend the remaining putative class action
suit. The FDCPA sets the maximum liability for such class action suits at the
lesser of $500,000 or 1% of the defendants' net worth. The Company believes
that it is in substantial compliance with the FDCPA and comparable state
statutes, although the Company reached a settlement in 1992 in an action
commenced by the FTC staff in which it alleged the Company had violated the
FDCPA. The matter was resolved with the Consent Decree, in which the Company
did not admit any liability. Pursuant to the Consent Decree, the Company
agreed to take additional steps to ensure compliance with the FDCPA and paid a
penalty of $100,000. The FTC staff recently completed an investigation
regarding the Company's compliance with the Consent Decree from January 1,
1994 to date. Without admitting liability for any of the alleged violations of
the FDCPA, the Company has settled the matter by agreeing to pay a civil
penalty of $1.0 million and by implementing certain procedures in connection
with the operation of the business, consisting primarily of disclosure to
debtors of their rights and enhanced training and compliance reporting
requirements. In connection with the Merger, First Data agreed to indemnify
the Company for any monetary penalty and expenses incurred in connection with
the FTC investigation. The settlement was filed with the court on October 6,
1998 in the form originally proposed. United States v. Nationwide Credit,
Inc., Civ. Act. No. 1:98-CV-2929. The Company believes that compliance by the
Company with the provisions of the Consent Decree, as well as with the
additional provisions related to the proposed settlement of the FTC
investigation, will not materially affect the Company's financial condition or
ongoing operations. See "Risk Factors--Litigation."
GOVERNMENTAL REGULATION
Certain of the Company's operations are subject to compliance with the FDCPA
and comparable statutes in many states. Under the FDCPA, a third-party
collection agency is restricted in the methods it uses to collect consumer
debt. For example, a third-party collection agency is limited in communicating
with persons other than the consumer about the consumer's debt, may not
telephone at inconvenient hours and must provide verification of the debt at
the consumer's request. Requirements under state collection agency statutes
vary, with most requiring compliance similar to that required under the FDCPA.
In addition, most states and certain municipalities require collection
agencies to be licensed with the appropriate authorities before collecting
debts from debtors within those jurisdictions. The Company maintains licenses
in all jurisdictions in which its operations require it to be licensed. It is
the Company's policy to comply with the provisions of the FDCPA, comparable
state statutes and applicable licensing requirements. The Company has
established certain policies and procedures to reduce the likelihood of
violations of the FDCPA and related state statutes. All account
representatives receive extensive training on these policies and must pass a
test on the FDCPA. Each account representative's desk has a list of suggested
and prohibited language by the telephone. The agents work in an open
environment, which allows managers to monitor interaction with debtors, and
the system automatically alerts managers of potential problems if calls extend
beyond a certain duration.
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Strict compliance with all of the relevant laws and regulations governing
the accounts receivable management industry is a top priority of the Company.
The Company is establishing new processes for complaint prevention and
resolution that are expected to be the standard for the debt collection
industry. The process will be administered in the field and monitored by the
general counsel's office and a special committee of the Board of Directors.
Any complaint against the Company or one of its employees is recorded and a
thorough investigation is initiated and appropriate corrective measures are
taken. The Company is extremely earnest in its efforts to avoid complaints.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the respective
directors of the Company's board of directors (the "Board of Directors") and
the executive officers of the Company. All directors hold office until the
next annual meeting of stockholders of the Company and until their successors
are duly elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
David B. Golub........... 36 Director, Chairman of the Board
Jerrold Kaufman.......... 58 Chief Executive Officer, President and Director
Nora E. Kerppola......... 33 Director
Loren F. Kranz........... 46 Chief Operating Officer, Executive Vice President,
Secretary and Director
Wesley W. Lang, Jr. ..... 40 Director, Vice Chairman of the Board
Lester Pollack........... 65 Director
Jeffrey A. Weiss......... 54 Director
Craig S. Whiting......... 41 Director
Paul J. Zepf............. 33 Director
Michael Lord............. 51 Chief Financial Officer and Treasurer
Daniel Sullivan.......... 48 Senior Vice President--Sales
Gregory Schubert......... 32 Senior Vice President--Operations
</TABLE>
DAVID B. GOLUB is a Managing Director of Centre Partners. He has worked at
Centre Partners and a predecessor fund, Corporate Advisors, L.P. ("Corporate
Advisors"), since 1988. Mr. Golub also serves as a director of The Burton
Corporation and Manorhouse Retirement Centers, Inc.
JERROLD KAUFMAN joined the Company in October 1994 as the Senior Vice
President of Sales and Marketing. In June 1996, Mr. Kaufman was named
Executive Vice President, Sales and Marketing and in September was named
President of the Company. Prior to joining the Company, Mr. Kaufman held
several executive positions in the accounts receivable collections industry.
From 1986 to 1992, Mr. Kaufman worked for American Creditors Bureau, where he
was Vice President of sales and marketing and served as a director. In 1992,
Mr. Kaufman started ABACUS Financial Management Services and served as its
Chairman and Chief Executive Officer until 1994.
NORA E. KERPPOLA is a Principal of Weiss, Peck & Greer, L.L.C., Inc. which
she joined in 1994 from Investor International (U.S.). Ms. Kerppola also
serves as a director of Dollar Financial Group, Inc. and Powell Plant Farms,
Inc.
LOREN F. KRANZ joined the Company in January 1997. Mr. Kranz has substantial
general management experience in highly labor intensive, customer-focused
business activities. He held numerous positions during his 23-year tenure with
General Electric Company ("General Electric"). In his most recent assignment
with General Electric, Mr. Kranz served as CEO of Advanced Services, Inc., a
wholly owned subsidiary of GE Appliances.
WESLEY W. LANG, JR. is a Managing Director and member of the Executive
Committee of Weiss, Peck & Greer, L.L.C, which he joined in 1985 from
Manufacturers Hanover Trust Company. Mr. Lang also serves as a director of
Chyron Corporation, Michael Alan Designs, Dollar Financial Group, Inc.,
Meridian Aggregates Company, Powell Plant Farms, Inc. and Tire Kingdom, Inc.
LESTER POLLACK is a Managing Director of Centre Partners, which he founded
in 1986. He has also been a Managing Director of Lazard Freres & Co. LLC since
1995 (prior thereto, a general partner). Mr. Pollack also serves as a director
of Parlex Corporation, Tidewater, Inc., LaSalle Re Holdings Limited, Firearms
Training Systems, Inc. and SunAmerica, Inc.
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<PAGE>
JEFFREY A. WEISS has served as the Chairman, President, and Chief Executive
Officer of Dollar Financial Group, Inc. since 1990. Until 1992, Mr. Weiss was
also a Managing Director at Bear Stearns & Co. Inc. with primary
responsibility for the firm's investments in small to mid-sized companies, in
addition to serving as Chairman and Chief Executive Officer for several of
these companies. Mr. Weiss is the author of several popular financial guides.
CRAIG S. WHITING is a Managing Director of Weiss, Peck & Greer, L.L.C.,
which he joined in 1992. Previously he was a vice president at Credit Suisse
First Boston Corporation. Mr. Whiting also serves as a director of Color
Associates, Inc., Michael Alan Designs and Tire Kingdom, Inc.
PAUL J. ZEPF is a Managing Director of Centre Partners. He has worked at
Centre Partners and a predecessor fund, Corporate Advisors, since 1989. Mr.
Zepf also serves as a director of LaSalle Re Holdings Limited, Firearms
Training Systems, Inc. and The Learning Company.
MICHAEL LORD joined the Company in May 1998 after being retained as a
consultant in January 1998. Prior to joining the Company, Mr. Lord was a
managing director of The RDR Group, Inc., specializing in financial and
operational consulting since 1991.
DANIEL SULLIVAN joined the Company in May 1998. Prior to joining the
Company, Mr. Sullivan was a Vice President and General Manager for GE Capital,
Retailer Financial Services, Southern Business Group ("GE Capital") since
September 1995. From December 1991 to September 1995, Mr. Sullivan was an
Executive Director of Marketing for GE Capital.
GREGORY SCHUBERT joined the Company in March 1992. Previously, Mr. Schubert
held various management positions with Financial Collection Agencies, Inc. In
early 1996, Mr. Schubert was promoted to the position of Vice President-AMEX
and given the responsibility for managing the Company's largest client. Mr.
Schubert was promoted in October 1996 into his current position as Senior Vice
President--Operations. In this role, Mr. Schubert oversees all field
operations and recovery efforts in both the pre-chargeoff and post-chargeoff
categories. Mr. Schubert has over 13 years experience in the collection
industry.
COMPENSATION OF DIRECTORS
Officers who are also directors are not provided with any additional
compensation for their services on the Board of Directors other than the
reimbursement of expenses associated with attending meetings of the Board of
Directors or any committee thereof. Mr. Weiss will receive compensation of
$30,000 per year and all other directors will receive $15,000 per year for
their services, as well as reimbursement of expenses associated with attending
meetings of the Board of Directors or any committee thereof.
EXECUTIVE COMPENSATION
The executive officers of the Company did not receive any compensation from
the Company during the prior fiscal year. The Company has entered into
employment agreements with Messrs. Kaufman, Kranz, Lord and Schubert. The
compensation to be paid to the executive officers of the Company will be
determined by the terms of those agreements and the Board of Directors of the
Company.
EMPLOYMENT AGREEMENTS
JERROLD KAUFMAN EMPLOYMENT AGREEMENT. Mr. Kaufman entered into an employment
agreement with the Company as of December 31, 1997. Pursuant to his employment
agreement, Mr. Kaufman will serve as the Chief Executive Officer of the
Company through December 31, 2000, unless terminated earlier as provided
therein.
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<PAGE>
The compensation provided to Mr. Kaufman under his employment agreement
includes an annual base salary of $260,000, with the potential to receive an
annual bonus based upon qualitative criteria and the attainment of
quantitative financial goals established annually by the Board of Directors.
For the year ending December 31, 1998, Mr. Kaufman will have the potential to
receive a bonus of up to $45,000, plus an additional bonus of up to $105,000
based on the Company's EBITDA (as defined therein) for the year. Mr. Kaufman
is also eligible to participate in all employee benefit programs of the
Company. In addition, Mr. Kaufman is entitled to reimbursement for reasonable
and necessary expenses made in furtherance of his employment.
Mr. Kaufman's employment agreement also provides that if Mr. Kaufman is
terminated without cause, he will be entitled to receive a severance benefit,
payable over a period of 12 months, in an amount equal to 12 months of his
then-existing base salary less the amount of compensation he receives from
another source during the last six months of the year during which his
severance benefit is payable under the terms of his employment agreement.
The employment agreement also provides that, without prior written consent
of the Board of Directors, Mr. Kaufman will not directly or indirectly (i)
engage, participate or invest in, be employed by or provide services to any
person or company in competition with the Company, (ii) solicit business of
the Company for another person or company, (iii) solicit employees of the
Company to terminate their employment with the Company, (iv) solicit companies
having business with the Company to curtail or cancel such business or (v)
authorize or assist any other person or company in taking such actions.
LOREN KRANZ EMPLOYMENT AGREEMENT. Mr. Kranz entered into an employment
agreement with the Company as of December 31, 1997. Pursuant to his employment
agreement, Mr. Kranz will serve as the Chief Operating Officer of the Company
through December 31, 2000, unless terminated earlier as provided therein.
The compensation provided to Mr. Kranz under his employment agreement
includes an annual base salary of $220,000, with the potential to receive an
annual bonus based upon qualitative criteria and the attainment of
quantitative financial goals established annually by the Board of Directors.
For the year ending December 31, 1998, Mr. Kranz will have the potential to
receive a bonus of up to $45,000, plus an additional bonus of up to $105,000
based on the Company's EBITDA (as defined therein) for the year. Mr. Kranz is
also eligible to participate in all employee benefit programs of the Company.
In addition, Mr. Kranz is entitled to reimbursement for reasonable and
necessary expenses made in furtherance of his employment.
Mr. Kranz's employment agreement also provides that if Mr. Kranz is
terminated without cause, he will be entitled to receive a severance benefit,
payable over a period of 12 months, in an amount equal to 12 months of his
then-existing base salary less the amount of compensation he receives from
another source during the last six months of the year during which his
severance benefit is payable under the terms of his employment agreement.
The employment agreement also provides that, without prior written consent
of the Board of Directors, Mr. Kranz will not directly or indirectly (i)
engage, participate or invest in, be employed by or provide services to any
person or company in competition with the Company, (ii) solicit business of
the Company for another person or company, (iii) solicit employees of the
Company to terminate their employment with the Company, (iv) solicit companies
having business with the Company to curtail or cancel such business or (v)
authorize or assist any other person or company in taking such actions.
MICHAEL LORD EMPLOYMENT AGREEMENT. Mr. Lord entered into an employment
agreement with the Company as of May 18, 1998. Pursuant to his employment
agreement, Mr. Lord will serve as the Chief Financial Officer of the Company
through May 18, 2001, unless terminated earlier as provided therein.
The compensation provided to Mr. Lord under his employment agreement
includes an annual base salary of $200,000, a bonus of $75,000 in 1998 and
$25,000 in 1999, with the potential to receive additional bonuses based upon
qualitative criteria and the attainment of quantitative financial goals
established annually by the Board of Directors. For the year ending December
31, 1998, Mr. Lord will have the potential to receive an additional bonus of
up to $21,000, plus an additional bonus of up to $49,000 based on the
Company's EBITDA
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<PAGE>
(as defined therein) for the year. Mr. Lord is also eligible to participate in
all employee benefit programs of the Company. In addition, Mr. Lord is
entitled to reimbursement for reasonable and necessary expenses made in
furtherance of his employment.
Mr. Lord's employment agreement also provides that if Mr. Lord is terminated
without cause, he will be entitled to receive a severance benefit, payable
over a period of 12 months, in an amount equal to 12 months of his then-
existing base salary less the amount of compensation he receives from another
source during such 12 month period.
The employment agreement also provides that, without prior written consent
of the Board of Directors, Mr. Lord will not directly or indirectly (i)
engage, participate or invest in, be employed by or provide services to any
person or company in competition with the Company, (ii) solicit business of
the Company for another person or company, (iii) solicit employees of the
Company to terminate their employment with the Company, (iv) solicit companies
having business with the Company to curtail or cancel such business or (v)
authorize or assist any other person or company in taking such actions.
GREGORY SCHUBERT EMPLOYMENT AGREEMENT. Mr. Schubert entered into an
employment agreement with the Company as of December 31, 1997. Pursuant to his
employment agreement, Mr. Schubert will serve as the Senior Vice President--
Operations of the Company through December 31, 2000, unless terminated earlier
as provided therein.
The compensation provided to Mr. Schubert under his employment agreement
includes an annual base salary of $137,000, with the potential to receive an
annual bonus based upon qualitative criteria and the attainment of
quantitative financial goals established annually by the Board of Directors.
For the year ending December 31, 1998, Mr. Schubert will have the potential to
receive a bonus of up to $27,000, plus an additional bonus of up to $63,000
based on the Company's EBITDA (as defined therein) for the year. Mr. Schubert
is also eligible to participate in all employee benefit programs of the
Company. In addition, Mr. Schubert is entitled to reimbursement for reasonable
and necessary expenses made in furtherance of his employment.
Mr. Schubert's employment agreement also provides that if Mr. Schubert is
terminated without cause, he will be entitled to receive a severance benefit,
payable over a period of 12 months, in an amount equal to 12 months of his
then-existing base salary less the amount of compensation he receives from
another source during the last six months of the period during which his
severance benefit is payable under the terms of his employment agreement.
The employment agreement also provides that, without prior written consent
of the Board of Directors, Mr. Schubert will not directly or indirectly (i)
engage, participate or invest in, be employed by or provide services to any
person or company in competition with the Company, (ii) solicit business of
the Company for another person or company, (iii) solicit employees of the
Company to terminate their employment with the Company, (iv) solicit companies
having business with the Company to curtail or cancel such business or (v)
authorize or assist any other person or company in taking such actions.
MANAGEMENT PERFORMANCE OPTION PLAN
On December 31, 1997, NAC adopted its 1997 Management Performance Option
Plan (the "Option Plan"). A total of 57,665 shares of NAC Common Stock may be
granted under the Option Plan, of which 40,846 are divided equally between
Class A Options and Class B Options and 9,610 are allocated as Class C
Options, and 7,209 of which may be allocated as Class A Options, Class B
Options or Class C Options, as determined by the Board.
In connection with the consummation of the Merger, options were granted to
certain members of management at an exercise price of $100.00 per share, as
follows: Jerrold Kaufman received Class A Options to
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<PAGE>
purchase 8,409 shares of NAC Common Stock, Class B Options to purchase 8,409
shares of NAC Common Stock and Class C Options to purchase 4,805 shares of NAC
Common Stock; Loren Kranz received Class A Options to purchase 7,208 shares of
NAC Common Stock, Class B Options to purchase 7,208 shares of NAC Common Stock
and Class C Options to purchase 4,805 shares of NAC Common Stock; and Greg
Schubert received Class A Options to purchase 1,802 shares of NAC Common Stock
and Class B Options to purchase 1,802 shares of NAC Common Stock. In
connection with his employment, Michael Lord received Class A Options to
purchase 2,403 shares of NAC Common Stock and Class B Options to purchase
2,403 shares of NAC Common Stock.
Class A Options vest 100% if the grantee is employed full time by the
Company on the third anniversary of such employee's employment, and at lesser
percentages if such grantee's employment is terminated without cause (as
defined in the Option Plan) prior to such time. Class B Options vest 100% if
either (i) the grantee is employed full time by the Company on the third
anniversary of such employee's employment and the Company performs such that
the Equity Investors realize varying rates of return on their investments or
(ii) the grantee is employed by the Company on the sixth anniversary of such
employee's employment. Class C Options vest 100% if either (i) the grantee is
employed full time by the Company on the third anniversary of such employee's
employment and the Company performs such that the Equity Investors realize an
internal rate of return on their investments of 40% (or such return is
realized within 180 days of such grantee's termination) or (ii) the grantee is
employed by the Company on the sixth anniversary of such employee's
employment. The vesting provisions of Class A Options and Class B Options
granted in the future may be altered by the Board of Directors of NAC. If a
grantee is terminated for cause, then 0% of options granted will vest. In
certain transfer events (as defined in the Option Plan), including certain
sales of substantially all of the assets of NAC or certain changes in the
beneficial ownership of a majority of the voting power of NAC, all options
granted will vest at such time.
Options granted under the Option Plan are non-transferable without the
consent of the Board of Directors of NAC, except by will or the laws of
descent and distribution or pursuant to a pledge of such options to NAC.
Options granted under the Option Plan expire until their exercise or in
accordance with their terms.
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<PAGE>
STOCK OWNERSHIP AND CERTAIN TRANSACTIONS
STOCK OWNERSHIP
All issued and outstanding shares of common stock of the Company are held by
NAC. The following table sets forth certain information regarding the
beneficial ownership of the voting securities of NAC, by each person who
beneficially owns more than 5% of any class of NAC's equity securities and by
the directors and certain executive officers of NAC, individually, and by the
directors and executive officers of NAC as a group.
<TABLE>
<CAPTION>
NUMBER
OF PERCENT OF
5% STOCKHOLDERS: SHARES OUTSTANDING
- ---------------- ------- -----------
<S> <C> <C>
Centre Partners Group (1)................................. 200,000 47.8%
30 Rockefeller Plaza
Suite 5050
New York, New York 10020
Weiss, Peck & Greer Parties (2)........................... 190,000 45.4
One New York Plaza
New York, New York 10004
OFFICERS AND DIRECTORS:
David B. Golub (1)........................................ 200,000 47.8%
Jerrold Kaufman (3)....................................... 1,000 *
Nora E. Kerppola (2)...................................... 190,000 45.4
Loren F. Kranz (4)........................................ 1,000 *
Wesley W. Lang, Jr. (2)................................... 190,000 45.4
Lester Pollack (1)........................................ 200,000 47.8
Jeffrey A. Weiss (5)...................................... 15,416 3.7
Craig S. Whiting (2)...................................... 190,000 45.4
Paul J. Zepf (1).......................................... 200,000 47.8
Michael Lord (6).......................................... -- *
Gregory Schubert (7)...................................... 500 *
All directors and officers as a group (8) (12 persons).... 408,066 100.0%
</TABLE>
- --------
* Represents less than 1%.
(1) Includes (i) 61,213 shares owned of record by Centre Capital Investors II,
L.P. ("Investors II"), (ii) 19,919 shares owned of record by Centre
Capital Tax-Exempt Investors II, L.P. ("Tax-Exempt II"), (iii) 12,280
shares owned of record by Centre Capital Offshore Investors II, L.P.
("Offshore II"), (iv) 939 shares owned of record by Centre Parallel
Management Partners, L.P. ("Parallel"), (v) 12,691 shares owned of record
by Centre Partners Coinvestment, L.P. ("Coinvestment") and (vi) 92,958
shares owned of record by the State Board of Administration of Florida
(the "Florida Board"). Investors II, Tax-Exempt II and Offshore II are
limited partnerships, of which the general partner of each is Centre
Partners II, L.P. ("Partners II"), and of which Centre Partners Management
LLC ("Centre Management") is an attorney-in-fact. Parallel and
Coinvestment are also limited partnerships. In its capacity as manager of
certain investments for the Florida Board pursuant to a management
agreement, Centre Management is an attorney-in-fact of Florida Board.
Centre Partners II LLC is the ultimate general partner of each of
Investors II, Tax-Exempt II, Offshore II, Parallel and Coinvestment. David
B. Golub, Lester Pollack and Paul J. Zepf are each Managing Directors of
Centre Management and Centre Partners II LLC and as such may be deemed to
beneficially own and share the power to vote or dispose of NAC Common
Stock held by Investors II, Tax-Exempt II, Offshore II, Parallel,
Coinvestment and the Florida Board. Each of Messrs. Golub, Pollack and
Zepf disclaims the beneficial ownership of such NAC Common Stock.
(2) Includes (i) 164,464 shares owned of record by WPG Corporate Development
Associates V, L.P. ("Development V") and (ii) 25,536 shares owned of
record by WPG Corporate Development Associates V (Overseas), L.P.
("Overseas V"). The general partner of Development V is WPG Private Equity
Partners II, LLC ("Equity Partners II") and the general partners of
Overseas V are WPG Private Equity Partners II
50
<PAGE>
(Overseas), LLC ("Equity Partners Overseas") and WPG CDA V (Overseas), Ltd.
("WPG CDA V"). Wesley W. Lang, Jr. is the Managing Principal of Equity
Partners II and a director of Equity Partners Overseas and as such he may
be deemed to beneficially own and share the power to vote or dispose of the
NAC Common Stock held by Development V and Overseas V. Mr. Lang disclaims
the beneficial ownership of such NAC Common Stock.
(3) Does not include 21,623 shares of NAC Common Stock issuable to Mr. Kaufman
upon exercise of options that are not exercisable within 60 days. See
"Management--Management Performance Option Plan."
(4) Does not include 19,221 shares of NAC Common Stock issuable to Mr. Kranz
upon exercise of Options that are not exercisable within 60 days. See
"Management--Management Performance Option Plan."
(5) Includes (i) 1,000 shares owned of record by Avalon Investment Partners,
LLC ("Avalon"), of which Mr. Weiss is a member and (ii) 14,416 shares of
NAC Common Stock issuable to Avalon upon exercise of Class I Options,
which are presently exercisable. Does not include 4,805 shares of NAC
Common Stock issuable to Avalon upon exercise of Class II Options that are
not exercisable within 60 days. See "--Certain Transactions--Avalon Option
Agreement."
(6) Does not include 4,806 shares of NAC Common Stock issuable to Mr. Lord
upon exercise of options that are not exercisable within 60 days. See
"Management--Management Performance Option Plan."
(7) Does not include 3,604 shares of NAC Common Stock issuable to Mr. Schubert
upon exercise of options that are not exercisable within 60 days. See
"Management--Management Performance Option Plan."
(8) Does not include 55,260 shares of NAC Common Stock issuable upon exercise
of options that are not exercisable within 60 days.
CERTAIN TRANSACTIONS
Stockholders' Agreement. Effective concurrent with the consummation of the
Merger, each investor in common stock of NAC entered into a stockholders'
agreement (the "Stockholders' Agreement"). The Stockholders' Agreement, among
other things, provides for: (i) the reimbursement of Centre Partners and WPG
for all reasonable expenses incurred by them in connection with the
Transactions; (ii) limits on the ability of stockholders to, directly or
indirectly, acquire beneficial ownerships of certain competitors of the
Company; (iii) limits on the ability of stockholders to amend NAC's bylaws
without certain approval of the Board of Directors; (iv) requirements that NAC
solicit offers from third parties to engage in acquisitions of NAC's stock or
assets following the fourth anniversary of the consummation date of the Merger
(see "Risk Factors--Change of Control"); (v) limits on the ability of
stockholders to transfer any shares of NAC's common stock without the approval
of its Board of Directors, including the granting to NAC, in the first
instance, and Centre Partners and WPG, in the second instance, of options to
purchase shares in the event a stockholder seeks to transfer such common stock
to certain proposed transferees; (vi) repurchase rights of NAC for shares of
NAC common stock held by members of management in the event of their
termination or shares held by insolvent stockholders; (vii) requirements
regarding the delivery of operating budgets, financial statements and other
information to the stockholders and inspection rights with respect to Centre
Partners and WPG; and (viii) certain non-disclosure obligations with respect
to confidential information. The Stockholders' Agreement also required these
Board-approved provisions to be set forth in the Company's charter and bylaws.
All parties to the Stockholders' Agreement also agree to take all action
within their respective power to cause the Board of Directors of NAC to at all
times be comprised of three designees of each of Centre Partners, WPG and the
majority of directors then in office; provided, however, that the initial
three designees of the Board were designated by a majority of the Class A
Directors and Class B Directors. The right of each of Centre Partners and WPG
to designate three directors shall be reduced to two designees in the event
that their respective ownership (as calculated therein) falls below 20%,
further reduced to one designee if such ownership falls below 10%, and
terminated if such ownership is less than 2% of the outstanding NAC common
stock. The Stockholders' Agreement also requires the presence of at least one
Class A Director and one Class B Director in order for there to be a quorum
present at a meeting of the Board of Directors. The Stockholders' Agreement
also provides for the selection of a Chairman of the Board and a Vice-Chairman
of the Board from the designees of each of Centre Partners and WPG for
rotating 12-month terms. The Stockholders' Agreement requires the approval of
a majority of the Board, which majority must include at least one Class A
Director and one Class B Director, to take certain actions, including without
limitation, approval of the annual operating budgets of NAC and its
subsidiaries,
51
<PAGE>
including the Company, making or committing to make capital expenditures or
asset acquisitions which individually exceed $0.5 million or in the aggregate
exceed $1.0 million, incur indebtedness in excess of $1.0 million, create
liens or security interests on any asset of NAC or its subsidiaries other than
in the ordinary course of business and settle claims or litigation for amounts
in excess of $0.5 million. In connection with the Stockholders' Agreement, the
stockholders also executed a registration rights agreement, which provides for
demand and incidental (or "piggyback") registration rights.
Avalon Fee Agreement. In connection with services rendered in connection
with the Transaction, the Company agreed to (i) pay Avalon an investment
banking fee of $750,000 less its investment of $100,000, (ii) grant options to
Avalon pursuant to a separate option agreement and (iii) pay the
representative of Avalon who serves as a director pursuant to the
Stockholders' Agreement an annual retainer for such period as such person
serves as a director.
Avalon Option Agreement. In connection with the Merger, on December 31, 1997
NAC and Avalon entered into the Avalon Option Agreement (the "Avalon Option
Agreement"). Pursuant to the Avalon Option Agreement, NAC granted to Avalon
Class I Options to acquire 14,416 shares of NAC common stock and Class II
Options to acquire 4,805 shares of NAC common stock, each for a purchase price
of $100.00 per share.
Class I Options vest fully and become exercisable upon the closing date of
the Merger. The Class I Options will expire on December 31, 2005. Class II
Options vest fully upon the closing date of the Merger and become exercisable
once certain stockholders have achieved a certain internal rate of return on
their investment. The Class II Options will expire on December 31, 2008.
Jerrold Kaufman Loans. Mr. Kaufman received two loans (the "Loans") on
December 31, 1997 (the "Loan Date") from the Company in the amount of $95,000
(the "2002 Loan") and in the amount of $5,000 (the "1998 Loan"). The 1998 Loan
has been paid in full. Interest on the 2002 Loan accrues on the unpaid
principal balance at the prime or corporate rate of interest per annum
published on the Loan Date by Citibank, N.A., and resets annually thereafter
to the prime or corporate rate at each anniversary of the Loan Date. The 2002
Loan is secured by a pledge by Mr. Kaufman of certain collateral (the "Pledged
Collateral") and the grant of a security interest in the Pledged Collateral.
The 2002 Loan will become due and payable upon the earliest to occur of (i)
any sale or transfer of the Pledged Collateral; (ii) within sixty (60) days
after the termination of employment of Mr. Kaufman due to his resignation or
for cause; and (iii) the dissolution or liquidation of Mr. Kaufman. In
addition, the Loans are subject to various voluntary and required prepayment
provisions.
Loren Kranz Loans. Mr. Kranz received two loans (the "Loans") on December
31, 1997 (the "Loan Date") from the Company in the amount of $45,000 (the
"2002 Loan") and in the amount of $55,000 (the "1998 Loan"). The 1998 Loan has
been paid in full. Interest on the 2002 Loan accrues on the unpaid principal
balance at the prime or corporate rate of interest per annum published on the
Loan Date by Citibank, N.A., and resets annually thereafter to the prime or
corporate rate at each anniversary of the Loan Date. The 2002 Loan is secured
by a pledge by Mr. Kranz of certain collateral (the "Pledged Collateral") and
the grant of a security interest in the Pledged Collateral.
The 2002 Loan will become due and payable upon the earliest to occur of (i)
any sale or transfer of the Pledged Collateral; (ii) within sixty (60) days
after the termination of employment of Mr. Kranz due to his resignation or for
cause; and (iii) the dissolution or liquidation of Mr. Kranz. In addition, the
Loans are subject to various voluntary and required prepayment provisions.
52
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were issued under an Indenture, dated as of January 28, 1998,
which requires that the Company file a registration statement under the
Securities Act with respect to the New Notes and, upon the effectiveness of
such registration statement, offer to the holders of the Old Notes the
opportunity to exchange their Old Notes for a like principal amount of New
Notes, which will be issued without a restrictive legend and, except as set
forth below, may be reoffered and resold by the holder without registration
under the Securities Act. Upon the completion of the Exchange Offer, the
Company's obligations with respect to the registration of the Old Notes and
the New Notes will terminate, except as provided below. A copy of the
Indenture and the Registration Rights Agreement delivered in connection
therewith have been filed as exhibits to the Registration Statement of which
this Prospectus is a part. As a result of the filing and the effectiveness of
the Registration Statement, certain prospective increases in the interest rate
on the Old Notes provided for in the Registration Rights Agreement will not
occur. Following the completion of the Exchange Offer, holders of Old Notes
not tendered will not have any further registration rights, except as provided
below, and the Old Notes will continue to be subject to certain restrictions
on transfer. Accordingly, the liquidity of the market for the Old Notes could
be adversely affected upon completion of the Exchange Offer.
Based on an interpretation by the staff of the Commission set forth in no-
action letters issued to third-parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by a holder thereof (other than
any such holder that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
holder represents to the Company that (i) such New Notes are acquired in the
ordinary course of business of such holder; (ii) such holder is not engaging
in and does not intend to engage in a distribution of such New Notes and (iii)
such holder has no arrangement or understanding with any person to participate
in the distribution of such New Notes. Any holder who tenders in the Exchange
Offer for the purpose of participating in a distribution of the New Notes
cannot rely on such interpretation by the staff of the Commission and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction. Each broker-
dealer that receives New Notes for its own account in exchange for Old Notes,
where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales of such New Notes. See "Plan of Distribution."
Broker-dealers who did not acquire Old Notes as a result of market-making or
other trading activities may not participate in the Exchange Offer.
In the event that any holder of Old Notes would not receive freely tradeable
New Notes in the Exchange Offer or is not eligible to participate in the
Exchange Offer, such holder can elect, by so indicating on the Letter of
Transmittal and providing certain additional necessary information, to have
such holder's Old Notes registered in a "shelf" registration statement on an
appropriate form pursuant to Rule 415 under the Securities Act.
In the event that the Company is obligated to file a "shelf" registration
statement, it will be required to keep such "shelf" registration statement
effective for a period of three years or such shorter period that will
terminate when all of the Old Notes covered by such registration statement
have been sold pursuant thereto. Other than set forth in this paragraph, no
holder will have the right to require the Company to register such holder's
Notes under the Securities Act. See "--Procedures for Tendering Notes."
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 P.M.,
New York time, on , 1998, provided, however,
53
<PAGE>
that if the Company, in its sole discretion, has extended the period of time
during which the Exchange Offer is open, the term "Expiration Date" means the
latest time and date to which the Exchange Offer is extended.
As of the date of this prospectus, $100,000,000 aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about March , 1998 to all Holders of
Old Notes known to the Company. The Company's obligation to accept Old Notes
for exchange pursuant to the Exchange Offer is subject to certain customary
conditions as set forth under "--Conditions to the Exchange Offer" below.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the Holders thereof as described below.
During any such extension, all Old Notes previously tendered will remain
subject to the Exchange Offer and may be accepted for exchange by the Company.
Any Old Notes not accepted for exchange for any reason will be returned
without expense to the tendering Holder thereof as promptly as practicable
after the expiration or termination of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 or any integral multiple thereof.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted
for exchange, upon the occurrence of any of the conditions of the Exchange
Offer specified below under "--Conditions to the Exchange Offer." The Company
will give oral or written notice of any extension, amendment, non-acceptance
or termination to the Holders of the Old Notes as promptly as practicable,
such notice in the case of any extension to be issued by means of a press
release or other public announcement no later than 9:00 a.m., New York City
time, on the next business day after the previously scheduled Expiration Date.
In the event the Company makes any material changes to the Exchange Offer, the
Company will distribute a supplement to this Prospectus disclosing such
changes in accordance with the requirements of the Exchange Act and the rules
thereunder.
PROCEDURES FOR TENDERING OLD NOTES
Only a registered holder of Old Notes may tender such Old Notes in the
Exchange Offer. The tender to the Company of Old Notes by a Holder thereof as
set forth below and the acceptance thereof by the Company will constitute a
binding agreement between the tendering Holder and the Company upon the terms
and subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal. Except as set forth below, a Holder who
wishes to tender Old Notes for exchange pursuant to the Exchange Offer must
transmit a properly completed and duly executed Letter of Transmittal,
including all other documents required by such Letter of Transmittal, to State
Street Bank and Trust Company (the "Exchange Agent") at one of the addresses
set forth below under "Exchange Agent" on or prior to the Expiration Date. In
addition, either (i) certificates for such Old Notes must be received by the
Exchange Agent along with the Letter of Transmittal, (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such
Old Notes, if such procedure is available, into the Exchange Agent's account
at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant
to the procedure for book-entry transfer described below, must be received by
the Exchange Agent prior to the Expiration Date, or (iii) the Holder must
comply with the guaranteed delivery procedures described below. THE METHOD OF
DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS
IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS
OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST
THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES, OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
54
<PAGE>
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company, or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's behalf, such owner must
prior to completing and executing the Letter of Transmittal and delivering
such owner's Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in such beneficial owner's name or obtain a
properly completed bond power from the registered holder. The transfer of
registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal Rights"), as the case may be, must be guaranteed (see
"--Guaranteed Delivery Procedures") unless the Old Notes surrendered for
exchange pursuant thereto are tendered (i) by a registered Holder of the Old
Notes who has not completed the box entitled "Special Issuance Instructions"
or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for
the account of an Eligible Institution (as defined below). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guaranties must be by a financial
institution (including most banks, savings and loan associations and brokerage
houses) that is a participant in the Securities Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Program or the Stock Exchanges
Medallion Program (collectively, "Eligible Institutions"). If Old Notes are
registered in the name of a person other than a signer of the Letter of
Transmittal, the Old Notes surrendered for exchange must be endorsed by or be
accompanied by a written instrument or instruments of transfer or exchange, in
a satisfactory form as determined by the Company in its sole discretion, duly
executed by the registered holder exactly as the name or names of the
registered holder or holders appear on the Old Notes with the signature
thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such person should so indicate when signing, and unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined
by the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or not to accept any
particular Old Note which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to
waive any defects or irregularities or conditions of the Exchange Offer as to
any particular Old Notes either before or after the Expiration Date (including
the right to waive the ineligibility of any Holder who seeks to tender Old
Notes in the Exchange Offer). The interpretation of the terms and conditions
of the Exchange Offer as to any particular Old Notes either before or after
the Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the
Company shall determine. None of the Company, the Exchange Agent or any other
person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall
any of them incur any liability for failure to give such notification.
By tendering, each Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the Holder, and that neither the Holder
nor such other person has any arrangement or understanding with any person to
participate in the distribution of the New Notes. If any Holder or any such
other person is an "affiliate," as defined under Rule 405 of the Securities
Act, of the Company or is engaged in or intends to engage in, or has an
arrangement or understanding with any person to participate in, a distribution
of such New Notes to be acquired pursuant to the Exchange Offer, such Holder
or any such other person (i) may not rely on the applicable interpretation of
staff of the SEC and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
55
<PAGE>
transaction. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus in connection with any
resale of such New Notes. See "Plan of Distribution." The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after
acceptance of the Old Notes. See "--Conditions to the Exchange Offer" below.
For purposes of the Exchange Offer, the Company will be deemed to have
accepted properly tendered Old Notes for exchange when, as and if the Company
has given oral or written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the Holder of such Old Note will
receive as set forth below under "Description of the Notes--Book-Entry,
Delivery and Form" a New Note having a principal amount equal to that of the
surrendered Old Note. Accordingly, registered holders of New Notes on the
relevant record date for the first interest payment date following the
consummation of the Exchange Offer will receive interest accruing from the
most recent date to which interest has been paid on the Old Notes or, if no
interest has been paid, from January 28, 1998. Old Notes accepted for exchange
will cease to accrue interest from and after the date of consummation of the
Exchange Offer. Holders whose Old Notes are accepted for exchange will not
receive any payment in respect of accrued interest on such Old Notes otherwise
payable on any interest payment date the record date for which occurs on or
after consummation of the Exchange Offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-
Entry Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are
not accepted for any reason set forth in the terms and conditions of the
Exchange Offer or if Old Notes are submitted for a greater principal amount
than the Holder desires to exchange, such unaccepted or non-exchanged Old
Notes will be returned without expense to the tendering Holder thereof (or, in
the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
procedures described below, such non-exchanged Old Notes will be credited to
an account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the Book-
Entry Transfer Facility, the Letter of Transmittal or a facsimile thereof,
with any required signature guarantees and any other required documents, must,
in any case, be transmitted to and received by the Exchange Agent at one of
the addresses set forth below under "--Exchange Agent" on or prior to the
Expiration Date or the guaranteed delivery procedures described below must be
complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
Holder's Old Notes or other required documents to reach the
56
<PAGE>
Exchange Agent before the Expiration Date, or the procedure for book-entry
transfer cannot be completed on a timely basis, a tender may be effected if
(i) the tender is made through an Eligible Institution, (ii) on or prior to
5:00 P.M., New York City time, on the Expiration Date, the Exchange Agent
receives from such Eligible Institution a properly completed and duly executed
Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by telegram,
telex, facsimile transmission, mail or hand delivery), setting forth the name
and address of the Holder of Old Notes and the amount of Old Notes tendered,
stating that the tender is being made thereby and guaranteeing that within
three New York Stock Exchange ("NYSE") trading days after the date of
execution of the Notice of Guaranteed Delivery, the certificates for all
physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, and (iii) the certificates for all physically tendered
Old Notes, in proper form for transfer, or a Book-Entry Confirmation, as the
case may be, will be deposited by the Eligible Institution within three NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 P.M., New
York City time, on the Expiration Date. For a withdrawal to be effective, a
written notice of withdrawal must be received by the Exchange Agent at one of
the addresses set forth below under "--Exchange Agent." Any such notice of
withdrawal must specify the name of the person having tendered the Old Notes
to be withdrawn, identify the Old Notes to be withdrawn (including the
principal amount of such Old Notes), and (where certificates for Old Notes
have been transmitted) specify the name in which such Old Notes are
registered, if different from that of the withdrawing Holder. If certificates
for Old Notes have been delivered or otherwise identified to the Exchange
Agent, then, prior to the release of such certificates the withdrawing Holder
must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such Holder is an Eligible Institution in which
case such guarantee will not be required. If Old Notes have been tendered
pursuant to the procedure for book-entry transfer described above, any notice
of withdrawal must specify the name and number of the account at the Book-
Entry Transfer Facility to be credited with the withdrawn Old Notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination will be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are not exchanged for
any reason will be returned to the Holder thereof without cost to such Holder
(or, in the case of Old Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry transfer procedures described above, such Old Notes will be
credited to an account maintained with such Book-Entry Transfer Facility for
the Old Notes) as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "--Procedures
for Tendering Old Notes" above at any time on or prior to the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, and subject to
its obligations pursuant to the Registration Rights Agreement, the Company
shall not be required to accept for exchange, or to issue New Notes in
exchange for, any Old Notes and may terminate or amend the Exchange Offer, if
at any time before the acceptance of such New Notes for exchange, any of the
following events shall occur:
(i) any injunction, order or decree shall have been issued by any court
or any governmental agency that would prohibit, prevent or otherwise
materially impair the ability of the Company to proceed with the Exchange
Offer; or
(ii) the Exchange Offer will violate any applicable law or any applicable
interpretation of the staff of the SEC.
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The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company in whole or in part at any time and from time to time
in its sole discretion. The failure by the Company at any time to exercise any
of the foregoing rights shall not be deemed a waiver of any such right and
such right shall be deemed an ongoing right which may be asserted at any time
and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes,
if at such time any stop order is threatened by the SEC or in effect with
respect to the Registration Statement of which this Prospectus is a part or
the qualification of the Indenture under the Trust Indenture Act of 1939, as
amended.
The Exchange Offer is not conditioned on any minimum principal amount of Old
Notes being tendered for exchange.
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as the Exchange Agent
for the Exchange Offer. All executed Letters of Transmittal should be directed
to the Exchange Agent at the address set forth below. Questions and requests
for assistance, requests for additional copies of this Prospectus or of the
Letter of Transmittal and requests or Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows.
State Street Bank and Trust Company, Exchange Agent
By Mail/Overnight Delivery
Attn: Kellie Mullen
Corporate Trust Department
4th Floor
Two International Place
Boston, MA 02110
By Facsimile:
(617) 664-5920
Confirm by Telephone:
(617) 664-5587
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
The Exchange Agent also acts as trustee under the Indenture.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
appoximately $200,000.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that Holders who instruct
the Company to register New Notes in the name of, or request that Old Notes
not tendered or not accepted in the Exchange Offer be returned to, a person
other than the registered tendering holder will be responsible for the payment
of any applicable transfer tax thereon.
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CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions
in the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions from,
or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act and
applicable state securities laws. The Company does not currently anticipate
that it will register Old Notes under the Securities Act. See "Description of
the Notes--Exchange Offer, Registration Rights." Based on interpretations by
the staff of the SEC, as set forth in no-action letters issued to third
parties, the Company believes that New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold or otherwise
transferred by holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course or such
holders' business and such holders, broker-dealers, have no arrangement or
understanding with any person to participate in the distribution of such New
Notes. However, the SEC has not considered the Exchange Offer in the context
of a no-action letter and there can be no assurance that the staff of the SEC
would make a similar determination with respect to the Exchange Offer as in
such other circumstances. Each Holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of such New Notes and has no arrangement or understanding to
participate in a distribution of New Notes. If any Holder is an affiliate of
the Company or is engaged in or intends to engage in or has any arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer, such Holder (i) may not rely on the applicable
interpretations of the staff of the SEC and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes pursuant to the Exchange
Offer must acknowledge that such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities and that
it will deliver a prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of New Notes received in exchange for Old
Notes where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of one year after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution." In addition, to comply with the securities
laws of certain jurisdictions, if applicable, the New Notes may not be offered
or sold unless they have been registered or qualified for sale in such
jurisdictions or an exemption from registration or qualification is available
and is complied with. The Company has agreed, pursuant to the Registration
Rights Agreement, subject to certain limitations specified therein, to
registered or qualify the New Notes for offer or sale under the securities
laws of such jurisdictions as any holder reasonably requests in writing.
Unless a holder so requests, the Company does not currently intend to register
or qualify the sale of the New Notes in any such jurisdictions. See "The
Exchange Offer."
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DESCRIPTION OF SENIOR CREDIT FACILITIES
The Credit Agreement (as defined) provides for (i) a seven-year term loan
facility, in the amount of $25.0 million (the "Term Loan"), and (ii) a six-
year revolving credit facility (the "Revolving Credit Facility") of $35.0
million. In connection with the Offering, all amounts outstanding under the
Acquisition Facilities were repaid utilizing the proceeds of the Offering, the
Term Loan and a portion of the Revolving Credit Facility. The Term Loan is be
repayable in quarterly installments in an aggregate principal amount of $0.25
million for each of the first six years and the remaining $23.5 million in the
last year of the facility.
Loans under the Senior Credit Facilities bear interest at an annual rate, at
the Company's option, equal to either (i) the Base Rate plus Applicable Margin
(as defined) or (ii) the Eurodollar Rate plus the Applicable Margin. "Base
Rate" means the highest of (i) the rate of interest publically announced by
Citibank, N.A. as its base or prime rate in effect at its principal office in
New York City (the "Prime Rate"), (ii) the secondary market rate for three-
month certificates of deposit (adjusted for statutory reserve requirements)
plus 1% and (iii) the federal funds effective rate from time to time plus
0.5%. "Eurodollar Rate" means the rate (adjusted for statutory requirements
for eurocurrency liabilities) at which eurodollar deposits for one, two, three
or six months (at the Company's option) are offered in the interbank
eurodollar market. "Applicable Margin" means a percentage based on the
performance of the Company, ranging from 0.375% to 2.00% for the Revolving
Credit Facility and 0.75% to 2.25% for the Term Loan; provided, that the
Applicable Margin on loans under the Revolving Credit Facility will initially
be 1.875% for a Eurodollar Loan and 0.875% for a Base Rate Loan and the Term
Loan will be initially be 2.125% for loans utilizing the Eurodollar Rate and
1.125% for loans utilizing the Base Rate. The Company is also required to pay
a quarterly commitment fee with respect to the Revolving Credit Facility,
ranging from 0.25% to 0.375%, calculated based on the average daily unused
portion of the Revolving Credit Facility. The rate will be determined based on
the Company's performance. The initial rate is 0.375%.
The Credit Agreement provides for first priority security interests in all
of the tangible and intangible assets (including, among other things, all of
the capital stock of the Company and each of its direct and indirect domestic
subsidiaries (excluding the Company's currently existing subsidiaries) and 65%
of the capital stock of first-tier foreign subsidiaries) of the Company and
its direct and indirect domestic subsidiaries (excluding the Company's
currently existing subsidiaries), except such assets as the Syndication Agent
determines in its sole discretion that costs of obtaining such a security
interest are excessive in relation to the value of the security to be
afforded. The Credit Agreement is guaranteed by the Company's future direct
and indirect domestic subsidiaries. Additionally, the Company is be required
to apply 100% of the net proceeds of any incurrence of certain indebtedness
after the date of the consummation of the Offering, 100% of the net proceeds
of any sale or other disposition by NAC, the Company or any of their
subsidiaries of any assets (except for the sale of inventory in the ordinary
course of business and certain other dispositions) and 75% of excess cash flow
(as defined in the Credit Agreement), provided that such percentage of excess
cash flow will be reduced if certain leverage ratios (as set forth in the
Credit Agreement) are attained.
The Credit Agreement contains certain financial and operating maintenance
covenants including (i) a minimum consolidated EBITDA amount, (ii) a
consolidated total debt ratio and (iii) a maximum consolidated interest
coverage ratio.
The operating covenants of the Credit Agreement include, among other things,
limitations on the ability of the Company to: (i) incur additional debt, other
than certain permitted debt, (ii) permit additional liens or encumbrances,
other than permitted liens, (iii) fundamentally change through certain mergers
or asset sales, (iv) pay certain dividends on capital stock, (v) make certain
capital expenditures, (vi) make certain investments, loans and advances, (vii)
make optional payments and modifications of subordinated and other debt
instruments, (viii) enter into certain transactions with affiliates (ix) alter
its fiscal year, (x) change its lines of business or (xi) enter into negative
pledge agreements.
If for any reason the Company is unable to comply with the terms of the
Credit Agreement, including the covenants included therein, such noncompliance
would result in an event of default under the Credit Agreement and could
result in acceleration of the payment of the debt outstanding under the Senior
Credit Facilities.
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DESCRIPTION OF NEW NOTES
GENERAL
The Old Notes were issued under an Indenture, dated as of January 28, 1998
(the "Indenture"), between the Company and State Street Bank and Trust
Company, as Trustee (the "Trustee"). The New Notes also will be issued under
the Indenture and the terms of the New Notes are identical in all material
respects to those of the Old Notes, except for certain transfer restrictions
relating to the Old Notes. The Old Notes and New Notes will be treated as a
single class of securities under the Indenture. Pursuant to the terms and
subject to the conditions of the Exchange Offer, the Company will accept the
Old Notes in exchange for the New Notes. See "The Exchange Offer."
The following is a summary of certain provisions of the Indenture and the
Notes, a copy of which Indenture and the form of Notes are filed as exhibits
to the Registration Statement of which this Prospectus is a part. The
following summary does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Indenture
and the Notes, including the definitions of certain terms therein and those
terms made a part thereof by the Trust Indenture Act of 1939, as amended. The
term "Notes" means the Old Notes and the New Notes, treated as single class.
The definitions of certain terms used in the following summary are set forth
below under "--Certain Definitions." For purposes of this summary, the term
"Company" refers only to Nationwide Credit, Inc. and not to any of its
Subsidiaries.
The New Notes will be, and the Old Notes are, general unsecured obligations
of the Company and rank pari passu in right of payment with all current and
future unsecured senior Indebtedness of the Company, including borrowings
under the Credit Agreement. However, all borrowings under the Credit Agreement
are secured by a first priority Lien on substantially all of the assets of the
Company and its Domestic Subsidiaries. As of July 31, 1998, approximately
$24.9 million was outstanding under the Credit Agreement. The Indenture
permits additional borrowings under the Credit Agreement in the future. See
"Risk Factors--Effective Subordination." The Company presently has no
indebtedness, and has no firm arrangements or intention to incur any
significant indebtedness, ranking junior to the Notes, although the Company
does have certain capital lease obligations.
The Notes will be guaranteed by the Company's Domestic Subsidiaries;
however, at present, none of the Company's Subsidiaries are Domestic
Subsidiaries. All of the Company's future Domestic Subsidiaries, if any, will
become Subsidiary Guarantors hereunder. The Company's only Subsidiaries are
NCI Recoveries Limited, organized under the laws of the United Kingdom ("NCI
Recoveries") and Master Collectors of Dallas, Inc., a Texas corporation
("MCD"). The revenue generated by these Subsidiaries are immaterial to the
Company. On the date of the Indenture, the Company's Board of Directors
designated MCD as an Unrestricted Subsidiary. All of the Company's future
Subsidiaries will be Restricted Subsidiaries. However, under certain
circumstances, the Company will be able to designate future Subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to
many of the restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $125.0 million, of
which $100.0 million was issued in the Offering, and will mature on January
15, 2008. Interest on the Notes accrues at the rate of 10.25% per annum and is
payable semi-annually in arrears on January 15 and July 15, commencing on July
15, 1998, to Holders of record on the immediately preceding January 1 and July
1. Additional Notes may be issued from time to time, subject to the provisions
of the Indenture described below under the caption "--Certain Covenants--
Incurrence of Indebtedness and Issuance of Preferred Stock." Interest on the
Notes accrues from the most recent date to which interest has been paid or, if
no interest has been paid, from the date of original issuance. Interest will
be computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest and Liquidated Damages, if any, on
the Notes will be payable at the office or agency of the Company maintained
for such purpose within the City and State of New York or, at the option of
the Company, payment of interest and Liquidated Damages, if any, may be made
by check mailed to the Holders of the Notes
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at their respective addresses set forth in the register of Holders of Notes;
provided that all payments of principal, premium, interest and Liquidated
Damages with respect to Notes the Holders of which have given wire transfer
instructions to the Company will be required to be made by wire transfer of
immediately available funds to the accounts specified by the Holders thereof.
Until otherwise designated by the Company, the Company's office or agency in
New York will be the office of the Trustee maintained for such purpose. The
Notes will be issued in denominations of $1,000 and integral multiples
thereof.
OPTIONAL REDEMPTION
Except as provided below, the Notes will not be redeemable at the Company's
option prior to January 15, 2003. Thereafter, the Notes will be subject to
redemption at any time at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued
and unpaid interest and Liquidated Damages, if any, thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on
January 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2003.......................................................... 105.125%
2004.......................................................... 103.417%
2005.......................................................... 101.708%
2006 and thereafter........................................... 100.000%
</TABLE>
Notwithstanding the foregoing, prior to January 15, 2001, the Company may
redeem up to 35% of the aggregate principal amount of Notes originally issued
under the Indenture at a redemption price of 110.25% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages thereon, if
any, to the redemption date, with the net cash proceeds of an initial public
offering of common stock of the Company or a capital contribution to the
Company's common equity of the net cash proceeds of an initial public offering
of the Company's direct parent; provided that at least $50.0 million in
aggregate principal amount of Notes remain outstanding immediately after the
occurrence of such redemption (excluding Notes held by the Company and its
Subsidiaries); and provided, further, that notice of such redemption shall be
given within 45 days of the date of the closing of such initial public
offering.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis,
by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each Holder of Notes to be redeemed at
its registered address. Notices of redemption may not be conditional. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. Notes called for redemption become due on the date fixed
for redemption. On and after the redemption date, interest ceases to accrue on
Notes or portions of them called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the
offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101%
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of the aggregate principal amount thereof plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date of purchase (the "Change of
Control Payment"). Within 30 days following any Change of Control, the Company
will mail a notice to each Holder describing the transaction or transactions
that constitute the Change of Control and offering to repurchase Notes on the
date specified in such notice, which date shall be no earlier than 30 days and
no later than 60 days from the date such notice is mailed (the "Change of
Control Payment Date"), pursuant to the procedures required by the Indenture
and described in such notice. The Company will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable
in connection with the repurchase of the Notes as a result of a Change of
Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount of Notes or portions thereof being purchased by
the Company. The Paying Agent will promptly mail to each Holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The Credit Agreement contains prohibitions of certain events that would
constitute a Change of Control. In addition, the exercise by the Holders of
Notes of their right to require the Company to repurchase the Notes could
cause a default under the Credit Agreement, even if the Change of Control
itself does not, due to the financial effect of such repurchases on the
Company. Finally, the Company's ability to pay cash to the Holders of Notes
upon a repurchase may be limited by the Company's then existing financial
resources. See "Risk Factors--Change of Control."
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under
applicable law. Accordingly, the ability of a Holder of Notes to require the
Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by
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the Company or such Restricted Subsidiary is in the form of cash or long-term
assets that are used or useful in the same or similar line of business as the
Company and its Restricted Subsidiaries were engaged in on the date of such
Asset Sale; provided that the amount of (x) any liabilities (as shown on the
Company's or such Restricted Subsidiary's most recent balance sheet), of the
Company or any Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Notes or any guarantee
thereof) that are assumed by the transferee of any such assets and (y) any
securities, notes or other obligations received by the Company or any such
Restricted Subsidiary from such transferee that are converted by the Company
or such Restricted Subsidiary into cash within 30 days of receipt (to the
extent of the cash received), shall be deemed to be cash for purposes of this
provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds at its option, (a) (i) to repay term
Indebtedness under the Credit Facilities or (ii) if no term Indebtedness
exists under the Credit Facilities, to reduce the revolving credit commitments
under the Credit Facilities or (b) to the acquisition of a majority of the
assets of, or a majority of the Voting Stock of, another business that is the
same or similar line of business as the Company and its Restricted
Subsidiaries were engaged in on the date of such Asset Sale, the making of a
capital expenditure or the acquisition of other long-term assets that are used
or useful in the same or similar line of business as the Company and its
Restricted Subsidiaries were engaged in on the date of such Asset Sale.
Pending the final application of any such Net Proceeds, the Company may
temporarily reduce revolving credit borrowings or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Indenture. Any Net
Proceeds from Asset Sales that are not applied or invested as provided in the
first sentence of this paragraph will be deemed to constitute "Excess
Proceeds." When the aggregate amount of Excess Proceeds exceeds $5.0 million,
the Company will be required to make an offer to all Holders of Notes and all
holders of other Indebtedness containing provisions similar to those set forth
in the Indenture with respect to offers to purchase or redeem with the
proceeds of sales of assets (an "Asset Sale Offer") to purchase the maximum
principal amount of Notes and such other Indebtedness that may be purchased
out of the Excess Proceeds, at an offer price in cash in an amount equal to
100% of the principal amount thereof plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date of purchase, in accordance
with the procedures set forth in the Indenture and such other Indebtedness. To
the extent that any Excess Proceeds remain after consummation of an Asset Sale
Offer, the Company may use such Excess Proceeds for any purpose not otherwise
prohibited by the Indenture. If the aggregate principal amount of Notes
tendered into such Asset Sale Offer surrendered by Holders thereof exceeds the
amount of Excess Proceeds, the Trustee shall select the Notes to be purchased
on a pro rata basis. Upon completion of such offer to purchase, the amount of
Excess Proceeds shall be reset at zero.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
Equity Interests (including, without limitation, any payment in connection
with any merger or consolidation involving the Company or any of its
Restricted Subsidiaries) or to the direct or indirect holders of the Company's
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
the Company or to the Company or a Restricted Subsidiary of the Company); (ii)
purchase, redeem or otherwise acquire or retire for value (including, without
limitation, in connection with any merger or consolidation involving the
Company) any Equity Interests of the Company or any direct or indirect parent
of the Company (other than any such Equity Interests owned by the Company or
any Wholly Owned Restricted Subsidiary of the Company); (iii) make any payment
on or with respect to, or purchase, redeem, defease or otherwise acquire or
retire for value any Indebtedness that is subordinated to the Notes, except a
payment of interest or principal at Stated Maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in
clauses (i) through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such Restricted
Payment:
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(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described above under caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (ii), (iii) and (iv) of the next succeeding
paragraph), is less than the sum, without duplication, of (i) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company since
the date of the Indenture as a contribution to its common equity capital or
from the issue or sale of Equity Interests of the Company (other than
Disqualified Stock) or from the issue or sale of Disqualified Stock or debt
securities of the Company that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the Company), plus
(iii) to the extent that any Restricted Investment that was made after the
date of the Indenture is sold for cash or otherwise liquidated or repaid
for cash, the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment, plus (iv) 50% of any
dividends received by the Company or a Wholly Owned Restricted Subsidiary
thereof from an Unrestricted Subsidiary of the Company representing Net
Income of such Unrestricted Subsidiary earned since the date of the
Indenture; provided that such dividends were not already included in
calculating Consolidated Net Income of the Company for such period.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the
Company in exchange for, or out of the net cash proceeds of the substantially
concurrent sale (other than to a Restricted Subsidiary of the Company) of,
other Equity Interests of the Company (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for
any such redemption, repurchase, retirement, defeasance or other acquisition
shall be excluded from clause (c)(ii) of the preceding paragraph; (iii) the
defeasance, redemption, repurchase or other acquisition of subordinated
Indebtedness with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness; (iv) the payment of any dividend by a Restricted
Subsidiary of the Company to the holders of its common Equity Interests on a
pro rata basis; (v) the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Company or any Restricted
Subsidiary of the Company held by any member of the Company's (or any of its
Restricted Subsidiaries') management pursuant to any management equity
subscription agreement or stock option agreement in effect as of the date of
the Indenture; provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not exceed
$500,000 in any twenty-four-month period, provided that the amount available
in any given twelve-month period shall be increased by the excess, if any, of
(A) $500,000 over (B) the amount used pursuant to this clause (v) in the
immediately preceding twelve-month period and no Default or Event of Default
shall have occurred and be continuing immediately after such transaction, (vi)
(A) as long as NAC has no Material Assets other than the stock of the Company,
the payment to NAC in respect of taxes of NAC, the Company and its
Subsidiaries which are payable by or owed by NAC, and (B) if on or after
January 1, 1998, NAC owns or acquires any Material Asset other than the stock
of the Company, the payment to NAC in respect of federal (and state) income
taxes for the tax periods for which a federal consolidated return (and state
combined return) is filed by NAC for a
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consolidated (or combined) group of which NAC is the parent and the Company
and its Subsidiaries are members in an amount equal to the amount of such
federal (and state) income taxes allocable to the Company and its Subsidiaries
in accordance with the principles of Treasury Regulations Section 1.1552-1 (a)
(2) (ii), as modified by the principles of Treasury Regulations Section
1.1502-33 (d) (2), in either case, to the extent that such payments are
actually used by NAC to pay such taxes; provided, however, that for purposes
of this subsection (vi) only, the term "Material Asset" means any asset with a
gross value in excess of $200,000, and (vii) payments or dividends to NAC to
allow NAC to pay reasonable legal, accounting, investment banking, financial
advisory, management, outside director or other professional and
administrative fees and expenses incurred by it in an aggregate amount
pursuant to this clause (vii) not to exceed $750,000 per year.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated will be deemed to be Restricted Payments at
the time of such designation and will reduce the amount available for
Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the fair market value of such Investments at the time of such
designation. Such designation will only be permitted if such Restricted
Payment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment shall be determined
by the Board of Directors whose resolution with respect thereto shall be
delivered to the Trustee, such determination to be based upon an opinion or
appraisal issued by an accounting, appraisal or investment banking firm of
national standing if such fair market value exceeds $5.0 million. Not later
than the date of making any Restricted Payment, the Company shall deliver to
the Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed, together with a copy of any
fairness opinion or appraisal required by the Indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Company will not issue any Disqualified Stock and
will not permit any of its Subsidiaries to issue any shares of preferred
stock; provided, however, that the Company may incur Indebtedness (including
Acquired Debt) or issue shares of Disqualified Stock if the Fixed Charge
Coverage Ratio for the Company's most recently ended four full fiscal quarters
for which internal financial statements are available immediately preceding
the date on which such additional Indebtedness is incurred or such
Disqualified Stock is issued would have been at least 2.0 to 1, determined on
a pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of
such four-quarter period.
The Indenture also provides that the Company will not incur any Indebtedness
that is contractually subordinated in right of payment to any other
Indebtedness of the Company unless such Indebtedness is also contractually
subordinated in right of payment to the Notes on substantially identical
terms; provided, however, that no Indebtedness of the Company shall be deemed
to be contractually subordinated in right of payment to any other Indebtedness
of the Company solely by virtue of being unsecured.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company of term Indebtedness under Credit
Facilities; provided that the aggregate principal amount of all term
Indebtedness outstanding under all Credit Facilities after giving effect
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to such incurrence does not exceed an amount equal to $25.0 million less
the aggregate amount of all repayments, optional or mandatory, of the
principal of any term Indebtedness under a Credit Facility that have been
made since the date of the Indenture;
(ii) the incurrence by the Company of revolving credit Indebtedness and
letters of credit (with letters of credit being deemed to have a principal
amount equal to the maximum potential liability of the Company and its
Subsidiaries thereunder) under Credit Facilities; provided that the
aggregate principal amount of all revolving credit Indebtedness outstanding
under all Credit Facilities after giving effect to such incurrence does not
exceed an amount equal to $35.0 million less the aggregate amount of all
Net Proceeds of Asset Sales applied to reduce the revolving credit
commitments under a Credit Facility pursuant to the covenant described
above under the caption "--Asset Sales;"
(iii) the incurrence by the Company of Indebtedness represented by the
Notes issued pursuant to the Offering;
(iv) the incurrence by the Company or any of its Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of the
Company or such Subsidiary, in an aggregate principal amount not to exceed
$5.0 million at any time outstanding;
(v) the incurrence by the Company or any of its Subsidiaries of Permitted
Refinancing Indebtedness in exchange for, or the net proceeds of which are
used to refund, refinance or replace Indebtedness (other than intercompany
Indebtedness) that was permitted by the Indenture to be incurred (x)
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of this covenant or (y) pursuant to clause (iii) of this
covenant;
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of its
Wholly Owned Restricted Subsidiaries; provided, however, that (i) if the
Company is the obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all Obligations with
respect to the Notes and (ii)(A) any subsequent issuance or transfer of
Equity Interests that results in any such Indebtedness being held by a
Person other than the Company or a Restricted Subsidiary thereof and (B)
any sale or other transfer of any such Indebtedness to a Person that is not
either the Company or a Wholly Owned Restricted Subsidiary thereof shall be
deemed, in each case, to constitute an incurrence of such Indebtedness by
the Company or such Restricted Subsidiary, as the case may be, that was not
permitted by this clause (vi);
(vii) the incurrence by the Company of Hedging Obligations that are
incurred for the purpose of fixing or hedging interest rate risk with
respect to any floating rate Indebtedness that is permitted by the terms of
this Indenture to be outstanding;
(viii) the Guarantee by the Company or any of the Subsidiary Guarantors
of Indebtedness of the Company or a Restricted Subsidiary of the Company
that was permitted to be incurred by another provision of this covenant;
(ix) the incurrence by the Company or any of its Restricted Subsidiaries
of Earn-out Obligations in an aggregate amount not to exceed $5.0 million
at any time outstanding;
(x) the incurrence by the Company's Unrestricted Subsidiaries of Non-
Recourse Debt, provided, however, that if any such Indebtedness ceases to
be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company that was not permitted by this clause (x); and
(xi) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding not to exceed $10.0 million.
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For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
of Permitted Debt described in clauses (i) through (xi) above or is entitled
to be incurred pursuant to the first paragraph of this covenant, the Company
shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant. Accrual of interest and accretion or
amortization of original issue discount will not be deemed to be an incurrence
of Indebtedness for purposes of this covenant; provided, in each such case,
that the amount thereof is included in Fixed Charges of the Company as
accrued.
LIENS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien on any asset now owned or hereafter acquired, or
any income or profits therefrom or assign or convey any right to receive
income therefrom, except Permitted Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1)
on its Capital Stock or (2) with respect to any other interest or
participation in, or measured by, its profits, or (b) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or
(iii) transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries. However, the foregoing restrictions will not apply to
encumbrances or restrictions existing under or by reason of (a) the Credit
Agreement as in effect as of the date of the Indenture and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are no more restrictive, taken as a whole, with
respect to such dividend and other payment restrictions than those contained
in the Credit Agreement as in effect on the date of the Indenture, (b) the
Indenture and the Notes, (c) applicable law, (d) any instrument governing
Indebtedness or Capital Stock of a Person acquired by the Company or any of
its Restricted Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other
than the Person, or the property or assets of the Person, so acquired,
provided that, in the case of Indebtedness, such Indebtedness was permitted by
the terms of the Indenture to be incurred, (e) customary non-assignment
provisions in leases, licenses or other agreements entered into in the
ordinary course of business and consistent with past practices, (f) purchase
money obligations for property acquired in the ordinary course of business
that impose restrictions of the nature described in clause (iii) above on the
property so acquired, (g) any agreement for the sale of a Restricted
Subsidiary that restricts distributions by that Restricted Subsidiary pending
its sale, (h) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those contained
in the agreements governing the Indebtedness being refinanced, (i) secured
Indebtedness otherwise permitted to be incurred pursuant to the provisions of
the covenant described above under the caption "--Liens" that limits the right
of the debtor to dispose of the assets securing such Indebtedness, (j)
provisions with respect to the disposition or distribution of assets or
property in joint venture agreements and other similar agreements entered into
in the ordinary course of business and (k) restrictions on cash or other
deposits or net worth imposed by customers under contracts entered into in the
ordinary course of business.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to
another corporation, Person or
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entity unless (i) the Company is the surviving corporation or the entity or
the Person formed by or surviving any such consolidation or merger (if other
than the Company) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state thereof
or the District of Columbia; (ii) the entity or Person formed by or surviving
any such consolidation or merger (if other than the Company) or the entity or
Person to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the obligations of the Company
under the Registration Rights Agreement, the Notes and the Indenture pursuant
to a supplemental indenture in a form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction no Default or Event of Default
exists; and (iv) except in the case of a merger of the Company with or into a
Wholly Owned Restricted Subsidiary of the Company, the Company or the entity
or Person formed by or surviving any such consolidation or merger (if other
than the Company), or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made (A) will have
Consolidated Net Worth immediately after the transaction equal to or greater
than the Consolidated Net Worth of the Company immediately preceding the
transaction and (B) will, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning of
the applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock."
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for
the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the Company or
such Restricted Subsidiary with an unrelated Person and (ii) the Company
delivers to the Trustee (a) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration in
excess of $1.0 million, a resolution of the Board of Directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction complies with
clause (i) above and that such Affiliate Transaction has been approved by a
majority of the disinterested members of the Board of Directors and (b) with
respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $5.0 million, an
opinion as to the fairness to the Holders of such Affiliate Transaction from a
financial point of view issued by an accounting, appraisal or investment
banking firm of national standing. Notwithstanding the foregoing, the
following items shall not be deemed to be Affiliate Transactions: (i) any
employment agreement or other compensation plan or arrangement entered into by
the Company or any of its Restricted Subsidiaries in the ordinary course of
business and consistent with the past practice of the Company or such
Restricted Subsidiary, (ii) transactions between or among the Company and/or
its Restricted Subsidiaries, (iii) payment of reasonable directors fees or
customary indemnification or similar arrangements, (iv) Restricted Payments
that are permitted by the provisions of the Indenture described above under
the caption "--Restricted Payments," and (v) payments and transactions in
connection with the Transactions, including the payment of any fees and
expenses with respect thereto, in each case to the extent disclosed in the
Prospectus under the caption "Use of Proceeds."
SUBSIDIARY GUARANTEES
The Indenture provides that if the Company or any of its Domestic
Subsidiaries shall acquire or create another Domestic Subsidiary after the
date of the Indenture, then such newly acquired or created Domestic Subsidiary
shall execute a Subsidiary Guarantee and deliver an opinion of counsel, in
accordance with the terms of the Indenture, except for all Subsidiaries that
have properly been designated as Unrestricted Subsidiaries in accordance with
the Indenture for so long as they continue to constitute Unrestricted
Subsidiaries.
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PAYMENTS FOR CONSENT
The Indenture provides that neither the Company nor any of its Subsidiaries
will, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fee or otherwise, to any Holder of any Notes for
or as an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Indenture or the Notes unless such consideration is offered
to be paid or is paid to all Holders of the Notes that consent, waive or agree
to amend in the time frame set forth in the solicitation documents relating to
such consent, waiver or agreement.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company will furnish to the Holders of
Notes (i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-
K if the Company were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
describes the financial condition and results of operations of the Company and
its consolidated Subsidiaries (showing in reasonable detail, the revenues and
EBITDA of the Company and its Restricted Subsidiaries separate from the
revenues and EBITDA of the Unrestricted Subsidiaries of the Company in the
event that either the revenue or the EBITDA of the Unrestricted Subsidiaries
for the accounting period covered thereby was greater than or equal to 10% of
the revenue or EBITDA of the Company and its consolidated Subsidiaries) and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports, in each case within the time periods specified
in the Commission's rules and regulations. In addition, following the
consummation of the exchange offer contemplated by the Registration Rights
Agreement, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability within the time periods specified
in the Commission's rules and regulations (unless the Commission will not
accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, the Company has
agreed that, for so long as any Notes remain outstanding, it will furnish to
the Holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes; (ii) default in payment when
due of the principal of or premium, if any, on the Notes; (iii) failure by the
Company or any of its Restricted Subsidiaries to comply with the provisions
described under the captions "--Change of Control," "-- Asset Sales," "--
Restricted Payments" or "--Incurrence of Indebtedness and Issuance of
Preferred Stock;" (iv) failure by the Company or any of its Restricted
Subsidiaries for 60 days after notice to comply with any of its other
agreements in the Indenture or the Notes; (v) default under any mortgage,
indenture or instrument under which there may be issued or by which there may
be secured or evidenced any Indebtedness for money borrowed by the Company or
any of its Restricted Subsidiaries (or the payment of which is guaranteed by
the Company or any of its Restricted Subsidiaries) whether such Indebtedness
or guarantee now exists, or is created after the date of the Indenture, which
default results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness or the
maturity of which has been so accelerated, aggregates $5.0 million or more;
(vi) failure by the Company or any of its Restricted Subsidiaries to pay final
judgments aggregating in excess of $5.0 million, which judgments are not paid,
discharged or stayed for a period of 60 days; (vii) except as permitted by the
Indenture, any Subsidiary Guarantee shall be held in any judicial proceeding
to be unenforceable or invalid or shall cease for any reason to be in full
force and effect or any Subsidiary Guarantor, or any Person acing on behalf of
any Subsidiary Guarantor, shall deny or disaffirm its obligations under its
Subsidiary Guarantee and (viii) certain events of bankruptcy or insolvency
with respect to the Company or any of its Subsidiaries.
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If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Restricted Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding Notes will become due and
payable without further action or notice. Holders of the Notes may not enforce
the Indenture or the Notes except as provided in the Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Holders of the Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
January 15, 2003 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to January 15, 2003, then the
premium specified in the Indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture except a continuing Default or Event of Default in the
payment of interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes, the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a
Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages on such Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights,
powers, trusts, duties and immunities of the Trustee, and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions
of the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
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Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages, if any, on the outstanding Notes on the stated maturity or
on the applicable redemption date, as the case may be, and the Company must
specify whether the Notes are being defeased to maturity or to a particular
redemption date; (ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from,
or there has been published by, the Internal Revenue Service a ruling or (B)
since the date of the Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel shall confirm that, the Holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax purposes
as a result of such Legal Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred; (iii) in the case of
Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Covenant Defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of
funds to be applied to such deposit) or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit; (v) such Legal Defeasance or
Covenant Defeasance will not result in a breach or violation of, or constitute
a default under any material agreement or instrument (other than the
Indenture) to which the Company or any of its Restricted Subsidiaries is a
party or by which the Company or any of its Restricted Subsidiaries is bound;
(vi) the Company must have delivered to the Trustee an opinion of counsel to
the effect that after the 91st day following the deposit, the trust funds will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii)
the Company must deliver to the Trustee an Officers' Certificate stating that
the deposit was not made by the Company with the intent of preferring the
Holders of Notes over the other creditors of the Company with the intent of
defeating, hindering, delaying or defrauding creditors of the Company or
others; and (viii) the Company must deliver to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or
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exchange offer for, Notes), and any existing default or compliance with any
provision of the Indenture or the Notes may be waived with the consent of the
Holders of a majority in principal amount of the then outstanding Notes
(including, without limitation, consents obtained in connection with a
purchase of, or tender offer or exchange offer for, Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed
maturity of any Note or alter the provisions with respect to the redemption of
the Notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders"), (iii) reduce the
rate of or change the time for payment of interest on any Note, (iv) waive a
Default or Event of Default in the payment of principal of or premium, if any,
or interest on the Notes (except a rescission of acceleration of the Notes by
the Holders of at least a majority in aggregate principal amount of the Notes
and a waiver of the payment default that resulted from such acceleration), (v)
make any Note payable in money other than that stated in the Notes, (vi) make
any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of Holders of Notes to receive payments of principal of
or premium, if any, or interest on the Notes, (vii) waive a redemption payment
with respect to any Note (other than a payment required by one of the
covenants described above under the caption "--Repurchase at the Option of
Holders") or (viii) make any change in the foregoing amendment and waiver
provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation or sale of all or substantially all of the Company's
assets, to make any change that would provide any additional rights or
benefits to the Holders of Notes or that does not adversely affect the legal
rights under the Indenture of any such Holder, or to comply with requirements
of the Commission in order to effect or maintain the qualification of the
Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company and the Initial Purchaser entered into the Registration Rights
Agreement on January 28, 1998. Pursuant to the Registration Rights Agreement,
the Company agreed to file with the Commission the Exchange Offer Registration
Statement on the appropriate form under the Securities Act with respect to the
New Notes. If any Holder of Transfer Restricted Securities notifies the
Company prior to the 20th day following consummation
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of the Exchange Offer that (A) it is prohibited by law or Commission policy
from participating in the Exchange Offer or (B) that it may not resell the New
Notes acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (C) that it is a
broker-dealer and owns Notes acquired directly from the Company or an
affiliate of the Company, the Company will file with the Commission a Shelf
Registration Statement to cover resales of the Notes by the Holders thereof
who satisfy certain conditions relating to the provision of information in
connection with the Shelf Registration Statement. The Company will use its
best efforts to cause the applicable registration statement to be declared
effective as promptly as possible by the Commission. For purposes of the
foregoing, "Transfer Restricted Securities" means each Note until (i) the date
on which such Note has been exchanged by a person other than a broker-dealer
for a New Note in the Exchange Offer, (ii) following the exchange by a broker-
dealer in the Exchange Offer of a Note for a New Note, the date on which such
New Note is sold to a purchaser who receives from such broker-dealer on or
prior to the date of such sale a copy of the prospectus contained in the
Exchange Offer Registration Statement, (iii) the date on which such Note has
been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or (iv) the date on which
such Note is distributed to the public pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that (i) the Company is to file
an Exchange Offer Registration Statement with the Commission on or prior to 60
days after the Closing Date, (ii) the Company is to use its best efforts to
have the Exchange Offer Registration Statement declared effective by the
Commission on or prior to 135 days after the Closing Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company is to commence the Exchange Offer and use its best efforts to
issue on or prior to 30 business days after the date on which the Exchange
Offer Registration Statement was declared effective by the Commission, New
Notes in exchange for all Notes tendered prior thereto in the Exchange Offer
and (iv) if obligated to file the Shelf Registration Statement, the Company is
to use its best efforts to file the Shelf Registration Statement with the
Commission on or prior to 30 days after such filing obligation arises and to
cause the Shelf Registration to be declared effective by the Commission on or
prior to 90 days after such obligation arises. If (a) the Company fails to
file any of the Registration Statements required by the Registration Rights
Agreement on or before the date specified for such filing, (b) any of such
Registration Statements is not declared effective by the Commission on or
prior to the date specified for such effectiveness (the "Effectiveness Target
Date"), or (c) the Company fails to consummate the Exchange Offer within 30
business days of the Effectiveness Target Date with respect to the Exchange
Offer Registration Statement, or (d) the Shelf Registration Statement or the
Exchange Offer Registration Statement is declared effective but thereafter
ceases to be effective or usable in connection with resales of Transfer
Restricted Securities during the periods specified in the Registration Rights
Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), then the Company will pay Liquidated Damages to each
Holder of Notes, with respect to the first 90-day period immediately following
the occurrence of the first Registration Default in an amount equal to $.05
per week per $1,000 principal amount of Notes held by such Holder. The amount
of the Liquidated Damages will increase by an additional $.05 per week per
$1,000 principal amount of Notes with respect to each subsequent 90-day period
until all Registration Defaults have been cured, up to a maximum amount of
Liquidated Damages for all Registration Defaults of $.50 per week per $1,000
principal amount of Notes. All accrued Liquidated Damages will be paid by the
Company on each Damages Payment Date by wire transfer of immediately available
funds or by federal funds check and to Holders of Certificated Securities by
wire transfer to the accounts specified by them or by mailing checks to their
registered addresses if no such accounts have been specified. Following the
cure of all Registration Defaults, the accrual of Liquidated Damages will
cease.
Holders of Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver certain
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time
periods set forth in the Registration Rights Agreement in order to have their
Notes included in the Shelf Registration Statement and benefit from the
provisions regarding Liquidated Damages set forth above.
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GOVERNING LAW
The Indenture and the Notes are governed by, and will be construed in
accordance with, the laws of the State of New York.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or becomes a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the Voting Stock of a
Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory or accounts receivable in the
ordinary course of business consistent with past practices (provided that the
sale, lease, conveyance or other disposition of all or substantially all of
the assets of the Company and its Restricted Subsidiaries taken as a whole
will be governed by the provisions of the Indenture described above under the
caption "--Change of Control" and/or the provisions described above under the
caption "--Merger, Consolidation or Sale of Assets" and not by the provisions
of the Asset Sale covenant), and (ii) the issue or sale by the Company or any
of its Restricted Subsidiaries of Equity Interests of any of the Company's
Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in
a single transaction or a series of related transactions (a) that have a fair
market value in excess of $2.0 million or (b) for net proceeds in excess of
$2.0 million. Notwithstanding the foregoing, the following items shall not be
deemed to be Asset Sales: (i) a transfer of assets by the Company to a Wholly
Owned Restricted Subsidiary or by a Wholly Owned Restricted Subsidiary to the
Company or to another Wholly Owned Restricted Subsidiary, (ii) an issuance of
Equity Interests by a Wholly Owned Restricted Subsidiary to the Company or to
another Wholly Owned Restricted Subsidiary, and (iii) a Restricted Payment
that is permitted by the covenant described above under the caption "--
Restricted Payments."
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States,
in each case maturing within one year from the date of acquisition; (ii)
certificates of deposit,
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time deposits, eurodollar time deposits or overnight bank deposits having
maturities of six months or less from the date of acquisition issued by any
Lender or by any commercial bank organized under the laws of the United States
or any state thereof having combined capital and surplus of not less than
$500.0 million; (iii) commercial paper of an issuer rated at least A-2 by
Standard & Poor's Ratings Services ("S&P") or P-2 by Moody's Investors
Service, Inc. ("Moody's"), or carrying an equivalent rating by a nationally
recognized rating agency, if both of the two named rating agencies cease
publishing ratings of commercial paper issuers generally, and maturing within
six months from the date of acquisition; (iv) repurchase obligations of any
Lender or of any commercial bank satisfying the requirements of clause (ii) of
this definition, having a term of not more than 30 days with respect to
securities issued or fully guaranteed or insured by the United States
government; (v) securities with maturities of one year or less from the date
of acquisition issued or fully guaranteed by any state, commonwealth or
territory of the United States, by any political subdivision or taxing
authority of any such state, commonwealth or territory or by any foreign
government, the securities of which state, commonwealth, territory, political
subdivision, taxing authority or foreign government (as the case may be) are
rated at least A by S&P or A by Moody's; (vi) securities with maturities of
six months or less from the date of acquisition backed by standby letters of
credit issued by any Lender or any commercial bank satisfying the requirements
of clause (ii) of this definition; or (vii) shares of money market mutual or
similar funds which invest exclusively in assets satisfying the requirements
of clauses (i) through (vi) of this definition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole to any "person" (as such term is used in Section
13(d)(3) of the Exchange Act) other than a Principal or a Related Party of a
Principal (as defined below), (ii) the adoption of a plan relating to the
liquidation or dissolution of the Company, (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above), other than the
Principals and their Related Parties or any underwriters in connection with an
underwritten public offering becomes the "beneficial owner" (as such term is
defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a
person shall be deemed to have "beneficial ownership" of all securities that
such person has the right to acquire, whether such right is currently
exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, of more than 50% of the Voting Stock of
the Company (measured by voting power rather than number of shares), (iv) the
first day on which a majority of the members of the Board of Directors of the
Company are not Continuing Directors or (v) the Company consolidates with, or
merges with or into, any Person, or any Person consolidates with, or merges
with or into, the Company, in any such event pursuant to a transaction in
which any of the outstanding Voting Stock of the Company is converted into or
exchanged for cash, securities or other property, other than any such
transaction where the Voting Stock of the Company outstanding immediately
prior to such transaction is converted into or exchanged for Voting Stock
(other than Disqualified Stock) of the surviving or transferee Person
constituting a majority of the outstanding shares of such Voting Stock of such
surviving or transferee Person (immediately after giving effect to such
issuance).
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent
that such provision for taxes was included in computing such Consolidated Net
Income, plus (iii) consolidated interest expense of such Person and its
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, commissions, discounts and
other fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing
such Consolidated Net Income, plus (iv) depreciation, amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) and other non-
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cash expenses (including any charge relating to the write-off of deferred
financing fees as a result of the repayment of the Acquisition Facilities and
excluding any such non-cash expense to the extent that it represents an
accrual of or reserve for cash expenses in any future period or amortization
of a prepaid cash expense that was paid in a prior period) of such Person and
its Subsidiaries for such period to the extent that such depreciation,
amortization and other non-cash expenses were deducted in computing such
Consolidated Net Income, minus (v) non-cash items increasing such Consolidated
Net Income for such period, in each case, on a consolidated basis and
determined in accordance with GAAP. Notwithstanding the foregoing, the
provision for taxes on the income or profits of, and the depreciation and
amortization and other non-cash expenses of, a Subsidiary of the referent
Person shall be added to Consolidated Net Income to compute Consolidated Cash
Flow only to the extent that a corresponding amount would be permitted at the
date of determination to be dividended to the Company by such Subsidiary
without prior governmental approval (that has not been obtained), and without
direct or indirect restriction pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms
of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted Subsidiary or
its stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition
shall be excluded, (iv) the Net Income (but not loss) of any Unrestricted
Subsidiary shall be excluded, whether or not distributed to the Company or one
of its Subsidiaries and (v) the cumulative effect of a change in accounting
principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (x) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the date of the
Indenture in the book value of any asset owned by such Person or a
consolidated Subsidiary of such Person, (y) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments), and (z) all unamortized debt discount
and expense and unamortized deferred charges as of such date, all of the
foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election or was nominated or designated for election to the
Board by a Principal or its Related Party.
"Credit Agreement" means that certain Credit Agreement, to be dated as of
January 28, 1998, by and among the Company, Lehman Brothers Inc., as arranger,
Lehman Commercial Paper Inc., as syndication agent, and the lenders named
therein, providing for $25.0 million of term borrowings and up to $35.0
million of revolving credit borrowings, including any related notes,
guarantees, collateral documents, instruments and
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agreements executed in connection therewith, and in each case as amended,
supplemented, extended, restated, modified, renewed, refunded, replaced or
refinanced from time to time, including any appendices, exhibits or schedules
to any of the foregoing.
"Credit Facilities" means, with respect to the Company, one or more debt
facilities (including, without limitation, the Credit Agreement) or commercial
paper facilities with banks or other institutional lenders providing for
revolving credit loans, term loans, receivables financing (including through
the sale of receivables to such lenders or to special purpose entities formed
to borrow from such lenders against such receivables) or letters of credit.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature; provided, however, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the
right to require the Company to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
described above under the caption "--Certain Covenants--Restricted Payments."
"Domestic Subsidiary" means (i) any Restricted Subsidiary of the Company
that is incorporated or domiciled in any state of the United States of America
or the District of Columbia or (ii) any Restricted Subsidiary of the Company
that has Guaranteed any Indebtedness of the Company or any Subsidiary
Guarantor.
"Earn-out Obligations" means contingent payment obligations of the Company
or any of its Restricted Subsidiaries incurred in connection with the
acquisition of assets or businesses, which obligations are payable based on
the performance of the assets or businesses so acquired; provided that the
amount of such obligations shall not exceed 25% of the total consideration
paid for such assets or businesses; and provided, further, that the amount of
such obligations outstanding at any time shall be measured by the maximum
amount potentially payable thereunder without regard to performance criteria,
the passage of time or other conditions.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person
and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations, but excluding the non-cash interest expense incurred by the
Company in connection with the Acquisition Facilities in January of 1998) and
(ii) the consolidated interest of such Person and its Restricted Subsidiaries
that was capitalized during such period, and (iii) any interest expense on
Indebtedness of another Person that is Guaranteed by such Person or one of its
Restricted Subsidiaries or secured by a Lien on assets of such Person or one
of its Restricted Subsidiaries (whether or not such Guarantee or Lien is
called upon) and (iv) the product of (a) all dividend payments, whether or not
in cash, on any series of preferred stock of such Person or any of its
Restricted Subsidiaries, other than dividend payments on Equity Interests
payable solely in Equity Interests of the Company (other than Disqualified
Stock) or to the Company or a Restricted Subsidiary of the
78
<PAGE>
Company, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal, in each case,
on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
referent Person or any of its Restricted Subsidiaries incurs, assumes,
Guarantees or redeems any Indebtedness (other than revolving credit
borrowings) or issues or redeems preferred stock subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but prior to the date on which the event for which the calculation
of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the
Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to
such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock (including any application of
proceeds therefrom), as if the same had occurred at the beginning of the
applicable four-quarter reference period. In addition, for purposes of making
the computation referred to above, (i) acquisitions that have been made by the
Company or any of its Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first
day of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated to include the Consolidated Cash Flow of
the acquired entities (adjusted to exclude (x) the cost of any compensation,
remuneration or other benefit paid or provided to any employee, consultant,
Affiliate or equity owner of the acquired entities to the extent such costs
are eliminated and not replaced and (y) the amount of any reduction in
general, administrative or overhead costs of the acquired entities, in each
case, as determined in good faith by an officer of the Company) without giving
effect to clause (iii) of the proviso set forth in the definition of
Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded,
and (iii) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, but only to the extent that
the obligations giving rise to such Fixed Charges will not be obligations of
the referent Person or any of its Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America, and the payment for which the
United States pledges its full faith and credit.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the
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<PAGE>
extent any of the foregoing (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, as well as all Indebtedness of others
secured by a Lien on any asset of such Person to the extent of such Lien
(whether or not such Indebtedness is assumed by such Person) and, to the
extent not otherwise included, the Guarantee by such Person of any
indebtedness of any other Person, except for Indebtedness arising from the
honoring by a bank or other financial institution of a check, draft or similar
instrument, drawn against insufficient funds, provided that such Indebtedness
is extinguished within five business days of the incurrence of such
Indebtedness. The amount of any Indebtedness outstanding as of any date shall
be (i) the accreted value thereof, in the case of any Indebtedness issued with
original issue discount, and (ii) the principal amount thereof, together with
any interest thereon that is more than 30 days past due, in the case of any
other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such Person is no longer a Restricted Subsidiary of the Company,
the Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Equity Interests of
such Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "Certain Covenants--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any
of its Restricted Subsidiaries and (ii) any extraordinary gain (but not loss),
together with any related provision for taxes on such extraordinary gain (but
not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied
to the repayment of Indebtedness (other than Indebtedness under the Credit
Facilities) secured by a Lien on the asset or assets that were the subject of
such Asset Sale and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both)
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<PAGE>
any holder of any other Indebtedness of the Company or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders of such Indebtedness have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, premium, if any, interest (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company or its Subsidiaries whether or not a
claim for post-filing interest is allowed in such proceeding), penalties,
fees, charges, expenses, indemnifications, reimbursement obligations, damages
(including Liquidated Damages), guarantees and other liabilities or amounts
payable under the documentation governing any Indebtedness or in respect
thereof.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company; (b) any Investment in Cash Equivalents;
(c) any Investment by the Company or any Restricted Subsidiary of the Company
in a Person, if as a result of such Investment (i) such Person becomes a
Restricted Subsidiary of the Company or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary of the Company; (d) any Investment made as a result of
the receipt of non-cash consideration from (i) an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "--Repurchase at the Option of Holders--Asset Sales" or (ii) a
disposition of assets that does not constitute an asset sale; (e) any
acquisition of assets, Equity Interests or other securities solely in exchange
for the issuance of Equity Interests (other than Disqualified Stock) of the
Company; (f) any acquisition by the Company or any of its Restricted
Subsidiaries of Purchased Portfolios; and (g) other Investments in any Person
having an aggregate fair market value (measured on the date each such
Investment was made and without giving effect to subsequent changes in value),
when taken together with all other Investments made pursuant to this clause
(e) that are at the time outstanding, not to exceed $7.5 million.
"Permitted Liens" means (i) Liens securing Indebtedness under the Credit
Facilities that was permitted by the terms of the Indenture; (ii) Liens in
favor of the Company; (iii) Liens on property of a Person existing at the time
such Person is merged into or consolidated with the Company or any Restricted
Subsidiary of the Company; provided that such Liens were in existence prior to
the contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company; (iv) Liens on property existing at the time of acquisition thereof by
the Company or any Restricted Subsidiary of the Company, provided that such
Liens were in existence prior to the contemplation of such acquisition; (v)
Liens to secure the performance of statutory obligations, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in the
ordinary course of business; (v) Liens to secure Indebtedness (including
Capital Lease Obligations) permitted by clause (iv) of the second paragraph of
the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred
Stock" covering only the assets acquired with such Indebtedness; (vi) Liens
existing on the date of the Indenture; (vii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor;
(viii) Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse
Debt of Unrestricted Subsidiaries; (ix) Liens incurred in the ordinary course
of business of the Company or any Subsidiary of the Company with respect to
obligations that do not exceed $5.0 million at any one time outstanding and
that (a) are not incurred in connection with the borrowing of money or the
obtaining of advances or credit (other than trade credit in the ordinary
course of business) and (b) do not in the aggregate materially detract from
the value of the property or materially impair the use thereof in the
operation of business by the Company or such Subsidiary and (x) Liens securing
Permitted Refinancing Indebtedness provided that the Company was permitted to
incur Liens with respect to the Indebtedness so refinanced.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); provided that: (i) the principal
amount (or accreted value, if applicable) of such
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<PAGE>
Permitted Refinancing Indebtedness does not exceed the principal amount of (or
accreted value, if applicable), plus accrued interest, premium and prepayment
penalties, if any, on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses
incurred in connection therewith); (ii) such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and has a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms at least as
favorable to the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness is incurred either by the
Company or by the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded.
"Principals" means Centre Partners Management, LLC and WPG Corporate
Development Associates V, L.P.
"Purchased Portfolios" means account receivables portfolios purchased by the
Company or any of its Restricted Subsidiaries.
"Related Party" with respect to any Principal means (A) any controlling
stockholder, 50% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (B) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 50% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"Subsidiary Guarantee" shall mean the joint and several Guarantee by the
Domestic Subsidiaries of the Company's obligations under the Notes, in
substantially the form of such Subsidiary Guarantee attached as an exhibit to
the Indenture.
"Subsidiary Guarantors" means each Domestic Subsidiary that executes a
Subsidiary Guarantee in accordance with the provisions of the Indenture, and
their respective successors and assigns.
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"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (c) is a Person with respect to
which neither the Company nor any of its Restricted Subsidiaries has any
direct or indirect obligation (x) to subscribe for additional Equity Interests
or (y) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; (d) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has
at least one director on its board of directors that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries and has
at least one executive officer that is not a director or executive officer of
the Company or any of its Restricted Subsidiaries. Any such designation by the
Board of Directors shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the caption "Certain Covenants--Restricted Payments."
If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of
the Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption
"Incurrence of Indebtedness and Issuance of Preferred Stock," the Company
shall be in default of such covenant). The Board of Directors of the Company
may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only
be permitted if (i) such Indebtedness is permitted under the covenant
described under the caption "Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock," calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference
period, and (ii) no Default or Event of Default would be in existence
following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
83
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain federal income tax
considerations relevant to the exchange of Old Notes for New Notes, but does
not purport to be a complete analysis of all potential tax effects. The
discussion is based upon the Internal Revenue Code of 1986, as amended,
Treasury regulations, Internal Revenue Service rulings and pronouncements, and
judicial decisions now in effect, all of which are subject to change at any
time by legislative, judicial or administrative action. Any such changes may
be applied retroactively in a manner that could adversely affect a holder of
the New Notes. The description does not consider the effect of any applicable
foreign, state, local or other tax laws or estate or gift tax considerations.
EACH HOLDER SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO IT OF EXCHANGING OLD NOTES FOR NEW NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
EXCHANGE OF OLD NOTES FOR NEW NOTES
The exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not constitute a significant modification of the terms of the Old Notes
and, therefore, such exchange should not constitute an exchange for federal
income tax purposes. Accordingly, such exchange should have no federal income
tax consequences to holders of Old Notes.
84
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of one year
after the Expiration Date, it will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
such resale.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer or the purchasers of any such New Notes. Any broker-
dealer that resells New Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such New Notes may be deemed to be an "underwriter" within the
meaning of the Securities Act and any profit on any such resale of New Notes
and any commission or concessions received by any such persons may be deemed
to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that, by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
For a period of one year after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
Supplement to this Prospectus to any broker-dealer that requests such
documents in the Letter of Transmittal. The Company has agreed, pursuant to
the Registration Rights Agreement, to pay all expenses incident to the
Exchange Offer (including the expenses of one counsel for all the holders of
the Notes as a single class) other than commissions or concessions of any
brokers or dealers and will indemnify the holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Company
by Weil, Gotshal & Manges LLP, New York, New York.
EXPERTS
The consolidated financial statements of Nationwide Credit, Inc. as of
December 31, 1997 and 1996 and for each of the three years in the period then
ended, appearing in this Prospectus and Registration Statement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
85
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NATIONWIDE CREDIT, INC.
Unaudited consolidated balance sheet of Nationwide Credit, Inc. as of June 30, 1998
and the related consolidated statements of operations and cash flows for the six
months ended June 30, 1998 and 1997 with accompanying notes......................... F-2
Consolidated balance sheets of Nationwide Credit, Inc. as of December 31, 1997 and
1996 and the related consolidated statements of income, stockholder's equity and
cash flows for the years ended December 31, 1997, 1996 and 1995 with accompanying
notes and Report of Independent Auditors thereon.................................... F-8
</TABLE>
F-1
<PAGE>
NATIONWIDE CREDIT, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
1998
---------
UNAUDITED
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 8,265
Cash held for clients.............................................. 779
Accounts receivable, net of allowance of $2,371.................... 12,387
Prepaid expenses and other current assets.......................... 1,031
--------
Total current assets................................................ 22,462
Property and equipment.............................................. 13,638
Accumulated depreciation............................................ (2,245)
--------
11,393
Goodwill, less accumulated amortization of $2,015................... 118,864
Other intangible assets, less accumulated amortization of $7,996.... 12,558
Deferred financing costs, less accumulated amortization of $1,309... 4,384
Other assets........................................................ 198
--------
Total assets........................................................ $169,859
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Collections due to clients......................................... $ 779
Accrued compensation............................................... 3,490
Accounts payable................................................... 1,784
Accrued severance and office closure costs......................... 929
Other accrued liabilities.......................................... 7,325
Current maturities of long-term debt............................... 250
--------
Total current liabilities........................................... 14,557
Accrued severance and office closure costs.......................... 2,400
Long-term debt
Term loan facility................................................. 24,625
10.25% Senior notes due 2008....................................... 100,000
Stockholder's equity:
Common Stock, no par value
Authorized shares--10,000
Issued and outstanding shares--10
Additional paid-in capital......................................... 39,115
Notes receivable--stockholders..................................... (140)
Retained earnings (deficit)........................................ (10,698)
--------
Total stockholder's equity.......................................... 28,277
--------
Total liabilities and stockholder's equity.......................... $169,859
========
</TABLE>
See accompanying notes.
F-2
<PAGE>
NATIONWIDE CREDIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30,
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenue................................................ $61,268 $ 54,577
Expenses:
Salaries and benefits............................... 34,540 32,751
Telecommunication................................... 3,286 2,769
Occupancy........................................... 2,396 2,123
Other operating and administrative.................. 10,790 7,332
Depreciation and amortization....................... 6,865 12,256
Provision for employee severance and office closure.. 679 --
Overhead charges from First Data Corporation........ 613 --
------- --------
Total expenses......................................... 59,169 57,231
------- --------
Operating income (loss) ............................... 2,099 (2,654)
Interest expense....................................... 63 7,175
------- --------
Income (loss) before income taxes and extraordinary
items................................................. 2,036 (9,829)
Income tax provision................................... 1,274 --
------- --------
Income (loss) before extraordinary items............... 762 (9,829)
Extraordinary loss on debt extinguishment.............. -- 869
------- --------
Net income (loss)...................................... $ 762 $(10,698)
======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
NATIONWIDE CREDIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) .................................... $ 762 $ (10,698)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation....................................... 2,196 2,245
Amortization....................................... 4,667 10,011
Amortization of deferred financing costs........... -- 1,309
Extraordinary loss on debt extinguishment.......... -- 869
Deferred tax provision............................. 2,021 --
Changes in operating assets and liabilities:
Accounts receivable............................... (3,215) 484
Prepaid expenses and other assets................. (129) (31)
Accrued compensation.............................. (1,905) (6)
Intercompany trade payables....................... 758 --
Accounts payable, other accrued liabilities and
other liabilities................................ 928 4,993
-------- ---------
Net cash provided by operating activities............. 6,083 9,176
INVESTING ACTIVITIES
Acquisitions.......................................... (24,069) --
Purchases of equipment................................ (4,739) (2,049)
-------- ---------
Net cash used in investing activities................. (28,808) (2,049)
FINANCING ACTIVITIES
Proceeds from Acquisition Facilities.................. -- 125,000
Capital contribution from Parent...................... -- 38,975
Funding of acquisition purchase price................. -- (157,270)
Proceeds from long-term debt.......................... -- 25,000
Proceeds from 10.25% Notes due 2008................... -- 100,000
Repayment of Acquisition Facilities................... -- (125,000)
Repayment of long-term debt........................... (1,500) (125)
Debt issuance costs................................... -- (6,562)
(To) from First Data Corporation...................... 21,127 --
Other................................................. -- (268)
-------- ---------
Net cash provided by (used in) financing activities... 19,627 (250)
-------- ---------
Increase (decrease) in cash and cash equivalents...... (3,098) 6,877
Cash and cash equivalents at beginning of period...... 4,109 1,388
-------- ---------
Cash and cash equivalents at end of period............ $ 1,011 $ 8,265
======== =========
Supplemental disclosures of cash flow information
Interest paid......................................... 1,711
=========
</TABLE>
F-4
<PAGE>
NATIONWIDE CREDIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE INDICATED)
1. ORGANIZATION AND BASIS OF PRESENTATION
On December 31, 1997, NCI Acquisition Corporation (the "Buyer"), NCI Merger
Corporation ("Merger Sub"), Nationwide Credit Inc. (the "Company"), First Data
Corporation (the "Seller") and its wholly owned subsidiary, First Financial
Management Corporation ("FFMC"), entered into an Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which Merger Sub merged with and into the
Company, with the Company as the surviving corporation and a wholly owned
subsidiary of the Buyer. The transaction was accounted for under the purchase
method of accounting with the consideration and related fees of the
acquisition allocated to the assets acquired and liabilities assumed based on
their estimated fair values at the date of the acquisition. The merger
consideration consisted of $155.2 million in cash (before transaction costs of
$2.1 million) and up to an additional $3.7 million, to be paid pursuant to the
terms of an earn-out agreement in the event the Company achieves certain
performance targets for the year ended December 31, 1998. The excess of cost
over the fair value of net assets acquired of $120.9 million is being
amortized on a straight-line basis over 30 years. Other identifiable
intangible assets are primarily comprised of the fair value of existing
account placements acquired of $14.5 million and non-competition agreements of
$5.7 million, which are being amortized over 1 and 4 years, respectively. The
Company periodically reviews goodwill and other intangibles to assess
recoverability. Impairment charges will be recognized in operations if the
expected future operating cash flow (undiscounted and without interest
charges) derived from such intangible assets is less than their carrying
value. As a result of the acquisition of the Company and in connection with
the implementation of the modified Operating Improvement Plan, the Company has
accrued estimated costs of approximately $4.0 million associated with closing
certain offices and branches ($1.8 million), severance payments to employees
($0.9 million), relocation costs ($0.7 million) and other costs primarily
associated with the write-down of leasehold improvements associated with the
closed facilities ($0.6 million). Specifically, the Company is closing and/or
reducing branches which are not operating at full capacity, or whose
operations can be consolidated with other branches. Any costs to be paid in
1999 and 2000 are primarily associated with lease commitments on facilities to
be closed during 1998 and 1999. The Company has reached an agreement with
First Data with respect to various matters relating to the acquisition of the
Company by its current shareholders in December 1997. The settlement includes
a cash payment of $10.9 million to the Company. The Company intends to use the
cash payment to reduce indebtedness under its term loan facility by
approximately $6.0 million, pay approximately $2.9 million in various expenses
relating to the Company's operations under First Data management prior to
January 1998, including obligations to the FTC and the DOE, and to increase
cash available for working capital and other corporate operations by
approximately $2.0 million.
The acquisition and related fees were intitially financed through borrowings
of $125.0 million against a $133.0 million senior credit facility (the
"Acquisition Facilities") provided by Lehman Commercial Paper Inc. and a
contribution of $40.4 million of equity capital (before related fees of $1.3
million).
F-5
<PAGE>
NATIONWIDE CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997, AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE INDICATED)
2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of the Company,
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, certain information and
footnote disclosures required by generally accepted accounting principles for
complete financial statements have been excluded. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. All
significant intercompany accounts and transactions have been eliminated in the
consolidation. Operating results for the six month period ended June 30, 1998
are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. The accompanying unaudited consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements of the Company for the year ended December
31, 1997.
Certain reclassifications have been made in the June 30, 1997 unaudited
consolidated financial statements to conform to the June 30, 1998
presentation.
3.LONG TERM DEBT
In January 1998, the Company implemented a financing plan which included the
issuance of $100 million 10 1/4% Senior Notes due 2008 ("Old Notes") in a
private placement (the "Offering"). The Company is in the process of
exchanging the Old Notes for $100 million 10.25% Series A senior notes due
2008 ("New Notes") which are being registered under the Securities Act of
1933, as amended.
As part of the financing plan, the Company also entered into a credit
agreement (the "Credit Agreement") which provides for (1) a seven-year term
loan facility in the amount of $25 million (the "Term Loan"), and (ii) a six-
year revolving credit facility (the "Revolving Credit Facility") of $35
million. In connection with the Offering, all amounts outstanding under the
Acquisition Facilities were repaid utilizing proceeds of the Offering and the
Term Loan. The interest rate of the Term Loan and the Revolving Credit
Facility is determined, at the Company's option, based upon the Eurodollar
Base Rate (as defined in the Credit Agreement) ("Eurodollar") plus 2.125% or
the Base Rate, as defined, plus 1.125%. Interest payments are made quarterly
for Base Rate loans. Interest payments on Eurodollar loans are made on the
earlier of their maturity date or 90 days depending on their term. In
addition, the Company is required to pay a commitment fee of .375% on the
unused portion of the Revolving Credit Facility. The Term Loan is repaid in
quarterly installments, which began March 31, 1998, in an aggregate annual
principal amount of $0.25 million for each of the first six years and the
remaining $23.5 million in the last year of the facility. Additionally, the
Company is required to make annual prepayments, beginning with the year ending
December 31, 1998, from Excess Cash Flow, as defined in the Credit Agreement.
Prepayments are also required in the event of an equity or debt issuance, or
upon certain dispositions of assets. Substantially all of the assets of the
Company are pledged as collateral for borrowings under the Credit Agreement.
The Credit Agreement requires the Company to, among other things, maintain
certain financial ratios and limits the Company's indebtedness, acquisitions
and capital expenditures. In August 1997, the Company negotiated revised
covenants under the Credit Agreement. The Company was in compliance with these
revised covenants as of June 30, 1998.
The Credit Agreement provides for a first priority lien on substantially all
properties and assets (including, among other things, all of the capital stock
of the Company and each of its direct and indirect domestic subsidiaries, and
65% of the capital stock of first-tier foreign subsidiaries) of the Company
and its direct and indirect domestic subsidiaries (excluding the Company's
currently existing subsidiaries).
F-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholder of Nationwide Credit, Inc.
We have audited the accompanying consolidated balance sheets of Nationwide
Credit, Inc. as of December 31, 1996 and 1997, and the related consolidated
statements of income, stockholder's equity, and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also include the
financial statement schedule listed in the accompanying Index to Financial
Statements. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Nationwide Credit, Inc. at December 31, 1996 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young llp
Atlanta, Georgia
March 31, 1998; except for Note 13, as to which the date is October 6, 1998
F-7
<PAGE>
NATIONWIDE CREDIT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 4,109 $ 1,388
Cash held for clients................................ 386 594
Accounts receivable, net of allowance of $3,203 and
$4,449, respectively................................ 12,137 12,871
Deferred tax assets.................................. 3,230 3,080
Prepaid expenses and other current assets............ 696 1,000
Intercompany trade receivables....................... 23 68
-------- --------
Total current assets.................................. 20,581 19,001
Property and equipment:
Computer equipment................................... 16,818 20,638
Furniture and equipment.............................. 3,369 3,726
Leasehold improvements............................... 1,958 3,243
-------- --------
22,145 27,607
Accumulated depreciation............................. (11,968) (16,017)
-------- --------
10,177 11,590
Goodwill and other intangible assets less accumulated
amortization of $30,617 and $40,261, respectively.... 145,500 159,999
Other assets.......................................... 958 275
-------- --------
Total assets.......................................... $177,216 $190,865
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Collections due to clients........................... $ 386 $ 594
Accrued compensation................................. 4,474 3,495
Accounts payable..................................... 2,427 1,652
Accrued severance and office closure costs........... 847 202
Other accrued liabilities............................ 1,267 3,410
Note payable--current................................ 1,500 1,451
Intercompany trade payables.......................... 1,333 2,344
-------- --------
Total current liabilities............................. 12,234 13,148
Payable to First Data Corporation..................... 98,669 112,450
Deferred tax liability................................ 1,297 1,388
Note payable--long term............................... 1,329 --
Commitments and contingencies
Stockholder's equity:
Common Stock, no par value
Authorized shares--10,000, issued and outstanding
shares--1,000...................................... -- --
Additional paid-in capital........................... 41,506 41,506
Retained earnings.................................... 22,682 22,775
Pension liability adjustment......................... (501) (402)
-------- --------
Total stockholder's equity............................ 63,687 63,879
-------- --------
Total liabilities and stockholder's equity............ $177,216 $190,865
======== ========
</TABLE>
See accompanying notes.
F-8
<PAGE>
NATIONWIDE CREDIT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue........................................... $154,506 $138,905 $119,013
Expenses:
Salaries and benefits.......................... 81,114 73,636 66,376
Telecommunication.............................. 9,539 7,341 6,236
Occupancy...................................... 5,148 4,602 5,014
Other operating and administrative............. 27,102 26,586 22,516
Depreciation and amortization.................. 11,893 12,021 14,364
Provision for merger costs, employee severance
and office closure........................... 13,562 4,323 679
Overhead charges from First Data Corporation... 1,545 1,389 1,190
-------- -------- --------
Total expenses.................................... 149,903 129,898 116,375
Operating income ................................. 4,603 9,007 2,638
Interest expense.................................. (501) (241) (122)
-------- -------- --------
Income before income taxes........................ 4,102 8,766 2,516
Provision for income taxes........................ 2,611 4,449 2,423
-------- -------- --------
Net income........................................ $ 1,491 $ 4,317 $ 93
======== ======== ========
</TABLE>
See accompanying notes.
F-9
<PAGE>
NATIONWIDE CREDIT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------- PAID-IN RETAINED PENSION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL
------ ------ ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995................... 1,000 $-- $36,799 $16,874 $(283) $53,390
Pension adjustment.... -- -- -- -- (284) (284)
Capital contribution.. -- -- 4,707 -- -- 4,707
Net income............ -- -- -- 1,491 -- 1,491
----- ---- ------- ------- ----- -------
Balance at December 31,
1995................... 1,000 -- 41,506 18,365 (567) 59,304
Pension adjustment.... -- -- -- -- 66 66
Net income............ -- -- -- 4,317 -- 4,317
----- ---- ------- ------- ----- -------
Balance at December 31,
1996................... 1,000 -- 41,506 22,682 (501) 63,687
Pension adjustment.... -- -- -- -- 99 99
Net income............ -- -- -- 93 -- 93
----- ---- ------- ------- ----- -------
Balance at December 31,
1997................... 1,000 $-- $41,506 $22,775 $(402) $63,879
===== ==== ======= ======= ===== =======
</TABLE>
See accompanying notes.
F-10
<PAGE>
NATIONWIDE CREDIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ..................................... $ 1,491 $ 4,317 $ 93
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation................................. 3,645 3,689 4,720
Amortization................................. 8,248 8,332 9,644
Asset impairment............................. 5,912 -- --
Other non-cash charges....................... 309 2,784 1,842
Deferred tax (benefit) provision............. (2,096) 2,023 218
Changes in operating assets and liabilities
(net of effect of acquisitions):
Accounts receivable...................... (1,660) 9,778 (2,862)
Prepaid expenses and other assets........ (1,506) 113 48
Accrued compensation..................... (1,247) (18) (857)
Accounts payable, other accrued liabilities
and other liabilities...................... 7,785 (8,338) 812
Intercompany trade accounts.............. 92 1,218 966
-------- -------- --------
Net cash provided by operating activities....... 20,973 23,898 14,624
-------- -------- --------
INVESTING ACTIVITIES
Purchases of property and equipment............. (5,016) (7,005) (5,465)
Acquisitions.................................... (2,732) (819) (24,161)
-------- -------- --------
Net cash used in investing activities........... (7,748) (7,824) (29,626)
-------- -------- --------
FINANCING ACTIVITIES
(To) from First Data Corporation................ (13,421) (16,697) 13,781
Repayment of note payable....................... (1,067) (1,500) (1,500)
-------- -------- --------
Net cash (used in) provided by financing
activities..................................... (14,488) (18,197) 12,281
Decrease in cash and cash equivalents........... (1,263) (2,123) (2,721)
Cash and cash equivalents at beginning of year.. 7,495 6,232 4,109
-------- -------- --------
Cash and cash equivalents at end of year........ $ 6,232 $ 4,109 $ 1,388
======== ======== ========
NON-CASH FINANCING ACTIVITY:
Repayment of note payable in 1995 with First Data common
stock of $2,904
</TABLE>
See accompanying notes.
F-11
<PAGE>
NATIONWIDE CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE INDICATED)
1. ORGANIZATION, BASIS OF ACCOUNTING AND DESCRIPTION OF BUSINESS
Prior to its December 31, 1997 change in ownership as discussed in Note 14,
Nationwide Credit, Inc. ("NCI" or the "Company") was a wholly owned subsidiary
of First Financial Management Corporation ("FFMC"), which is a wholly owned
subsidiary of First Data Corporation ("First Data").
The Company was acquired in June 1990 by FFMC. First Data's October 1995
merger with FFMC (the "Merger"), accounted for under the pooling of interests
method, resulted in the combination of First Data's accounts receivable
management company, ACB Business Services, Inc. ("ACB"), with NCI. ACB was
primarily the result of two purchase business combinations consummated by
First Data in 1993. The accompanying financial statements reflect First Data's
and FFMC's basis in ACB and NCI, respectively.
The consolidated accounts of the Company include certain majority-owned
subsidiaries, the financial position and results of operations of which are
not material. Intercompany accounts and transactions have been eliminated in
consolidation.
The Company is a provider of accounts receivable management services and its
principal service is consumer debt collection on a contingency fee basis. The
Company derives a significant portion of its revenue from American Express
Company ("American Express") and the U.S. Department of Education ("DOE") and
serves other clients in a variety of industries including healthcare, travel
and entertainment card, retail, banking, oil and gas and telecommunications as
well as other government agencies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash held for clients,
representing collections not yet remitted to clients, is not considered a cash
equivalent.
Property and Equipment
Property and equipment are recorded at cost. Depreciation expense is
calculated over the estimated useful lives of the related assets (three to
eight years) using the straight-line method for financial reporting purposes.
Leasehold improvements are amortized over the term of the related lease.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over the fair value of net
tangible and identifiable intangible assets acquired and is being amortized
using the straight-line method over 25 to 40 years. At December 31, 1996 and
1997, the Company had goodwill of $134.3 million and $147.2 million,
respectively. Other intangible assets consist primarily of software and non-
compete agreements related to these acquisitions and acquired contract costs.
These costs are amortized on a straight-line basis over the length of the
agreement or benefit period, ranging from 5 to 25 years. Goodwill and other
intangible assets are reviewed for impairment whenever events indicate that
their carrying amount may not be recoverable. In such reviews, estimated
undiscounted future cash flows associated with these assets are compared with
their carrying value to determine if a write-down to fair value (normally
measured by discounting estimated future cash flows) is required.
F-12
<PAGE>
NATIONWIDE CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE INDICATED)
Revenue Recognition
The Company generates substantially all of its revenue from contingency fees
which are a percentage of debtor collections. Revenue is recognized upon
collection of funds on behalf of clients. Revenues that are not contingency
fee based are recognized as the services are performed.
Income Taxes
The Company accounts for income taxes under the liability method required by
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes, whereby deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting and tax purposes.
The taxable income of the Company is included in the consolidated U.S.
federal income tax return of First Data. The Company's provision for income
taxes has been determined as if the Company were a separate tax-paying entity.
Effective January 1, 1996, current income taxes payable are included in the
Payable to First Data account.
Employee Stock Options
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123")
established accounting and reporting standards for stock based employee
compensation plans. As permitted by the standard, First Data and the Company
elected to continue to account for employee stock options under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
("APB 25") and related interpretations. Accordingly, adoption of the standard
has not affected the Company's results of operations or financial position.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. ACQUISITIONS
On February 28, 1997, the Company acquired certain assets of Consolidated
Collection Co. ("CCC"), an accounts receivable management company based in
Denver, Colorado for approximately $12.2 million excluding acquisition related
costs of $1.4 million (of which $0.4 million remained unpaid at December 31,
1997). The acquisition was accounted for as a purchase which, prior to the
settlement outlined below, resulted in the recording of $8.6 million in
goodwill, which is being amortized over 25 years, and $5.4 million of other
intangibles related to a non-compete agreement. In September 1997, First Data
negotiated a final, additional payment of $11.0 million as consideration for
the elimination of the contingent consideration clause in the asset purchase
agreement. This First Data payment was recorded by the Company as goodwill
with a corresponding increase in the Payable to First Data account. First Data
further agreed to an additional contingent payment of up to $2 million if
First Data, or a then affiliate of First Data, enters into a definitive
agreement to provide debt collection services to a certain telecommunications
company prior to March 4, 1999.
F-13
<PAGE>
NATIONWIDE CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE INDICATED)
The following table summarizes unaudited pro forma results of operations of
NCI as if the acquisition of CCC had occurred and all cash consideration was
paid on January 1, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Revenue................................................. $ 149,650 $ 121,315
Net Income.............................................. 4,696 369
</TABLE>
This pro forma information is not necessarily indicative of what the
combined results of operations would have been if the Company had consummated
the acquisition of CCC on January 1, 1996.
4. PROVISION FOR MERGER COSTS, EMPLOYEE SEVERANCE AND OFFICE CLOSURE
Primarily as a result of integrating the operations of NCI and ACB, the
Company has incurred charges relating to employee severance and branch office
closure costs as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1995 1996 1997
------- ------ ----
<S> <C> <C> <C>
Asset impairment........................................... $ 5,912 $ -- $--
Employee severance......................................... 3,492 2,271 679
Merger costs............................................... 3,000 (750) --
Office closure............................................. 1,158 2,802 --
------- ------ ----
$13,562 $4,323 $679
======= ====== ====
</TABLE>
The asset impairment charge in 1995 is principally comprised of $4.5 million
attributable to the ACB trade name which was not to be utilized by the
combined Company. The $3.0 million provision for merger costs in 1995 related
to an estimated payment to the former owners of one of the two businesses
acquired by First Data in 1993. Were it not for the Merger, this payment would
not have been necessary as the acquired business was not performing at the
level necessary for it to be made. Accordingly, First Data included it as a
component of the merger, integration and impairment charge in its 1995
financial statements and this accounting has been pushed down to the Company's
financial statements. The $750 credit in 1996 represents the benefit First
Data realized from settling this issue at an amount less than the $3.0 million
estimate. Employee severance has involved giving notice of termination to 475,
200 and 78 employees during 1995, 1996 and 1997, respectively.
5. RELATED PARTY TRANSACTIONS
The Company has various transactions with First Data and its affiliates.
These transactions can be generally classified into the following categories:
. trade activities--this involves the Company deriving revenue for
collection activities on behalf of First Data affiliates and incurring
expenses from First Data affiliates for such services as obtaining
address information and document imaging. The following summarizes the
Company's trade transactions with First Data and affiliates:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
--------------- --------
<S> <C> <C> <C>
Trade revenue...................................... $ 291 $ 400 $ 347
Trade expenses..................................... 56 2,646 1,771
</TABLE>
F-14
<PAGE>
NATIONWIDE CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE INDICATED)
. allocation of general and administrative costs--this is a general
allocation of First Data corporate overhead based on 1% of the Company's
revenue. Functions provided by First Data corporate include
administration of employee benefit programs, internal audit, financial
systems licensing and processing, taxes and other support services.
. direct charges--certain programs and activities are administered by First
Data on a consolidated basis. Examples are employee benefit plans, group
and other insurance programs and certain vendor agreements that are
negotiated by First Data on an enterprise wide basis. The costs of these
programs and activities are specifically identifiable to each
participating business unit and, for this reason, the costs are not
included in the table above.
Management believes that the overall amount of charges to and from First
Data are reasonable and that, except as described below, the accompanying
financial statements reflect all of the Company's costs of doing business.
Management further believes that the incremental general and administrative
costs that would result from the Company being a stand-alone entity would not
exceed the 1% of revenue charge from First Data.
First Data does not have any specific indebtedness related to the Company
and the accompanying financial statements do not reflect any allocations of
First Data interest expense. There are no formal financing arrangements with
First Data. However, cash not necessary for the Company's near term operating
requirements has been remitted to First Data which in turn has funded the
Company's operating, investing and financing activities as required.
Accordingly, the net change in the payable to First Data balance has been
reflected as a financing activity in the accompanying statement of cash flows.
The average balances in the payable to First Data balance were $119.1 million,
$105.8 million and $104.4 million for the years ended December 31, 1995, 1996
and 1997, respectively.
6. NOTE PAYABLE
Note payable represents the remaining balance of a non-interest bearing note
related to a 1993 business acquisition. The original note was for $7.5 million
and provided for five annual payments in May of each year of $1.5 million. A
portion of this note was contingent upon 1994 performance and the May 1995
payment on the note was reduced by $1,250. The note is carried in the
accompanying financial statements at its present value based upon an 8%
interest rate. The final $1.5 million installment is payable in May 1998.
7. SIGNIFICANT CLIENTS AND CONCENTRATIONS OF CREDIT RISK
The Company derives a significant portion of its revenue from American
Express and the DOE. The amounts of consolidated net revenue and accounts
receivable attributable to these clients are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
REVENUE:
American Express...................................... $42,061 $41,770 $33,665
DOE................................................... 40,339 31,551 20,711
DECEMBER 31,
ACCOUNTS RECEIVABLE: 1996 1997
------- -------
American Express...................................... $ 1,327 $ 1,235
DOE................................................... 3,431 4,606
</TABLE>
F-15
<PAGE>
NATIONWIDE CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE INDICATED)
Additionally, in the aggregate, the Company had accounts receivable from
other departments and agencies of the U.S. Government amounting to $1.4
million and $0.7 million at December 31, 1996 and 1997, respectively. No other
single client accounted for more than 10% of the consolidated totals for the
periods indicated.
8. FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash, accounts
receivable, accounts payable and notes payable, exclusive of non-interest
bearing amounts payable to First Data, approximate their estimated fair
values.
9. OPERATING LEASES
The Company leases certain office equipment and office space under
noncancellable lease agreements. Future minimum lease payments, on a calendar
year basis, under noncancellable operating leases, with initial lease terms of
at least one year at the time of inception, are as follows at December 31,
1997:
<TABLE>
<S> <C>
1998................................. $ 4,076
1999................................. 3,486
2000................................. 2,923
2001................................. 1,849
2002................................. 620
-------
Total minimum lease payments....... $12,954
=======
</TABLE>
Total rent expense for all operating leases was approximately $4,495,
$4,311, and $4,725 for the years ended December 31, 1995, 1996 and 1997,
respectively.
10. STOCK OPTION PLAN
The Company participates in a First Data plan that provides for the granting
of First Data stock options to key employees and other key individuals who
perform services for the Company. A total of 53.7 million shares of First Data
common stock have been reserved for issuance under First Data plans, of which
7.6 million shares remain available for future grant as of December 31, 1997.
The options have been issued at a price equivalent to First Data common
stock's fair market value at the date of grant, generally have ten year terms
and generally become exercisable in three or four equal annual increments
beginning 12 months after the date of grant.
In October 1996, First Data instituted an employee stock purchase plan for
which a total of six million shares have been reserved for issuance, of which
4.8 million shares remain available for future grant as of December 31, 1997.
Monies accumulated through payroll deductions elected by eligible employees
are used to effect quarterly purchases of First Data common stock at a 15%
discount from the lower of the market price at the beginning or end of the
quarter.
The Company has elected to follow APB 25 for First Data stock options
because, as discussed below, the alternative fair value accounting under SFAS
No. 123 requires use of option valuation models that were not developed for
use in valuing employee stock options. Under APB 25, because the exercise
price of the stock options equals the market price of the underlying First
Data stock on the date of grant, no compensation expense is recognized.
F-16
<PAGE>
NATIONWIDE CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE INDICATED)
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, assuming the Company has accounted for its First
Data employee stock options granted subsequent to December 31, 1994 under the
fair value method of SFAS No. 123. The fair value for options was estimated at
the date of grant using a Black-Scholes option pricing model with the
following weighted average assumptions for the years ended December 31, 1995,
1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate--options............. 5.29% 6.28% 6.23%
Risk-free interest rate--employee stock
purchase rights............................. -- 5.04% 6.23%
Dividend yield............................... 0.22% 0.22% 0.22%
Volatility of First Data common stock........ 17.6% 16.9% 18.9%
Expected option life......................... 5 years 5 years 5 years
Expected employee stock purchase right life.. -- 0.25 years 0.25 years
Weighted-average fair value of options
granted..................................... $ 8 $11 $11
Weighted-average fair value of employee stock
purchase rights............................. $-- $ 7 $ 7
</TABLE>
The Company's pro forma net income (loss) after amortizing the fair value of
the options and the stock purchase rights over their vesting period is $1,382,
$4,071 and ($410) for the years ended December 31, 1995, 1996 and 1997,
respectively (because SFAS 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 1999).
Because the Company's First Data employee stock options have characteristics
significantly different from those of traded options for which the Black-
Scholes model was developed, and because changes in the subjective input
assumptions can materially affect the fair value estimate, the existing
models, in management's opinion, do not necessarily provide a reliable single
measure of the fair value of its First Data employee stock options.
A summary of First Data stock option activity for the Company's employees is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1996 1997
------------------ ------------------ -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 653,674 $17 583,200 $23 359,332 $28
Granted................. 302,222 29 163,742 38 76,000 40
Exercised............... (216,154) 13 (149,638) 21 (77,357) 17
Canceled................ (156,542) 22 (237,972) 28 (71,897) 32
-------- -------- -------
Outstanding at end of
period................. 583,200 $23 359,332 $28 286,078 $34
======== ======== =======
Exercisable............. 114,768 $15 87,325 $17 79,297 $28
======== ======== =======
</TABLE>
F-17
<PAGE>
NATIONWIDE CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE INDICATED)
The following summarizes information about stock options outstanding.
<TABLE>
<S> <C> <C> <C> <C> <C>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------- ---------------------
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$11-$26 76,936 6.6 years $23 48,427 $22
$31-$44 209,142 8.7 years 38 30,870 36
------- ------
286,078 8.2 years 34 79,297 28
======= ======
</TABLE>
11. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1996 1997
------- ------ ------
<S> <C> <C> <C>
Federal.................................................. $ 2,214 $3,692 $2,091
State and local.......................................... 397 757 332
------- ------ ------
Total.................................................. $ 2,611 $4,449 $2,423
======= ====== ======
Deferred income taxes result from the recognition of temporary differences.
Temporary differences are differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements that will
result in differences between income for tax purposes and income for financial
statement purposes in future years.
The provision for income taxes is comprised of the following:
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1995 1996 1997
------- ------ ------
<S> <C> <C> <C>
Current.................................................. $ 4,707 $2,426 $2,205
Deferred................................................. (2,096) 2,023 218
------- ------ ------
Total.................................................. $ 2,611 $4,449 $2,423
======= ====== ======
</TABLE>
The Company's net deferred tax assets (liabilities) consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Accrued costs............................................... $ 1,699 $ 1,124
Minimum pension liability................................... 270 247
Accounts receivable allowance............................... 1,261 1,709
------- -------
Total deferred tax assets..................................... 3,230 3,080
Valuation allowance........................................... -- --
------- -------
Net deferred tax assets....................................... 3,230 3,080
Deferred tax liabilities:
Depreciation and amortization............................... (1,297) (1,388)
------- -------
Total deferred tax liabilities................................ (1,297) (1,388)
------- -------
Net deferred tax assets..................................... $ 1,933 $ 1,692
======= =======
</TABLE>
F-18
<PAGE>
NATIONWIDE CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE INDICATED)
The reconciliation of income tax computed at the U.S. federal statutory tax
rate to income tax expense is:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Tax at U.S. statutory rate................................ $1,436 $3,068 $ 881
Increases in taxes from:
State and local taxes................................... 258 492 216
Non-deductible goodwill................................. 801 782 782
Other non-deductible.................................... -- -- 350
Other................................................... 116 107 194
------ ------ ------
Total................................................. $2,611 $4,449 $2,423
====== ====== ======
</TABLE>
12. RETIREMENT PLANS
Defined Benefit Plan
ACB has a defined benefit pension plan covering employees hired prior to May
1, 1993 when the Plan was frozen such that no new participants would be added
and existing participants would cease accruing additional benefits. Benefits
under the plan are based on years of service and annual compensation. Funding
of retirement costs complies with the minimum funding requirements specified
by the Employee Retirement Income Security Act of 1974, as amended. Plan
assets consist principally of mutual fund investments and fixed income
securities.
Net pension cost for the years ended December 31, 1995, 1996 and 1997
consisted of:
<TABLE>
<CAPTION>
1995 1996 1997
---- ----- -----
<S> <C> <C> <C>
Service cost--benefit earned during period.................. $-- $ -- $ --
Interest cost on projected benefit obligation............... 196 196 216
Actual return on plan assets................................ (70) (148) (542)
Net amortization and deferral............................... (74) 35 348
---- ----- -----
Net periodic pension cost................................... $ 52 $ 83 $ 22
==== ===== =====
</TABLE>
The following table sets forth the funded status and amounts recognized in
the balance sheet for the Company's plan at December 31, 1996 and 1997.
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested, Accumulated and Projected benefit obligation....... $ (2,689) $ (3,076)
Plan assets at fair value.................................... 2,406 2,904
-------- --------
Plan assets less than projected benefit obligations.......... (283) (172)
Unrecognized net loss........................................ 772 649
Minimum liability adjustment................................. (772) (649)
-------- --------
Pension liability included in the balance sheet.............. $ (283) $ (172)
======== ========
</TABLE>
F-19
<PAGE>
NATIONWIDE CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE INDICATED)
In computing the foregoing, a discount rate of 8.0% in 1996 and 7.5% in 1997
was used. The expected long-term rate of return on assets of 9.5% was used for
1996 and 1997.
Defined Contribution Plan
First Data has an incentive savings plan which allows eligible employees of
First Data and its subsidiaries to contribute a percentage of their
compensation and provides for certain matching, service-related and other
contributions. The Company's matching and service-related contributions
associated with the plan were approximately $705, $453 and $584 for the years
ended December 31, 1995, 1996 and 1997, respectively.
13. CONTINGENCIES
In 1992, an action was commenced by the Federal Trade Commission ("FTC")
staff in which it alleged the Company had violated the Fair Debt Collection
Practices Act ("FDCPA"). The matter was resolved with a consent decree, in
which the Company did not admit any liability. Pursuant to the consent decree,
the Company agreed to take additional steps to ensure compliance with the
FDCPA and paid a penalty of $0.1 million. The FTC staff recently completed an
investigation regarding the Company's compliance with the consent decree. In
connection with the change in ownership discussed in Note 14, First Data has
agreed to indemnify the Company for any monetary penalty resulting from the
FTC staff investigation. On December 26, 1997, the Company received
correspondence indicating that the FTC will seek a monetary fine, as well as
certain injunctive relief in connection with the operations of the business.
Without admitting liability for any of the alleged violations of the FDCPA, on
October 6, 1998 the Company settled the matter by agreeing to pay a civil
monetary penalty of $1.0 million and also agreed to certain injunctive relief
in connection with the operations of the business, consisting primarily of
disclosure to debtors of their rights and enhanced training and compliance
reporting requirements. The Company believes that its compliance with the
provisions of this tentative settlement relating to any injunctive relief
sought by the FTC staff will not materially affect the Company's financial
condition or ongoing operations.
In January 1998, management became aware, through chargebacks, that the DOE
intends to revise the amounts it previously paid to the Company during the
years ended December 31, 1994 through 1997.
Management's evaluation of the FTC and DOE issues has resulted in the
determination that losses are probable and estimable, accordingly, an
aggregate loss provision of approximately $1.9 million was recorded in the
fourth quarter of 1997.
The Company is involved in certain litigation arising in the ordinary course
of business. In the opinion of management, the ultimate resolution of these
matters will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
14. CHANGE IN OWNERSHIP
On December 31, 1997, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") along with NCI Acquisition Corporation
("NAC"), NCI Merger Corporation ("Merger Sub"), First Data and FFMC. Upon the
consummation of the merger, the Company became a wholly owned subsidiary of
F-20
<PAGE>
NATIONWIDE CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE INDICATED)
NAC. Consideration for the merger consisted of $155.2 million in cash and up
to an additional $3.7 million, to be paid pursuant to the terms of an earn-out
agreement in the event the Company achieves certain performance targets for
the year ended December 31, 1998. The accompanying financial statements
reflect the Company's historical financial position and results of operations
prior to consummation of any of the transactions contemplated under the Merger
Agreement. The purchase price in the Merger Agreement will be adjusted to
reflect the change in the Company's net worth, as defined in the Merger
Agreement, between November 30, 1997 and December 31, 1997.
In January 1998 the Company implemented a financing plan which included the
issuance of $100.0 million of 10 1/4% senior notes due 2008 ("Old Notes") in a
private placement (the "Offering"). The Company is in the process of
exchanging the senior notes for $100.0 million 10 1/4% Series A senior notes
due 2008 ("New Notes") which are being registered under the Securities Act of
1933, as amended.
As part of the financing plan, the Company also entered into a credit
agreement (the "Credit Agreement") which provides for (i) a seven-year term
loan facility, in the amount of $25.0 million (the "Term Loan"), and (ii) a
six-year revolving credit facility (the "Revolving Credit Facility") of $35.0
million. In connection with the Offering, all amounts outstanding under the
Acquisition Facilities were repaid utilizing proceeds of the Offering, the
Term Loan and a portion of the Revolving Credit Facility. The Term Loan is to
be repayable in quarterly installments in an aggregate principle amount of
$0.25 million for each of the first six years and the remaining $23.5 million
in the last year of the facility. The Credit Agreement provides for a first
priority lien on substantially all properties and assets (including, among
other things, all of the capital stock of the Company and each of its direct
and indirect domestic subsidiaries, and 65% of the capital stock of first-tier
foreign subsidiaries) of the Company and its direct and indirect domestic
subsidiaries (excluding the Company's currently existing subsidiaries).
The New Notes will be, and the Old Notes are, general unsecured obligations
of the Company and rank pari passu in right of payment with all current and
future unsecured senior indebtedness of the Company, including borrowings
under the Credit Agreement.
None of the Company's subsidiaries are subsidiary guarantors. All of the
Company's future domestic subsidiaries, if any, will become subsidiary
guarantors hereunder. The Company's only subsidiaries, are NCI Recoveries
Limited, organized under the laws of the United Kingdom ("NCI Recoveries") and
Master Collectors of Dallas, Inc., a Texas corporation ("MCD"). The assets of
and revenue and earnings generated by these subsidiaries are immaterial to the
Company. Separate financial statements of each subsidiary have not been
presented because management has determined that they would not be material to
investors.
F-21
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS NOT IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COM-
PANY OR THE INITIAL PURCHASER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
NOTES OFFERED HEREBY NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITA-
TION OF AN OFFER TO BUY, ANY OF THE NOTES TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PER-
SON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN
ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR INCORPORATED BY REFER-
ENCE HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information..................................................... i
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 12
Capitalization............................................................ 18
Selected Historical Financial Information and Other Data.................. 19
Unaudited Condensed Consolidated Pro Forma Financial Information.......... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 26
Business.................................................................. 35
Management................................................................ 45
Stock Ownership and Certain Transactions.................................. 50
The Exchange Offer........................................................ 53
Description of Senior Credit Facilities................................... 60
Description of New Notes.................................................. 61
Certain Federal Income Tax Considerations ................................ 84
Plan of Distribution...................................................... 85
Legal Matters............................................................. 85
Experts................................................................... 85
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
OFFER TO EXCHANGE
ALL OUTSTANDING
10 1/4 SENIOR NOTES DUE 2008
FOR
10 1/4 SERIES A SENIOR NOTES DUE 2008
OF
NATIONWIDE CREDIT, INC.
-----------------
PROSPECTUS
-----------------
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 14-2-202(b)(4) of the Georgia Business Corporation Code (the
"Georgia Code") provides that a corporation's articles of incorporation may
include a provision that eliminates or limits the liability of directors for
monetary damages to the corporation or its shareholders for any action taken,
or failure to take any action, as directors; provided, however, that this
Section does not permit a corporation to eliminate or limit the liability of a
director (i) for appropriating, in violation of his or her duties, any
business opportunity of the corporation, (ii) for acts or omissions which
involve intentional misconduct or a knowing violation of law, (iii) for any
transaction from which the director obtained an improper personal benefit, or
(iv) for voting for or assenting to an unlawful distribution (whether as a
dividend, stock repurchase or redemption or otherwise) as provided in Section
14-2-832 of the Georgia Code. Section 14-2-202(b)(4) does not eliminate or
limit the rights of a corporation or any shareholder to seek an injunction or
other non-monetary relief in the event of a breach of a director's fiduciary
duty. In addition, this Section applies only to claims against a director
arising out of his role as a director and does not relieve a director from
liability arising from his role as an officer or in any other capacity. The
Company's Articles of Incorporation include a provision exonerating the
Company's directors from monetary liability to the extent described above and
provide further that the liability of directors of the Company shall be
limited to the fullest extent permitted by Georgia law, as the same may from
time to time be amended.
Sections 14-2-850 to 14-2-859, inclusive, of the Georgia Code govern the
indemnification of directors, officers, employees and agents. Subsection (a)
of Section 14-2-851 of the Georgia Code provides that a corporation may
indemnify or obligate itself to indemnify an individual made a party to a
proceeding because he or she is or was a director against liability incurred
in the proceeding if (1) such individual conducted himself or herself in good
faith; and (2) such individual reasonably believed (A) in the case of conduct
in his or her official capacity, that such conduct was in the best interests
of the corporation; (B) in all other cases, that such conduct was at least not
opposed to the best interests of the corporation; and (C) in the case of any
criminal proceeding, that the individual had no reasonable cause to believe
such conduct was unlawful. Subsection (d) of Section 14-2-851 of the Georgia
Code provides that a corporation may not indemnify a director (1) in
connection with a proceeding by or in the right of the corporation, except for
reasonable expenses incurred in connection with the proceeding if it is
determined that the director has met the relevant standard of conduct, or (2)
in connection with any proceeding with respect to conduct for which he or she
was adjudged liable on the basis that personal benefit was improperly received
by him or her, whether or not involving action in his or her official
capacity. Notwithstanding the foregoing, pursuant to Section 14-2-854 of the
Georgia Code, a court may order a corporation to indemnify a director if such
court determines, in view of all the relevant circumstances, that it is fair
and reasonable to indemnify the director even if the director has not met the
relevant standard of conduct set forth in subsections (a) and (b) of Section
14-2-851 of the Georgia Code or was adjudged liable in a proceeding referred
to in subsection (d) of Section 14-2-851 of the Georgia Code, but if the
director was adjudged so liable, the indemnification shall be limited to
reasonable expenses incurred in connection with the proceeding.
Section 14-2-852 of the Georgia Code provides that a corporation shall
indemnify a director who was wholly successful, on the merits or otherwise, in
the defense of any proceeding to which he or she was a party because he or she
was a director of the corporation against reasonable expenses incurred by the
director in connection with the proceeding.
Section 14-2-857 of the Georgia Code provides that a corporation may
indemnify an officer of the corporation who is a party to a proceeding because
he or she is an officer of the corporation to the same extent as a director.
If the officer is not a director (or if the officer is a director but the sole
basis on which he or she is made a party to the proceeding is an act or
omission solely as an officer), the corporation may indemnify such officer to
such further extent as may be provided by the articles of incorporation, the
bylaws, a resolution of the board of directors, or contract except for
liability arising out of conduct that constitutes (1) appropriation, in
II-1
<PAGE>
violation of his or her duties, of any business opportunity of the
corporation, (2) acts or omissions which involve intentional misconduct or a
knowing violation of law, (3) the types of liability set forth in Section 14-
2-832 of the Georgia Code, or (4) receipt of an improper personal benefit. An
officer of a corporation who is not a director is entitled to mandatory
indemnification under Section 14-2-852 of the Georgia Code and may apply to a
court under Section 14-2-854 of the Georgia Code for indemnification, in each
case to the same extent to which a director may be entitled to indemnification
under those provisions. Finally, a corporation may also indemnify an employee
or agent who is not a director to the extent, consistent with public policy,
that may be provided by its articles of incorporation, bylaws, general or
specific action by its board of directors, or contract.
Article Six of the Company's Bylaws provides that the Company shall
indemnify each director and officer of the Company to the full extent
permitted under Sections 14-2-851 and 14-2-852 (with respect to directors) and
Section 14-2-857 (with respect to non-director officers). In addition, the
Bylaws permit indemnification to the full extent permitted by Section 14-2-857
of an employee or agent of the Company, or a person serving at the request of
the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise.
The determination of whether the required standard of conduct for
indemnification has been met will be made, in accordance with the provisions
of Section 14-2-855 of the Georgia Code, as follows: (i) by the majority vote
of all the disinterested directors of the board of directors (a majority of
whom shall constitute a quorum for such purpose), or by a majority of the
members of a committee of disinterested directors; (ii) by special legal
counsel; or (iii) by the shareholders, but in such event, shares owned by or
voted under the control of directors who are not disinterested may not be
voted.
Pursuant to Sections 14-2-853 and 14-2-857 of the Georgia Code and Article
Six of the Company's Bylaws, expenses incurred by a director, officer,
employee or agent of the Company in defending a proceeding may be paid by the
Company in advance of the final disposition of such proceeding, as authorized
in the specific case, if such person delivers to the Company (1) a written
affirmation of his or her good faith belief that he or she has met the
relevant standard of conduct set forth in the Georgia Code or, as to
directors, that the proceeding involves conduct for which liability has been
eliminated by a provision of the Company's Articles of Incorporation as
authorized by Section l4-2-202(b)(4) of the Georgia Code; and (2) a written
undertaking by such person to repay any funds advanced if it is ultimately
determined that the person is not entitled to indemnification by the Company.
Indemnification and advancement of expenses pursuant to Article Six of the
Company's Bylaws are not exclusive of any rights to which a director, officer,
employee or agent may be entitled under any law (common or statutory),
agreement, vote of shareholders or disinterested directors or otherwise, both
as to action in such person's official capacity and as to action in any other
capacity while holding office or while employed by or acting as agent for the
Company. In addition, the Company is specifically authorized to enter into
agreements which provide indemnification rights and procedures permitted by
the Georgia Code. All rights to indemnification under Article Six of the
Company's Bylaws shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
The Company's Bylaws provide that the Company shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Company or who is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether
or not the Company would have the power to indemnify such person against such
liability. Officers and directors of the Company are presently covered by
insurance maintained by the Company which (with certain exceptions and within
certain limitations) indemnifies them against any losses or liabilities
arising from any alleged "wrongful act" including any alleged breach of duty,
neglect, error, misstatement, misleading statement, omissions or other act.
II-2
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
2.1 --Agreement and Plan of Merger, dated as of December 31, 1997, among
NCI Acquisition Corporation, NCI Merger Corporation, the Registrant,
First Financial Management Corporation and First Data Corporation.*
2.2 --Amendment to Agreement and Plan of Merger, dated as of August 27,
1998, among NCI Acquisition Corporation, NCI Merger Corporation, the
Registrant, First Financial Management Corporation and First Data
Corporation.+
<C> <S>
3.1 --Certificate of Incorporation of the Registrant.*
3.2 --Bylaws of the Registrant.*
4.1 --Series A and Series B 10 1/4% Senior Notes due 2008 Indenture, dated
as of January 28, 1998, between the Registrant and State Street Bank
and Trust Company, as Trustee.*
4.2 --Form of Note (included in Exhibit 4.1, Exhibit A-1).*
4.3 --A/B Exchange Registration Rights Agreement, dated as of January 28,
1998, by and among the Registrant and Lehman Brothers Inc.*
5 --Opinion of Weil, Gotshal & Manges LLP.+
8 --Opinion of Weil, Gotshal & Manges LLP regarding certain tax matters.+
10.1 --Credit Agreement, dated as of January 28, 1998, among NCI Acquisition
Corporation, the Registrant, the Several Lenders from time to time
parties thereto, Lehman Brothers Inc., Lehman Commercial Paper Inc.,
Fleet Capital Corporation and BHF-Bank Aktiengesellschaft.*
10.2 --Purchase Agreement, dated as of January 23, 1998, by and between the
Registrant and Lehman Brothers Inc.*
10.3 --NCI Acquisition Corporation 1997 Management Performance Option Plan.*
10.4 --Stock Option Agreement, dated as of December 31, 1997, between NCI
Acquisition Corporation and Jerry Kaufman.*
10.5 --Stock Option Agreement, dated as of December 31, 1997, between NCI
Acquisition Corporation and Loren Kranz.*
10.6 --Stock Option Agreement, dated as of May 18, 1998, between NCI
Acquisition Corporation and Michael Lord.*
10.7 --Stock Option Agreement, dated as of December 31, 1997, between NCI
Acquisition Corporation and Greg Schubert.*
10.8 --Stock Option Agreement, dated as of December 31, 1997, between NCI
Acquisition Corporation and Avalon Investment Partners, LLC.*
10.9 --Employment Agreement, dated as of December 31, 1997, by and between
the Registrant and Jerry Kaufman.*
10.10 --Employment Agreement, dated as of December 31, 1997, by and between
the Registrant and Loren Kranz.*
10.11 --Employment Agreement, dated as of May 18, 1998, by and between the
Registrant and Michael Lord.*
10.12 --Employment Agreement, dated as of December 31, 1997, by and between
the Registrant and Gregory Schubert.*
10.13 --Stockholders' Agreement, dated as of December 31, 1997, by and among
NCI Acquisition Corporation, the State Board of Administration of
Florida, Centre Capital Investors II, L.P., Centre Capital Tax Exempt
Investors II, L.P., Centre Capital Offshore Investors II, L.P.,
Centre Parallel Management Partners, L.P., Centre Partners
Coinvestment, L.P., WPG Corporate Development Associates V, L.P., WPG
Corporate Development Associates V (Overseas), L.P., Weber Family
Trust, Lion Investments Limited, Westpool Investment Trust plc,
Avalon Investment Partners LLC, Jerrold Kaufman, Loren Kranz, Gregory
Schubert and Kevin Henry.*
10.14 --Form of Guarantee and Collateral Agreement relation to Credit
Agreement, dated as of January 28, 1998.*
10.15 --Amendment, dated as of August 7, 1998, to Credit Agreement, dated as
of January 28, 1998.*
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
12 --Statement of Computation of Earnings to Fixed Charges.*
21 --Subsidiaries of the Registrant.*
23.1 --Consent of Weil, Gotshal & Manges LLP (included in Exhibit 5).+
23.2 --Consent of Ernst & Young LLP, independent auditors.+
23.3 --Consent of Weil, Gotshal & Manges LLP regarding tax opinion (included in Exhibit 8).+
24 --Power of Attorney (see signature page).*
25 --Statement of Eligibility and Qualification of State Street Bank and Trust Company, as Trustee
under the Indenture filed as Exhibit 4.1.*
27 --Financial Data Schedule.*
99.1 --Form of Letter of Transmittal.*
99.2 --Form of Notice of Guaranteed Delivery.*
</TABLE>
- --------
+Filed herewith.
*Previously filed.
(b)Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable or not
required or the required information is included in the financial statements
as notes thereto.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1)To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i)to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii)to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2)That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
(3)To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4)To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the registration statement through the date of responding to the request.
(5)To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when it
became effective.
(h)See Item 20.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO ITS REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF ATLANTA, STATE OF GEORGIA, ON OCTOBER 6, 1998.
NATIONWIDE CREDIT, INC.
/s/MICHAEL LORD
By: ________________________________
Michael Lord
Chief Financial Officer
EACH PERSON WHOSE SIGNATURE TO THIS REGISTRATION STATEMENT APPEARS BELOW
HEREBY APPOINTS JERROLD KAUFMAN AND MICHAEL LORD, AND EACH OF THEM
INDIVIDUALLY, ANY ONE OF WHOM MAY ACT WITHOUT THE JOINDER OF THE OTHER, AS HIS
AGENT AND ATTORNEY-IN-FACT TO SIGN ON HIS BEHALF INDIVIDUALLY AND IN THE
CAPACITY STATED BELOW AND TO FILE ALL PRE- AND POST-EFFECTIVE AMENDMENTS TO
THIS REGISTRATION STATEMENT, WHICH MAY MAKE SUCH CHANGES AND ADDITIONS TO THIS
REGISTRATION STATEMENT AS SUCH AGENT AND ATTORNEY-IN-FACT MAY DEEM NECESSARY
OR APPROPRIATE.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
* Chief Executive Officer
- --------------------------------- (Principal Executive October 6, 1998
Jerrold Kaufman Officer) and Director
/s/MICHAEL LORD Chief Financial Officer
- --------------------------------- (Principal Accounting October 6, 1998
Michael Lord and Financial Officer)
* Chief Operating Officer,
- --------------------------------- Executive Vice October 6, 1998
Loren F. Kranz President, Secretary and
Director
* Chairman of the Board of
- --------------------------------- Directors and Director October 6, 1998
David B. Golub
* Vice Chairman of the
- --------------------------------- Board of Directors and October 6, 1998
Wesley W. Lang, Jr. Director
* Director
- --------------------------------- October 6, 1998
Nora E. Kerppola
II-5
<PAGE>
* Director
- -------------------------------- October 6, 1998
Lester Pollack
* Director
- -------------------------------- October 6, 1998
Jeffrey A. Weiss
* Director
- -------------------------------- October 6, 1998
Craig S. Whiting
* Director
- -------------------------------- October 6, 1998
Paul J. Zepf
*By: /s/ MICHAEL LORD
- --------------------------------
Michael Lord
Attorney-in-Fact
II-6
<PAGE>
SCHEDULE II
NATIONWIDE CREDIT, INC.
VALUATION AND QUALIFYING ACCOUNTS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DESCRIPTION ADDITIONS
----------- -----------------
CHARGED
BALANCE AT TO COSTS CHARGED BALANCE AT
BEGINNING AND TO OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
deducted from Receivables.. $ 471 $ 450 -- -- $ 921
Year ended December 31, 1996
deducted from Receivables.. 921 2,440 -- (158) 3,203
Year ended December 31, 1997
deducted from Receivables.. 3,203 2,128 -- (882) 4,449
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 --Agreement and Plan of Merger, dated as of December 31, 1997, among
NCI Acquisition Corporation, NCI Merger Corporation, the Registrant,
First Financial Management Corporation and First Data Corporation.*
2.2 --Amendment to Agreement and Plan of Merger, dated as of August 27,
1998, among NCI Acquisition Corporation, NCI Merger Corporation, the
Registrant, First Financial Management Corporation and First Data
Corporation.+
<C> <S>
3.1 --Certificate of Incorporation of the Registrant.*
3.2 --Bylaws of the Registrant.*
4.1 --Series A and Series B 10 1/4% Senior Notes due 2008 Indenture, dated
as of January 28, 1998, between the Registrant and State Street Bank
and Trust Company, as Trustee.*
4.2 --Form of Note (included in Exhibit 4.1, Exhibit A-1).*
4.3 --A/B Exchange Registration Rights Agreement, dated as of January 28,
1998, by and among the Registrant and Lehman Brothers Inc.*
5 --Opinion of Weil, Gotshal & Manges LLP.+
8 --Opinion of Weil, Gotshal & Manges LLP regarding certain tax
matters.+
10.1 --Credit Agreement, dated as of January 28, 1998, among NCI
Acquisition Corporation, the Registrant, the Several Lenders from
time to time parties thereto, Lehman Brothers Inc., Lehman
Commercial Paper Inc., Fleet Capital Corporation and BHF-Bank
Aktiengesellschaft.*
10.2 --Purchase Agreement, dated as of January 23, 1998, by and between the
Registrant and Lehman Brothers Inc.*
10.3 --NCI Acquisition Corporation 1997 Management Performance Option
Plan.*
10.4 --Stock Option Agreement, dated as of December 31, 1997, between NCI
Acquisition Corporation and Jerry Kaufman.*
10.5 --Stock Option Agreement, dated as of December 31, 1997, between NCI
Acquisition Corporation and Loren Kranz.*
10.6 --Stock Option Agreement, dated as of May 18, 1998, between NCI
Acquisition Corporation and Michael Lord.*
10.7 --Stock Option Agreement, dated as of December 31, 1997, between NCI
Acquisition Corporation and Greg Schubert.*
10.8 --Stock Option Agreement, dated as of December 31, 1997, between NCI
Acquisition Corporation and Avalon Investment Partners, LLC.*
10.9 --Employment Agreement, dated as of December 31, 1997, by and between
the Registrant and Jerry Kaufman.*
10.10 --Employment Agreement, dated as of December 31, 1997, by and between
the Registrant and Loren Kranz.*
10.11 --Employment Agreement, dated as of May 18, 1998, by and between the
Registrant and Michael Lord.*
10.12 --Employment Agreement, dated as of December 31, 1997, by and between
the Registrant and Gregory Schubert.*
10.13 --Stockholders' Agreement, dated as of December 31, 1997, by and among
NCI Acquisition Corporation, the State Board of Administration of
Florida, Centre Capital Investors II, L.P., Centre Capital Tax
Exempt Investors II, L.P., Centre Capital Offshore Investors II,
L.P., Centre Parallel Management Partners, L.P., Centre Partners
Coinvestment, L.P., WPG Corporate Development Associates V, L.P.,
WPG Corporate Development Associates V (Overseas), L.P., Weber
Family Trust, Lion Investments Limited, Westpool Investment Trust
plc, Avalon Investment Partners LLC, Jerrold Kaufman, Loren Kranz,
Gregory Schubert and Kevin Henry.*
10.14 --Form of Guarantee and Collateral Agreement relation to Credit
Agreement, dated as of January 28, 1998.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.15 --Amendment, dated as of August 7, 1998, to Credit Agreement, dated as
of January 28, 1998.*
12 --Statement of Computation of Earnings to Fixed Charges.*
21 --Subsidiaries of the Registrant.*
23.1 --Consent of Weil, Gotshal & Manges LLP (included in Exhibit 5).+
23.2 --Consent of Ernst & Young LLP, independent auditors.+
23.3 --Consent of Weil, Gotshal & Manges LLP regarding tax opinion
(included in Exhibit 8).+
24 --Power of Attorney (see signature page).*
25 --Statement of Eligibility and Qualification of State Street Bank and
Trust Company, as Trustee under the Indenture filed as Exhibit 4.1.*
27 --Financial Data Schedule.*
99.1 --Form of Letter of Transmittal.*
99.2 --Form of Notice of Guaranteed Delivery.*
</TABLE>
- --------
+Filed herewith.
*Previously filed.
<PAGE>
EXHIBIT 2.2
AMENDMENT TO AGREEMENT
AND PLAN OF MERGER
AMENDMENT TO AGREEMENT AND PLAN OF MERGER, dated as of August 27, 1998
(this "Amendment") among NCI Acquisition Corporation, a Delaware corporation
---------
("Buyer"), Nationwide Credit, Inc., a Georgia corporation ("NCI"), First
------ ---
Financial Management Corporation, a Georgia corporation ("FFMC") and First Data
----
Corporation, a Delaware corporation ("FDC"), each of which agrees as follows:
---
SECTION 1. Defined Terms and Interpretation. (a) Capitalized terms
--------------------------------
used herein and not otherwise defined herein shall have the meanings assigned to
such terms in the Agreement and Plan of Merger, dated December 31, 1997 (the
"Agreement") or the schedules to the Agreement.
---------
SECTION 2. Amendments to the Agreement. The Agreement is, effective
---------------------------
as of noon on September 1, 1998 (the "First Amendment Effective Time"), amended
------------------------------
as follows:
2.1 The first sentence of the final paragraph of Section 11.1(c) of
---------------
the Agreement is hereby amended by deleting such sentence and replacing it with
the following sentence:
"The aggregate amount required to be paid by the Sellers
pursuant to Section 11.1(a) (other than in respect of
---------------
matters set forth in clause (I) of the immediately following
sentence) shall not in any event exceed $20,000,000."
2.2 The definition of Applicable Deductible is hereby
amended by deleting such definition and replacing it with the
following definition:
"'Applicable Deductible' means $10,000,000."
---------------------
2.3 Section 5.21 of the Agreement is deleted in its entirety.
------------
2.4 The second sentence of Section 5.5(a) of the Agreement is deleted
--------------
in its entirety.
2.5 Each reference to "Year-End Balance Sheet" in Section 8.2 of the
-----------
Agreement shall be deemed to refer to the consolidated balance sheet for the
Company as of December 31, 1997 included in the Company's Registration Statement
on Form S-4 (Reg. No. 333-57429), as filed with the Securities and Exchange
Commission on June 22, 1998.
SECTION 3. Execution in Counterparts. This Amendment may be
-------------------------
executed in one or more counterparts, each of which shall be considered an
original instrument, but all of which shall be considered one and the same
agreement, and shall become binding when
<PAGE>
one or more counterparts have been signed by each of the parties hereto and
delivered to each of FDC, FFMC, Buyer and NCI. The parties hereto hereby waive
the requirement that NCI Mergerco sign this letter agreement in light of the
merger of NCI Mergerco into NCI pursuant to the Agreement.
SECTION 4. Amendments; Conflicts. This Amendment shall not be
---------------------
amended, modified or supplemented except by a written instrument signed by an
authorized representative of each of the parties hereto. In the event of any
conflict between the provisions of this Amendment and the provisions of the
Agreement, the provisions of this Amendment shall control.
SECTION 5. Governing Law. This Amendment shall be governed by and
-------------
construed in accordance with the internal laws (as opposed to the conflict of
laws provisions) of the State of New York.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the
date first written above.
FIRST DATA CORPORATION
By:_________________________________
Name:
Title:
FIRST FINANCIAL MANAGEMENT
CORPORATION
By:_________________________________
Name:
Title:
NCI ACQUISITION CORPORATION
By:_________________________________
Name:
Title:
NATIONWIDE CREDIT, INC.
By:_________________________________
Name:
Title:
2
<PAGE>
EXHIBIT 5
September 24, 1998
Nationwide Credit, Inc.
6190 Powers Ferry Road, 4th Floor
Atlanta, Georgia 30339
Ladies and Gentlemen:
We have acted as counsel to Nationwide Credit, Inc., a Georgia corporation
(the "Company"), in connection with the preparation and filing by the Company of
a Registration Statement on Form S-4 (Registration No. 333-57429), as amended
(the "Registration Statement"), filed with the Securities and Exchange
Commission on June 22, 1998 under the Securities Act of 1933, as amended (the
"Act"), relating to $100,000,000 aggregate principal amount of 10 1/4% Series A
Senior Notes due 2008 (the "New Notes") of the Company that may be issued in
exchange for a like principal amount of the issued and outstanding 10 1/4%
Senior Notes due 2008 (the "Old Notes") of the Company. The Company proposes to
offer, upon the terms set forth in the prospectus contained in the Registration
Statement, to exchange $1,000 principal amount of New Notes for each $1,000
principal amount of Old Notes (the "Exchange Offer"). The New Notes will be
issued under the Indenture, dated as of January 28, 1998, by and between the
Company and State Street Bank and Trust Company, as trustee (as amended or
supplemented to the date hereof, the "Indenture"). Capitalized terms defined in
the Registration Statement and not otherwise defined herein are used herein as
so defined.
In so acting, we have examined originals or copies, certified or otherwise
identified to our satisfaction, of the Indenture, the form of the New Note set
forth in the Indenture and such corporate records, agreements, documents and
other instruments, and such certificates or comparable documents of public
officials and of officers and representatives of the Company and have made such
inquiries of such officers and representatives as we have deemed relevant and
necessary as a basis for the opinion hereinafter set forth.
<PAGE>
Nationwide Credit, Inc.
September 24, 1998
Page 2
In such examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to us as originals, the conformity to original documents of documents submitted
to us as certified or photostatic copies and the authenticity of the originals
of such latter documents. As to all questions of fact material to this opinion
that have not been independently established, we have relied upon certificates
or comparable documents of officers and representatives of the Company. We have
also assumed (i) the due incorporation and valid existence of the Company, (ii)
that the Company has the requisite corporate power and authority to enter into
and perform the Indenture and issue the New Notes, (iii) the Indenture has been
duly authorized, executed and delivered by the Company in accordance with
Georgia corporate law, and (iv) the issuance and delivery of the New Notes upon
consummation of the Exchange Offer will have been duly authorized by the Company
in accordance with Georgia corporate law.
Based on the foregoing, and subject to the qualifications stated herein, we
are of the opinion that, assuming that the Indenture has been duly authorized,
executed and delivered by the Trustee, when (i) the New Notes issuable upon
consummation of the Exchange Offer have been duly executed by the Company and
authenticated by the Trustee in accordance with the terms of the Indenture and
(ii) the New Notes issuable upon consummation of the Exchange Offer have been
duly delivered against receipt of Old Notes surrendered in exchange therefor,
the New Notes issuable upon consummation of the Exchange Offer will constitute
the legal, valid and binding obligations of the Company, enforceable against it
in accordance with their terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally, and subject, as to enforceability, to
general principles of equity, including principles of commercial reasonableness,
good faith and fair dealing (regardless of whether enforcement is sought in a
proceeding at law or in equity).
The opinion expressed herein is limited to the laws of the State of New
York and the federal laws of the United States, and we express no opinion as to
the effect on the matters covered by this letter of the laws of any other
jurisdiction.
<PAGE>
Nationwide Credit, Inc.
September 24, 1998
Page 3
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference to this firm under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement.
Very truly yours,
/s/ Weil, Gotshal & Manges LLP
<PAGE>
EXHIBIT 8
September 24, 1998
Nationwide Credit, Inc.
6190 Powers Ferry Road, 4th Floor
Atlanta, Georgia 30339
Ladies and Gentlemen:
We have acted as counsel to Nationwide Credit, Inc., a Georgia corporation
(the "Company"), in connection with the preparation and filing with the
Securities and Exchange Commission of the Company's Registration Statement
(Registration No. 333-57429) on Form S-4 on June 22, 1998, as amended to the
date hereof (together with the exhibits thereto, the "Registration Statement"),
relating to the registration by the Company of its 10 1/4% Series A Senior Notes
due 2008.
In so acting, we have examined originals or copies, certified or otherwise
identified to our satisfaction, of the Registration Statement, including the
Prospectus which is a part thereof (the "Prospectus"), and such corporate
records, agreements, documents and other instruments (the aforementioned
documents together, the "Documents"), and have made such inquiries of such
officers and representatives, as we have deemed relevant and necessary as a
basis for the opinion hereinafter set forth. In such examination, we have
assumed the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies, the authenticity of the originals of such latter
documents, the genuineness of all signatures, and the correctness of all
representations made therein. (The terms of the Documents are incorporated
herein by reference.) We have further assumed that the final executed Documents
will be substantially the same as those which we have reviewed and that there
are no agreements or understandings between or among the parties to the
Documents with respect to the transactions contemplated therein other than those
contained in the Documents.
<PAGE>
Nationwide Credit, Inc.
September 24, 1998
Page 2
Based on the foregoing, subject to the next succeeding paragraph, and
assuming full compliance with all the terms of the Documents, it is our opinion
that the discussion included in the Prospectus under the caption "Certain
Federal Income Tax Considerations," insofar as it constitutes statements of law
or legal conclusions and except to the extent qualified therein, is accurate in
all material respects.
The foregoing opinion is based on current provisions of the Internal
Revenue Code of 1986, as amended, the Treasury Regulations promulgated
thereunder, published pronouncements of the Internal Revenue Service, and case
law, any of which may be changed at any time with retroactive effect. No
opinion is expressed on any matters other than those specifically covered by the
foregoing opinion.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ Weil, Gotshal & Manges LLP
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Summary Historical
and Pro Forma Financial and Other Data," "Selected Historical Financial
Information and Other Data" and "Experts" and to the use of our report dated
March 31, 1998 (except for Note 13, as to which the date is October 6, 1998),
in Amendment No. 2 to the Registration Statement (Form S-4 No. 333-57429) and
related Prospectus of Nationwide Credit, Inc. for the registration of
$100,000,000 of its 10 1/4% Senior Notes due 2008.
/s/ Ernst & Young LLP
Atlanta, Georgia
October 6, 1998
