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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
- -- Exchange Act of 1934 (Fee required)
For the fiscal year ended December 31, 1998.
- -- Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from ______________ to ______________.
Commission file number 0001059083
NATIONWIDE CREDIT, INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-1900192
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
6190 Powers Ferry Road, 4/th/ Floor, Atlanta, Georgia 30339
- ----------------------------------------------------- --------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (770) 644-7452
Securities registered pursuant to Section 12(b) of the Act: None
Securities pursuant to Section 12(g) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Paragraph 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [X].
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant. (The aggregate market value shall be
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such common equity, as of a specified date within 60
days prior to the date of filing.)
NO ESTABLISHED PUBLISHED TRADING MARKET EXISTS FOR THE COMMON STOCK, PAR VALUE
$.01 PER SHARE, OF NATIONWIDE CREDIT, INC. ALL OF THE 1,000 OUSTANDING SHARES
OF COMMON STOCK, PAR VALUE $.01 PER SHARE, OF NATIONWIDE CREDIT, INC. ARE HELD
BY NCI ACQUISITION CORPORATION.
Indicate the number of shares outstanding of each registrant's classes of common
stock, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 15, 1999
----- -----------------------------
COMMON STOCK 1,000
DOCUMENTS INCORPORATED BY REFERENCE: None
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PART I
ITEM 1 - BUSINESS
Overview
Nationwide Credit, Inc. (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
customized past-due account collection and accounts receivable management
services to its clients through a nationwide network of 16 call centers located
in 14 states. The Company employs sophisticated call management systems
comprised of predictive dialers, automated call distribution systems, digital
switching and customized computer software.
The Company has historically generated substantially all of its revenue
from the recovery of delinquent accounts receivable on a contingency fee basis.
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. In addition, in 1998, the Company began
providing outsourcing services to a major telecommunications company. The
Company provides trained personnel and management resources while the client
provides the facility and equipment. 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, either party may terminate the
contracts on 30 to 90 days' notice.
The Company's costs consist principally of payroll and related personnel
costs, telecommunications, 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.
Company History
On December 31, 1997, NCI Acquisition Corporation (the "Buyer"), NCI Merger
Corporation ("Merger Sub"), 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
"Merger"). 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. After applicable purchase price
adjustments, the merger consideration consisted of $147.3 million in cash,
(before transaction costs of $2.6 million). The excess of the cost over the
fair value of net assets acquired of $116.0 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-compete agreements of $5.7 million, which are being
amortized over one and four years, respectively. 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) $100.0 million of proceeds from an offering of
10.25% Senior Notes (the "Notes"), and (ii) $60.0 million of senior secured
debt (the "Senior Credit Facilities"), of which $25.0 million was drawn
concurrent with the execution of the Notes. The Merger, the Acquisition
Facilities, the Senior Credit Facilities and the offering of the Notes, together
with the application of the
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proceeds from the Acquisition Facilities, the Senior Credit Facilities and the
Notes, are collectively referred to as the "1998 Transactions". As a result of
the acquisition of the Company and in connection with the implementation of an
operating improvement plan, the Company has accrued estimated costs of
approximately $4.0 million associated with closing certain offices and branches
($2.3 million), severance payments to employees ($0.8 million), and relocation
costs ($0.9 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 closed or to be closed
during 1998 and 1999.
Competitive Strengths
The accounts receivable management industry is highly fragmented and
competitive. The Company competes with approximately 6,500 providers, including
large national corporations such as Outsourcing Solutions, Inc., GC Services,
Inc., and Equifax, as well as many regional and local firms. Many larger
clients retain multiple accounts receivable management and recovery providers
which exposes the Company to continuous competition in order to remain a
preferred vendor. 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 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. The Company believes that the primary
competitive factors in obtaining and retaining clients are the ability to
provide customized solutions to a client's requirements, personalized service,
sophisticated call and information systems and price.
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 and has grown to become one of the
largest independent providers of accounts receivable management services in the
United States, as measured by placement volume. The Company 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. The Company is
often one of the largest providers of accounts receivable management services to
its major clients as a result of solid collections performance.
National Presence. The Company operates in all 50 states through 16 call
centers and one corporate office. 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 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, BellSouth,
the Department of Education (the "DOE"), First Union, the General Services
Administration (the "GSA"), General Motors Acceptance Corporation ("GMAC"), MCI,
Mobil, Bank of America, Novus (issuer of DISCOVER Card) and Texaco. Moreover,
the Company (or its predecessors) has been in
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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 contributes to its
success and position as an industry leader. In order to generate increased
revenue and reduce costs, the Company 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 an operating improvement plan
designed to improve productivity, further integrate the Company's various
acquired businesses and reduce costs. This plan included (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 Centre Partners
Management, LLC ("Centre Partners"), affiliates of Weiss, Peck & Greer, LLC
("WPG") and Avalon Investment Partners, LLC ("Avalon" and together with Centre
Partners and WPG, the "Investor Group) and NCI Acquisition Corporation, a
Delaware Corporation, ("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, 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.
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Services
In order to achieve its objective of becoming the accounts receivable
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 credit grantors. The
Company utilizes sophisticated management information systems to leverage its
experience with locating, contacting and effecting payment from delinquent
account holders. With 16 call centers in 14 states and approximately 2,375
employees, the Company has the ability to service a large volume of accounts
with national coverage. The Company generated approximately 83%, 93% and 95% of
its revenue through contingent fee services for the years ended December 31,
1998, 1997 and 1996, 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 (in cases where the client's customer's telephone number or address
is unknown, a systematic search is performed using postal change of address
services, credit agency reports, consumer data bases, electronic telephone
directories, and tax assessor and voter registration sources, 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 Call Center Management Services. The Company has expanded its
services to include on-site call center management for a major
telecommunications company whereby the Company manages the client's directory
assistance operations 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 supervisory
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
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 maximize collections and
minimize expense through the use of automated dialing programs as well as manual
calling efforts.
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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, BellSouth, the DOE, First Union, the GSA, GMAC, MCI, Mobil,
Bank of America, 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 revenues
from the following industries for 1998, are:
Financial Services 49.3%
Telecommunication 16.3%
Retail 13.3%
Institutional (1) 11.6%
Healthcare 8.9%
Other 0.6%
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Total 100.0%
======
_________
(1) Institutional revenue consists primarily of revenue from local, state and
federal government entities.
Revenue from American Express for the years ended December 31, 1998, 1997
and 1996 accounted for approximately 36%, 28%, and 30% of the Company's revenue,
respectively. Revenue from the DOE for years ended December 31, 1998, 1997, and
1996 accounted for approximately 9%, 17% and 23% of the Company's revenue,
respectively. In addition, the Company's ten largest clients accounted for
approximately 70%, 63% and 66% of the Company's revenue for the years ended
December 31, 1998, 1997 and 1996, respectively. A significant downturn in
placements by these clients or a change in placement or compensation practices
could have a material adverse effect on the Company.
Most client contracts entered into by the Company define, among other
things, fee arrangements, scope of services and termination provisions.
Generally clients may terminate such a contract on 30 or 60 days notice.
Accordingly, there can be no assurance that existing clients will continue to
use the Company's services at historical levels, if at all. Under the terms of
these contracts, clients are not required to place accounts 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.
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
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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
telecommunications systems to enhance productivity in all areas of its business.
The Company has three primary software systems dedicated to its core business.
One system is a program developed and used primarily for one of its largest
clients. A third party developed the other two systems and the Company believes
them 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 databases, which provide information used for debtor evaluation and
contacts.
All three 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. The in-
house system also implements a distributed architecture, allowing 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.
Governmental Regulation
Certain of the Company's operations are subject to compliance with the Fair
Debt Collection Practices Act ("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 required licenses in all jurisdictions in which it operates. 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 FDCPA and related
state statute violations. All account representatives receive extensive training
on these policies and must pass a test on the FDCPA. Account representatives
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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The Company is also subject to the Fair Credit Reporting Act which
regulates the consumer credit reporting industry and which may impose liability
on the Company to the extent that the adverse credit information reported on a
consumer to a credit bureau is false or inaccurate.
The accounts receivable management business is also subject to state
regulation. Some states require that the Company be licensed as a debt
collection company. Management believes that the Company currently holds
applicable licenses from all states where required.
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 processes 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, a thorough
investigation is initiated and appropriate corrective measures are taken. The
Company is extremely earnest in its efforts to avoid complaints.
Employees and Training
As of December 31, 1998, the Company had a total of approximately 2,375
employees, of which approximately 1,240 were collectors and 620 were directory
assistance operators. 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 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 American Collectors Association. All collector
training provides full, 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 the debtors reside. Only after licensing,
registration, and training are collectors assigned an account for collection.
ITEM 2 - PROPERTIES
The company currently operates 16 branches and one corporate office in 14
states across the United States, all of which are leased. The chart below
summarizes the Company's facilities as of December 31, 1998:
Approximate
Location of Facility Square Footage
-------------------- --------------
Marietta, GA 70,000
Dallas, TX 7,372
Atlanta, GA 48,413
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Lynnwood, WA 13,811
Sacramento, CA 13,967
Aurora, CO 27,681
Louisville, KY 11,218
Hendersonville, TN 36,505
Brentwood, TN 1,400
Phoenix, AZ 44,966
Woburn, MA 7,603
Shawnee Mission, KS 8,711
Houston, TX 10,555
Lauderdale Lake, FL 6,316
Westlake, OH 13,127
Endicott, NY 12,001
The leases of these facilities, most of which contain renewal options,
expire between 1999 and 2003. The Company believes that facilities are adequate
for current operations, but additional facilities may be required to support
growth. The Company believes that suitable additional or alternative space will
be available as needed on commercially acceptable terms.
ITEM 3 - LEGAL PROCEEDINGS
The Company is involved in legal proceedings from time to time in the
ordinary course of business involving claims for damages, which constitute
routine litigation incidental to the business.
The FTC staff completed its investigation regarding the Company's
compliance with the 1992 Consent Decree. Without admitting liability for any of
the alleged violations of the FDCPA, the Company settled the matter in October
1998 by paying 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 it is
in compliance with the provisions of the Consent Decree.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
All of the Company's outstanding common stock is held by NCI Acquisition
Corporation, and, accordingly, there is no established public trading market for
the Company's Common Stock. The Company paid no dividends since inception, and
its ability to pay dividends is limited by the terms of certain agreements
related to its indebtedness.
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Dividend Policy
The Company does not anticipate paying cash dividends on its Common Stock
in the foreseeable future. In addition, the Company's Senior Credit Facilities
prohibit the Company from paying cash dividends without the lender's prior
consent. The Company currently intends to retain future earnings to finance its
operations and fund the growth of the business. Any payment of future dividends
will be at the discretion of the Board of Directors of the Company and will
depend upon, among other things, the Company's earnings, financial condition,
capital requirements, level of indebtedness, contractual restrictions with
respect to the payment of dividends and other factors that the Company's Board
of Directors deems relevant.
Recent Sales of Unregistered Securities
Not Applicable
ITEM 6 - SELECTED HISTORICAL FINANCIAL INFORMATION AND OTHER DATA
In the 1998 Transactions, the Company was acquired by NAC. The predecessor
to the Company (the "Predecessor Company") was Nationwide Credit, Inc., a wholly
owned subsidiary of FFMC, a wholly owned subsidiary of First Data. The
Predecessor 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 and the
Predecessor 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 report. The 1998 Consolidated Financial Information
of the Company has been audited by Arthur Andersen LLP, independent public
accountants. The historical consolidated financial information of the
Predecessor Company for the years ended December 31, 1994 through 1997 have been
derived from the respective consolidated financial statements. The years ended
1995, 1996, and 1997 have been audited by Ernst & Young LLP, independent
auditors. The historical consolidated financial information for the year ended
December 31, 1994, has been derived from unaudited consolidated financial
statements of the Predecessor 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) necessary for a fair
presentation of financial position and results of operations and cash flows as
of the dates and for the periods indicated.
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<TABLE>
<CAPTION>
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Year Ended December 31,
(dollars in thousands)
1994 1995 1996 1997 1998
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Predecessor The Company
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<S> <C> <C> <C> <C> <C>
(Unaudited) (1)
Income Statement Data:
Revenue ............................... $143,376 $154,506 $138,905 $119,013 $ 102,797
Expenses
Salaries and benefits ............. 74,353 81,114 73,636 66,376 64,825
Telecommunication ................. 10,075 9,539 7,341 6,236 4,960
Occupancy ......................... 4,959 5,148 4,602 5,014 4,212
Other operating and
administrative ................... 22,963 27,102 26,586 22,516 14,249
Depreciation and amortization....... 10,002 11,893 12,021 14,364 24,315
Provision for merger costs,
employee severance
and office closure (2)............. -- 13,562 4,323 679 1,563
Goodwill write-off.................. -- -- -- -- 10,100
Overhead charges from First Data ... 1,434 1,545 1,389 1,190 --
-------------------------------------------------------------------------------
Operating income (loss) ........... 19,590 4,603 9,007 2,638 ( 21,427)
Interest expense, net ............. 680 501 241 122 13,418
-------------------------------------------------------------------------------
Income (loss) before income
taxes and extraordinary item ...... 18,910 4,102 8,766 2,516 (34,845)
Provision for income taxes ........ 8,438 2,611 4,449 2,423 --
-------------------------------------------------------------------------------
Income (loss) before extraordinary
item .............................. 10,472 1,491 4,317 93 (34,845)
Extraordinary loss on debt
extinguishment ................... -- -- -- -- 783
-------------------------------------------------------------------------------
Net income (loss) ................. $ 10,472 $ 1,491 $ 4,317 $ 93 $ (35,628)
==============================================================================
Other Data:
Ratio of earnings to fixed
charges (3) ....................... 10.2x 3.1x 6.2x 2.4x --
Adjusted EBITDA (4) ................ $ 29,592 $ 30,058 $ 25,351 $ 21,169 $ 14,551
Adjusted EBITDA margin (4) ......... 20.6% 19.5% 18.3% 17.8% 14.2%
Net Cash Provided By (Used In):
Operating activities ............... N/A $ 20,973 $ 23,898 $ 14,624 $ 4,023
Investing activities ............... N/A (7,748) (7,824) (29,626) (153,409)
Financing activities ............... N/A (14,488) (18,197) 12,281 151,199
Capital expenditures ............... $ 5,800 $ 5,016 $ 7,005 $ 5,465 $ 3,897
Balance Sheet Data:
Cash ............................... $ 1,388 $ 3,201
Total assets ....................... 190,865 140,315
Total indebtedness (5) ............ 113,901 118,750
Stockholder's Equity ............... 63,879 3,697
</TABLE>
(1) In February 1997, the Predecessor 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) In 1998, the Company recorded a charge for office closure of $1.6 million.
The provision for merger costs, employee severance and office closure for
the years 1995, 1996 and 1997 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 that the Company
believes to be representative of interest expense. The Company's earnings
were insufficient to cover fixed charges by $34.8 million for the year
ended December 31, 1998.
11
<PAGE>
(4) Adjusted EBITDA is earnings before interest, taxes, depreciation,
amortization and provision for merger costs, employee severance and office
closure, goodwill write-off, a non-recurring contract settlement expense,
non-recurring settlement expense with the FTC and a non-recurring expense
related to DOE chargebacks. Adjusted EBITDA reconciles to net income as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1994 1995 1996 1997 1998
------------------------------------------------
The
Predecessor Company
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Income (loss) $10,472 $ 1,491 $ 4,317 $ 93 ($35,628)
Add: Depreciation and amortization 10,002 11,893 12,021 14,364 24,315
Goodwill write-off -- -- -- -- 10,100
Provision for merger costs, employee
severance and office closure -- 13,562 4,323 679 1,563
Non-recurring contract settlement -- -- -- 1,553 --
Non-recurring settlement expense with the FTC and
expenses associated with DOE chargebacks -- -- -- 1,935 --
Interest expense, net 680 501 241 122 13,418
Provision for income taxes 8,438 2,611 4,449 2,423 --
Extraordinary loss on debt extinguishment -- -- -- -- 783
------- ------- ------- ------- ---------
Adjusted EBITDA $29,592 $30,058 $25,351 $21,169 $ 14,551
================================================
</TABLE>
The Company believes that Adjusted EBITDA presents a more meaningful measure
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 its bondholders because the
Company's lenders use them as one means of analyzing the Company's ability
to service its debt 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 Adjusted 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, 1998 includes $100.0 million Senior
Notes due 2008 and an $18.8 million term loan. Total indebtedness as of
December 31, 1997 includes a $112.5 million non-interest bearing note
payable to First Data.
(6) In December 1998, management determined that a goodwill write-off was
required relating to the Denver operation. The revenue from continuing
clients is not sufficient to cover fixed operating costs of a separate
facility. The Company closed the Denver facility on February 28, 1999 and
moved the remaining account placements to another facility. The Company
recorded a goodwill write-off of $10.1 million related to the Denver
operation which represented approximately 65% of the goodwill attributed to
the Denver operation.
12
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Nationwide Credit, Inc. (the "Company") was acquired in a purchase transaction
(the "Transaction") on December 31, 1997. The predecessor to the Company was
Nationwide Credit, Inc., (the "Predecessor Company") a wholly owned subsidiary
of First Financial Management Company ("FFMC"). The following discussion is
based upon and should be read in conjunction with ''Selected Historical
Financial Information and Other Data'', included elsewhere in this report.
All information as of and prior to December 31, 1997 is for the Predecessor
Company and may not be readily comparable to the 1998 financial information of
the Company because of the significance of purchase accounting adjustments and
differences in financial structure of the Company.
Overview
The Company was acquired from First Data Corporation ("First Data") by NCI
Acquisition Corporation, a Delaware corporation ("NAC") on December 31, 1997, in
a transaction accounted for as a purchase. The Predecessor Company was
previously a wholly owned subsidiary of FFMC, which is a wholly owned subsidiary
of First Data. The Predecessor 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 Business Services, Inc. ("ACB"), with the
Predecessor 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 Predecessor Company has historically relied on First Data for
certain general and administrative functions and cash management needs.
On February 28, 1997, the Predecessor Company acquired certain assets of
Consolidated Collection Co. ("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 Predecessor Company include the revenue and expenses of
Consolidated from the date of acquisition. Total consideration for the purchase
was $23.3 million.
General
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. The Company offers contingent fee collection, pre-chargeoff accounts
receivable management and on-site 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 16 call centers.
The Company has historically generated substantially all of its revenue
from the recovery of delinquent accounts receivable on a contingent fee basis.
The Company also provides 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, either party may terminate contingency fee
contracts on 30 to 90 days' notice. Fixed fee contracts tend to be longer in
duration with extended termination provisions. In 1998, the Company began
providing outsourced directory assistance services to a major telecommunications
company. Revenue is earned based on operator hours worked. The Company
provides the labor force and management; the client provides the facility and
technology infrastructure.
13
<PAGE>
The Company's costs consist principally of payroll and related personnel
costs, telecommunications, occupancy, 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.
Results of Operations
Comparison of year ended December 31, 1998, to year ended December 31, 1997
(Predecessor).
Revenue. Total revenue decreased $16.2 million or 13.6% from $119.0
million for 1997 to $102.8 for 1998. The decrease was primarily the result of
(i) a reduction in revenue from the Department of Education ("DOE") and the
General Services Administration ("GSA") of $12.9 million resulting from the
reduction of contracts with the Company from four to one, a requirement of the
DOE, and a delay in new placements under the new GSA contract, (ii) a decrease
of $4.1 million revenue, primarily from lower placements on gas credit cards and
telecommunications companies, and (iii) a decrease in revenue from healthcare
account placements of $0.9 million due to the elimination of unprofitable
clients, and (iv) a decrease in revenue from telecommunications account
placements of $3.1 million. These decreases were partially offset by increased
revenue of $0.8 million from American Express and $3.2 million from on-site
services.
Expenses. Salaries and benefits expense decreased $1.6 million or 2.3%
from $66.4 million for 1997 to $64.8 million for 1998. During 1998, the Company
maintained the level of trained staff it deemed necessary to service the
anticipated DOE and GSA placements. As a result, salaries and benefits expense
did not decrease in proportion to the revenue decrease. The Company determined
it would not have been prudent to eliminate trained personnel who would be
required for DOE placements that were later received.
Telecommunications expense decreased $1.3 million or 20.5% from $6.2
million for 1997 to $4.9 million for 1998. The decrease is primarily the result
of lower negotiated long distance rates and lower call volume.
Occupancy expense decreased $0.8 million or 16.0% from $5.0 million for
1997 to $4.2 million for 1998. The company closed its Atlanta data center and
consolidated these operations into the Phoenix data center and reduced occupied
space in the Denver facility.
Other operating and administrative expense decreased $8.3 million or 36.7%
from $22.5 million for 1997 to $14.3 million for 1998. The decrease is the
result of the continuation of the Company's operating improvement plan offset by
certain charges in 1997. In 1997, the Predecessor Company incurred a non-
recurring contract settlement expense of approximately $1.6 million, a non-
recurring charge of $0.9 million to correct for out-of- balance conditions that
occurred during the 1996 integration of ACB and the Predecessor Company
operations, a non-recurring litigation settlement expense with the FTC of $1.0
million and a non-recurring charge related to DOE charge-backs of $0.9 million.
In addition, other operating and administrative expenses included a $2.1 million
charge for the year ended December 31, 1997 for doubtful accounts related to
billing disputes. These billing disputes, known as short pays, were recorded as
a reduction in revenue for 1998.
Provision for employee severance and office closure was $1.6 million in
1998. In 1997, the Predecessor Company incurred $0.7 million related to employee
severance. The Company is in final negotiations with real estate brokers to
lease a new facility for its corporate offices. This charge represents the
future rent obligations under the existing lease offset by estimated sublease
income less broker commissions. The Company expects to vacate its current
headquarters facility during the second quarter of 1999.
14
<PAGE>
Overhead charges from First Data Corporation, the Company's former Parent,
were $1.2 million for 1997. These charges represent certain administrative
functions performed by First Data for the Company. In 1998, these services were
performed by the Company.
Depreciation and amortization expense increased $9.9 million or 69.3% from
$14.4 million for 1997 to $24.3 million for 1998. This increase represents
results from the amortization of goodwill and other intangibles arising from the
Transactions. Specifically, the value of existing placements of $14.5 million
was amortized over 12 months. Non-compete agreements of $5.4 million are
amortized over four years and goodwill is amortized over 30 years.
Goodwill Write-off. In December 1998, management determined that a
goodwill write-off was required relating to the Denver operation. The revenue
from continuing clients is not sufficient to cover fixed operating costs of a
separate facility. The Company closed the Denver facility on February 28, 1999
and moved the remaining account placements to another facility. The Company
recorded a goodwill write-off of $10.1 million related to the Denver operation
which represented approximately 65% of the goodwill attributed to the Denver
operation.
Operating income (loss). The Company incurred an operating loss of $21.4
million for 1998, a decrease of $24.0 million from operating income of $2.6
million for 1997. The decrease was caused by a number of factors each of which
are mentioned above. To summarize, the reduction was primarily due to a
decrease in revenue of $16.2 million, the increase in depreciation and
amortization expense of $9.9 million, a goodwill impairment charge of $10.1
million, offset by operating expense reductions of approximately $12.2 million.
Interest expense. Interest expense relating to the Term Loan Facility and
Senior Notes was $13.4 million for 1998. Prior to the Transaction, the
Predecessor Company had intercompany payables and receivables with First Data
and its affiliates. In 1997, the Predecessor Company had minimal external debt.
Extraordinary loss. The extraordinary loss on debt extinguishment of $0.8
million represents the write off of deferred debt issuance costs related to the
interim financing of the Transaction.
Net income (loss). The Company incurred a net loss of $35.6 for 1998, a
decrease of $35.7 million from net income of $0.1 million for 1997.
Comparison of year ended December 31, 1997, to year ended December 31, 1996 for
the Predecessor Company
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, including 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.
15
<PAGE>
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.
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 was 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 are 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.
16
<PAGE>
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 1997. The resulting net impact of these decreases in revenues
and salaries and benefits 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.
Liquidity and Capital Resources
In 1998, the Company's principal sources of cash were from operations.
Cash was used for purchases of property and equipment, investments in
technology, acquisitions and repayment of principal and interest on debt.
Cash provided by operating activities was $4.0 million, $14.6 million and
$23.9 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The decrease in cash provided by operating activities for the year
ended December 31, 1998 versus the year ended December 31, 1997, was primarily
due to a decrease in net income and increased working capital needs. 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.
Net income before extraordinary items and after adding back depreciation,
amortization, taxes and interest (EBITDA) generated $14.6 million for the year
ended December 31, 1998 as compared to $17.0 million for the same period in
1997. Alternatively, the decreased cash provided by operating activities was
primarily due to (i) a decrease in EBITDA of $2.4 million, (ii) interest paid of
$7.4 million, and (iii) decrease in working capital items $1.5 million.
Cash used in investing activities was $153.4 million, $29.6 million and
$7.8 million for the years ended December 31, 1998, 1997 and 1996, respectively.
The increase from 1997 was primarily due to the acquisition of the Company on
December 31, 1997. Cash provided by First Data was used to fund this
acquisition. No acquisitions occurred during 1998. Other than cash used for the
Consolidated acquisition in February 1997, the Company's principal use of cash
in investing activities during 1996, 1997 and 1998 was for capital expenditures,
primarily for new computer and telecommunications equipment.
Cash provided by (used in) financing activities was $151.2 million, $12.3
million and ($18.2) for the years ended December 31, 1998, 1997 and 1996,
respectively. The decrease from 1997 to 1998 was primarily due to the
Transaction. Specifically, (i) the interim financing of the Transaction
("Notes"), (ii) the refinancing of the interim facility with the issuance of
$100 million 10.25% Senior notes due 2008 and a $25.0 million seven-year term
loan facility ("Term Loan Facility"), and (iii) the payment of transaction
costs. The increase from 1996 to 1997 was primarily due to net intercompany
repayments in 1996 as compared to net intercompany borrowings to fund the
acquisition of Consolidated in 1997.
As a result of the acquisition of the Company by NAC and the implementation
of the operating improvement plan, the Company has accrued estimated costs of
approximately $4.0 million associated with closing certain offices and call
centers ($2.3 million), severance payments to employees ($0.8 million) and
relocation costs ($0.9 million). Of the $4.0 million, $1.3 million was paid in
1998, $1.8 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
17
<PAGE>
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.
In connection with the Transaction, the Company implemented a financing
plan which included 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. The Revolving Credit Facility has been reduced to $5.0 million and
the Term Loan Facility has been paid down $6.2 million to $18.8 million.
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
1.375% to 3.50% and the Applicable Margin on the Term Loan Facility ranges from
1.75% to 3.75%; 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 $17.5 million in the last year
of the facility. The Company has approximately $5.0 million of unborrowed
availability under the Revolving Credit Facility at December 31, 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 December 31,
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 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.
The Company 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 included a cash payment of $10.9 million to the
Company. The Company reduced its Term Loan indebtedness under the credit
agreement by $6.0 million. The remaining $4.9 million was used to 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.
18
<PAGE>
Income Taxes
The Company has not recorded any tax benefit on its loss before income
taxes for the year ended December 31, 1998 as it is presently not ''more likely
than not'' that the Company will be able to realize such benefits.
The Predecessor Company's effective tax rates for the years ended December
31, 1997 and 1996 were 96.3% and 50.8%, 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 1997 effective tax rate
differs from the 1996 tax rate due to the decrease in taxable income in 1997
without any corresponding decreases in state taxes and non-deductible goodwill.
The Predecessor Company's results of operations for the years 1997 and 1996
have been included in the consolidated federal income tax returns of First Data.
The Predecessor Company's historical income tax expense is presented as if the
Predecessor 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 15 years.
Year 2000 Remediation
Until recently, computer programs were written to store only the 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 based on a
methodology recommended by an outside consultant, with a dedicated Year 2000
Project Office and Coordinator. The Company has completed the process of
defining, assessing and converting, or replacing, various programs and hardware
to make them Year 2000 compatible. The Company is currently conducting formal
compliance testing of the renovated applications, which cover all sensitive time
periods (e.g., the weeks straddling December 1999 to January 2000, February 29,
2000, etc).
The total cost for the Year 2000 remediation 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. The
Company incurred and expensed approximately $0.6 million for the year ended
December 31, 1998, primarily for assessment of the Year 2000 issue, the
development of a modification plan and programming costs.
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 interfaces are compliant.
Accordingly, the Company has implemented an aggressive client outreach program
to analyze the data interfaces shared with customers, partners and suppliers and
to communicate specific plans for their needs. Clients sharing electronic
interfaces with the Company are currently being contacted and such interfaces
will be completely aligned by the end of the third quarter of 1999. A vendor
outreach program has also been implemented to identify critical systems for
supplied products and services used, and to analyze the risk to the Company and
its customers should the products or services fail. The targeted completion date
for this activity is June 30, 1999, with the last half of 1999 reserved for
auditing and testing activities. The procurement process was revised in early
1998 to prevent acquisition of non-compliant products.
19
<PAGE>
The Company is also addressing the impact of Year 2000 on its non-
information technology systems, which include examination of each location to
ensure lighting, elevators, copiers and fax machines function properly. This
portion of the Year 2000 project is expected to be completed by the end of the
third quarter of 1999. Additionally, on-going internal and external
communications through monthly executive reviews and weekly project reviews
ensure that progress is monitored by senior management.
The Company recognizes the need for contingency plans in all aspects of the
project. Such plans are now being outlined, particularly with vendors and
clients, with a targeted completion date of June 30, 1999. As circumstances
change, these contingency plans will be adjusted throughout the last half of
1999.
The Company believes that with testing and communication with its clients,
vendors and employees, the Year 2000 problem will not pose significant
operational problems for its computer systems. However, if such testing and
analysis is not completed in a timely fashion or if the Company's clients or
significant suppliers do not successfully achieve Year 2000 compliance, the Year
2000 Problem could have a material impact on the operations of the Company
including a reduction in revenue and profit.
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 quarters 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 years ended December 31, 1998, 1997 or 1996.
Recent Accounting Pronouncements
20
<PAGE>
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.
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 are written-off and any
future start-up costs are expensed as incurred. The Company has no capitalized
start-up costs recorded as of December 31, 1998.
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.
ITEM 7A - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Long Term Debt
Non-Traded Instruments
As of December 31, 1998
(in $000's)
- ---------------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable Rate:
Term Loan Facility : $ 250 $ 250 $ 250 $ 250 $ 250 $ 17,500 $ 18,750 $18,750
$18 million 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
$.75 million 10.50% 10.50% 10.50% 10.50% 10.50% 10.50%
Revolving Credit Facility ($US)
Fixed Rate:
Senior Notes due 2008: $ -- $ -- $ -- $ -- $ -- $100,000 $100,000 $83,000
$100 million @ 10.25% 10.25%
</TABLE>
In January 1998, the Company implemented a financing plan which included
the issuance of $100 million 10.25% Senior Notes due 2008 in a private
placement. The Company exchanged these notes for $100 million 10.25% Series A
Senior Notes due 2008 which are were 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 $5
million.
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
21
<PAGE>
Applicable Margin or (B) the Eurodollar Rate plus the Applicable Margin.
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. The above table presents the rates paid under variable
instruments at year end. Changes in the Base Rate or Eurodollar Rate will
impact the actual interest rates paid by the Company.
The Company's primary market risk exposure with respect to these
instruments is that of interest rate risk. The Base Rate for any given day for
the Term Loan Facility and Revolving Credit Facility is equal to the greatest of
(i) the Prime Rate in effect on such day, (ii) the Base CD Rate in effect on
such day plus 1%, and (iii) the Federal Funds Effective Rate in effect on such
day plus 1/2 of 1%. The Company is vulnerable to changes in all of these
rates.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company commence at page F-1 of this Annual
Report.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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>
<S> <C> <C>
Name Age Position
David B. Golub 36 Director, Vice Chairman of the Board
Jerrold Kaufman 59 Chief Executive Officer, President and Director
Nora E. Kerppola 34 Director
Loren F. Kranz 46 Chief Operating Officer, Executive Vice President,
Secretary and Director
Wesley W. Lang, Jr. 41 Director, Chairman of the Board
Lester Pollack 65 Director
Jeffrey A. Weiss 54 Director
Craig S. Whiting 42 Director
Paul J. Zepf 34 Director
Micahel Lord 52 Chief Financial Officer and Treasurer
Gregory Schubert 33 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
22
<PAGE>
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. Mr. Pollack also serves as a director of Parlex Corporation,
Tidewater, Inc., LaSalle Re Holdings Limited and Firearms Training Systems, Inc.
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 Corporate Advisors since 1989. Mr. Zepf also serves as a
director of LaSalle Re Holdings Limited, Firearms Training Systems, Inc., The
Learning Company and BUCA, Inc.
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.
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.
23
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION
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 receives compensation of $30,000
per year and all other directors 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 Company has entered into employment agreements with Messrs. Kaufmann,
Kranz, Lord and Schubert. The compensation paid to the executive officers of the
Company has been 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.
The compensation provided to Mr. Kaufman under his employment agreement
includes an annual base salary of $270,400, 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, 1999, 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 $228,800, 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, 1999, 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
24
<PAGE>
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 $208,000, and a bonus of $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, 1999, Mr. Lord will have the
potential to receive an additional bonus of up to $35,000, plus an additional
bonus of up to $95,000 based on the Company's EBITDA (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 $171,600, 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, 1999, 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.
25
<PAGE>
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 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.
26
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 Percent of
5% Stockholders: of 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
27
<PAGE>
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
(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.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED 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
28
<PAGE>
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, 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 (i) paid Avalon an investment banking fee of
$750,000 less its investment of $100,000, (ii) granted options to Avalon
pursuant to a separate option agreement and (iii) will 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 vested fully and became 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
29
<PAGE>
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.
30
<PAGE>
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) List of Financial Statements and Financial Statement Schedule
The following consolidated financial statements of Nationwide Credit,
Inc. and subsidiaries are included herein commencing on page
F- 1:
Financial Statements:
Reports of Independent Public Accountants
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1998
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Stockholder's Equity for each of
the three years in the period ended December 31, 1998
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998
Notes to Consolidated Financial Statements
Schedule II - Valuation of Qualifying Accounts
(b) Exhibits:
<TABLE>
<S> <C>
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. ++
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. ++
</TABLE>
31
<PAGE>
<TABLE>
<S> <C>
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. ++
10.16 Amendment, dated as of March 7, 199, 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>
_______
++ Incorporated by reference
+ Filed herewith.
(b) Reports on Form 8-K:
Form 8-K, Item 4 - Changes in Registrant's Certifying Accountant, dated
November 2, 1998; filed November 9, 1998, incorporated by reference
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NATIONWIDE CREDIT, INC.
Date: March __, 1999 By: /s/ Jerrold Kaufman
--------------------
Jerrold Kaufman
Chief Executive Officer and Director
33
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------- ---------------------------- --------------
<S> <C> <C>
/s/ Jerrold Kaufman Chief Executive Officer March 30, 1999
- ------------------------- and Director
Jerrold Kaufman
/s/ Michael Lord Chief Financial Officer March 30, 1999
- ------------------------- and Chief Accounting Officer
Michael Lord
/s/ Loren F. Kranz Chief Operating Officer, March 30, 1999
- ------------------------- Executive Vice President
Loren F. Kranz
and Director
/s/ David B. Golub Chairman of the Board March 30, 1999
- ------------------------- Directors and Director
David B. Golub
/s/ Wesley W. Lang, Jr. Vice Chairman of the Board March 30, 1999
- ------------------------- of Directors and Director
Wesley W. Lang, Jr.
/s/ Nora E. Kerppola Director March 30, 1999
- -------------------------
Nora E. Kerppola
/s/ Lester Pollack Director March 30, 1999
- -------------------------
Lester Pollack
/s/ Jeffrey A. Weiss Director March 30, 1999
- -------------------------
Jeffrey A. Weiss
/s/ Craig S. Whiting Director March 30, 1999
- -------------------------
Craig S. Whiting
/s/ Paul J. Zepf Director March 30, 1999
- -------------------------
Paul J. Zepf
</TABLE>
34
<PAGE>
NATIONWIDE CREDIT, INC.
Consolidated Financial Statements
As of December 31, 1998 and 1997
And for each of the three years in the period ended December 31, 1998
Contents
Reports of Independent Public Accountants............................. F-1
Consolidated Financial Statements
Consolidated Balance Sheets........................................... F-3
Consolidated Statements of Operations................................. F-5
Consolidated Statements of Stockholder's Equity....................... F-6
Consolidated Statements of Cash Flows................................. F-7
Notes to Consolidated Financial Statements............................ F-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
Nationwide Credit Inc.
We have audited the accompanying consolidated balance sheet of NATIONWIDE
CREDIT, INC. (a Georgia Corporation - Note 1) as of December 31, 1998 and the
related consolidated statement of operations, stockholder's equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The consolidated balance sheet of
Nationwide Credit, Inc. as of December 31, 1997 and the related consolidated
statements of operations, stockholder's equity, and cash flows for each of the
two years in the period ended December 31, 1997, were audited by other auditors
whose report dated March 31, 1998 expressed an unqualified opinion on those
statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Nationwide Credit,
Inc. as of December 31, 1998 and the results of their operations and their cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 12, 1999
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholder of Nationwide Credit, Inc.
We have audited the accompanying consolidated balance sheet of Nationwide
Credit, Inc. as of December 31, 1997 and the related consolidated statements of
income, stockholder's equity, and cash flows for each of the two years in the
period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the accompanying Index. 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, 1997 and the consolidated results of its
operations and its cash flows for each of the two 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.
ERNST & YOUNG LLP
Atlanta, Georgia
March 31, 1998
F-2
<PAGE>
NATIONWIDE CREDIT, INC.
(Successor to Nationwide Credit, Inc. - Note 1)
Consolidated Balance Sheets
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1998 1997
The Company Predecessor
------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,201 $ 1,388
Cash held for clients 2,279 594
Accounts receivable, net of allowance of
$951 and $4,449, respectively 12,885 12,871
Deferred tax assets - 3,080
Intercompany trade receivables - 68
Prepaid expenses and other current assets 1,208 1,000
------------------------------------------
Total current assets 19,573 19,001
Property and equipment, less accumulated
depreciation of $4,575 and $16,017, respectively 9,859 11,590
Goodwill, less accumulated amortization of
$3,763 and $30,377, respectively 102,107 147,193
Other intangible assets, less accumulated amortization
of $15,978 and $9,884, respectively 4,301 12,806
Deferred financing costs, less accumulated
amortization of $2,288 and $0, respectively 4,238 -
Other assets 237 275
------------------------------------------
Total assets $140,315 $190,865
==========================================
</TABLE>
The accompanying notes are an integral part of these Consolidated Balance
Sheets.
<Continued>
F-3
<PAGE>
NATIONWIDE CREDIT, INC.
(Successor to Nationwide Credit, Inc. - Note 1)
Consolidated Balance Sheets
(Dollar amounts in thousands)
<Continued>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1998 1997
The Company Predecessor
-----------------------------------------------
<S> <C> <C>
Liabilities and stockholder's equity
Liabilities:
Collections due to clients $ 2,279 $ 594
Accrued compensation 4,201 3,495
Accounts payable 1,870 1,652
Accrued severance and office closure costs 1,845 202
Other accrued liabilities 5,273 3,410
Intercompany trade payables - 2,344
Current maturities of long-term debt 250 1,451
-----------------------------------------------
Total current liabilities 15,718 13,148
Payable to First Data Corporation - 112,450
Deferred tax liability - 1,388
Accrued severance and office closure costs 2,400 -
Long-term debt, less current maturities 118,500 -
Stockholder's equity:
Common stock - $.01 par value
Authorized - 10,000 shares
Issued and outstanding - 1,000 shares - -
Additional paid in capital 39,465 41,506
Retained earnings (deficit) (35,628) 22,775
Notes receivable - officers (140) -
Accumulated other comprehensive income - (402)
-----------------------------------------------
Total stockholder's equity 3,697 63,879
-----------------------------------------------
Total liabilities and stockholder's equity $140,315 $190,865
===============================================
</TABLE>
The accompanying notes are an integral part of these Consolidated Balance
Sheets.
F-4
<PAGE>
NATIONWIDE CREDIT, INC.
(Successor to Nationwide Credit, Inc. - Note 1)
Consolidated Statements of Operations
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------------------
1998 1997 1996
The Company Predecessor
------------------------------------------------------------
<S> <C> <C> <C>
Revenue $102,797 $119,013 $138,905
Expenses:
Salaries and benefits 64,825 66,376 73,636
Telecommunication 4,960 6,236 7,341
Occupancy 4,212 5,014 4,602
Other operating and administrative 14,249 22,516 26,586
Depreciation and amortization 24,315 14,364 12,021
Provision for employee severance
and office closure 1,563 679 4,323
Goodwill write-off 10,100 - -
Overhead charges from First Data
Corporation - 1,190 1,389
------------------------------------------------------------
Total Expenses 124,224 116,375 129,898
------------------------------------------------------------
Operating income (loss) (21,427) 2,638 9,007
Interest expense 13,418 122 241
------------------------------------------------------------
Income (loss) before income taxes (34,845) 2,516 8,766
Provision for income taxes - 2,423 4,449
------------------------------------------------------------
Income (loss) before extraordinary item (34,845) 93 4,317
Extraordinary loss on debt
extinguishment 783 - -
------------------------------------------------------------
Net income (loss) $(35,628) $ 93 $ 4,317
============================================================
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
<PAGE>
NATIONWIDE CREDIT, INC.
(Successor to Nationwide Credit, Inc. - Note 1)
Consolidated Statements of Stockholder's Equity
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Common Stock Additional Other
-------------- Paid-In Retained Notes Rec. Comprehensive
Shares Amount Capital Earnings Officers Income Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1997
Predecessor ........................ 1,000 -- 41,506 22,682 -- (501) 63,687
Pension adjustment ................ -- -- -- -- -- 99 --
Net income ....................... -- -- -- 93 -- -- --
Total comprehensive income........ -- -- -- -- -- -- 192
--------------------------------------------------------------------------------
Balance at December 31, 1997
Predecessor ..................... 1,000 -- 41,506 22,775 (402) $ 63,879
===== ===== ===== ====== ====== ====== ========
Initial Capitalization
January 1, 1998 1,000 -- $39,465 -- (140) -- 39,325
Net (loss) ........................ -- -- -- $(35,628) -- -- (35,628)
--------------------------------------------------------------------------------
Balance at December 31, 1998,
The Company 1,000 $ -- $39,465 $(35,628) $(140) $ -- $ 3,697
================================================================================
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
<PAGE>
NATIONWIDE CREDIT, INC.
(Successor to Nationwide Credit, Inc. - Note 1)
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------------------
1998 1997 1996
The Company Predecessor
-------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ (35,628) $ 93 $ 4,317
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 25,821 14,364 12,021
Goodwill write-off 10,100 - -
Extraordinary loss on debt extinguishment 783 - -
Other non-cash charges 1,563 1,842 2,784
Deferred tax provision - 218 2,023
Changes in operating assets and liabilities, net of
acquisition:
Accounts receivable (664) (2,862) 9,778
Prepaid expenses and other assets (312) 48 113
Accrued compensation 1,236 (857) (18)
Intercompany trade payables - 966 1,218
Accounts payable and other accrued liabilities 1,124 812 (8,338)
-------------------------------------------------------------
Net cash provided by operating activities 4,023 14,624 23,898
Investing activities
Purchase of Company, net of cash acquired (149,512) (24,161) (819)
Purchases of property and equipment (3,897) (5,465) (7,005)
-------------------------------------------------------------
Net cash used in investing activities (153,409) (29,626) (7,824)
Financing activities
Proceeds from acquisition facilities 125,000 - -
Capital contribution from Parent 38,975 - -
Proceeds from long-term debt 125,000 - -
Repayment of acquisition facilities (125,000) - -
Repayment of long-term debt (6,250) (1,500) (1,500)
Debt issuance and acquisition costs (6,526) - -
Change in due from (to) First Data Corporation - 13,781 (16,697)
-------------------------------------------------------------
Net cash provided by (used in) financing activities 151,199 12,281 (18,197)
Increase (decrease) in cash and cash equivalents 1,813 (2,721) (2,123)
-------------------------------------------------------------
Cash and cash equivalents at beginning of year 1,388 4,109 6,232
-------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,201 $ 1,388 $ 4,109
=============================================================
Cash paid for interest $7,379 $ - $ -
=============================================================
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-7
<PAGE>
NATIONWIDE CREDIT, INC.
(SUCCESSOR TO NATIONWIDE CREDIT, INC. - NOTE 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
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 surviving corporation and a wholly
owned subsidiary of the Buyer (the "Transaction"). 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. After purchase price adjustments, the merger consideration
consisted of $147.3 million in cash (before transaction costs of $2.6
million). The excess of the cost over the fair value of net assets acquired
("goodwill") of $116.0 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-compete agreements of $5.7 million, which are being amortized over
one and four years, respectively. During 1998, the Company made adjustments
to increase goodwill by $2.6 million as a result of finalizing the fair value
of acquired assets and assumed liabilities. In December 1998, the Company
wrote off $10.1 million of goodwill (Note 13). As a result of the acquisition
of the Company and in connection with the implementation of an operating
improvement plan, the Company accrued estimated costs of approximately $4.0
million associated with closing certain offices and branches ($2.3 million),
severance payments to employees ($0.8 million), and relocation costs ($0.9
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.
The acquisition and related fees were initially financed through borrowings
of $125.0 million against a $133.0 million senior credit facility (the
"Acquisition Facilities") and a contribution of $40.4 million of equity
capital (before related fees of $1.4 million).
The accompanying financial statements for 1997 and 1996 reflect the
Predesessor's historical financial position and results of operations prior
to the consummation of the Transaction. References herein to "Predecessor"
refer to financial results prior to the Transaction.
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
F-8
<PAGE>
purposes. Leasehold improvements are amortized over the shorter of the term
of the underlying lease or five years.
The following table summarizes the Company's property and equipment (in
thousands):
--------------------------------------
1998 1997
The Company Predecessor
Computer equipment $10,444 $ 20,638
Furniture and equipment 2,222 3,726
Leasehold improvements 1,768 3,243
--------------------------------------
14,434 27,607
Accumulated depreciation (4,575) (16,017)
--------------------------------------
$ 9,859 $ 11,590
======================================
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 30 years. At December 31, 1998 and 1997,
the Company had goodwill of $102.1 million and $147.2 million, respectively.
Other intangible assets consist primarily of non-compete agreements and the
value of existing placements related to these acquisitions. These costs are
amortized on a straight-line basis over the length of the agreement or benefit
period, ranging from one to four years. Goodwill and other intangible assets
are periodically reviewed for impairment. The measurement of possible
impairment is based primarily on the ability to recover the balance of the
goodwill from expected future operating cash flows on a discounted basis.
The Predecessor's goodwill is amortized on a straight-line basis over 25 to 40
years. Other intangible assets are amortized on a straight-line basis over the
length of the agreement or benefit period, ranging from 5 to 25 years.
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. In 1998, the Company
has recognized $0.5 million as a reduction in revenue. The Predecessor
included this adjustment as a component of bad debt expense.
Income Taxes
The Company accounts for income taxes under the liability method required by
Statements 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 Company has not recorded any tax benefit on its loss before income taxes
for 1998, as it is not "more likely than not" that the Company will be able to
realize such benefits.
The Predecessor's taxable income for the years 1997 and 1996 are included in
the consolidated U. S. federal income tax return of First Data. The Company's
provision for income taxes for these years was determined as if the Company
were a separate tax-paying entity, and income taxes payable were included in
the Payable to First Data account.
F-9
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with general 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.
Recent Accounting Pronouncements
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.
In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs or Start-Up
Activities." The SOP is effective beginning on January 1 1999, and requires
that start-up costs capitalized prior to January 1, 1999 are written-off and
any future start-up costs are expensed as incurred. The Company has no
capitalized start-up costs recorded as of December 31, 1998.
In June 1998, the Financial Accounting Standards 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.
3. Acquisitions
On February 28, 1997, the Predecessor acquired certain assets of Consolidated
Collection Co. ("Consolidated"), an accounts receivable management company
based in Denver, Colorado for approximately $12.2 million excluding
acquisition related costs of $1.4 million. 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 Predecessor as goodwill with a corresponding
increase in the Payable to First Data account.
4. Provision for Merger Costs, Employee Severance and Office Closure
In December 1998, the Company decided to relocate its corporate headquarters
offices. The Company is in final negotiations with real estate brokers to
lease a new facility for these offices. The Company recorded a charge of $1.6
million in 1998 which represents the future rent obligations under the
existing lease offset by estimated sublease income less broker commissions.
The Company expects to vacate its current headquarters facility during the
second quarter of 1999.
Primarily as a result of integrating the operations of NCI and ACB in 1997
and 1996, the Company incurred charges relating to employee severance and
branch office closure as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------
1998 1997 1996
The Company Predecessor
--------------------------------------------------------
<S> <C> <C> <C>
Employee severance ...................... $ -- $ 679 $2,271
Merger costs ............................ -- -- (750)
Office closure .......................... 1,563 -- 2,802
--------------------------------------------------------
$1,563 $ 679 $4,323
=========================================================
</TABLE>
As discussed in Note 1, the Company accrued $4.0 million for office closures,
employee severance and relocation costs. The amounts remaining at December
31, 1998 from this accrual, as well as the $1.6 million charge discussed
above, is as follows (in thousands):
Office closure $ 3,239
Employee severance 608
Relocation 398
---------
$ 4,245
=========
5. Related Party Transactions
During 1997 and 1996, the Predecessor had various transactions with First
Data and its affiliates. These transactions can be generally classified into
the following categories:
. Trade activities--the Predecessor derived revenue for collection activities
on behalf of First Data affiliates and incurred expenses from First Data
affiliates for such services as obtaining address
F-10
<PAGE>
information and document imaging. The following summarizes the
Predecessor's trade transactions with First Data and affiliates (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1997 1996
Predecessor
-----------------------------------------
<S> <C> <C>
Trade revenue ............... $ 347 $ 400
Trade expenses .............. 1,771 2,646
</TABLE>
. Allocation of general and administrative costs--this was a general
allocation of First Data corporate overhead based on 1% of the
Predecessor's revenue. Functions provided by First Data corporate included
administration of employee benefit programs, internal audit, financial
systems licensing and processing, taxes and other support services.
. Direct charges--certain programs and activities, administered by First Data
on a consolidated basis were employee benefit plans, group and other
insurance programs and certain vendor agreements that were negotiated by
First Data on an enterprise wide basis. The costs of these programs and
activities were specifically identifiable to each participating business
unit and, for this reason, the costs were 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 Predecessor's costs of doing
business. Management further believes that the incremental general and
administrative costs that would have resulted from the Predecessor being a
stand-alone entity would not exceed the 1% of revenue charge from First Data.
First Data did not have any specific indebtedness related to the Predecessor
and the accompanying financial statements do not reflect any allocations of
First Data interest expense. There were no formal financing arrangements with
First Data. However, cash not necessary for the Predecessor's near term
operating requirements was remitted to First Data which, in turn, funded the
Predecessor's operating, investing and financing activities as required.
Accordingly, the net change in the payable to First Data balance was
reflected as a financing activity in the accompanying statement of cash
flows. The average balances in the payable to First Data balance were 104.4
million and $105.8 million for the years ended December 31, 1997 and 1996,
respectively.
6. Note Payable and Long-Term Debt and Credit Agreement
In January 1998, the Company implemented a financing plan which included the
issuance of $100 million 10.25% Senior Notes due 2008 in a private placement
(the "Offering"). The Company exchanged these notes for $100 million 10.25%
Series A Senior Notes due 2008 which were 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, as amended, (the "Revolving Credit Facility")
of $5 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 as defined in the Credit Agreement, as amended, at the Company's
option, is based upon the Eurodollar Base Rate ("Eurodollar") plus 3.75% or
the Base Rate, plus 2.75%. Interest payments are made quarterly for Base Rate
loans. Interest payments on Eurodollar loans are made on the
F-11
<PAGE>
earlier of their maturity date or 90 days depending on their term. In
addition, the Company is required to pay a commitment fee of .625% 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 $250,000 for each of the first six years and the
remaining $17.5 million in the last year of the facility. Additionally, the
Company is required to make annual prepayments 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. The
Company made a prepayment of $6.0 million in 1998 reducing the balance of the
Term Loan from $24.8 million to $18.8 million. 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 maintain
certain financial ratios and limits the Company's indebtedness, ability to
pay dividends, acquisitions and capital expenditures. In 1998 and in January
1999, the Company entered into an amendment to the Credit Agreement which
modified certain financial covenants. The Company is in compliance with all
financial covenants, as amended.
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 following table summarizes the Company's current and long-term debt (in
thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
The Company Predecessor
-----------------------------------------------
<S> <C> <C>
10.25% Senior Notes,
due 2008 $100,000 $ --
Term loan facility 18,750 --
Note payable -- 1,451
-----------------------------------------------
118,750 1,451
Less current maturities (250) (1,451)
-----------------------------------------------
$118,500 $ --
===============================================
</TABLE>
Future maturities of the long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $ 250
2000 250
2001 250
2002 250
2003 250
thereafter 117,500
--------
$118,750
========
</TABLE>
The 1997 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 $1.25 million. The note is carried in
the
F-12
<PAGE>
accompanying financial statements at its present value based upon an 8%
interest rate. The final $1.5 million installment was paid in May 1998.
7. Business Segments, Significant Customers and Concentrations of Credit Risk
The Company operates in a single segment, the accounts receivable management
business. It receives placements from a number of different industry groups
on both a pre and post charge-off basis. In 1998, the Company also began
providing outsourcing services to the telcommunications industry. The revenue
from this service to the telecommunications industry. The revenue from this
service is less than five percent of total revenues and is therefore not
presented as a separate segment.
The Company derives a significant portion of its revenue from American
Express and the Department of Education ("DOE"). The amounts of consolidated
net revenues and accounts receivable attributable to these customers are as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1998 1997 1996
The Company Predecessor
-------------------------------------------------------
<S> <C> <C> <C>
Revenue:
American Express $36,332 $33,665 $41,770
DOE 8,892 20,711 31,551
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1997
The Company Predecessor
-------------------------------------
<S> <C> <C>
Accounts Receivable:
American Express $1,911 $1,235
DOE 2,770 4,606
</TABLE>
Additionally, in the aggregate, the Company had accounts receivable from
other departments and agencies of the U.S. Government amounting to $0.4
million and $0.7 million at December 31, 1998 and 1997, respectively. No
other single customer accounted for more than 10% of the consolidated totals
for the periods indicated.
In 1998, the DOE revised the amounts it previously paid to the Predecessor
during the years ended December 31, 1994 through 1997 of approximately $0.9
million. These amounts were recorded as a charge to expense in 1997.
8. Fair Value of Financial Instruments
The carrying amounts reflected in the consolidated balance sheets for cash,
cash equivalents, accounts receivable, accounts payable, short-term notes
payable and current maturities of long-term debt approximate fair value due
to the short maturities of these instruments. The fair value of outstanding
bonds are based on market quotes. The carrying amount of the Term Loan
approximates fair value due to variable interest rates. The carrying amounts
and fair values of the Company's long-term debt as December 31, 1998 are as
follows (in thousands):
Carrying Fair
Amount value
-------- -----
Senior Notes 100,000 83,000
Term Loan 18,500 18,500
------- -------
118,500 101,500
======= =======
9. Operating Leases
F-13
<PAGE>
The Company leases certain office space and office equipment 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,
1998 (in thousands):
<TABLE>
<S> <C>
1999 $ 3,955
2000 3,434
2001 2,383
2002 865
2003 44
------------------
Total minimum lease payments $10,681
==================
</TABLE>
Rental expense for all operating leases was $3,495, $4,725 and $4,311 for
1998, 1997 and 1996, respectively.
10. Stock Option Plans
Company Stock Option Plans
In connection with the Transaction, the Buyer adopted its 1997 Management
Performance Option Plan (the "Option Plan"). A total of 57,665 shares of the
Buyer's Common Stock may be granted under the Option Plan, under 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 which may be allocated as
Class A Options, Class B Options or Class C Options, as determined by the
Buyer's board of directors.
Class A Options vest 100% if the grantee is employed full time by the Comany
on the third anniversary of such employee's employment, and at lesser
percentages if such grantee's employment is terminated without cause prior
to such time. Class B Options and Class C Options vest 100% on the sixth
anniversary of the employee's employment or on an accelerated basis if
specified rates of return are achieved. All options fully vest upon certain
defined changes in control.
In connection with the transaction, 19,822, 19,822 and 9,610 Class A
Options, Class B Options and Class C Options, respectively, were granted to
certain members of management. All options were awarded at an exercise price
of $100, which equaled the fair market value at the date of grant. There
have been no additional grants or forfeitures during the year and all
options awarded under the Option Plan are outstanding at December 31, 1998.
No options are exercisable at December 31, 1998.
The Company accounts for stock-based compensation using the instrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," under which no compensation cost for stock
options is recognized for stock option awards granted at or above fair
market value. Had compensation expense for the the Option Plan been
determined based upon fair values at the grant date for awards under the
Option Plan in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss for 1997 would have been increased to
the pro forma amount indicated below.
Net loss (in thousands)
As reported $(35,628)
Pro forma (35,897)
The weighted average fair value of options granted in connection with the
Transaction estimated on the date of grant using the minimum values model
was $24.85. The fair value of the options granted was based on the following
assumptions: dividend yield of 0 percent, risk free interest rate of 5.7
percent, and expected lives of 4 years for Class A Options and 6 years for
Class B Options and Class C Options. The weighted average remaining
contractual life of options outstanding at December 31, 1998 was 8.2 years.
Predecessor Stock Option Plan
In 1997 and 1996, the Predecessor participated in a First Data plan that
provided 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 were reserved for issuance under
First Data plans, of which 7.6 million shares remained available for future
grant as of December 31, 1997. The options were issued at a price equivalent
to First Data common stock's fair market value at the date of grant,
generally had ten year terms and generally became 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 6.0 million shares were reserved for issuance, of which 4.8
million shares remained available for future grant as of December 31, 1997.
Monies accumulated through payroll deductions elected by eligible employees
were 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 Predecessor 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. No compensation expense was
recognized 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.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, assuming the Predecessor 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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
Predecessor
----------------------------------
<S> <C> <C>
Risk-free interest rate--options ................................... 6.23% 6.28%
Risk-free interest rate--employee stock purchase rights ............ 6.23% 5.04%
Dividend yield ..................................................... 0.22% 0.22%
Volatility of First Data common stock .............................. 18.9% 16.9%
Expected option life ............................................... 5 years 5 years
Expected employee stock purchase right life ........................ 0.25 years 0.25 years
</TABLE>
F-14
<PAGE>
<TABLE>
<S> <C> <C>
Weighted-average fair value of options granted ..................... $ 11 $ 11
Weighted-average fair value of employee stock purchase rights ...... $ 7 $ 7
</TABLE>
The Predecessor's pro forma net income (loss) after amortizing the fair value
of the options and the stock purchase rights over their vesting period is
($410) and $4,071 for the years ended December 31, 1997 and 1996,
respectively.
Because the Predecessor'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 Predecessor's
employees is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1997 1996
Predecessor
-------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
-------------------------------------------------------
Outstanding at beginning of period .... 359,332 $28 583,200 $23
Granted ............................... 76,000 40 163,742 38
Exercised ............................. (77,357) 17 (149,638) 21
Cancelled ............................. (71,897) 32 (237,972) 28
--------------- --------------
Outstanding at end of period .......... 286,078 $34 359,332 $28
=============== ==============
Exercisable ........................... 79,297 $28 87,325 $17
=============== ==============
</TABLE>
The following summarizes information about stock options outstanding at
December 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------
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
During 1998, the Company has not recognized any benefit for income taxes
since it has recognized a valuation allowance equal to the amount of total
deferred tax assets. The provision for income taxes consists of the
following (in thousands):
F-15
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------
1998 1997 1996
The Company Predecessor
--------------------------------------------------------
<S> <C> <C> <C>
Federal $ -- $2,091 $3,692
State and local -- 332 757
--------------------------------------------------------
Total $ -- $2,423 $4,449
=========================================================
</TABLE>
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 (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1998 1997 1996
The Company Predecessor
---------------------------------------------------------
<S> <C> <C> <C>
Current $ -- $2,205 $2,426
Deferred -- 218 2,023
---------------------------------------------------------
Total $ -- $2,423 $4,449
=========================================================
</TABLE>
The Company's net deferred tax assets (liabilities) consist of the following
(in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1998 1997
The Company Predecessor
--------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accrued costs $ 608 $ 1,124
Minimum pension liability -- 247
Depreciation and amortization 5,195 --
Goodwill write-off 3,667 --
Accounts receivable allowance 370 1,709
Net operating loss 4,020 --
--------------------------------------------
Total deferred tax assets 13,860 3,080
Valuation allowance (13,860) --
--------------------------------------------
Net deferred tax assets -- 3,080
Deferred tax liabilities:
Depreciation and amortization -- (1,388)
--------------------------------------------
Total deferred tax liabilities -- (1,388)
--------------------------------------------
Net deferred tax assets $ -- $ 1,692
============================================
</TABLE>
F-16
<PAGE>
The reconciliation of income tax computed at the U. S. federal statutory tax
rate to income tax expense is (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------------
1998 1997 1996
The Company Predecessor
-----------------------------------------------------------------------
<S> <C> <C> <C>
Tax at U.S. statutory rate $(12,470) $ 881 $3,068
Increases in taxes from:
State and local taxes (1,390) 216 492
Non-deductible goodwill -- 782 782
Other non-deductible -- 350 --
Other -- 194 107
-----------------------------------------------------------------------
(13,860) 2,423 4,449
Valuation allowance 13,860 -- --
-----------------------------------------------------------------------
Total $ -- $2,423 $4,449
=======================================================================
</TABLE>
12. Retirement Plans
Defined Contribution Plan
The Company has an incentive savings plan that allows eligible employees to
contribute a percentage of their compensation and provides for certain
matching, service-related and other contributions. The matching and service-
related contributions associated with the plans were approximately $267 for
the year ending December 31, 1998.
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 Predecessor's matching and service-related contributions
associated with the plan were approximately $584 and $453 for the years
ended December 31, 1997 and 1996, respectively.
Defined Benefit Plan
In 1997 and 1996, the Predecessor had 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 this plan were based on
years of service and annual compensation. Funding of retirement costs
complied with the minimum funding requirements specified by the Employee
Retirement Income Security Act of 1974, as amended. Plan assets consisted
principally of mutual fund investments and fixed income securities.
F-17
<PAGE>
Net pension cost for the years ended December 31, 1997 and 1996 consisted
of (in thousands):
<TABLE>
<CAPTION>
-------------------------------------------
1997 1996
Predecessor
-------------------------------------------
<S> <C> <C>
Service cost--benefit earned during period $ -- $ --
Interest cost on projected benefit obligation 216 196
Actual return on plan assets (542) (148)
Net amortization and deferral 348 35
-------------------------------------------
Net periodic pension cost $ 22 $ 83
===========================================
</TABLE>
The following table sets forth the funded status and amounts recognized in
the balance sheet for the Company's plan at December 31, 1997, (in thousands)
<TABLE>
<CAPTION>
----------------
1997
Predecessor
----------------
<S> <C>
Actuarial present value of benefit obligations:
Vested, Accumulated and Projected benefit obligation $(3,076)
Plan assets at fair value 2,904
----------------
Plan assets less than projected benefit obligations (172)
Unrecognized net loss 649
Minimum liability adjustment (649)
----------------
Pension liability included in the balance sheet $ (172)
================
</TABLE>
In computing the foregoing, a discount rate of 7.5% was used. The expected
long-term rate of return on assets was 9.5%.
13. Goodwill Write-off
In December 1998, management determined that a goodwill write-off was
required relating to the Denver operation. The revenue from continuing
clients is not sufficient to cover fixed operating costs of a separate
facility. The Company closed the Denver facility on February 28, 1999 and
moved the remaining account placements to another facility. The Company
recorded a goodwill write-off of $10.1 million related to the Denver
operation which represented approximately 73% of the goodwill attributed to
the Denver operation.
14. Commitments and Contingencies
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.
In 1992, the Predecessor 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 Federal Trade Commission completed its
investigation regarding the Company's compliance with the
F-18
<PAGE>
Consent Decree from January 1, 1994 to October 1998, when the matter was
settled. The Company settled the matter by paying 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. First
Data reimbursed the Company for the 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 results of operations.
15. Subsequent Events
In March 1999, the Company 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. In connection with the
amendment, the Applicable Margin on the Eurodollar Loan and Base Rate Loan
was increased 1% to 3.75% and 2.75%, respectively. The Company was in
compliance with the revised covenants as of December 31, 1998.
F-19
<PAGE>
Nationwide Credit, Inc.
Schedule IX
Valuation and Qualifying Accounts
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Charged
Balance at to Costs Charged Balance at
Beginning and to Other End of
Description of Period Expenses Accounts Deductions Period
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
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
Year ended December 31, 1998
deducted from receivables 4,449 524 - (4,022) 951
Accrued severance and office closure costs
Year ended December 31, 1998 - 1,563 4,000 (1) (1,318) 4,245
</TABLE>
(1) Accrual recorded as part of the purchase accounting adjustments
resulting from the acquisition of the Company.
<PAGE>
EXHIBIT 10.16
SECOND AMENDMENT AND AGREEMENT
SECOND AMENDMENT AND AGREEMENT, dated as of March __, 1999 (this
"Amendment"), to the Credit Agreement, dated as of January 28, 1998 (the Credit
- ---------- ------
Agreement"), among NCI ACQUISITION CORPORATION, a Delaware corporation
- ---------
("Holdings"), NATIONWIDE CREDIT, INC., a Georgia corporation (the "Borrower"),
- ---------- --------
the several banks and other financial institutions or entities from time to time
parties to thereto (the "Lenders"), LEHMAN BROTHERS INC., as advisor and
-------
arranger (in such capacity, the "Arranger"), LEHMAN COMMERCIAL PAPER INC., as
--------
syndication agent (in such capacity, the "Syndication Agent"), FLEET CAPITAL
-----------------
CORPORATION, as administrative agent (in such capacity, the "Administrative
--------------
Agent"), and BHF - BANK AKTIENGESELLSCHAFT, GRAND CAYMAN BRANCH, as
- -----
Documentation Agent (in such capacity, the "Documentation Agent").
-------------------
W I T N E S S E T H:
-------------------
WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to
make, and have made, certain loans and other extensions of credit to the
Borrower; and
WHEREAS, the Borrower has requested, and, upon this Amendment becoming
effective, the Required Lenders have agreed, to amend certain provisions of the
Credit Agreement as provided for in this Amendment;
NOW, THEREFORE, the parties hereto hereby agree as follows:
I. Defined Terms. Terms defined in the Credit Agreement and used
-------------
herein shall have the meanings given to them in the Credit Agreement.
II. Amendments to Credit Agreement. Section 7.1 of the Credit
------------------------------
Agreement is hereby amended by replacing the portion of such Section provided
for below in its entirety and substituting in lieu thereof the following (and
the remaining portion of such Section shall not be amended and shall remain in
full force and effect):
"(a) Minimum Consolidated EBITDA. Permit the Consolidated
---------------------------
EBITDA for any period of four consecutive fiscal quarters of the
Borrower (or, if less, the number of full fiscal quarters in
1998) ending with any fiscal quarter set forth below to be less
than the amount set forth below opposite such fiscal quarter:
<PAGE>
2
Fiscal Quarter Minimum Consolidated EBITDA
-------------- ---------------------------
<TABLE>
<CAPTION>
<S> <C>
December 31, 1998 $14,500,000
March 31, 1999 $11,360,000
June 30, 1999 $13,110,000
September 30, 1999 $14,780,000
December 31, 1999 $19,000,000
</TABLE>
(b) Consolidated Total Debt Ratio. Permit the Consolidated Total
-----------------------------
Debt Ratio as at the last day of any period of four consecutive fiscal
quarters of the Borrower (or, if less, the number of full fiscal
quarters in 1998) ending with any fiscal quarter set forth below to
exceed the ratio set forth below opposite such fiscal quarter:
Consolidated
Fiscal Quarter Total Debt Ratio
-------------- ----------------
<TABLE>
<CAPTION>
<S> <C>
December 31, 1998 8.20 to 1.00
March 31, 1999 10.40 to 1.00
June 30, 1999 9.00 to 1.00
September 30, 1999 8.00 to 1.00
December 31, 1999 6.25 to 1.00
</TABLE>
(c) Consolidated Interest Coverage Ratio. Permit the Consolidated
------------------------------------
Interest Coverage Ratio for any period of four consecutive fiscal quarters of
the Borrower (or, if less, the number of full fiscal quarters in 1998) ending
with any fiscal quarter set forth below to be less than the ratio set forth
below opposite such fiscal quarter:
Consolidated Interest
Fiscal Quarter Coverage Ratio
-------------- ---------------------
<TABLE>
<CAPTION>
<S> <C>
December 31, 1998 1.30 to 1.00
March 31, 1999 .90 to 1.00
June 30, 1999 1.00 to 1.00
September 30, 1999 1.20 to 1.00
December 31, 1999 1.50 to 1.00
</TABLE>
4. Amendment to Annex A. Annex A to the Credit Agreement is hereby
--------------------
amended by deleting such Annex A in its entirety and substituting in lieu
thereof Annex A hereto.
III. Agreement. The Revolving Credit Commitments shall be
---------
permanently reduced to $5,000,000 on the Amendment Effective Date (as defined
below).
<PAGE>
3
IV. Conditions to Effectiveness. This Amendment shall become
---------------------------
effective on the date (the "Amendment Effective Date") on which (i) the
------------------------
Borrower, the Agents and the Required Lenders shall have executed and delivered
this Amendment and (ii) the Borrower shall have paid to Administrative Agent for
distribution to each Lender that executes this Amendment prior to March__, 1999
an amendment fee equal to the product of .25% times such Lender's Aggregate
Exposure as of the Amendment Effective Date.
V. General
-------
1. Representation and Warranties. To induce the Agents and the
-----------------------------
Lenders parties hereto to enter into this Amendment, the Borrower hereby
represents and warrants to the Agent and all of the Lenders as of the Amendment
Effective Date that (a) the representations and warranties made by the Loan
Parties in the Loan Documents are true and correct in all material respects on
and as of the Amendment Effective Date, after giving effect to the effectiveness
of this Amendment, as if made on and as of the Amendment Effective Date and (b)
no Default or Event of Default shall have occurred and be continuing.
2. Payment of Expenses. The Borrower agrees to pay or reimburse the
-------------------
Agents for all of their out-of-pocket costs and reasonable expenses incurred in
connection with this Amendment, any other documents prepared in connection
herewith and the transactions contemplated hereby, including, without
limitation, the reasonable fees and disbursements of counsel.
3. No Other Amendments; Confirmation. Except as expressly amended,
-------------------
modified and supplemented hereby, the provisions of the Credit Agreement and the
other Loan Documents are and shall remain in full force and effect. This
Amendment shall be a Loan Document.
4. Governing Law; Counterparts. (a) This Amendment and the rights
---------------------------
and obligations of the parties hereto shall be governed by, and construed and
interpreted in accordance with, the laws of the State of New York.
(b) This Amendment may be executed by one or more of the parties to
this Agreement on any number of separate counterparts, and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. A set of the copies of this Amendment signed by all the parties
shall be lodged with the Borrower and the Administrative Agent. This Amendment
may be delivered by facsimile transmission of the relevant signature pages
hereof.
<PAGE>
4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective proper and duly authorized
officers as of the day and year first above written.
NCI ACQUISITION CORPORATION
By:_____________________________________
Name:
Title:
NATIONWIDE CREDIT, INC.
By:_____________________________________
Name:
Title:
LEHMAN COMMERCIAL PAPER INC., as
Syndication Agent and as a Lender
By:______________________________________
Name:
Title:
BHF - BANK AKTIENGESELLSCHAFT, GRAND CAYMAN
BRANCH,
By:______________________________________
Name:
Title:
By:______________________________________
Name:
Title:
<PAGE>
5
FLEET CAPITAL CORPORATION, as
Administrative Agent and as a Lender
By:______________________________________
Name:
Title:
BALANCED HIGH-YIELD FUND I LTD.
By: BHF - Bank Aktiengesellschaft
acting through its New York Branch
as attorney-in-fact
By:______________________________________
Name:
Title:
<PAGE>
Annex A
-------
Pricing Grid
<TABLE>
<CAPTION>
Consolidated Applicable Margin Applicable Margin
Total Debt for Eurodollar Loans for Base Rate Loans
Ratio
Revolving Tranche B Revolving Tranche B Commitment
Credit Term Credit Term Fee
Loans Loans Loans Loans Rate
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
greater than or equal to:
6.00 to 1.00 3.500% 3.750% 2.500% 2.750% 0.625
- --------------------------------------------------------------------------------------------------------
less than:
6.00 to 1.00 3.250% 3.500% 2.250% 2.500% 0.500
but greater than or equal to:
5.50 to 1.00
- --------------------------------------------------------------------------------------------------------
less than:
5.50 to 1.00 3.000% 3.250% 2.000% 2.250% 0.375
but greater than or equal to:
5.00 to 1.00
less than:
5.00 to 1.00 2.875% 3.125% 1.875% 2.125% 0.375
but greater than or equal to:
4.50 to 1.00
less than:
4.50 to 1.00 2.625% 3.000% 1.625% 2.000% 0.375
but greater than or equal to:
4.00 to 1.00
less than:
4.00 to 1.00 2.500% 2.875% 1.500% 1.875% 0.375
but greater than or equal to:
3.50 to 1.00
less than:
3.50 to 1.00 2.375% 2.750% 1.375% 1.750% 0.250
</TABLE>
Changes in the Applicable Margin with respect to the Revolving Credit Loan and
the Tranche B Term Loans resulting from changes in the Consolidated Total Debt
Ratio shall become effective on the date (the "Adjustment Date") on which
---------------
financial statements are delivered to the Lenders pursuant to Section 6.1 (but
in any event not later than the 45th day after the end of each of the first
three quarterly periods of each fiscal year or the 90th day after the end of
each fiscal year, as the case may be) and shall remain in effect until the next
change to be effected pursuant to this paragraph. If any financial statements
referred to above are not delivered within the time periods specified above,
then, until such financial statements are delivered, the Consolidated Total Debt
Ratio as at the end of the fiscal period that would have been covered thereby
shall for the purposes of this definition be deemed to be greater than 6.00 to
1. In addition, at all times while an Event of Default shall have occurred and
be continuing, the Consolidated Total Debt Ratio shall for the purposes of this
definition be deemed to be greater than 6.00 to 1. Each determination of the
Consolidated Total Debt Ratio pursuant to this definition shall be made with
respect to the period of four consecutive fiscal quarters of the Borrower ending
at the end of the period covered by the relevant financial statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 5480 1982
<SECURITIES> 0 0
<RECEIVABLES> 12885 12871
<ALLOWANCES> 951 4449
<INVENTORY> 0 0
<CURRENT-ASSETS> 19573 19001
<PP&E> 14434 27607
<DEPRECIATION> 4575 16017
<TOTAL-ASSETS> 140315 190865
<CURRENT-LIABILITIES> 15718 13148
<BONDS> 100000 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 3697 63879
<TOTAL-LIABILITY-AND-EQUITY> 140315 190865
<SALES> 102797 119013
<TOTAL-REVENUES> 102797 119013
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 124224 116375
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 13418 122
<INCOME-PRETAX> (34845) 2516
<INCOME-TAX> 0 2423
<INCOME-CONTINUING> (34845) 93
<DISCONTINUED> 0 0
<EXTRAORDINARY> 783 0
<CHANGES> 0 0
<NET-INCOME> (35628) 93
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
