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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998 or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0001059083
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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 (IRS Employer
of incorporation or organization) Identification Number)
6190 Powers Ferry Road, 4th Floor, Atlanta, Georgia 30339
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 644-7452
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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
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TABLE OF CONTENTS
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - AMENDED........................... 1
SIGNATURE................................................... 7
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
On December 31, 1997, NCI Acquisition Corporation (the "Buyer"), NCI
Merger Corporation ("Merger Sub"), Nationwide Credit, Inc. (the "Company"),
First Data Corporation (the "Seller") and its wholly owned subsidiary, First
Financial Management Corporation ("FFMC"), entered into an agreement and Plan of
merger (the "Merger Agreement") pursuant to which Merger Sub merged with and
into the Company, with the Company as the surviving corporation and a wholly
subsidiary of the Buyer. The transaction was accounted for under the purchase
method of accounting with the consideration and related fees of the acquisition
allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the date of the acquisition. The merger consideration
consisted of $155.2 million in cash (before transaction costs of $2.1 million)
and up to an additional $3.7 million, to be paid pursuant to the terms of an
earn-out agreement in the event the Company achieves certain performance targets
for the year ended December 31, 1998. The excess of the cost over the fair value
of net assets acquired of $112.9 million is being amortized on a straight-line
basis over 30 years. Other identifiable intangible assets are primarily
comprised of the fair value of existing account placements acquired of $14.5
million and non-competition agreements of $5.7 million, which are being
amortized over 1 and 4 years, respectively. The Company periodically reviews
goodwill and other intangibles to assess recoverability. Impairment charges will
be recognized in operations if the expected future operating cash flow
(undiscounted and without interest charges) derived from such intangible assets
is less than their carrying value. As a result of the acquisition of the Company
and in connection with the implementation of the modified operating improvement
plan, the Company has accrued estimated costs of approximately $4.0 million
associated with closing certain offices and branches ($1.8 million), severance
payments to employees ($0.9 million), relocation costs ($0.7 million) and other
costs primarily associated with the write-down of leasehold improvements
associated with the closed facilities ($0.6 million). Specifically, the company
is closing and/or reducing branches which are not operating at full capacity, or
whose operations can be consolidated with other branches. Any costs to be paid
in 1999 and 2000 are primarily associated with lease commitments on facilities
to be closed during 1998 and 1999.
Results of Operations
Nine Months ended September 30, 1998, compared to Nine Months ended September
30, 1997.
Revenue. Total revenue was $78.6 million for the nine months ended
September 30, 1998, as compared to $91.4 million for the nine months ended
September 30, 1997, a decrease of $12.8 million or 14.0%. The decline in revenue
was primarily the result of (i) a decrease in revenue earned of $10.6 million
from the cancellation of the old DOE contract and delayed placements under the
new GSA and DOE contracts, (ii) a decrease in revenue from banking and retail
businesses of $3.1 million primarily from lower placements on gas credit cards,
(iii) a decrease in revenue from healthcare account placements of approximately
$ 0.7 million primarily caused by a strategic shift away from less profitable
lines of business and (iv) a decrease in revenue from telecommunication account
placements of approximately $1.8 million.
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These decreases were partially offset by the impact of the February 28, 1997
acquisition of Consolidated, increased revenue of $ 0.8 million from American
Express and from on-site services of $1.7 million.
Expenses. Salaries and benefits expense was $ 47.6 million for the nine
months ended September 30, 1998, as compared to $50.9 million for the nine
months ended September 30, 1997, a decrease of $3.3 million or 6.5%. Salaries
and benefits did not decrease in proportion to revenue primarily due to the
delayed placements from the DOE and GSA. The Company maintained its trained
staff in anticipation of the receipt of these placements and believes it would
not have been prudent to eliminate trained personnel who would be required for
DOE contracts that were later received.
Telecommunications expense was $3.9 million for the nine months ended
September 30, 1998, as compared to $4.7 million for the nine months ended
September 30, 1997, a decrease of $0.8 million or 17.0%. The decrease is
primarily the result of lower rates as well as lower levels of activity.
Occupancy expense was $3.1 million for the nine months ended September
30, 1998, as compared to $ 3.7 million for the nine months ended September 30,
1997, a decrease of $ 0.6 million or 16.2%, primarily resulting from the closing
of one facility in the second quarter of 1998, and the reduction of space at a
second facility in the third quarter of 1998.
Other operating and administrative expense was $ 11.0 million for the
nine months ended September 30, 1998, as compared to $15.1 million for the nine
months ended September 30, 1997, a decrease of $4.1 million or 27.2%. The
decrease is primarily due to savings generated by general expense controls
offset by a one-time contract settlement expense of $1.6 million. In 1997, First
Data had charged the Company $0.9 million for services now being performed and
paid directly by the Company.
There were no provisions for severance or office closures in the nine
months ended September 30, 1998, nor were there any overhead charges from First
Data. These two items amounted to $1.6 million for the nine months ended
September 30, 1997.
Depreciation and amortization expense was $18.2 million for the nine
months ended September 30, 1998, as compared to $10.5 million for the nine
months ended September 30, 1997, an increase of $7.7 million or 73.3%. This
increase reflects the amortization of intangibles arising from the Transactions.
Operating Income (Loss). The company incurred an operating loss of $5.2
million for the nine months ended September 30, 1998, as compared to operating
income of $ 4.8 million for the nine months ended September 30, 1997, a decrease
of $10.0 million. This reduction is primarily due to the increase in
amortization expense of $7.7 million , a decrease in revenue of $ 12.8 million,
offset by the savings on operating expenses of $10.5 million.
Interest Expense. Interest expense relating to the Term Loan Facility
and Senior Notes was $10.3 million for the nine months ended September 30, 1998.
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Extraordinary Loss. The extraordinary loss on debt extinguishment of $
0.9 million represents the write off of deferred debt issuance costs related to
the interim financing of the Transactions.
Net Income (Loss). The Company incurred a net loss for the nine months
ended September 30, 1998, of $ 16.4 million, as compared to net income of $ 2.2
million in the same period of 1997.
Three Months ended September 30, 1998, compared to Three Months ended September
30, 1997.
Revenue. Total revenue was $ 24.1 million for the three months ended
September 30, 1998, as compared to $ 30.1 million for the three months ended
September 30, 1997, a decrease of $6.0 million or 19.9%. The decline in revenue
was primarily the result of (i) a decrease in revenue earned of $4.8 million
from the cancellation of the old DOE contract and delayed placements under the
new GSA and DOE contracts, (ii) a decrease in revenue from banking and retail
businesses of $ 1.0 million primarily from lower placements on gas credit cards,
and (iii) a decrease in revenue from telecommunication account placements of
approximately $ 2.1 million. These decreases were partially offset by improved
revenue of $ 1.2 million from onsite services.
Expenses. Salaries and benefits expense was $14.8 million for the three
months ended September 30, 1998, as compared to $16.4 million for the three
months ended September 30, 1997, a decrease of $1.6 million or 9.8%. Salaries
and benefits did not decrease in proportion to revenue primarily due to the
delayed placements from the DOE and GSA. The Company maintained its trained
staff in anticipation of the receipt of these placements and believes it would
not have been prudent to eliminate trained personnel who would be required for
DOE contracts that were later received
Telecommunications expense was $ 1.1 million for the three months ended
September 30, 1998, as compared to $ 1.4 million for the three months ended
September 30, 1997, a decrease of $ 0.3 million or 21.4%. The decrease was
primarily the result of lower rates as well as lower levels of activity.
Occupancy expense was $ 1.0 million for the three months ended September
30, 1998, as compared to $1.3 million for the three months ended September 30,
1997, a decrease of $0.3 million or 23.1%, primarily resulting from the
reduction of space at a second facility in the third quarter of 1998.
Other operating and administrative expense was $3.7 million for the
three months ended September 30, 1998, as compared to $4.7 million for the three
months ended September 30, 1997, a decrease of $1.0 million or 21.5% resulting
from savings generated by general expense controls.
There were no provisions for severance or office closures in the three
months ended September 30, 1998, nor were there any overhead charges from First
Data. These two items amounted to $0.3 million for the three months ended
September 30, 1997.
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Depreciation and amortization expense was $ 6.0 million for the three
months ended September 30, 1998, as compared to $3.7 million for the three
months ended September 30, 1997, an increase of $2.3 million or 62.2%. This
increase reflects the amortization of intangibles arising from the Transactions.
Operating Income (Loss). The Company incurred an operating loss of $ 2.5
million for the three months ended September 30, 1998, as compared to operating
income of $ 2.7 million for the three months ended September 30, 1997, a
decrease of $ 5.2 million. This reduction is primarily due to the increase in
amortization expense of $2.3 million, a decrease in revenue of $6.0 million,
offset by the savings on operating expenses of $3.1 million.
Interest Expense. Interest expense relating to the Term Loan Facility
and Senior was $3.2 million for the three months ended September 30, 1998.
Net Income (Loss). The Company incurred a net loss for the three months
ended September 30, 1998, of $ 5.7 million, as compared to net income of $ 1.4
million in the same period of 1997.
Liquidity and Capital Resources
Cash provided by operating activities was $ 10.6 million for the nine
months ended September 30, 1998 as compared to $11.1 million for the nine months
ended September 30, 1997. Net income before extraordinary items and after adding
back depreciation, amortization, taxes and interest (EBITDA) was $13.0 million
as compared to $ 15.4 million in the 1997 period. Net working capital items,
excluding accrued interest of $2.1 million, decreased by $ 4.4 million in the
nine months ended September 30, 1998 as compared to an increase of $ 2.4 million
in the nine months ended September 30, 1997.
Cash used in investing activities for the nine months ended September
30, 1998 was $3.4 million, consisting of purchases of equipment and software.
Cash used in investing activities for the nine months ended September 30, 1998
was $28.9 million, representing $4.8 million for equipment purchases and $24.1
million related to the February 1997 acquisition of Consolidated Collection
Company.
The Company received a settlement payment of $10.9 million from First
Data. Consequently, the Company has reduced its indebtedness under the Term Loan
Facility by $6.0 million. The Company had outstanding indebtedness under the
Term Loan facility of $18.8 million as of September 30, 1998.
In addition, the company used the settlement proceeds 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 $2.1 million.
Substantially all the agreements relating to the Company's outstanding
indebtedness contain covenants that impact the Company's liquidity and capital
resources, including financial
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covenants and restrictions on the incurrence of indebtedness and liens and asset
sales. The Company negotiated an amendment of the Senior Credit Facility to
revise the cumulative EBITDA and related ratio covenants to reflect the
Company's revised EBITDA expectations. There can be no assurance that the
Company will achieve such EBITDA expectations in the future. The Company was in
compliance with all such covenants as of September 30, 1998.
The Company has settled the matter with the Federal Trade Commission 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. First Data has reimbursed the Company for the penalty
and expenses incurred by the Company in connection with the FTC investigation.
The settlement was filed with the court on October 6, 1998 in the form
originally proposed, United States v. Nationwide Credit, Inc., Civ Act.
No. 1:98-CV-2929. The Company believes that compliance by the Company with the
provisions of the consent Decree, as well as with the additional provisions
related to the proposed settlement of the FTC investigation, will not materially
affect the company's financial condition or ongoing operations.
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.
Income Taxes
The Company has not recorded any tax benefit on it's loss before income
taxes for the nine months ended September 30, 1998 as it is not "more likely
than not" that the Company will be able to realize such benefits.
Year 2000
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 the Gartner Group, with a dedicated Year 2000
Project Office and Coordinator. The Company expects to complete the process of
defining, assessing and converting, or replacing, various programs and hardware
to make them Year 2000 compatible by the end of 1998. At that time, the Company
will conduct 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).
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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 $0.3 million, through
September 30, 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 interface 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. Every client
who shares electronic interfaces with the Company will be 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.
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.
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SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Nationwide Credit, Inc., has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NATIONWIDE CREDIT, INC.
/s/ Michael Lord
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Michael Lord
Chief Financial Officer
Dated: March 3, 1999
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