UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001 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 ____________
Commission file number 333-57249
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NATIONWIDE CREDIT, INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-1900192
- --------------------------------- -------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
2015 Vaughn Road, Building 300, Kennesaw, GA 30144
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 933-6659
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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
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
as of March 31, 2001 and December 31, 2000......................................... 2
Consolidated Statements of Operations
for the Three Months Ended March 31, 2001 and March 31, 2000....................... 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2001 and March 31, 2000....................... 5
Notes to Consolidated Financial Statements as of March 31, 2001..................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................. 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............... 12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................... 12
SIGNATURE..................................................................................... 13
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONWIDE CREDIT, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
March 31, December 31,
2001 2000
Unaudited Audited
------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,401 $ 2,426
Cash held for clients 2,601 1,604
Accounts receivable, net of allowance of
$782 and $699, respectively 19,001 16,945
Prepaid expenses and other current assets 4,156 3,678
------------------------------------
Total current assets 27,159 24,653
Property and equipment, less accumulated
depreciation and amortization of $16,601
and $14,845, respectively 18,044 17,934
Goodwill, less accumulated amortization of $11,469
and $10,587, respectively 94,401 95,283
Other intangible assets, less accumulated amortization
of $19,203 and $18,845, respectively 1,075 1,434
Deferred financing costs, less accumulated amortization
of $3,576 and $3,399, respectively 3,526 3,567
Other assets 1,079 1,184
------------------------------------
Total assets $145,284 $144,055
====================================
The accompanying notes are an integral part of these consolidated balance
sheets.
2
NATIONWIDE CREDIT, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
March 31, December 31,
2001 2000
Unaudited Audited
------------------------------------
Liabilities and stockholder's deficit
Liabilities:
Collections due to clients $ 2,601 $ 1,604
Accrued compensation 3,139 3,997
Accounts payable 2,077 3,446
Accrued severance and office closure costs, current 1,091 1,771
Other accrued liabilities 6,291 7,814
Short-term debt 370 185
Current portion of capital leases 538 636
Current maturities of long-term debt 1,308 1,625
------------------------------------
Total current liabilities 17,415 21,078
Accrued severance and office closure costs, long-term 541 576
Capital lease obligations, less current portion 1,310 1,451
Long-term debt, less current maturities 132,385 130,959
------------------------------------
Total liabilities 151,651 154,064
Stockholder's deficit:
Common stock - $.01 par value
Authorized: 10,000 shares;
Issued and outstanding - 1,000 shares -- --
Additional paid-in capital 54,465 49,465
Accumulated deficit (60,692) (59,334)
Notes receivable - officers (140) (140)
------------------------------------
Total stockholder's deficit (6,367) (10,009)
------------------------------------
Total liabilities and stockholder's deficit $145,284 $ 144,055
====================================
The accompanying notes are an integral part of these consolidated balance
sheets.
3
NATIONWIDE CREDIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands)
For the Three Months
Ended March 31,
-----------------------------------
2001 2000
Unaudited Unaudited
-----------------------------------
Revenue $ 34,566 $ 33,493
Expenses:
Salaries and benefits 20,747 21,688
Telecommunication 1,409 1,319
Occupancy 1,737 1,517
Other operating and administrative 5,410 4,795
Depreciation and amortization 3,020 2,804
Provision for employee severance, office closure and
other unusual charges -- 334
-----------------------------------
Total expenses 32,323 32,457
Operating income 2,243 1,036
Interest expense 3,601 3,487
-----------------------------------
Loss before income taxes (1,358) (2,451)
Provision for income taxes -- --
-----------------------------------
Net loss $ (1,358) $ (2,451)
===================================
The accompanying notes are an integral part of these consolidated statements.
4
NATIONWIDE CREDIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
For the Three Months
Ended March 31,
-----------------------------------------
2001 2000
Unaudited Unaudited
-----------------------------------------
Operating activities
Net loss $ (1,358) $ (2,451)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,567 3,111
Other non-cash charges 191 69
Changes in operating assets and liabilities:
Accounts receivable (2,139) 2,223
Prepaid expenses and other assets (743) (1,528)
Accrued compensation (858) 417
Accounts payable and other accrued liabilities (3,642) (3,192)
-----------------------------------------
Net cash used in operating activities (4,982) (1,351)
Investing activities
Purchases of property and equipment (1,962) (3,321)
Financing activities
Capital contribution 5,000 6,000
Repayment of long-term debt (327) (82)
Payments on capital lease obligations (239) (74)
Net proceeds from revolving credit facility 1,436 5,900
Proceeds from short-term debt 491 --
Repayment of short-term debt (306) --
Debt issuance costs (136) --
-----------------------------------------
Net cash provided by financing activities 5,919 11,744
(Decrease) increase in cash and cash equivalents (1,025) 7,072
Cash and cash equivalents at beginning of period 2,426 --
-----------------------------------------
Cash and cash equivalents at end of period $ 1,401 $ 7,072
=========================================
Supplemental cash flow information
Cash paid for interest $ 6,275 $ 5,729
The accompanying notes are an integral part of these consolidated statements.
5
NATIONWIDE CREDIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, certain information and footnote
disclosures required by accounting principles generally accepted in the
United States for complete financial statements have been excluded. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
All significant intercompany accounts and transactions have been eliminated
in consolidation. The accompanying unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements of the Company for the year ended December 31, 2000
included in Form 10-K.
Certain reclassifications have been made to prior year amounts to conform
with the current year presentation.
Operating results for the three month period ended March 31, 2001 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2001.
2. Nature of Operations
The Company is among the largest independent providers of accounts receivable
management services in the United States. The Company's client base is
comprised of financial institutions, government agencies, retail and consumer
businesses, telecommunications companies and healthcare providers located
throughout the United States.
3. Long-Term Debt and Stockholder's Deficit
The following table summarizes the Company's long-term debt (in thousands):
March 31, 2001 December 31, 2000
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10.25% Senior Notes, due 2008 $ 100,000 $ 100,000
Term loan facility 21,200 21,512
Revolving credit facility 12,400 10,963
Security agreement 93 109
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133,693 132,584
Less current maturities (1,308) (1,625)
---------------------------------------------------
$ 132,385 $ 130,959
===================================================
On January 16, 2001, the Company amended its revolving credit facility to
obtain a new overadvance commitment (the "Overadvance Facility") and a new
customer commitment (the "Customer Facility"). Under the Overadvance
Facility, the Company can borrow $2.0 million at an interest rate equal to
the Base Rate plus 3.75%. The facility expires on December 31, 2001 but can
be extended to January 28, 2004 if the eligible accounts receivable balance
is greater than $14.7 million. Under the Customer Facility, the Company can
borrow $2.0 million at an interest rate
6
equal to the Base Rate plus 3.75%. Borrowings under the Customer Facility
must be used to make payments to customers of the Company to cover the float
in respect of checks deposited into one or more trust funds by debtors of
such customers and can be outstanding for a maximum of 5 days. The Company is
limited to two borrowings per calendar month under the Customer Facility. The
Customer Facility expires on December 31, 2001. In addition, the Company is
required to pay a commitment fee of .625% on the unused portion of the
Overadvance Facilty and Customer Facility. Among other restrictions, the
credit agreement, as amended, requires the Company to maintain certain
financial ratios and limits the Company's ability to incur additional debt,
pay dividends, and to make acquisitions and capital expenditures. At March
31, 2001, the Company was in compliance with all covenants, as amended on
January 16, 2001.
In order to fund the working capital requirements associated with expanding
the business, the Company received additional equity investment of $5.0
million from its stockholder in January 2001.
4. 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.
5. Provision for Employee Severance, Office Closure and Other Unusual Charges
In the last quarter of 1999 and the first six months of 2000, the Company
expanded its pre-chargeoff services to provide more comprehensive collection
solutions for its clients. This expansion required the addition of two new
facilities. Accordingly, in the first quarter of 2000 the Company incurred
$0.3 million for the costs of such expansion activities.
Changes in the accrual associated with office closures are as follows (in
thousands):
Write-off
Employee Relo- Office hardware
Severance cation Closure /software Total
-----------------------------------------------------------------------
Accrued costs as of December 31, 2000 $ 505 $ 386 $ 1,190 $ 266 $ 2,347
Re-estimation of the accrued costs 116 --- 150 (266) --
Amounts charged against the provision (366) (46) (303) -- (715)
-----------------------------------------------------------------------
Accrued costs as of March 31, 2001 $ 255 $ 340 $ 1,037 $ -- $ 1,632
=======================================================================
6. Recent Accounting Developments
The Financial Accounting Standards Board ("FASB") is in the process of
completing a proposal to change merger accounting rules. The proposal, 2001
FASB Exposure Draft "Business Combinations and Intangible Assets Accounting
for Goodwill", would eliminate the pooling-of-interests method of accounting
for mergers and acquisitions, mandating purchase accounting for such
transactions. Under the current business combination accounting rules, the
unallocated difference between the fair market value of the assets and
liabilities purchased for an acquisition accounted for under the purchase
method of accounting and the purchase price (goodwill) is amortized over the
estimated useful life of this asset.
7
The new proposal takes a nonamortization approach to goodwill. Under the new
proposal, goodwill would be tested periodically for impairment. The final
rule has not been issued yet, nor is there any certainty as to the effective
date of this rule. The Company is actively monitoring the status of this
pronouncement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
(Three months ended March 31, 2001 compared to three months ended March 31,
2000)
Revenue. Total revenue increased $1.1 million or 3% from $33.5 million for the
three months ended March 31, 2000 to $34.6 million for the three months ended
March 31, 2001. Excluding $1.5 million of 2000 revenue from a directory
assistance program to a major telecommunications company, which the Company
discontinued in July 2000, revenue grew 8% from $32.0 million for the first
quarter of 2000 to $34.6 million for the first quarter of 2001. The increase
was primarily due to a $4.2 million increase in pre-chargeoff revenues from
clients in the telecommunications and financial services industries, partially
offset by a $1.6 million decrease in contingent fee revenues. The decrease in
contingent fee revenue was primarily due to a rate reduction by one of the
Company's largest financial services clients and, to a lesser extent, a decrease
in healthcare revenues.
Expenses. Salaries and benefits expense decreased $1.0 million or 4% to $20.7
million for the three months ended March 31, 2001 from $21.7 million for the
three months ended March 31, 2000. This decrease was primarily the result of
reorganizing the Company's operations and closing small unprofitable collection
centers in 2000.
Telecommunications expense increased $0.1 million or 7% to $1.4 million for the
three months ended March 31, 2001 from $1.3 million for the same period in 2000.
The increase was primarily the result of the continued growth of the business.
Occupancy expense increased $0.2 million or 15% to $1.7 million for the three
months ended March 31, 2001 from $1.5 million for the same period in 2000. The
increase was the result of annual rent escalations in 2001 and the Company
leasing additional facilities in 2000 to accommodate the Company's growth.
Although the Company eliminated small unprofitable call centers in 2000, the
majority of the cost savings associated with the reorganization of the Company's
operations were in salaries and benefits and other operating and administrative
expense.
Other operating and administrative expense increased $0.6 million or 13% to $5.4
million for the three months ended March 31, 2001 from $4.8 million for the same
period in 2000. The increase was primarily the result of additional professional
services fees due to growth in the Company's business.
Depreciation and amortization expense increased $0.2 million or 8% to $3.0
million for the three months ended March 31, 2001 from $2.8 million for the
period ended March 31, 2000. The increase was primarily the result of
depreciation on capital assets acquired in 2000 to support the Company's revenue
growth.
Provision for employee severance, office closure and other unusual charges. In
the last quarter of 1999 and the first six months of 2000, the Company expanded
its pre-chargeoff services to provide more
8
comprehensive collection solutions for its clients. This expansion required the
addition of two new facilities. Accordingly, in the first quarter of 2000 the
Company incurred $0.3 million for the costs of such expansion activities.
Operating Income. Operating income was $2.2 million for the three months ended
March 31, 2001, an increase of $1.2 million from operating income of $1.0
million for the same period in 2000. This increase was primarily the result of
increased revenues, elimination of small unprofitable collection centers in 2000
and the restructuring of certain operations in 2000. The Company will continue
to look for ways to streamline the business and become more efficient. As an
example, the Company closed another small collection center in Woburn,
Massachusetts on April 30, 2001.
Interest Expense. Interest expense was $3.6 million for the three months ended
March 31, 2001 compared to $3.5 million for the same period in 2000, an increase
of $0.1 million. This increase was primarily the result of additional borrowings
against the revolving credit facility and interest paid on capital lease
obligations, partially offset by lower interest on the term loans due to
scheduled payments made over the past year that reduced the principal balance.
Net Loss. The Company incurred a net loss for the three months ended March 31,
2001 of $1.4 million compared to a net loss of $2.5 million in the same period
of 2000.
Liquidity and Capital Resources
Cash Flows. Cash used in operating activities was $5.0 million for the three
months ended March 31, 2001 compared to $1.4 million for the three months ended
March 31, 2000, resulting in an increase in cash used of $3.6 million. The
increase in cash used compared to the same period in 2000 was primarily a result
of an increase in accounts receivable of $2.1 million in 2001 compared to a
decrease in accounts receivable of $2.2 million during the first three months of
2000. The accounts receivable increase was primarily the result of a change in
the revenue mix and, to a lesser extent, the timing of payments by the Company's
clients. Accounts payable and other accrued liabilities decreased by $3.6
million during the first quarter of 2001 primarily due to a $5.1 million semi-
annual interest payment on January 15, 2001 for the Company's outstanding notes
and $0.7 million of payments related to the provision for accrued severance and
office closure costs. Cash used in investing activities for the first three
months of 2001 and 2000 was $2.0 million and $3.3 million, respectively,
consisting of capital expenditures. Cash provided by financing activities was
$5.9 million and $11.7 million for the three months ended March 31, 2001 and
2000, respectively. The decrease in cash provided by financing activities in
2001 compared to 2000 was primarily due to lower additional borrowings on the
revolving credit facility. In the first quarter of 2001 the Company borrowed an
additional $1.4 million on the Company's revolving credit facility compared to
borrowings of $5.9 million during the first quarter of 2000.
Working Capital. Working capital increased to $9.7 million at March 31, 2001
from $3.6 million at December 31, 2000, primarily as a result of the $2.1
million increase in accounts receivable and $3.6 million decrease in accounts
payable and other accrued liabilities discussed above.
Capital Expenditures. Capital expenditures for the three months ended March 31,
2001 were $2.0 million, principally for equipment to support the expansion of
pre-chargeoff services to a major telecommunications company as well as
investment in telecommunications and information systems technology. The Company
expects to limit capital spending to approximately $5.5 million for the year.
9
Liquidity. The principal sources of liquidity for the Company's business and
operating needs in the first quarter of 2001 were internally generated funds
from its operations, borrowings of $1.4 million against the revolving credit
facility ("Revolving Credit Facility") and a $5.0 million capital infusion from
the Company's shareholder. On January 16, 2001, the Company amended its
Revolving Credit Facility to obtain a new overadvance commitment (the
"Overadvance Facility") and a new customer commitment (the "Customer Facility").
Under the Overadvance Facility, the Company can borrow $2.0 million at an
interest rate equal to the Base Rate plus 3.75%. The facility expires on
December 31, 2001 but can be extended to January 28, 2004 if the eligible
accounts receivable balance is greater than $14.7 million. Under the Customer
Facility, the Company can borrow $2.0 million at an interest rate equal to the
Base Rate plus 3.75%. Borrowings under the Customer Facility must be used to
make payments to customers of the Company to cover the float in respect of
checks deposited into one or more trust funds by debtors of such customers and
can be outstanding for a maximum of 5 days. The Company is limited to two
borrowings per calendar month under the Customer Facility. The Customer Facility
expires on December 31, 2001. In addition, the Company is required to pay a
commitment fee of .625% on the unused portion of the Overadvance Facilty and
Customer Facility. At March 31, 2001, the Company had $12.4 million of
borrowings outstanding under the Revolving Credit Facility. Among other
restrictions, the Credit Agreement, as amended, requires the Company to maintain
certain financial ratios and limits the Company's ability to incur additional
debt, pay dividends, and to make acquisitions and capital expenditures. At March
31, 2001, the Company was in compliance with all covenants, as amended on
January 16, 2001.
The ability of the Company to meet its debt service obligations and to comply
with the restrictive and financial covenants contained in the Company's senior
credit facility, the Revolving Credit Facility and the Company's outstanding
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.
Management believes that, based on current levels of operations and anticipated
improvements in operating results, cash flows from operations and borrowings
available under the credit facilities will be adequate to allow for anticipated
capital expenditures, to fund working capital requirements and to make required
payments of principal and interest on its debt. 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, obtain
additional financing or obtain additional equity contribution from existing
investors, 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 its loss before income taxes for
the three months ended March 31, 2001 due to the uncertainty regarding the
realization of such benefits.
Recent Accounting Developments
The Financial Accounting Standards Board ("FASB") is in the process of
completing a proposal to change merger accounting rules. The proposal, 2001
FASB Exposure Draft "Business Combinations and Intangible Assets Accounting for
Goodwill", would eliminate the pooling-of-interests method of accounting for
mergers and acquisitions, mandating purchase accounting for such transactions.
Under the current business combination accounting rules, the unallocated
difference between the fair market value of
10
the assets and liabilities purchased for an acquisition accounted for under the
purchase method of accounting and the purchase price (goodwill) is amortized
over the estimated useful life of this asset.
The new proposal takes a nonamortization approach to goodwill. Under the new
proposal, goodwill would be tested periodically for impairment. The final rule
has not been issued yet, nor is there any certainty as to the effective date of
this rule. The Company is actively monitoring the status of this pronouncement.
Forward-Looking Statements
This Form 10-Q and other communications, as well as oral statements made by
representatives of the Company, may contain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements relate to, among other things, the Company's outlook for future
periods, market forces within the industry, cost reduction strategies and their
results, planned capital expenditures, long-term objectives of management and
other statements of expectations concerning matters that are not historical
facts.
Predictions of future results contain a measure of uncertainty and, accordingly,
actual results could differ materially due to various factors. Factors that
could change forward-looking statements are, among others, changes in the
general economy, changes in demand for the Company's services and/or cyclicality
in the industries to which the Company's services are rendered, governmental
regulations and other unforeseen circumstances. A number of these factors are
discussed in this Form 10-Q and in the Company's annual report on Form 10-K for
the year ended December 31, 2000.
11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Long Term Debt
Non-Traded Instruments
As of March 31, 2001
(In $000's)
Fair
2001 2002 2003 2004 2005 Thereafter Total Value
- --------------------------------------------------------------------------------------------------------------------------
Variable Rate:
Term Loan Facility: $ 1,250 $1,250 $1,200 $17,500 $ -- $ -- $ 21,200 $21,200
$ 18.000 million 8.86% 8.86% 8.86% 8.86% 8.86% 8.86%
$ 0.250 million 11.00% 11.00% 11.00% 11.00% 11.00% 11.00%
$ 0.950 million 11.25% 11.25% 11.25% 11.25% 11.25% 11.25%
$ 2.000 million 9.11% 9.11% 9.11% 9.11% 9.11% 9.11%
Revolving Credit Facility: $ -- $ -- $ -- $12,400 $ -- $ -- $ 12,400 $12,400
$ 0.375 million 11.75% 11.75% 11.75% 11.75% 11.75% 11.75%
$ 9.000 million 8.81% 8.81% 8.81% 8.81% 8.81% 8.81%
$ 3.025 million 10.75% 10.75% 10.75% 10.75% 10.75% 10.75%
Fixed Rate:
Senior Notes due 2008: $ -- $ -- $ -- $ -- $ -- $100,000 $100,000 $35,000
$100 million @ 10.25% 10.25%
Security Agreements $ 47 $ 46 $ -- $ -- $ -- $ -- $ 93 $ 93
22.50% 22.50%
The Company's primary risk exposure in the normal course of business is that of
interest rate risk. There have been no material changes in this type of
exposure since December 31, 2000.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
99 Reconciliation of Net Loss to Adjusted EBITDA
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated
January 18, 2001, in which it amended and restated the
Credit Agreement as of April 18, 2000.
12
SIGNATURE
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/ Eric R. Dey
- ------------------------
Eric R. Dey
Chief Financial Officer
Dated: May 14, 2001
13