<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended MARCH 31, 1997 or
--------------
[ ] 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: 0-14315
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ATC COMMUNICATIONS GROUP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2050538
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(State of Incorporation) (I.R.S. Employer Identification No.)
5950 BERKSHIRE LANE, SUITE 1650 DALLAS, TEXAS 75225
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 361-9870
-----------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Title of Each Class Number of Shares Outstanding
------------------- ----------------------------
at May 12, 1997
---------------
COMMON STOCK $.01 PAR VALUE 21,378,426
<PAGE> 2
ATC COMMUNICATIONS GROUP, INC.
MARCH 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1997 and June 30, 1996............................................ 3
Consolidated Statements of Operations
Three Months Ended March 31, 1997
and March 31, 1996.......................................................... 4
Nine Months Ended March 31, 1997
and March 31, 1996.......................................................... 5
Consolidated Statements of Cash Flow
Nine Months Ended March 31, 1997
and March 31, 1996.......................................................... 6
Notes to Consolidated Financial Statements........................................ 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................... 9-11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................. 12
SIGNATURES................................................................................................ 13
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1997 June 30, 1996
ASSETS: (Unaudited) (Audited)
-------------- -------------
<S> <C> <C>
Current Assets:
Cash $ 552,475 $ 1,723,702
Notes receivable 2,320,934 825,428
Accounts receivable, less allowance for doubtful
accounts of $73,826 and $175,016 19,561,593 21,699,793
Prepaid expenses 903,522 292,632
Deferred tax asset 506,539 506,539
----------- -----------
Total Current Assets 23,845,063 25,048,094
Equipment and Other Assets:
Equipment net of accumulated depreciation of
$7,075,034 and $6,912,196 15,346,318 10,807,739
Cost in excess of net assets acquired, net of
accumulated amortization of $1,027,523 and $970,669 1,212,886 1,269,740
Other assets 579,809 654,609
----------- -----------
Total Equipment and Other Assets 17,139,013 12,732,088
----------- -----------
$40,984,076 $37,780,182
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Accounts payable $ 1,198,493 $ 2,576,068
Revolving line of credit 960,503 2,382,165
Unearned revenues and customer deposits 428,986 1,072,662
Accrued compensation 2,641,265 1,958,413
Accrued telephone expense 907,844 1,129,703
Other accrued liabilities 2,353,636 5,389,319
Current portion of long-term debt 1,380,294 1,156,547
----------- -----------
Total Current Liabilities 9,871,021 15,664,877
Long-term Debt 5,114,489 2,455,022
Deferred Tax Liability 218,507 218,507
Shareholders' Equity:
Preferred Stock, $.01 par value, 1,000,000 shares authorized; 29,778
convertible, $.36 cumulative Series B shares issued and outstanding and
840,000 convertible, $.11 cumulative Series C
shares issued and outstanding at June 30, 1996. 298 8,698
Common Stock, $.01 par value, 27,500,000 shares authorized;
21,267,090 and 15,032,161 issued and outstanding at March 31,
1997 and June 30, 1996, respectively 212,671 150,322
Additional paid-in capital 12,992,792 10,092,956
Retained earnings 12,574,298 9,189,800
----------- -----------
Total Shareholders' Equity 25,780,059 19,441,776
----------- -----------
$40,984,076 $37,780,182
=========== ===========
</TABLE>
See accompanying note.
<PAGE> 4
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenues $24,480,347 $23,102,455
Cost of services, excluding depreciation shown below 16,781,122 15,314,803
----------- -----------
Gross profit 7,699,225 7,787,652
Selling, general and administrative expense 6,048,327 4,791,111
Depreciation and amortization expense 920,451 756,620
----------- -----------
Income from operations 730,447 2,239,921
Interest expense 139,418 381,796
Interest income 25,020 20,724
----------- -----------
Income before provision for income taxes 616,049 1,878,849
Income tax expense 203,349 722,180
----------- -----------
Net income $ 412,700 $ 1,156,669
=========== ===========
Earnings per common share and common share
equivalents (Note 1): $ 0.02 $ 0.05
=========== ===========
Weighted average common and common
equivalent shares outstanding 21,871,609 21,488,717
=========== ===========
</TABLE>
See accompanying note.
<PAGE> 5
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenues $76,139,785 $64,101,461
Cost of services, excluding depreciation shown below 52,489,652 43,955,372
----------- -----------
Gross profit 23,650,133 20,146,089
Selling, general and administrative expense 15,601,656 12,350,129
Depreciation and amortization expense 2,593,501 2,190,298
----------- -----------
Income from operations 5,454,976 5,605,662
Interest expense 395,576 759,425
Interest income 73,802 64,920
----------- -----------
Income before provision for income taxes 5,133,202 4,911,157
Income tax expense 1,748,711 1,865,517
----------- -----------
Net income $ 3,384,491 $ 3,045,640
=========== ===========
Earnings per common share and common share
equivalents (Note 1): $ 0.14 $ 0.13
========== ===========
Weighted average common and common
equivalent shares
outstanding 22,273,271 21,494,541
========== ===========
</TABLE>
See accompanying note.
<PAGE> 6
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 3,384,491 $ 3,045,640
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 2,593,501 2,190,298
Other -- 1,243
Changes in certain other assets and liabilities:
Accounts receivable 2,138,200 (14,313,364)
Notes receivable (1,495,506) 293,957
Prepaid expenses (610,890) 31,015
Other assets (39,287) 72,408
Accounts payable (1,377,575) (149,307)
Unearned revenue and customer deposits (643,676) (8,491)
Accrued liabilities (1,811,655) 2,809,377
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Net cash provided by (used in) operating activities 2,137,603 (6,027,224)
Cash Flow From Investing Activities:
Capital expenditures (3,155,304) (1,811,070)
Proceeds from sale of equipment -- 175,000
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Net cash used in investing activities (3,155,304) (1,636,070)
Cash Flow From Financing Activities:
Net proceeds from (payments on) line of credit (1,421,662) 7,573,483
Payments on capital leases (672,612) (494,386)
Payments on long-term debt (250,002) (808,388)
Proceeds from exercise of stock options 2,190,750 169,043
----------- ------------
Net cash provided by (used in) financing activities (153,526) 6,439,752
Net change in cash (1,171,227) (1,223,542)
Cash at beginning of the period 1,723,702 2,481,170
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Cash at end of the period $ 552,475 $ 1,257,628
=========== ============
Supplemental information on non-cash transactions is as follows:
Tax benefit of stock options exercised $ 763,035 $ --
Capital lease obligations entered into 3,805,828 101,507
</TABLE>
See accompanying note.
<PAGE> 7
ATC COMMUNICATIONS GROUP, INC.
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996
Earnings per share:
Primary and fully diluted earnings per common share are computed by dividing
net income applicable to common stock by the weighted average number of shares
of common stock and dilutive common stock equivalents outstanding during the
period. Common stock equivalents consist of common stock issuable under the
assumed exercise of stock options and warrants, computed based on the treasury
stock method, and the assumed conversion of the Company's issued and
outstanding preferred stock. Net income applicable to common stock for the
three and nine month periods ended March 31, 1997 and 1996 were adjusted to
reflect the income attributable to the minority ownership interest, including
stock options issued to certain key employees and officers, in ATC
Communications Inc. ("ATC"), the operating subsidiary of the Company.
Primary and fully diluted weighted average shares outstanding for the three
month period ending March 31, 1997 and 1996 was computed as follows:
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
PRIMARY
Weighted average shares outstanding 19,225,323 13,736,504
Common stock equivalents:
Net effect of dilutive stock options and warrants 588,952 3,417,648
Net effect of assumed conversion of dilutive preferred stock 2,057,334 4,259,556
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Primary shares outstanding 21,871,609 21,413,708
========== ==========
FULLY DILUTED
Weighted average shares outstanding 19,225,323 13,736,504
Common stock equivalents:
Net effect of dilutive stock options and warrants 588,952 3,492,657
Net effect of assumed conversion of dilutive preferred stock 2,057,334 4,259,556
---------- ----------
Fully diluted shares outstanding 21,871,609 21,488,717
========== ==========
</TABLE>
<PAGE> 8
Primary and fully diluted weighted average shares outstanding for the nine
month period ending March 31, 1997 and 1996 was computed as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
PRIMARY
Weighted average shares outstanding 16,964,022 13,620,657
Common stock equivalents:
Net effect of dilutive stock options and warrants 1,740,915 3,262,263
Net effect of assumed conversion of dilutive preferred
stock 3,525,482 4,259,556
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Primary shares outstanding 22,230,419 21,142,476
========== ==========
FULLY DILUTED
Weighted average shares outstanding 16,964,022 13,620,657
Common stock equivalents:
Net effect of dilutive stock options and warrants 1,783,767 3,614,328
Net effect of assumed conversion of dilutive preferred
stock 3,525,482 4,259,556
---------- ----------
Fully diluted shares outstanding 22,273,271 21,494,541
========== ==========
</TABLE>
Net income applicable to common stock for the three and nine month periods
ended March 31, 1997 and 1996 was computed as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31 March 31
--------------------- -----------------------
1997 1996 1997 1996
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $412,700 $1,156,669 $3,384,491 $3,045,640
Less: income applicable to
ATC minority ownership 61,350 154,367 325,684 353,845
-------- ---------- ---------- ----------
Net Income applicable to common stock $351,350 $1,002,302 $3,058,807 $2,691,795
======== ========== ========== ==========
</TABLE>
Net income applicable to ATC minority ownership for the three and nine month
periods ended March 31, 1997, and 1996 was computed as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31 March 31
---------------------- ------------------------
1997 1996 1997 1996
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ATC net income after income tax allocation $702,749 $1,715,189 $3,730,630 $3,931,611
Minority Interest 8.73% 9.00% 8.73% 9.00%
-------- ---------- ---------- ----------
Net income applicable to ATC minority
interest $ 61,350 $ 154,367 $ 325,684 $ 353,845
======== ========== ========== ==========
</TABLE>
<PAGE> 9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The accompanying consolidated financial statements, in the opinion of
the Company's management, contain all material, normal and recurring
adjustments necessary to present accurately the consolidated financial
condition of the Company and the consolidated results of its operations for the
quarter and nine months ended March 31, 1997. The consolidated results of
operations for the period reported are not necessarily indicative of the
results to be experienced for the entire current fiscal year.
Results of Operations
The Company earned income from operations of $730,447 on revenues of
$24,480,347 for the quarter ended March 31, 1997, and for the nine months ended
March 31, 1997 earned income from operations of $5,454,976 on revenues of
$76,139,785. In the previous fiscal year the Company earned income from
operations of $2,239,921 and $5,605,662 in the comparable three and nine month
periods, respectively. The quarter ended March 31, 1997, continued to be a
period of transition and investment in the future as the Company completed its
additions to new senior management and its investments in new proprietary,
internal reporting systems. While these investments reduced the Company's
operating margins in the quarter and the nine months ended March 31, 1997 and
are expected to continue to do so in the near term, management believes they
were necessary to enhance the level of service provided to the Company's
customers and to position the Company for continued and increasing growth in
the future.
For the quarter ended March 31, 1997 revenues increased $1,377,892
(6.0%) over revenues generated in the corresponding quarter of the previous
fiscal year and increased $12,038,324 (18.8%) for the nine months ended March
31, 1997 versus the comparable prior year nine month period. The increases in
revenues in both the three and nine month periods ended March 31, 1997 was due
primarily to increased business volumes generated by the Company's existing
customers. The Company's revenue growth rate for the current year quarter was
impacted by lower than expected growth in business volumes with some of the
Company's larger customers and by other factors including a lack of new
business contracts and the loss of one of the Company's smaller customers.
Approximately 47% of the Company's revenues during the nine months ended March
31, 1997 were generated by one customer. The Company is continuing efforts to
increase revenues and reduce the concentration of business with this customer
by pursuing a strategy to secure recurring revenues through long-term
relationships with targeted, large corporate customers that use
telecommunications as an integral part of their customer service and marketing
programs. The Company also continues to meet its customers' demands by
performing project-based services; however, there can be no assurance that
these customers will continue existing projects or provide new ones.
Gross profit earned on revenues decreased for the three months ended
March 31, 1997 $88,427 (1.1%) from the prior year's quarter while for the nine
month period ended March 31, 1997 gross profits increased $3,504,044 (17.4%).
The increase for the nine months ended March 31, 1997 was due primarily to the
increase in revenue for the period as compared to the comparable prior year
period. As a percentage of revenues, gross margins for the three and nine month
periods ended March 31, 1997 were 31.5% and 31.1%, respectively, versus 33.7%
and 31.4% in the comparable three and nine month periods of the prior year,
respectively. Both the
<PAGE> 10
decreases in gross profit and in gross margin as a percentage of revenue for
the three months ended March 31, 1997 as compared with the comparable prior
year period were due to lower capacity utilization resulting from a change in
business mix. Compared to the three month period ended December 31, 1996, gross
margin increased 15.0% for the quarter ended March 31, 1997 because the Company
incurred no additional investment in its new internal reporting systems and due
to increased efficiency in utilizing such systems.
Selling, general and administrative expenses ("SG&A") increased
$1,257,216 (26.2%) in the quarter ended March 31, 1997 and increased $3,251,527
(26.3%) in the current year's nine month period then ended versus comparable
prior year periods. The increase in SG&A was primarily the result of the
addition of personnel and infrastructure in anticipation of expected revenue
growth in the current year. In response to the slower growth in revenue, the
Company has implemented an aggressive expense reduction program to match
expenses with expected revenue levels.
The increase in depreciation and amortization expense of $403,203
(18.4%) in the nine months ended March 31, 1997 versus the comparable prior
year period is primarily the result of the expansion of operating capacity
during the fiscal year ended June 30, 1996 and which is continuing in the
current fiscal year. The increase in revenues generated in the current year
necessitating such expansion mitigated the impact of the increase in
depreciation expense on the Company's operating margin. As a percentage of
revenues, the depreciation expense for the nine months ended March 31, 1997
remained consistent with the comparable prior year period at 3.4%.
Net interest expense decreased for the three and nine month periods
ended March 31, 1996 $246,674 (68.3%) and $372,731 (53.7%), respectively versus
the same periods in the previous fiscal year due to a reduction in average
long-term debt during the periods, decreased utilization of the Company's
working capital line of credit, and due to a write-off of approximately
$170,000 in unamortized fees associated with a prior banking relationship
recorded during the quarter ended March 31, 1996.
The Company's effective state and federal income tax rate was
approximately 34.1% for the nine months ended March 31, 1997 versus 37.9% for
the comparable prior year nine month period. The decrease in the tax rate
emanates from federal tax credits generated by a federal program, effective
October, 1 1996, which encourages the hiring of certain qualifying individuals.
This federal program should have the effect of lowering the Company's effective
tax rate during the remainder of the 1997 fiscal year from the prior year
levels.
Management knows of no trends or uncertainties other than those
mentioned above that are expected to have a material favorable or unfavorable
impact on operating results.
Liquidity and Capital Resources
Currently, the Company has the liquidity and access to working capital
to meet its near-term cash flow demands as a result of its profitability over
the past two years and its $15 million working capital line of credit.
Recently, the Company completed the reconfiguration of certain production and
administrative areas in its existing facilities which added approximately 300
workstations. This reconfiguration was funded by existing cash flow. In
addition, the Company recently upgraded its computer hardware and software
configurations through a $5.9 million
<PAGE> 11
capital lease financing arrangement with the supplying vendor which replaced
its previous capital lease obligations with this vendor.
The Company operates in a dynamic, fast-growing industry. As the
Company grows additional call center facilities will be needed and such
facilities will have furniture, equipment and technological requirements
consistent with its existing facilities. Currently, the Company is pursuing a
new site strategy focused on smaller call centers outside of the Dallas labor
market which management believes should result in lower operating expenses.
In addition to traditional growth strategies, management is currently
pursuing opportunities for growth through the acquisition of other call center
companies. The Company is currently engaged in discussions with several
acquisition targets. Although there can be no assurances that any proposed
acquisition will be successfully completed, management believes that the
acquisition candidate would fit with the Company's corporate and operating
strategies.
In light of the recent decline in its stock price, the Company
believes its shares of common stock are undervalued. The Company's Board of
Directors has authorized management to pursue the implementation of a stock
repurchase program for the repurchase of up to five million shares of the
Company's common stock on the open market and through privately negotiated
transactions. The Company anticipates that the initial portion of this
repurchase program will be funded by available cash flow and borrowings under
its working capital credit facility. The Company may also secure additional
debt financing in order to fund such purchases.
Although no assurances can be made in this regard, management
anticipates that, based on the Company's recent profitability and its ability
to secure such financing to date, the Company should be able to secure debt or
equity funding for the capital equipment requirements of future call center
facilities, for acquisition opportunities, or for the repurchase of its common
shares.
The $15 million accounts receivable credit facility and a $1.5 million
equipment term loan with the same major bank contain various covenants which
limit, among other things, the operating subsidiary's indebtedness, capital
expenditures, investments, payments and dividends to the Company and requires
the operating subsidiary to meet certain financial covenants. Similarly, under
the terms of the guaranty arrangement, the Company is subject to certain
covenants limiting, among other things, its ability to incur indebtedness,
enter into guaranties, and acquire other companies. These credit facilities are
secured by liens on the operating subsidiary's accounts receivables, furniture
and equipment, and are guaranteed by the Company.
The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995: Statements contained in this Form 10-Q that are
not based on historical facts are forward-looking statements subject to
uncertainties and risks, including but not limited to, the Company's reliance
on certain major customers; the implementation of a stock repurchase program as
outlined; results of financing and acquisition efforts; government regulation
and tax policy; economic conditions; competition and pricing; dependence on the
Company's labor force; the assumption that operating expenses in smaller call
centers outside the Dallas area will result in lower operating expenses;
reliance on technology; telephone service dependence; and other operational,
financial or legal risks or uncertainties detailed in the Company's SEC
filings.
<PAGE> 12
PART II OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBIT
EXHIBIT 27.1 FINANCIAL DATA SCHEDULE (FILED HEREWITH).
(B) Reports of Form 8-K
None.
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
ATC COMMUNICATIONS GROUP, INC.
By: /s/ MATTHEW S. WALLER
---------------------------------
Dated: Matthew S. Waller
May 13, 1997 Chief Financial Officer
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
<S> <C>
Exhibit 27.1 Financial Data Schedule, filed herewith
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 555,475
<SECURITIES> 0
<RECEIVABLES> 21,882,527
<ALLOWANCES> 73,826
<INVENTORY> 0
<CURRENT-ASSETS> 23,845,063
<PP&E> 22,421,352
<DEPRECIATION> 7,075,034
<TOTAL-ASSETS> 40,984,076
<CURRENT-LIABILITIES> 9,871,021
<BONDS> 0
298
0
<COMMON> 212,671
<OTHER-SE> 25,567,090
<TOTAL-LIABILITY-AND-EQUITY> 40,984,076
<SALES> 76,139,785
<TOTAL-REVENUES> 76,139,785
<CGS> 52,489,652
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 18,195,157
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 321,774
<INCOME-PRETAX> 5,133,202
<INCOME-TAX> 1,748,711
<INCOME-CONTINUING> 3,384,491
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,384,491
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
