<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 SEPTEMBER 30, 1997.
[ ] 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
ATC COMMUNICATIONS GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2050538
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
5950 BERKSHIRE LANE, SUITE 1650, DALLAS, TEXAS 75225
----------------------------------------------------
(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.
<TABLE>
<CAPTION>
Number of Shares Outstanding
Title of Each Class at November 7, 1997
------------------- ----------------------------
<S> <C>
COMMON STOCK $.01 PAR VALUE 21,829,334
</TABLE>
<PAGE> 2
ATC COMMUNICATIONS GROUP, INC.
SEPTEMBER 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1997 and June 30, 1997..................... 3-4
Consolidated Statements of Operations
Three Months Ended September 30, 1997
and September 30, 1996................................... 5
Consolidated Statements of Cash Flows
Three Months Ended September 30, 1997
and September 30, 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>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND JUNE 30, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1997
(UNAUDITED) (AUDITED)
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 718,194 $ 632,826
Accounts receivable - trade, less allowance for
doubtful accounts of $73,826 16,412,708 14,527,440
Notes receivable -- related parties 4,003,328 3,809,658
Notes receivable -- other 158,323 157,693
Current deferred tax asset 3,037,066 3,037,066
Other current assets 614,858 763,361
------------------ ------------------
Total current assets 24,944,477 22,928,044
Property and equipment and other assets:
Property and equipment, net of accumulated
depreciation of $9,168,049 and $8,211,046 at
September 30, 1997 and June 30, 1997,
respectively 14,316,124 14,447,962
Cost in excess of net assets acquired, net of
accumulated amortization of $1,070,720
and $1,046,475 at September 30, 1997 and
June 30, 1997, respectively 1,710,108 1,723,319
Deferred tax assets 2,939,235 1,998,531
Other assets 497,441 124,930
------------------ ------------------
$ 44,407,385 $ 41,222,786
================== ==================
</TABLE>
See accompanying notes.
3
<PAGE> 4
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND JUNE 30, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1997
(UNAUDITED) (AUDITED)
------------------ ------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 2,571,239 $ --
Accounts payable - trade 2,910,326 821,187
Unearned revenues and customer deposits 462,589 573,922
Accrued compensation expense 2,912,846 1,524,954
Accrued telephone expense 684,509 659,949
Other accrued liabilities 3,280,203 2,872,596
Current portion of long-term debt 1,419,072 1,395,304
------------------ ------------------
Total current liabilities 14,240,784 7,847,912
Long-term debt 4,387,148 4,753,613
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; 29,778 convertible, $.36 cumulative
Series B shares issued and outstanding 298 298
Common stock, $.01 par value, 27,500,000 shares
authorized; 21,812,322 and 21,793,122 shares
issued and outstanding at September 30, 1997
and June 30, 1997, respectively 218,123 217,931
Treasury stock (1,420,921) (420,921)
Additional paid-in capital 18,212,996 18,204,685
Retained earnings 8,768,957 10,619,268
------------------ ------------------
Total shareholders' equity 25,779,453 28,621,261
------------------ ------------------
$ 44,407,385 $ 41,222,786
================== ==================
</TABLE>
See accompanying notes.
4
<PAGE> 5
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Revenues $ 20,524,862 $ 26,545,074
Cost of services, excluding depreciation and
amortization shown below 15,719,319 17,465,050
------------ ------------
Gross profit 4,805,543 9,080,024
Selling, general and administrative expenses 6,461,843 4,957,232
Depreciation and amortization 999,960 809,196
------------ ------------
Total expenses 7,461,803 5,766,428
------------ ------------
Income (loss) from operations (2,656,260) 3,313,596
Interest expense 193,417 118,573
Interest income 58,656 19,013
------------ ------------
Income (loss) from operations before income taxes (2,791,021) 3,214,036
Income tax expense (benefit) (940,704) 1,092,775
------------ ------------
Net income (loss) $ (1,850,317) $ 2,121,261
============ ============
Earnings per common and common equivalent share:
Net income (loss) $ (0.08) $ 0.09
============ ============
Weighted average common and common equivalent
shares outstanding: 22,054,131 22,458,072
============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
ATC COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $(1,850,317) $ 2,121,261
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 999,960 809,196
Other (2,525) --
Changes in operating assets and liabilities:
Accounts and notes receivable -- related parties (193,670) (209)
Accounts and notes receivable -- other (1,885,898) 2,840,274
Other current assets 148,503 (311,680)
Deferred taxes (940,704) --
Other assets (391,222) 10,376
Accounts payable 2,089,139 (533,719)
Unearned revenues (111,333) (563,382)
Accrued liabilities 1,820,059 (802,412)
----------- -----------
Net cash provided by (used in) operating activities (318,008) 3,569,705
Cash flows from investing activities:
Capital expenditures (825,166) (1,448,170)
----------- -----------
Net cash used in investing activities (825,166) (1,448,170)
Cash flows from financing activities:
Proceeds from (payments on) line of credit, net 2,571,239 (2,128,085)
Payments on long-term debt (83,334) (83,334)
Payments on capital lease obligations (259,363) (195,214)
Proceeds from exercise of stock options -- 746,842
Purchases of treasury stock (1,000,000) --
----------- -----------
Net cash provided by (used in) financing activities 1,228,542 (1,659,791)
Net change in cash and cash equivalents 85,368 461,744
Cash and cash equivalents at beginning of period 632,826 1,723,702
----------- -----------
Cash and cash equivalents at end of period $ 718,194 $ 2,185,446
=========== ===========
Supplemental information on non-cash transactions:
Tax benefit of stock options exercised -- 471,750
</TABLE>
See accompanying notes.
6
<PAGE> 7
ATC COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
1. 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 month period ended September 30, 1996 was adjusted to reflect the income
attributable to the minority ownership interest, including stock options issued
to certain key employees and officers, in Advanced Telemarketing Corporation
d/b/a ATC Communications, Inc. ("Advanced"), the operating subsidiary of the
Company. Net loss applicable to common stock for the three month period ended
September 30, 1997 was not adjusted to reflect the income attributable to the
minority ownership interest, including stock options issued to certain key
employees and officers, in Advanced because minority interest holders in
Advanced are under no obligation to fund their proportionate share of losses
incurred by Advanced.
Primary and fully diluted weighted average shares outstanding for the three
month periods ending September 30, 1997 and 1996 was computed as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
PRIMARY
Weighted average shares outstanding 21,493,412 15,169,544
Common stock equivalents:
Dilutive stock options and warrants, net of shares
assumed repurchased with exercise proceeds 501,163 2,888,638
Common Stock assumed issued on conversion of
dilutive preferred stock 59,556 4,259,556
---------- ----------
Primary shares 22,054,131 22,317,738
========== ==========
FULLY DILUTED
Weighted average shares outstanding 21,493,412 15,169,544
Common stock equivalents:
Dilutive stock options and warrants, net of shares
assumed repurchased with exercise proceeds 501,163 3,028,972
Common Stock assumed issued on conversion of
dilutive preferred stock 59,556 4,259,556
---------- ----------
Fully diluted shares 22,054,131 22,458,072
========== ==========
</TABLE>
7
<PAGE> 8
Net income (loss) applicable to common stock for the three month periods ended
September 30, 1997 and 1996 was computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Net income (loss) from continuing operations $ (1,850,317) $ 2,121,261
Less: subsidiary income (loss) attributable to minority
interest in the subsidiary's stock and stock options -- (1) (204,497)
------------------ ------------------
Net income (loss) applicable to common shareholders $ (1,850,317) $ 1,916,764
================== ==================
Primary earnings per share ($ 0.08) $ 0.09
================== ==================
Fully diluted earnings per share ($ 0.08) $ 0.09
================== ==================
</TABLE>
Net income (loss) applicable to Advanced minority interest for the three month
periods ended September 30, 1997 and 1996 was computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Advanced net income (loss) after income tax allocation $ (1,077,729) $ 2,306,070
Minority interest -- (1) 8.87%
------------------ ------------------
Net income applicable to Advanced minority interest $ -- $ 204,497
================== ==================
</TABLE>
- -------------------------------------------------------------------------------
(1) Net loss applicable to common stock for the three month period ended
September 30, 1997 was not adjusted to reflect the income attributable to
the minority ownership interest in Advanced because minority interest
holders in Advanced are under no obligation to fund their proportionate
share of losses incurred by Advanced.
8
<PAGE> 9
ITEM 1. 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 ended
September 30, 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 experienced a loss from operations of $2,656,260 on revenues
of $20,524,862 for the quarter ended September 30, 1997. In the previous fiscal
year, the Company earned income from operations of $3,313,596 on revenues of
$26,545,074 in the comparable three month period.
For the quarter ended September 30, 1997 revenues decreased $6,020,212, or
22.7%, from revenues generated in the corresponding quarter of the previous
fiscal year. The decrease in revenues in the three month period ended September
30, 1997 was due primarily to a price reduction and decreases in service
volumes from the Company's historically largest client. Based on recent trends,
management does not anticipate any additional near-term declines in service
volumes from this client.
Approximately 22% of the Company's revenues during the quarter ended
September 30, 1997 were generated by the Company's historically largest client
as compared to approximately 49% in the quarter ended September 30, 1996.
Excluding this client, revenues increased approximately 19% in the quarter
ended September 30, 1997 versus the prior year quarter. The Company is
continuing efforts to reduce its concentration of business with this client by
pursuing a strategy to secure recurring revenues through long-term
relationships with targeted, large corporate clients that use
telecommunications as an integral part of their client service and marketing
programs.
The Company signed contract extensions with Western Union Financial
Services, Inc. and one of the Company's large telecommunications clients in
the quarter ended September 30, 1997. In addition, the Company began providing
services to a new Internet customer and four new telecommunications clients, and
signed a new agreement with a large financial services company. Management
believes these new relationships should impact revenues as early as the
Company's second fiscal quarter. By mutual agreement, the Company and one of its
new financial services clients terminated their contract after completing a
pilot program. In addition to providing services on an outsourcing basis, in
which the Company provides all or a substantial portion of a client's
telemarketing needs, the Company also continues to perform project-based
services for certain customers. However, there can be no assurance that these
clients will continue existing projects or provide new ones.
Gross profit earned on revenues decreased $4,274,481, or 47.1%, from the
prior year quarter. As a percentage of revenues, gross margin for the quarter
ended September 30, 1997 was 23.4% versus 34.2% in the comparable period of the
prior year. Both the decrease in gross profit and in gross margin as a
percentage of revenues for the three months ended September 30, 1997 as compared
with the comparable prior year period were due to lower capacity utilization
resulting from additional decreases in service volumes from the Company's
historically largest client and a price reduction from this client.
Selling, general and administrative expenses ("SG&A") increased
$1,504,611, or 30.4%, in the quarter ended September 30, 1997 versus the
comparable prior year period. The increase in SG&A was primarily due to the
recording of a reserve for severance expense and other non-recurring charges of
approximately $633,000, and significant increases in recruiting and marketing
costs compared to the
9
<PAGE> 10
prior year quarter. The Company anticipates that recruiting costs should remain
at current levels in the near-term while marketing costs should decrease to
prior year levels.
In response to slower growth in revenues, management is continuing to
aggressively reduce operating costs, a key element of which is ATC's
previously-announced new site strategy which focuses on smaller call centers
outside of the Dallas labor market. The Company anticipates opening a new 300
station call center in Joplin, Missouri in the third quarter of ATC's 1998
fiscal year. Following the Joplin opening, ATC plans to open a comparable new
center in the Southwest later in fiscal 1998. Management believes these new
centers should provide cost savings over the Company's current centers due to
decreased recruiting costs and lower employee turnover. Management expects
these future cost advantages, combined with the impact of the recent closing of
the Company's San Francisco call center, to result in a reduction in operating
expenses as a percentage of revenues.
The increase in depreciation and amortization expense of $190,764, or
23.6%, in the quarter ended September 30, 1997 versus the comparable prior year
period is primarily the result of the enhancement of internal systems during
the fiscal year ended June 30, 1997. As a percentage of revenues, depreciation
expense for the three months ended September 30, 1997 was 4.9% versus 3.0% in
the comparable prior year period.
Net interest expense for the three month period ended September 30, 1997
increased $35,210, or 35.4%, versus the same period in the previous fiscal year
due to increased utilization of the Company's working capital line of credit.
The Company's effective state and federal income tax rate was
approximately 33.7% for the three month period ended September 30, 1997 and
34.0% for the quarter ended September 30, 1996.
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
The following table sets forth certain information from the Company's
statement of cash flows for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Net cash provided by (used in) operating activities $ (318,008) $ 3,569,705
Net cash used in investing activities (825,166) (1,448,170)
Net cash provided by (used in) financing activities 1,228,542 (1,659,791)
============== ==============
Net increase in cash and cash equivalents $ 85,368 $ 461,744
============== ==============
</TABLE>
Historically, the Company's primary sources of liquidity have been cash
flow from operating activities and available borrowing capacity under credit
facilities. Despite experiencing negative cash flow from operations in the last
fiscal quarter, management believes the Company currently has the liquidity and
access to working capital to meet its near-term cash flow demands due to its
$15 million working capital line of credit. If the Company is unable to reduce
its operating costs or resume revenue growth in accordance with management
expectations and continues to use cash in operating activities, the Company may
experience difficulty in meeting its liquidity requirements. In such an event,
10
<PAGE> 11
the Company may need to explore other means of financing its operations,
including without limitation, negotiating a new and expanded loan facility,
raising funds through debt or equity financings, or entering into other
arrangements.
The Company operates in a fast-growing, competitive 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. The Company anticipates opening a new
300-station teleservicing center in Joplin, Missouri in the first quarter of
calendar 1998. The Joplin opening will begin implementation of the Company's
new site strategy which will focus on smaller call centers outside the Dallas
labor market. Management anticipates opening a comparable new center in the
Southwest later in fiscal 1998.
In addition to traditional growth strategies, management is currently
pursuing opportunities for growth through the acquisition of other call center
companies. From time to time, the Company engages in discussions with
acquisition candidates. Although there can be no assurances that any proposed
acquisition will be successfully completed, management believes that any
acquisition candidates would fit with the Company's corporate and operating
strategies.
In April 1997, the Company's Board of Directors 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. To date, the Company has used
available cash flow to purchase 355,000 shares at an average cost of $3.98 per
share. The Company anticipates that any future purchases of shares as part of
this repurchase program will be funded by available cash flow and borrowings
under its working capital credit facility. Based on its current liquidity
position, the Company does not anticipate making any such purchases in the
near-term.
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.
Although no assurances can be made in this regard, management anticipates
that, based on 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 or acquisition opportunities.
The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995: Statements contained in this document that are
not based on historical facts are "forward-looking statements". Terms such as
"anticipate", "believe, "estimate", "expect", "predict" and similar expressions
are intended to identify forward-looking statements. Such statements are by
nature subject to uncertainties and risks, including but not limited to: the
Company's reliance on certain major clients; government regulation and tax
policy; economic conditions; competition and pricing; dependence on the
Company's labor force; reliance on technology; telephone service dependence;
and other operational, financial or legal risks or uncertainties detailed in
the Company's SEC filings.
11
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit 27.1 Financial Data Schedule (filed herewith).
(B) Reports on Form 8-K
None.
12
<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.
(The Registrant)
Dated: November 13, 1997 By: /s/ Matthew S. Waller
------------------------------------
Matthew S. Waller
Chief Financial Officer
9/30/97 QUARTER
13
<PAGE> 14
EXHIBITS 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> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 718,194
<SECURITIES> 0
<RECEIVABLES> 20,574,359
<ALLOWANCES> 73,826
<INVENTORY> 0
<CURRENT-ASSETS> 24,944,477
<PP&E> 23,484,173
<DEPRECIATION> 9,168,049
<TOTAL-ASSETS> 44,407,385
<CURRENT-LIABILITIES> 14,240,784
<BONDS> 0
0
298
<COMMON> 218,123
<OTHER-SE> 25,561,032
<TOTAL-LIABILITY-AND-EQUITY> 44,407,385
<SALES> 20,524,862
<TOTAL-REVENUES> 20,524,862
<CGS> 15,719,319
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,461,803
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 134,761
<INCOME-PRETAX> (2,791,021)
<INCOME-TAX> (940,704)
<INCOME-CONTINUING> (1,850,317)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,850,317)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
