SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 29, 1996
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: 0-26786
APAC TELESERVICES, INC.
(Exact name of registrant as specified in its charter)
Illinois 36-2777140
(I.R.S. Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)
One Parkway North Center, Suite 510, Deerfield, Illinois 60015
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 945-0055
Securities registered pursuant to Section 12(b) of the Act:
Names of each exchange
Title of Each Class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $0.01 Par Value
(Title of class)
Indicate by check mark whether the Registrant (l) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
As of March 3, 1997, 46,657,760 Common Shares were outstanding.
The aggregate market value of the Registrant's Common Shares held by
nonaffiliates on March 3, 1997 was approximately $1,393,900,000
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement for Annual Meeting
of Share Owners to be held on May 20, 1997 are incorporated by reference
in Part III
PART I
ITEM 1. BUSINESS.
GENERAL
APAC TeleServices, Inc. ("APAC" or the "Company") is one of the largest
and fastest growing providers of outsourced telephone-based marketing, sales
and customer management solutions. The Company's client base is comprised of
large companies with growing needs for cost-effective means of servicing and
selling current and prospective customers. The Company operates 8,450
workstations in 62 Customer Contact Centers located primarily in the Midwest.
The Customer Contact Centers are managed centrally through the application of
extensive telecommunications and computer technology to promote the
consistent delivery of quality service. The Company believes its innovative
approach to providing quality service distinguishes it from its competitors
and has led to the Company's rapid growth rate and its retention of key
clients. The Company's net revenue and net income for fiscal 1996 were $276.4
million and $30.6 million, respectively, increases of 171.9% and 308.3%,
respectively, compared to fiscal 1995, on a pro forma basis. The Company has
two primary service offerings: Outbound Sales and Marketing Solutions
("Sales Solutions") and Inbound Customer Service Solutions ("Service
Solutions").
SALES SOLUTIONS
Services. Sales Solutions provides telephone-based sales to consumer and
business markets, database analysis and management, market research, targeted
marketing plan development and customer lead generation, acquisition and
retention. Sales Solutions generated $141.8 million of net revenue, or 51.3%
of the Company's total net revenue, in fiscal 1996, an increase of 95.1%
compared to fiscal 1995.
Sales Solutions activities typically begin when APAC calls a consumer or
business customer targeted by one of its clients to offer the client's
products or services. Customer information, which APAC typically receives
electronically from its clients, is selected to match the demographic profile
of the targeted customer for the product or service being offered. APAC's
data management system sorts the customer information and assigns the
information to one of its Sales Solutions Customer Contact Centers.
Computerized call management systems utilizing predictive dialers
automatically dial the telephone numbers, determine if a live connection is
made, and present connected calls to a telephone sales representative who has
been specifically trained for the client's program. When a call is presented,
the customer's name, other information about the customer, and the program
script simultaneously appear on the telephone sales representative's computer
screen. The telephone sales representative then uses the script to solicit an
order for the client's product or service or to request information which
will be added to the client's database. APAC's advanced systems permit on-
line monitoring of marketing campaigns allowing its clients to refine
programs while in progress.
Clients. APAC targets those companies with large customer bases and the
greatest potential to generate recurring revenue driven by their ongoing
telephone-based direct sales and marketing needs. Sales Solutions currently
specializes in three industries:
Telecommunications-APAC provides Sales Solutions services to the
telecommunications industry, primarily servicing long distance, regional
and wireless telecommunications companies. The Company's services include
new account acquisition, direct sales of custom calling features,
personalized "800" and long distance services and other customer retention
services in both the business and consumer market segments. The Company's
most significant relationship in this industry is with AT&T, which
accounted for 34.2% of the Company's Sales Solutions net revenue in fiscal
1996. Sales Solutions net revenue from telecommunications industry clients
represented 39.0%, 12.9% and 2.3% of the Company's total Sales Solutions
net revenue, and 20.0%, 9.3% and 1.2% of the Company's total net revenue,
in fiscal years 1996, 1995 and 1994, respectively.
Insurance-APAC is a major marketer of insurance products throughout the
United States. The Company works with large consumer insurance companies
and their agents, marketing products such as life, accident, health, and
property and casualty insurance. The Company employs over 250 insurance
agents licensed to sell insurance in a total of 49 states. APAC has sold
approximately 5.0 million insurance policies for its clients since 1991.
Significant relationships in this industry include Mass Marketing
Insurance Group, J.C. Penney Life Insurance Company and American Bankers
Insurance Group, which clients accounted for 15.7%, 7.1% and 3.0%,
respectively, of the Company's Sales Solutions net revenue in fiscal 1996.
Sales Solutions net revenue from insurance industry clients represented
32.9%, 48.0% and 51.7% of the Company's total Sales Solutions net revenue,
and 16.9%, 34.3% and 44.6% of the Company's total net revenue, in fiscal
years 1996, 1995 and 1994, respectively.
Financial Services-APAC provides sales and marketing services to many of
the largest U.S. credit card issuers. The Company's services include
customer account acquisition, credit line expansion, balance
consolidation, cardholder retention and sales of other banking products
and services. Sales Solutions net revenue from financial service industry
clients represented 24.2%, 32.2% and 42.2% of the Company's total Sales
Solutions net revenue, and 12.4%, 23.0% and 36.4% of the Company's total
net revenue, in fiscal years 1996, 1995 and 1994, respectively.
Sales Solutions provided services to 41 clients in fiscal 1996. Sales
Solutions operates generally under contracts that may be terminated or
modified on short notice. However, the Company tends to establish long-term
relationships with its clients and approximately 43% of Sales Solutions net
revenue in fiscal 1996 was generated from companies that have been clients of
the Company since at least 1993. The Company is generally paid a fixed fee
for each hour that it provides a telephone sales representative under its
Sales Solutions contracts. Except for AT&T in fiscal 1996 and Mass Marketing
Insurance Group in fiscal 1995, no Sales Solutions' client accounted for more
than ten percent of the Company's total net revenue in fiscal 1996, fiscal
1995 or fiscal 1994.
APAC also offers business-to-business account management services. These
services, positioned as APAC SalesSource, include obtaining customer record
updates, conducting customer satisfaction and preference surveys and cross-
selling client products. SalesSource services are designed to provide pro-
active customer management with the objective of account expansion and
enhanced customer retention. SalesSource services accounted for
approximately 3.9% of the Company's Sales Solutions net revenue, and 2.0% of
the Company's total net revenue, in fiscal 1996.
SERVICE SOLUTIONS
Services. Service Solutions provides inbound customer service, direct mail
response, help desk support, and catalog order processing. Certain Service
Solutions clients rely upon the Company to provide specialized telephone
service representatives such as insurance agents and computer technicians,
capable of responding to specific customer inquiries. Service Solutions,
which initiated full-scale offerings in late fiscal 1993, generated $134.6
million of net revenue, or 48.7% of the Company's total net revenue, in
fiscal 1996, an increase of 364.1% when compared to fiscal 1995. APAC
believes significant opportunities to generate new business in Service
Solutions exist as more companies move to outsource all or a portion of their
telephone-based marketing and customer service functions.
Service Solutions involves the receipt of a call from a client's customer,
the identification of the call and the routing of the call to the appropriate
APAC telephone service representative. The customer typically calls a toll-
free "800" number to request product or service information, place an order
for a product or service or obtain assistance regarding a previous order or
purchase. APAC utilizes automated call distributors and digital switches to
identify each inbound call by "800" number and route the call to an APAC
telephone service representative trained for the client's program.
Simultaneously with receipt of the call, the telephone service
representative's computer screen displays customer, product and service
information relevant to the call. The Company reports information and results
captured during the call to its client for order processing, customer service
and database management.
Clients. Service Solutions directs its business development efforts toward
large companies with inbound annual call volume in excess of 500,000 calls.
Within this market segment, APAC targets those companies that operate in
high-cost metropolitan areas or that are currently utilizing inefficient or
expensive technology in their customer service operations. Service Solutions
provided services to 35 clients in fiscal 1996. The Company's significant
relationships include United Parcel Service ("UPS"), Quill Corporation and
Western Union, which accounted for 75.4%, 2.5% and 2.4%, respectively, of the
Company's Service Solutions net revenue in fiscal 1996. As of July 1995, the
Company entered into an agreement to operate four of UPS's new customer
services facilities on an outsourced basis. The Company began operating three
such facilities in Newport News, Virginia; Fort Worth, Texas; and High Point,
North Carolina pursuant to this agreement in fiscal 1995, and began operating
the fourth such facility in Boynton Beach, Florida in February, 1996. In
August, 1996, the Company entered into a five-year agreement to receive and
process customer orders for John H. Harland Corporation, a leading supplier
of checks, database marketing services and loan automation software to the
financial services industry. In October 1996, the Company began taking
inbound calls for AT&T, in support of AT&T's direct marketing program, at a
300-workstation Customer Contact Center. In January, 1997, the Company
entered into a three-year agreement to receive calls from insureds to provide
after-hours claims and catastrophe services to Farmers Group, Inc., a major
provider of insurance and also entered into an agreement with Associates
Financial Group to provide the opportunity for customers of Associates
Financial Group to acquire homeowner or automobile insurance.
Service Solutions operates under contracts with terms up to five years.
Typically, these contracts may be terminated or modified on short notice. The
Company is generally paid a fixed fee for each hour that it provides a
telephone service representative under its Service Solutions contracts,
regardless of the number of calls handled. The client works with the Company
to determine the number of telephone representatives which are necessary to
efficiently handle the expected volume of inbound calls. As of July 10, 1995,
the Company entered into a four and one-half year contract with UPS which
differs substantially from its other Service Solutions contracts. The UPS
agreement required significantly greater up-front expenditures by the Company
which were not specifically reimbursed. The UPS agreement is not terminable
except upon breach by the Company or upon a change of control (as defined) of
the Company. Under the contract, the Company provides services in dedicated
facilities which are located and owned by UPS and used exclusively to service
this contract. Employees who provide services under this contract are trained
by both APAC and UPS personnel. Upon termination or expiration of the
contract, UPS has the option to offer employment to all APAC employees
located within a Customer Contact Center and dedicated to the contract. If
UPS does not hire these employees and APAC decides to continue their
employment, it would be necessary to relocate and retrain these employees at
a substantial cost in order for such employees to effectively perform
services for other clients. The Company is paid a fixed fee for each hour
that it provides a telephone service representative under the UPS agreement,
regardless of the number of calls handled. However, the amount of net revenue
which will be generated under this agreement cannot be projected by the
Company with certainty. Except for UPS in fiscal 1996 and fiscal 1995, no
Service Solutions client of the Company accounted for more than ten percent
of the Company's total net revenue in fiscal 1996, fiscal 1995 or fiscal
1994.
TECHNOLOGY RESOURCES
APAC's management information and call and database management systems
have been designed to provide quality service to its clients and to
effectively manage and control all aspects of APAC's business. APAC utilizes
more than 200 technicians who are dedicated to maintaining, expanding and
upgrading the Company's systems. The Company has invested $46.8 million to
purchase these systems since the beginning of fiscal 1993.
The UNIX-based computer system that the Company has developed utilizes a
"hub and spoke" configuration to electronically link each Customer Contact
Center's systems to the Company's operational headquarters. This open
architecture system provides APAC with the flexibility to integrate its
client server and mid-range systems with the variety of systems maintained by
its clients. By integrating with its clients' systems, APAC is able to
receive calls and data directly from its clients' in-house systems, forward
calls to its clients' in-house telephone representatives when appropriate,
and report, on a real-time basis, the status and results of the Company's
services. APAC's custom software is built on relational database technology
that enables the Company to quickly design tailored software applications
that enhance the efficiency of a client's call services, while providing
flexible scripting and readily accessible screen navigation.
In order to provide efficient and effective services, the Company's
calling systems also utilize sophisticated technology such as automated and
predictive dialers, automated call delivery systems, call management systems
and interactive voice response systems which are integrated with
minicomputer-based database management systems, universal workstations, local
area networks and wide area networks. The Company believes its computer
security system and off-site disaster back-up storage sufficiently protect
the integrity and confidentiality of its computer systems and data.
SALES AND MARKETING
The Company seeks to differentiate itself from other providers of
telephone-based services by offering customized solutions that address the
specialized needs of its clients. The Company has developed a targeted
approach to identifying new clients and the potential additional needs of
existing clients. Often, APAC initially develops a pilot program for a new
client to demonstrate the Company's abilities and the effectiveness of
telephone-based marketing and customer service. The Company's sales personnel
also assist clients in identifying high potential customers and developing
programs to reach those customers, communicate results of the program and
assist clients in modifying programs for future use. The Company markets its
services by expanding relationships with existing clients, advertising in
business publications, responding to requests for proposals, pursuing client
referrals and participating in trade shows. The Company believes its
increasingly consultative approach will enhance its ability to successfully
identify additional business opportunities and secure new business.
PERSONNEL AND TRAINING
The Company believes a key component of APAC's success is the quality of
its employees. Therefore, the Company is continually refining its systematic
approach to hiring, training and managing qualified personnel. APAC locates
Customer Contact Centers primarily in small to mid-sized communities in an
effort to lower its operating costs and attract a high quality, dedicated
work force. The Company believes that by employing a significant number of
full-time employees it is able to maintain a more stable work force and
reduce the Company's recruiting and training expenditures. At each Customer
Contact Center, the Company utilizes a management structure designed to
ensure that its telephone representatives are properly supervised, managed
and developed.
The Company offers extensive classroom and on-the-job training programs
for its personnel including instruction about the client's company and its
product and service offerings as well as proper telephone-based sales or
customer service techniques. Once hired, each new telephone representative
receives on-site training lasting from three to 17 days. The amount of
initial training each employee receives varies depending upon whether the
employee will be performing outbound or inbound services and the nature
of the services being offered. In addition, the Company offers one and
two week courses to its telephone representatives who are preparing for
the insurance agent license exam. The Company has also developed a
three-month management training program designed to provide a timely
source of well-trained managers. The Company continues to develop "APAC
University," an educational program for employees which provides a
variety of supplemental training classes. In November 1996, the Company
acquired The Shechtman Group, L.L.C., a management consulting company
which provided leadership training programs to the Company's managers,
from Morris Shechtman, a director of the Company. See Item 13, "Certain
Relationships and Related Transactions."
The number of full- and part-time employees of the Company has increased
from approximately 6,500 on January 1, 1996 to over 14,000 on March 1, 1997.
None of APAC's employees is subject to a collective bargaining agreement. The
Company considers its relations with its employees to be good.
QUALITY ASSURANCE
Because APAC's services involve direct contact with its clients'
customers, the Company's reputation for quality service is critical to
acquiring and retaining clients. Therefore, the Company and its clients
monitor the Company's telephone representatives for strict compliance with
the client's script and to maintain quality and efficiency. The Company also
regularly measures the quality of its services by benchmarking such factors
as sales per hour, level of customer complaints, call abandonment rates and
average speed of answer.The Company's information systems enable APAC to
provide clients with reports on a real-time basis as to the status of an
ongoing campaign and can transmit summary data and captured information
electronically to clients. This data enables APAC and its clients to modify
or enhance an ongoing campaign to improve its effectiveness. In addition to
daily contact with its clients, APAC asks each client to rate the Company's
performance quarterly using specific quality measures.
COMPETITION
The industry in which the Company operates is very competitive and highly
fragmented. APAC's competitors range in size from very small firms offering
specialized applications or short term projects, to large independent firms
and the in-house operations of many clients and potential clients. A number
of competitors have capabilities and resources equal to, or greater than, the
Company's. The market includes non-captive telemarketing and customer service
operations such as MATRIXX Marketing Inc., SITEL Corporation, ITI Marketing
Services, Inc., West Teleservices Corporation, TeleService Resources,
Precision Response Corporation, Electronic Data Systems Corporation and
TeleTech Holdings, Inc., as well as in-house telemarketing and customer
service organizations throughout the United States. In-house telemarketing
and customer service organizations comprise by far the largest segment of the
industry. In addition, some of the Company's services also compete with other
forms of direct marketing such as mail, television and radio. The Company
believes the principal competitive factors in the telephone-based marketing
and customer service industry are reputation for quality, sales and marketing
results, price, technological expertise, and the ability to promptly provide
clients with customized solutions to their sales, marketing and customer
service needs.
GOVERNMENT REGULATION
Telephone sales practices are regulated at both the Federal and state
level. The Federal Communications Commission's (the "FCC") rules under the
Federal Telephone Consumer Protection Act of 1991 (the "TCPA") prohibit the
initiation of telephone solicitations to residential telephone subscribers
before 8:00 a.m. or after 9:00 p.m., local time, and prohibit the use of
automated telephone dialing equipment to call certain telephone numbers. In
addition, the FCC rules require the maintenance of a list of residential
consumers who have stated that they do not want to receive telephone
solicitations and avoidance of making calls to such consumers' telephone
numbers.
The Federal Telemarketing and Consumer Fraud and Abuse Protection Act of
1994 (the "TCFAPA") broadly authorizes the Federal Trade Commission (the
"FTC") to issue regulations prohibiting misrepresentation in telephone sales.
In August, 1995, the FTC issued rules under the TCFAPA. These rules generally
prohibit abusive telephone solicitation practices and impose disclosure and
record keeping requirements.
The Company believes that it is in compliance with the TCPA and the FCC
rules thereunder and with the FTC's rules under the TCFAPA. The Company
trains its telephone sales representatives to comply with the FTC and FCC
rules and programs its call management system to avoid telephone calls during
restricted hours or to individuals maintained on APAC's "do-not-call" list.
Subject to certain limitations, APAC generally undertakes to indemnify its
clients against claims and expenses resulting from any failure by APAC to
comply with federal and state laws regulating telephone solicitation
practices.
A number of states have enacted or are considering legislation to regulate
telephone solicitations. For example, telephone sales in certain states
cannot be final unless a written contract is delivered to and signed by the
buyer and may be cancelled within three business days. At least one state
also prohibits telemarketers from requiring credit card payment and several
other states require certain telemarketers to obtain licenses and post bonds.
From time to time, bills are introduced in Congress which, if enacted, would
regulate the use of credit information. The Company cannot predict whether
this legislation will be enacted and what effect, if any, it would have on
the Company or its industry.
The industries served by the Company are also subject to varying degrees
of government regulation. Generally, the Company relies on its clients and
their advisors to develop the scripts to be used by APAC in making consumer
solicitations. The Company generally requires its clients to indemnify APAC
against claims and expenses arising in connection with a client's failure to
provide products or services to customers, any defect or deficiency in such
products or services or any written or oral presentation furnished by the
client to APAC. The Company has never been held responsible for regulatory
noncompliance by a client. APAC employees who complete the sale of insurance
products are required to be licensed by various state insurance commissions
and participate in regular continuing education programs, which are currently
provided in-house by the Company.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Deerfield, Illinois in
leased facilities consisting of approximately 16,500 square feet of office
space. The term of this lease expires in March, 2001. The Company's
operational headquarters are located in approximately 80,000 square feet of
office space in Cedar Rapids, Iowa. This office space is located on seven
floors which are owned and/or leased by the Company and is part of an office
condominium. The Company also leases office space in Atlanta.
The Company also leases the facilities listed below, except for the
Newport News, Fort Worth, High Point and Boynton Beach facilities which are
not leased by the Company, but are managed, staffed and operated by the
Company on behalf of a client. As of December 29, 1996, the Company operated
the following Customer Contact Centers:
<TABLE>
SALES SOLUTIONS CUSTOMER CONTACT CENTERS
<CAPTION>
CURRENT NUMBER OF
LOCATION DATE OPENED WORKSTATIONS
<S> <C> <C>
Dubuque, Iowa September, 1990 80
Clinton, Iowa October, 1990 80
Burlington, Iowa October, 1991 80
Oskaloosa, Iowa September, 1992 96
Waterloo, Iowa February, 1993 96
Cedar Falls, Iowa February, 1993 64
Iowa City, Iowa March, 1993 64
Mt. Pleasant, Iowa September, 1993 64
Ottumwa, Iowa November, 1993 144
Decorah, Iowa January, 1994 80
Marshalltown, Iowa February, 1994 80
Fort Madison, Iowa March, 1994 96
Keokuk, Iowa May, 1994 80
Mason City, Iowa December, 1994 80
Newton, Iowa March, 1995 64
Knoxville, Iowa March, 1995 80
Fort Dodge, Iowa March, 1995 80
Woodlawn, Maryland April, 1995 96
Muscatine, Iowa April, 1995 96
Estherville, Iowa April, 1995 64
Spencer, Iowa May, 1995 64
Indianola, Iowa July, 1995 80
Hiawatha, Iowa July, 1995 176
Algona, Iowa September, 1995 64
Webster City, Iowa September, 1995 64
Davenport, Iowa February, 1996 464
Maquoketa, Iowa February, 1996 80
Kewanee, Illinois February, 1996 96
Dixon, Illinois February, 1996 96
Quincy, Illinois February, 1996 96
Kalamazoo, Michigan February, 1996 48
Danville, Illinois February, 1996 96
Freeport, Illinois March, 1996 96
Normal, Illinois March, 1996 80
Rock Falls, Illinois March, 1996 96
Waverly, Iowa March, 1996 64
Decatur, Illinois April, 1996 80
Jacksonville, Illinois April, 1996 96
Canton, Illinois May, 1996 96
Lincoln, Illinois May, 1996 80
Pekin, Illinois May, 1996 96
Peoria, Illinois May, 1996 192
Galesburg, Illinois June, 1996 96
Mount Vernon, Illinois June, 1996 80
Vincennes, Indiana June, 1996 80
Washington, Indiana June, 1996 80
Alton, Illinois December, 1996 96
Marion, Illinois December, 1996 96
Belleville, Illinois December, 1996<F1> 0
Granite City, Illinois December, 1996<F1> 0
Total Sales Solutions 4,592
SERVICE SOLUTIONS CUSTOMER CONTACT CENTERS
CURRENT NUMBER OF
LOCATION DATE OPENED WORKSTATIONS
Cedar Rapids, Iowa-22nd Avenue January, 1994<F2> 145
Cedar Rapids, Iowa-3rd Avenue August, 1994 203
Cedar Rapids, Iowa-Park Place I January, 1995 126
Cedar Rapids, Iowa-Park Place II November, 1995 162
Newport News, Virginia August, 1995 746
Fort Worth, Texas October, 1995 787
High Point, North Carolina November, 1995 591
Boynton Beach, Florida February, 1996 506
Kalamazoo, Michigan February, 1996 144
Marion, Iowa February, 1996<F2> 96
Waterloo, Iowa October, 1996<F3> 218
Corpus Christi, Texas October, 1996<F4> 102
Columbia, South Carolina December, 1996<F5> 32
Total Service Solutions 3,858
<FN>
<F1> Belleville and Granite City were opened after fiscal 1996 year end, on
December 30, 1996. Both Customer Contact Centers are expected to
operate 96 workstations when fully staffed in early 1997.
<F2> The Cedar Rapids-22nd Avenue and Marion Customer Contact Centers were
originally opened as Sales Solutions centers in June, 1990 and December,
1993, respectively. The Cedar Rapids center was converted to a Service
Solutions center in January, 1994, while the Marion center was converted
in September, 1996.
<F3> Waterloo is expected to operate approximately 300 workstations when
fully staffed in early 1997.
<F4> Corpus Christi is expected to operate approximately 725 workstations
when fully staffed in 1997.
<F5> Columbia is expected to operate approximately 550 workstations when
fully staffed in 1997.
</TABLE>
The leases of these facilities have an average length of three years and
typically contain early termination buyouts and renewal options. The Company
believes that its existing facilities are suitable and adequate for its
current operations, but additional facilities will be required to support
growth. The Company intends to continue to add Customer Contact Centers and
workstations as required by demand for its services. APAC believes that
suitable additional or alternative space will be available as needed to
expand its business on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation incidental to its
business. In the opinion of the Company, no litigation to which the Company
is currently a party is likely to have a materially adverse effect on the
Company's results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Theodore G. Schwartz 43 Chairman, President, Chief Executive Officer and
Director
Marc S. Simon 48 Chief Financial Officer and Director
Donald B. Berryman 39 Senior Vice President/General Manager-Operations
Kenneth G. Culver 52 Senior Vice President-Facilities
John C. Dontje 52 Senior Vice President/General Manager-Operations
Robert C. Froetscher 39 Senior Vice President/General Manager-Operations
Allen A. Kalkstein 46 Senior Vice President/General Manager-Technology
Solutions
Richard H. Kremer 52 Senior Vice President-People & Learning
James M. Nikrant 57 Senior Vice President/General Manager-Operations
</TABLE>
Theodore G. Schwartz has served as the Company's Chairman, President and
Chief Executive Officer since its formation in May 1973.
Marc S. Simon joined the Company as Chief Financial Officer in June 1995
and was elected as a Director of the Company in August 1995. Prior to joining
the Company, Mr. Simon was a partner practicing corporate and business law at
the law firm of Neal, Gerber & Eisenberg for more than 7 years. Mr. Simon is
a certified public accountant.
Donald B. Berryman joined the Company as Vice President/General Manager-
Service Solutions in March 1993 and became Senior Vice President/General
Manager-Operations in October 1995. From August 1990 until March 1993, Mr.
Berryman was the Director of National Reservations and Customer Service at
Ryder Truck Rental, Inc. Prior to joining Ryder Truck Rental, Mr. Berryman
was employed by Gannett Co., Inc. where he served as Director of National
Customer Service for USA Today.
Kenneth G. Culver joined the Company as Vice President-Operations and
Marketing in March 1990 and became Senior Vice President-Facilities in
October 1995. Prior thereto, he served as Senior Director/Product Manager at
Western Union for its electronic mail service offering.
John C. Dontje joined the Company as Vice President in May 1996 and became
a Senior Vice President/General Manager-Operations in October 1996. From
November 1994 to May 1996. Mr. Dontje was Regional Manager of a division of
Electronic Data Systems Corporation ("EDS") that operated multi-location
inbound and outbound call centers. From March 1991 to November 1994,
Mr. Dontje was a managing director of Bernard C. Harris Publishing Company,
Inc.
Robert C. Froetscher joined the Company as Senior Vice President/General
Manager-Operations in August 1996. Prior to joining the Company,
Mr. Froetscher was Vice President of Sales and Service for Ameritech's
Consumer Service business unit from May 1994 to August 1996. From October
1993 to May 1994, Mr. Froetscher was the National Director of Operator
Services at MCI Communications Corporation, where he had served as Director
of Consumer Sales and Services (East Region) from May 1992 to October 1993.
From May 1991 to May 1992, Mr. Froetscher served as Vice President-Marketing
and Client Services at Videocart, Inc.
Allen A. Kalkstein joined the Company as Senior Vice President/General
Manager-Technology Solutions in March 1997. Prior thereto, Mr. Kalkstein was
a partner at Ernst & Young LLP from March 1984 until March 1997.
Richard H. Kremer joined the Company as Senior Vice President-People &
Learning in December 1996. From February 1996 through November 1996, Mr.
Kremer was a consultant for The Shechtman Group, a management consulting firm
which had been owned by Morris Shechtman, a director of the Company, and was
acquired by the Company on November 29, 1996. See Item 13 "Certain
Relationships and Related Transactions." From 1994 to November 1995, Mr.
Kremer was with Allmerica Financial and from 1991 to 1994 he was the Chief
Marketing Officer for the Individual Strategic Business Unit of Union Central
Life Insurance Company, a mutual company. From 1967 to 1991, Mr. Kremer was
with CIGNA where he most recently served as Senior Vice President of CIGNA's
Individual Financial Services Company.
James M. Nikrant joined the Company as Senior Vice President/General
Manager-Operations in May 1996. From July 1993 to February 1996, Mr. Nikrant
was with Montgomery Ward and Company, Inc. where he most recently served as
Senior Vice President Logistics/Product Service. From 1989 to July 1993,
Mr. Nikrant was President and Chief Executive Officer of SafeMasters Company
Inc. From 1962 to 1989, Mr. Nikrant was with General Electric where he most
recently served as Head of Eastern U.S. Customer Service functions
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHARE OWNER
MATTERS
The Company completed an initial public offering on October 10, 1995 (the
"Initial Public Offering") at a price of $8.00 per share. Since the Initial
Public Offering, the Company's common shares have been quoted on the Nasdaq
National Market under the symbol "APAC." Prior to the Initial Public
Offering, the common shares were not listed or quoted on any organized market
system. The information presented throughout this Report reflects a two-for-
one stock split in the form of a dividend paid by the Company on May 15,
1996. The following table sets forth for the periods indicated the high and
low sale prices of the common shares as reported on the Nasdaq National
Market during such period.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Fiscal 1995:
Fourth Quarter (from October 11, 1995) $17 7/16 $ 8 15/16
Fiscal 1996:
First Quarter 36 1/8 13 5/16
Second Quarter 43 7/8 30 1/4
Third Quarter 58 32 1/4
Fourth Quarter 59 35
</TABLE>
As of March 3, 1997, there were 129 holders of record of the common
shares. The Company currently intends to retain future earnings to finance
its growth and development and therefore does not anticipate paying any cash
dividends in the foreseeable future. In addition, the Company's Credit
Facility restricts the payment of cash dividends by the Company. Payment of
any future dividends will depend upon the future earnings and capital
requirements of the Company and other factors which the Board of Directors
considers appropriate. For certain information regarding distributions made
by the Company prior to its Initial Public Offering in fiscal 1995, see the
Company's Financial Statement and the Notes thereto included elsewhere in
this report.
On November 29, 1996, the Company issued an aggregate of 54,440 common
shares to Morris Shechtman, a director of the Company, and his spouse in
consideration for all of the issued and outstanding interests in The
Shechtman Group, L.L.C., a Nevada limited liability company. Such common
shares were issued in reliance on the exemption from registration provided in
Section 4(2) of the Securities Act of 1933, as amended. See Item 13 "Certain
Relationships and Related Transactions."
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Financial Statements of the Company and notes thereto included elsewhere
in this Report. The income statement data and balance sheet data for and as
of the end of each of the fiscal years in the five-year period ended December
29, 1996, are derived from the audited Financial Statements of the Company.
<TABLE>
<CAPTION>
For the Fiscal Years Ended<F1>
1996 1995 1994 1993 1992
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue $ 276,443 $ 101,667 $ 46,618 $ 28,912 $ 13,529
Cost of services 193,967 71,982 30,666 19,790 9,662
Selling, general and administrative expenses 33,397 16,398 9,322 5,070 2,532
Total operating expenses 227,364 88,380 39,988 24,860 12,194
Income from operations 49,079 13,287 6,630 4,052 1,335
Interest expense, net 29 804 664 203 131
Provision for income taxes <F2> 18,500 4,330 - - -
Net income $ 30,550 $ 8,153 $ 5,966 $ 3,849 $ 1,204
PRO FORMA INCOME DATA (UNAUDITED):
Net income as reported $8,153 $5,966 $3,849 $ 1,204
Pro forma adjustment for income taxes <F3> 670 2,070 1,500 360
Pro forma net income<F3> $7,483 $3,896 $2,349 $844
Pro forma net income per share
(actual for fiscal 1996) $0.64 $0.18 $0.10 $0.06 $0.02
Weighted average shares outstanding 47,935 41,624 40,086 40,086 40,086
SELECTED OPERATING DATA
(AT END OF PERIOD):
Number of workstations 8,450 4,210 1,630 934 480
Number of Customer Contact Centers 62 33 17 12 6
BALANCE SHEET DATA:
Cash and short-term investments $ 141 $ 30,186 $ 1 $ 58 $ 699
Working capital 13,354 33,045 2,877 454 1,064
Total assets 141,381 74,332 21,181 11,501 6,026
Long-term debt, less current maturities 1,325 1,474 8,218 3,073 1,094
Share owners' equity 88,206 52,707 5,722 4,183 2,745
<FN>
<F1> The Company has a 52/53 week fiscal year that ends on the Sunday closest to December 31. Fiscal 1992 is the only period
presented that consisted of 53 weeks.
<F2> Prior to the Initial Public Offering, the Company was an S Corporation and not subject to Federal and certain state
corporate income taxes. On October 16, 1995, the Company changed its tax status from an S Corporation to a C
Corporation, recorded deferred income taxes totaling $3,780,000 and began providing for Federal and state corporate
income taxes. See Note 2 to the Company's Financial Statements.
<F3> The income statement data reflects a pro forma adjustment for income taxes as if the Company were subject to Federal and
state corporate income taxes for all periods. The pro forma provisions for income taxes represent a combined Federal and
state tax rate of 43%, less applicable Federal and state job creation tax credits, which resulted in effective tax rates
ranging from 30% to 40%. See Note 2 to the Company's Financial Statements.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's historical results of
operations and of its liquidity and capital resources should be read in
conjunction with the Selected Financial and Operating Data and the
Financial Statements of the Company and related notes thereto appearing
elsewhere in this Report.
RESULTS OF OPERATIONS
The following table sets forth income statement and other data as a
percent of net revenue from services provided by the Company for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
1996 1995 1994
<S> <C> <C> <C>
Net revenue:
Sales Solutions 51.3% 71.5% 86.3%
Service Solutions 48.7 28.5 13.7
Total net revenue 100.0 100.0 100.0
Operating expenses:
Cost of services 70.1 70.8 65.8
Selling, general
and administrative expenses 12.1 16.1 20.0
Total operating expenses 82.2 86.9 85.8
Income from operations 17.8 13.1 14.2
Interest expense, net - 0.8 1.4
Income before taxes 17.8 12.3 12.8
Provision for income taxes (pro forma for
fiscal years 1995 and 1994) 6.7 4.9 4.4
Net income 11.1% 7.4% 8.4%
</TABLE>
FISCAL YEAR ENDED DECEMBER 29, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1995
Net revenue increased 171.9% in fiscal 1996 to $276.4 million, up
$174.7 million from fiscal 1995. Approximately fifty percent of the
revenue growth was attributed to Service Solutions revenue from the
commencement of a four year contact to operate and manage four United
Parcel Services' ("UPS") customer service facilities. As a result of this
growth, Service Solutions represented 48.7% of the Company's net revenue
in fiscal 1996 as compared to 28.5% in fiscal 1995. The remaining
increase in net revenue was due to higher Sales Solutions call volume from
existing clients and growth from new clients in the telecommunications
industry.
Cost of services as a percent of net revenue decreased from 70.8% in
fiscal 1995 to 70.1% in fiscal 1996. Exclusive of start up activities
relating to UPS, cost of services as a percent of net revenue increased by
1.1% in fiscal 1996 as compared to fiscal 1995. This increase reflects
the shift in service mix to UPS. The UPS business has a lower gross
margin compared to the Company's other service offerings because of the
nature of outsourced services provided for UPS. Recruiting, training and
facility costs incurred in advance of full-scale operations of twenty-nine
new Customer Contact Centers during fiscal 1996 also contributed to the
higher service costs.
Selling, general and administrative expenses increased 103.7% in fiscal
1996 to $33.4 million, up $17.0 million over fiscal 1995. Approximately
seventy-five percent of the growth in overhead was due to investments in
systems and management to support the Company's increased revenue base,
with the balance due primarily to expenses associated with the new UPS
business. Selling, general and administrative expenses as a percent of
net revenue have continued to decline as a result of economics of scale
associated with spreading fixed and semi-variable costs over a larger
revenue base. Selling, general and administrative expenses as a percent
of net revenue were 12.1% for fiscal 1996 compared to 16.1% for fiscal
1995.
Net interest expense decreased $0.8 million, or 96.4%, from fiscal 1995
to fiscal 1996. This decrease was due to a reduction of average
outstanding borrowings as a result of debt retired in 1995 with cash
raised from the initial public offering of the Company's stock in October,
1995.
The provision for income taxes of $18.5 million recognized in fiscal
1996 is based upon the Company's estimated effective tax rate of 37.7%.
Prior to the Initial Public Offering, the Company included its income and
expenses with those of its share owners for Federal and certain state
income tax purposes (an S Corporation election). In connection with the
Initial Public Offering, the Company terminated its S Corporation
election. The pro forma tax rate of 40.1% in fiscal 1995 assumes that the
Company was treated as a C Corporation for the entire year and reflects
Federal taxes at the statutory rate of 35% plus state taxes, net of
Federal benefit and state job creation credits. The change between the
pro forma tax rate in fiscal 1995 and the actual tax rate in fiscal 1996
was due to tax planning strategies which have reduced state income taxes
payable.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED JANUARY
1, 1995
Net revenue increased to $101.7 million in fiscal 1995 from $46.6
million in fiscal 1994, an increase of $55.1 million or 118.1%. Sales
Solutions net revenue increased to $72.7 million in fiscal 1995 from $40.2
million in fiscal 1994, an increase of $32.5 million or 80.8%, primarily
as a result of increased call volume from existing clients and the
addition of new clients in the telecommunications industry. Service
Solutions net revenue increased to $29.0 million in fiscal 1995 from $6.4
million in fiscal 1994, an increase of $22.6 million or 353.1%, the result
of both new client relationships and expansion of call volumes with
existing clients.
Cost of services as a percent of net revenue increased to 70.8% in
fiscal 1995 from 65.8% in fiscal 1994. This increase was primarily the
result of costs incurred prior to the commencement of full-scale
operations under the Company's new agreement with UPS.
Selling, general and administrative expenses increased to $16.4 million
in fiscal 1995 from $9.3 million in fiscal 1994, an increase of $7.1
million or 75.9%. The increase in selling, general and administrative
expenses was principally the result of additional administrative personnel
and related corporate expenses associated with the Company's growth. As a
percent of net revenue, selling, general and administrative expenses
decreased from 20.0% in fiscal 1994 to 16.1% in fiscal 1995 as a result of
the spreading of fixed costs over a larger revenue base.
Net interest expense increased to $0.8 million in fiscal 1995 from $0.7
million in fiscal 1994. This increase reflects higher average outstanding
borrowings during the first half of fiscal 1995 which were used to open
new Customer Contact Centers and to finance working capital needs. As a
percent of net revenue, net interest expense decreased from 1.4% in fiscal
1994 to 0.8% in fiscal 1995 primarily as a result of the repayment of
certain bank installment notes and amounts outstanding under the Company's
credit facilities from the proceeds of the Initial Public Offering.
Pro Forma net income increased to $7.5 million in fiscal 1995 from $3.9
million in fiscal 1994, an increase of $3.6 million or 92.1%. Net income
for each year includes a pro forma provision for Federal and state income
taxes at an effective rate of 40.1% and 34.7%, respectively. These rates
reflect the combined Federal and state income tax rate of 43.0%, less
applicable Federal and state job creation tax credits, as if the Company
had been treated as a C Corporation.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been cash flow from
operating activities and available borrowing capacity under credit
facilities. In October 1995, the Company obtained additional liquidity
from the net proceeds of the Initial Public Offering. The following
table sets forth certain information from the Company's statement of cash
flows for the periods indicated.
<TABLE>
<CAPTION>
For the Fiscal Years Ended
1996 1995 1994
(In Thousands)
<S> <C> <C> <C>
Net cash provided by operating activities $12,067 $15,200 $2,871
Net cash used in investing activities (38,417) (42 ,626) (6,526)
Net cash provided by financing activities 22,306 31,610 3,599
</TABLE>
The Company generated $30.1 million in cash from operating activities
in the last three fiscal years. Although net income for fiscal 1996
increased by $22.4 million, or 274.7% when compared to fiscal 1995, cash
provided by operations decreased by $3.1 million due to higher accounts
receivable balances generated through larger sales volumes and extended
billing cycles with several new clients.
Cash used in investing activities has been expended for equipment and
other capital to support expansion of the Company's Customer Contact
Center operations, including additions to the Company's telephone and data
management systems. During the last three fiscal years, the Company has
opened 50 new Customer Contact Centers adding approximately 7,500
workstations. Capital expenditures during this period totaled $87.6
million and have been funded with proceeds from the Initial Public
Offering, bank borrowings and excess cash from operations.
Financing activities have included distributions to share owners,
borrowing activity under the Company's credit facilities, the sale of
common shares through the Initial Public Offering and the exercise of
stock options. Cash distributions to share owners during the last three
fiscal years amounted to $13.8 million and represent dividends to cover
share owner taxes related to the Company's former S Corporation status and
the payment of the Company's previously undistributed S Corporation
taxable income.
In June, 1996, the Company entered into new unsecured credit facilities
with a group of three banks. These facilities consist of a $20 million
committed revolving credit facility (the "Revolving Facility") and a $20
million revolving credit facility which may be converted into a term loan
(the "Convertible Revolving Facility" and, together with the Revolving
Facility, the "Credit Facility"). The Credit Facility is available for
general working capital purposes. The Credit Facility contains certain
covenants, including financial covenants and restrictions on the Company's
ability to pay dividends on the common shares. As of December 29, 1996,
$15.9 million was outstanding under the Credit Facility.
The Company intends to use funds generated from future operations and
available credit under its Credit Facility to meet normal operating needs
as well as fund planned capital expenditures for the first half of fiscal
1997.
INFLATION
Inflation has not had a material impact upon operating results and the
Company does not expect it to have such an impact in the future. To date,
in those instances where the Company has experienced cost increases, it
has been able to increase its rates to offset the costs. There can be no
assurance, however, that the Company's business will not be so affected by
inflation or that it can continue to increase its rates and remain
competitive.
QUARTERLY RESULTS
The Company could experience quarterly variations in net revenue and
operating income as a result of many factors, including the timing of
clients' marketing campaigns and customer service programs, the timing of
additional selling, general and administrative expenses to acquire and
support such new business and changes in the Company's revenue mix among
its various service offerings. In connection with certain contracts, the
Company could incur costs in periods prior to recognizing revenue under
those contracts. In addition, the Company must plan its operating
expenditures based on revenue forecasts, and a revenue shortfall below
such forecast in any quarter would likely adversely affect the Company's
operating results for that quarter. While the effects of seasonality on
APAC's business have historically been obscured by its growing net
revenue, the Company's business tends to be slower in the first and third
quarters of its fiscal year due to client marketing programs which are
typically slower in the post-holiday and summer months.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the foregoing "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere
in this Report constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-
looking statements involve known and unknown risks, including, but not
limited to, general economic and business conditions, competition,
changing trends in customer profiles and changes in governmental
regulations. Although the Company believes that its expectations with
respect to the forward-looking statements are based upon reasonable
assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results, performance or
achievements of the Company will not differ materially from any future
results, performance or achievements expressed or implied by such forward
looking statements.
In addition to the risks and uncertainties of ordinary business
operations, the forward-looking statements of the Company contained in
this Annual Report on Form 10-K are also subject to the following risks
and uncertainties:
RELIANCE ON MAJOR CLIENTS
Because a substantial portion of the Company's revenue is generated
from relatively few clients, the loss of a significant client or clients
could have a materially adverse effect on the Company. The Company's ten
and four largest clients collectively accounted for 80.7% and 68.7%,
respectively, of the Company's net revenue in fiscal 1996. The Company's
largest clients in fiscal 1996 were UPS and AT&T, which accounted for
38.6% and 18.4%, respectively, of the Company's net revenue in fiscal
1996. The Company's third largest client in fiscal 1996 was Mass
Marketing Insurance Group, which accounted for 8.1% of the Company's net
revenue during that period. The insurance products sold by Mass Marketing
Insurance Group are currently underwritten by J.C. Penney Life Insurance
Company. During fiscal 1996, J.C. Penney Life Insurance Company was the
fourth largest client of the Company, accounting for 3.6% of the Company's
net revenue. Many of the Company's clients are concentrated in the parcel
delivery, telecommunications, insurance and financial services industries.
A significant downturn in any of these industries or a trend in any of
these industries not to use, or to reduce their use of, telephone-based
sales, marketing or customer management solutions could have a materially
adverse effect on the Company's business. The Company generally operates
under contracts which may be terminated on short notice, some of which do
not have minimum volume requirements.
FACTORS AFFECTING ABILITY TO MANAGE AND SUSTAIN GROWTH
The Company has experienced rapid growth over the past several years
and anticipates continued growth to be driven primarily by industry trends
towards outsourcing of telephone-based sales, marketing, and customer
service operations and increased penetration by the Company of new and
existing clients and markets. Future growth will depend on a number of
factors, including the effective and timely initiation and development of
client relationships, opening of new Customer Contact Centers, and
recruitment, motivation and retention of qualified personnel. Sustaining
growth will also require the implementation of enhanced operational and
financial systems and will require additional management, operational and
financial resources. There can be no assurance that the Company will be
able to manage its expanding operations effectively or that it will be
able to maintain or accelerate its growth.
COMPETITIVE AND FRAGMENTED INDUSTRY; POTENTIAL FUTURE COMPETING
TECHNOLOGIES AND TRENDS
The industry in which the Company competes is extremely competitive and
highly fragmented. The Company's competitors range in size from very
small firms offering special applications or short term projects to large
independent firms and the in-house operations of many clients and
potential clients. A number of competitors have capabilities and
resources equal to, or greater than, the Company's. Some of the Company's
services also compete with direct mail, television, radio and other
advertising media. There can be no assurance that, as the Company's
industry continues to evolve, additional competitors with greater
resources than the Company will not enter the industry (or particular
segments of the industry) or that the Company's clients will not choose to
conduct more of their telephone-based sales, marketing or customer service
activities internally.
The development of new forms of direct sales and marketing techniques,
such as interactive home shopping through television, computer networks
and other media, could have an adverse effect on the demand for the
Company's Sales Solutions services. In addition, the increased use of new
telephone-based technologies, such as interactive voice response systems
and increased use of the Internet, could reduce the demand for certain of
the Company's Service Solutions offerings. Moreover, the effectiveness of
marketing by telephone could also decrease as a result of consumer
saturation and increased consumer resistance to this direct marketing
tool. Although the Company attempts to monitor industry trends and
respond accordingly, there can be no assurance that the Company will be
able to anticipate and successfully respond to such trends in a timely
manner.
RELIANCE ON TECHNOLOGY
The Company has invested significantly in sophisticated and specialized
telecommunications and computer technology, and has focused on the
application of this technology to provide customized solutions to meet its
clients needs. The Company anticipates that it will be necessary to
continue to select, invest in and develop new and enhanced technology on a
timely basis in the future in order to maintain its competitiveness. The
Company's future success will depend in part on its ability to continue to
develop information technology solutions which keep pace with evolving
industry standards and changing client demands. In addition, the
Company's business is highly dependent on its computer and telephone
equipment and software systems, and the temporary or permanent loss of
such equipment or systems, through casualty or operating malfunction,
could have a materially adverse effect on the Company's business.
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends in large part upon the abilities and
continued service of its executive officers and other key employees.
There can be no assurance that the Company will be able to retain the
services of such officers and employees. The loss of key personnel could
have a materially adverse effect on the Company. The Company has non-
competition agreements with certain of its existing key personnel.
However, courts are at times reluctant to enforce such agreements. In
order to support growth, the Company will be required to effectively
recruit, develop and retain additional qualified management personnel.
DEPENDENCE ON LABOR FORCE
The Company's industry is very labor intensive and has experienced high
personnel turnover. Many of the Company's employees receive modest hourly
wages and a significant number are employed on a part-time basis. A
higher turnover rate among the Company's employees would increase the
Company's recruiting and training costs and decrease operating
efficiencies and productivity. Some of the Company's operations,
particularly insurance product sales and technology-based inbound customer
service, require specially trained employees. Growth in the Company's
business will require it to recruit and train qualified personnel at an
accelerated rate from time to time. There can be no assurance that the
Company will be able to continue to hire, train and retain a sufficient
labor force of qualified employees. A significant portion of the
Company's costs consists of wages to hourly workers. An increase in
hourly wages, costs of employee benefits or employment taxes could
materially adversely effect the Company.
DEPENDENCE ON TELEPHONE SERVICE
The Company's business is materially dependent on service provided by
various local and long distance telephone companies. A significant
increase in the cost of telephone services that is not recoverable through
an increase in the price of the Company's services, or any significant
interruption in telephone services, could have a materially adverse impact
on the Company.
GOVERNMENT REGULATION
The Company's business is subject to various Federal and state laws and
regulations. The Company's industry has become subject to an increasing
amount of Federal and state regulation in the past five years. The FCC
rules under the TCPA limit the hours during which telemarketers may call
consumers and prohibit the use of automated telephone dialing equipment to
call certain telephone numbers. The TCFAPA broadly authorizes the FTC to
issue regulations prohibiting misrepresentation in telemarketing sales.
In August 1995, the FTC issued regulations under the TCFAPA which, among
other things, require telemarketers to make certain disclosures when
soliciting sales. The Company's operating procedures comply with the
telephone solicitation rules of the FCC and FTC. However, there can be no
assurance that additional Federal or state legislation, or changes in
regulatory implementation, would not limit the activities of the Company
or its clients in the future or significantly increase the cost of
regulatory compliance.
Several of the industries in which the Company's clients operate are
subject to varying degrees of government regulation, particularly the
telecommunications, insurance and financial services industries.
Generally, compliance with these regulations is the responsibility of the
Company's clients. However, the Company could be subject to a variety of
enforcement or private actions for its failure or the failure of its
clients to comply with such regulations. The Company's telephone
representatives who sell insurance products are required to be licensed by
various state insurance commissions and participate in regular continuing
education programs, thus requiring the Company to comply with the
extensive regulations of these state commissions. As a result, changes in
these regulations or their implementation could materially increase the
Company's operating costs.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company could experience quarterly variations in revenues and
operating income as a result of many factors, including the timing of
clients' marketing campaigns and customer service programs, the timing of
additional selling, general and administrative expenses to acquire and
support such new business and changes in the Company's revenue mix among
its various service offerings. In connection with certain contracts, the
Company could incur costs in periods prior to recognizing revenue under
those contracts. In addition, the Company must plan its operating
expenditures based on revenue forecasts, and a revenue shortfall below
such forecast in any quarter would likely adversely affect the Company's
operating results for that quarter. The effects of seasonality on the
Company's business have historically been obscured by its growing net
revenue. However, the Company's business tends to be slower in the first
and third quarters due to client marketing programs which are typically
slower in the post-holiday and summer months.
CONTROL BY PRINCIPAL SHARE OWNER
Mr. Schwartz, the Company's Chairman, President and Chief Executive
Officer, beneficially owns approximately 42.5% of the outstanding common
shares. As a result, Mr. Schwartz is able to exercise significant control
over the outcome of substantially all matters requiring action by the
Company's share owners. Such voting concentration may have the effect of
discouraging, delaying or preventing a change in control of the Company.
In addition, two trusts each beneficially own approximately 5.6% of the
outstanding common shares.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial information is included in this report:
Page
Report of Independent Public Accountants
Balance Sheets as of December 29, 1996 and December 31, 1995
Statements of Income for the Fiscal Years Ended December 29, 1996,
December 31, 1995 and January 1, 1995
Statements of Share Owners' Equity for the Fiscal Years Ended December 29,
1996, December 31, 1995 and January 1, 1995
Statements of Cash Flows for the Fiscal Years Ended December 29, 1996,
December 31, 1995 and January 1, 1995
Notes to Financial Statements
Schedule II
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Share Owners of APAC TeleServices, Inc.:
We have audited the accompanying balance sheets of APAC TELESERVICES,
INC. (an Illinois corporation) as of December 29, 1996 and December 31,
1995 and the related statements of income, share owners' equity and cash
flows for the three years ended December 29, 1996, December 31, 1995 and
January 1, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of APAC
TeleServices, Inc. as of December 29, 1996 and December 31, 1995 and the
results of its operations and its cash flows for the three years ended
December 29, 1996, December 31, 1995 and January 1, 1995, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
January 28, 1997
<TABLE>
APAC TELESERVICES, INC.
BALANCE SHEETS
<CAPTION>
ASSETS DECEMBER 29, DECEMBER 31,
1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 141,395 $ 4,185,916
Short-term investments - 26,000,000
Receivables -
Trade, less allowance for doubtful accounts of
$360,000 in 1996 and $240,000 in 1995 56,148,579 18,497,590
Share owner/officer 300,000 -
Other 3,024,684 238,000
Prepaid expenses 2,024,793 651,845
Deferred preoperating costs, net 644,653 1,142,219
Total current assets 62,284,104 50,715,570
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization 78,444,380 23,616,367
OTHER ASSETS 652,800 -
Total assets $ 141,381,284 $ 74,331,937
LIABILITIES AND SHARE OWNERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 146,474 $ 845,397
Revolving credit facility 15,900,000 -
Book overdraft 5,113,105 -
Accounts payable 11,967,239 2,222,347
Income taxes payable 452,790 1,263,000
Accrued expenses -
Payroll, bonuses and related items 10,669,357 5,209,868
Telecommunications 1,059,537 1,734,036
Other 2,841,117 3,007,215
Deferred income taxes 780,000 580,000
S Corporation distributions payable - 2,809,000
Total current liabilities 48,929,619 17,670,863
LONG-TERM DEBT, less current maturities 1,325,411 1,473,715
DEFERRED INCOME TAXES 2,920,000 2,480,000
COMMITMENTS AND CONTINGENCIES
SHARE OWNERS' EQUITY:
Preferred shares, $0.01 par value; 50,000,000 shares authorized;
none issued and outstanding - -
Common Shares, $0.01 par value; 200,000,000 shares authorized; 46,540,057 and
46,200,000 shares issued and outstanding at December 29, 1996 and
December 31, 1995 respectively 465,401 462,000
Additional paid-in capital 54,016,993 49,071,750
Retained earnings 33,723,860 3,173,609
Total share owners' equity 88,206,254 52,707,359
Total liabilities and share owners' equity $ 141,381,284 $ 74,331,937
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
APAC TELESERVICES, INC.
STATEMENTS OF INCOME
<CAPTION>
FOR THE FISCAL YEARS ENDED
DECEMBER 29, DECEMBER 31, JANUARY 1,
1996 1995 1995
<S> <C> <C> <C>
NET REVENUE $276,442,506 $101,666,470 $46,618,487
Operating Expenses:
Cost of Services 193,967,365 71,981,814 30,665,996
Selling, general and administrative expenses 33,396,407 16,397,608 9,322,212
Total operating expenses 227,363,772 88,379,422 39,988,208
Income from operations 49,078,734 13,287,048 6,630,279
INVESTMENT INCOME 280,296 284,252 -
INTEREST EXPENSE (308,779) (1,088,196) (663,801)
Income before income taxes 49,050,251 12,483,104 5,966,478
INCOME TAXES:
Income tax provision on C Corporation income 18,500,000 550,000 -
Deferred income taxes recorded in conjunction with
termination of S Corporation election on
October 15, 1995 - 3,780,000 -
Total income taxes 18,500,000 4,330,000 -
NET INCOME $ 30,550,251 $ 8,153,104 $ 5,966,478
PRO FORMA INCOME DATA (UNAUDITED):
Net income as reported $ 8,153,104 $ 5,966,478
Pro forma adjustment to recognize C Corporation
provision for income taxes for the year 670,000 2,070,000
Pro forma net income $ 7,483,104 $ 3,896,478
Pro forma net income per share
(actual for fiscal 1996) $ 0.64 $ 0.18 $ 0.10
Weighted average number of shares outstanding 47,935,000 41,624,000 40,086,000
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
APAC TELESERVICES, INC.
STATEMENTS OF SHARE OWNERS' EQUITY
<CAPTION>
COMMON SHARES ADDITIONAL TOTAL
SHARES PAID-IN RETAINED SHARE OWNERS'
ISSUED AMOUNT CAPITAL EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE, January 2, 1994 39,600,000 $396,000 - $3,787,308 $4,183,308
Net income - - - 5,966,478 5,966,478
S Corporation distributions paid - - (4,428,053) (4,428,053)
BALANCE, January 1, 1995 39,600,000 396,000 - 5,325,733 5,721,733
Net income - - - 8,153,104 8,153,104
S Corporation distributions paid or
accrued - - - (9,374,489) (9,374,489)
Capitalization of undistributed S
Corporation earnings in
conjunction with termination
of S Corporation election on
October 15, 1995 - - 897,739 (897,739) -
Issuance of common shares in
connection with initial public
offering 6,600,000 66,000 48,174,011 (33,000) 48,207,011
BALANCE, December 31, 1995 46,200,000 462,000 49,071,750 3,173,609 52,707,359
Net income - - - 30,550,251 30,550,251
Exercise of employee stock options,
including related tax benefit 273,558 2,736 4,606,471 - 4,609,207
Issuance of common shares through
employee stock purchase plan 12,059 121 339,316 - 339,437
Issuance of common shares in
connection with business
combination 54,440 544 (544) - -
BALANCE, December 29, 1996 46,540,057 $465,401 $54,016,993 $ 33,723,860 $ 88,206,254
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE> APAC TELESERVICES, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
FOR THE FISCAL YEARS ENDED
DECEMBER 29, DECEMBER 31, JANUARY 1,
1996 1995 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $30,550,251 $ 8,153,104 $ 5,966,478
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 10,784,083 4,072,370 2,265,161
Deferred income taxes 640,000 3,060,000 -
Change in assets and liabilities -
Receivables (40,737,673) (8,696,302) (5,491,525)
Prepaid expenses (1,372,948) (574,631) 16,775
Deferred preoperating costs (697,233) (1,142,219) -
Other assets (652,800) - -
Accounts payable 9,744,892 1,949,838 (356,375)
Income taxes payable (810,210) 1,263,000 -
Accrued expenses 4,618,892 7,114,887 470,168
Net cash provided by operating activities 12,067,254 15,200,047 2,870,682
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments 26,000,000 (26,000,000) -
Purchase of property and equipment, net (64,417,297) (16,625,811) (6,526,401)
Net cash used by investing activities (38,417,297) (42,625,811) (6,526,401)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from credit facilities 15,900,000 11,787,520 -
Initial public offering proceeds used to retire credit - (11,787,520) -
facilities
Proceeds from long-term debt - 6,702,149 8,164,937
Payments on long-term debt (847,227) (15,423,177) -
Increase (decrease) in book overdraft 5,113,105 (1,310,000) (1,448,022)
Exercise of employee stock options, including related 4,609,207 48,207,011 -
tax benefit
Proceeds from employee stock purchase plan 339,437 - 1,310,000
S Corporation distributions paid (2,809,000) (6,565,489) (4,428,053)
Net cash provided by financing activities 22,305,522 31,610,494 3,598,862
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (4,044,521) 4,184,730 (56,857)
CASH AND CASH EQUIVALENTS, beginning of year 4,185,916 1,186 58,043
CASH AND CASH EQUIVALENTS, end of year $141,395 $ 4,185,916 $ 1,186
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for -
Interest, including $196,315 which was capitalized
during 1996 $604,614 $ 1,099,309 $ 664,170
Income taxes 17,013,210 - -
Non-cash financing activities-
Fair market value of common shares issued in
connection with business combination 2,613,120 - -
Distribution payable to S Corporation
share owners representing undistributed
taxable income prior to conversion to a C
Corporation on October 16, 1995 - 2,809,000 -
The accompanying notes are an integral part of these financial statements.
</TABLE>
APAC TELESERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The principal accounting policies of APAC TeleServices, Inc. (the "Company")
are as follows:
(a) Fiscal Year. The Company has a 52/53 week fiscal year that ends on the
Sunday closest to December 31.
(b) Industry Information. The Company provides high volume telephone-based
sales, marketing and customer management solutions for corporate clients
operating in the telecommunications, insurance, financial services, parcel
delivery, utilities and entertainment industries throughout the United
States. The nature of the industry is such that the Company is dependent on
several large clients for a significant portion of its annual revenues. The
Company had two, two and one client(s) that each accounted for more than ten
percent of the Company's net revenue for the fiscal years ended December 29,
1996, December 31, 1995 and January 1, 1995, respectively. For the periods
ended (a) December 29, 1996, such two clients accounted for 39% and 18% of
the Company's net revenue, (b) December 31, 1995, such two clients accounted
for 16% and 14% of the Company's net revenue, and (c) January 1, 1995, such
client accounted for 24% of the Company's net revenues, respectively. The
loss of one or more of these major clients could have a materially adverse
effect on the Company's business.
(c) Cash and Cash Equivalents. Cash and cash equivalents consist of cash in
banks and overnight securities.
(d) Short-term Investments. The Company invests excess operating cash in
instruments with maturities of 12 months or less. The Company intends to hold
such investments, which may consist of short-term municipal preferred
securities, certificates of deposit, U.S. Treasury and Agency securities,
repurchase agreements and others, to maturity. At December 31, 1995, short-
term investments consisted of municipal preferred securities with maturities
of less than 50 days. The market value of such investments (including
interest) was equal to the original cost basis.
(e) Property and Equipment. Property and equipment are stated at cost less
accumulated depreciation. Major improvements are capitalized and charged to
expense through depreciation. Repairs and maintenance are charged to expense
as incurred. Upon sale or retirement, the related cost and accumulated
depreciation are removed from the accounts, and any gain or loss is recorded
in the statement of income. Depreciation is determined using the straight-
line method for financial reporting purposes and accelerated methods for
income tax reporting purposes over the estimated useful lives of the
respective assets. Leasehold improvements are amortized on a straight-line
basis over the shorter of the estimated useful life of the assets or the
lease term.
(f) Capitalized Software Costs. The Company capitalizes the cost of third-
party computer software purchased for internal use and costs related to the
installation of such software. These costs are amortized over their
estimated useful life of approximately five years.
The Company also capitalizes certain software costs incurred while providing
services to its customers in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software
to be Sold, Leased, or Otherwise Marketed." Costs associated with the
planning and design phase of the software development, including coding and
testing activities necessary to establish technological feasibility, are
expenses as incurred. Once technological feasibility has been determined,
additional costs incurred in development, including coding, testing and
product quality assurance, are capitalized when material. During the year
ended December 29, 1996, the Company capitalized approximately $1,280,000 of
such costs, which are amortized over the period in which revenues directly
attributable to such costs are expected to be generated.
(g) Revenue Recognition. The Company recognizes revenue on programs as
services are performed for its clients, generally based upon hours incurred.
(h) Deferred Preoperating Costs. The Company has entered into contracts to
provide telephone-based services for periods of up to five years. The
Company has incurred preoperating costs directly associated with these
contracts. Preoperating costs include payroll and other costs associated
with hiring and training new personnel dedicated to providing service under
the contracts during their term. The costs are amortized over a 12-month
period beginning on the date the facility to which they relate is staffed and
ready for operation.
(i) Concentration of Credit Risk. Concentration of credit risk is limited
to trade accounts receivable and is subject to the financial conditions of
certain major clients described in Industry Information above. The Company
does not require collateral or other security to support clients'
receivables. The Company conducts periodic reviews of its clients' financial
conditions and vendor payment practices to minimize collection risks on trade
accounts receivable.
(j) Management's Estimates. Management has made certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities during the preparation of the
financial statements. Actual results could differ from these estimates.
However, management does not believe they would have a material effect on
operating results.
(k) Net Income Per Share. Pro forma and actual net income per share amounts
are computed based upon the weighted average number of common shares and
common share equivalents outstanding during each period presented after
retroactive adjustments for stock splits and all stock options granted within
one year of the Company's inial public offering. Supplementary pro forma net
income per common share and common share equivalents would not have been
materially different than that reflected on the accompanying statements of
income for the year ended December 31, 1995.
(l) Training costs. The Company maintains ongoing training programs for its
employees. The cost of this training is expenses as incurred. In addition,
certain contracts require clients to reimburse the Company for specific
training. These costs are billed to clients as incurred.
(m) Accounting of Stock-Based Compensation. The Company currently utilizes
Accounting Principles Board Opinion No. 25 in its accounting for stock
options. In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("Statement 123"),
"Accounting for Stock-Based Compensation." The accounting method as provided
in the pronouncement is not required to be adopted; however, it is
encouraged. The Company has adopted the disclosure-only provisions of
Statement No. 123.
2. INCOME TAXES
Prior to the initial public offering of the Company's common shares
completed on October 16, 1995, the Company included its income and expenses
with those of its share owners for Federal and certain state income tax
purposes (an S Corporation election). Accordingly, the statements of income
for the fiscal year ended January 1, 1995 did not include a provision for
Federal income taxes. In connection with the Company's initial public
offering in October 1995, the Company terminated its S Corporation election
and accordingly recorded a deferred income tax liability and corresponding
income tax expense of $3,780,000, arising from a change in the Company's tax
status and a change from the cash basis to the accrual basis of accounting
for income tax purposes. Beginning October 16, 1995, the Company provides
for deferred income taxes under the asset and liability method of accounting.
This method requires the recognition of deferred income taxes based upon the
tax consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities.
In connection with the initial public offering, the Company and certain of
its share owners entered into a tax agreement. The agreement provides that
the Company will indemnify such share owners against additional income taxes
resulting from adjustments made (as determined by an appropriate tax
authority) to the taxable income reported by the Company as an S Corporation
for the periods prior to the initial public offering, but only to the extent
those adjustments result in a decrease in income taxes otherwise payable by
the Company.
The provision for income taxes for the years ended December 29, 1996 and
December 31, 1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current:
Federal $15,772,000 $ 920,000
State 2,088,000 350,000
Total current provision 17,860,000 1,270,000
Deferred:
Federal 571,000 (582,000)
State 69,000 (138,000)
Total deferred provision 640,000 (720,000)
Initial recognition of deferred income taxes
resulting from change in tax status - 3,780,000
Total income tax provision $18,500,000 $4,330,000
A reconciliation of statutory Federal tax rate to the actual effective
income tax rate for the year ended December 29, 1996, and to the pro forma
and actual effective income tax rates for the year ended December 31, 1995,
is as follows:
</TABLE>
<TABLE>
<CAPTION>
1995
1996 PRO
ACTUAL FORMA ACTUAL
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
State taxes, net of Federal benefit and state credits 3.0 5.3 1.7
Tax-exempt investment income (0.4) (0.6) (0.6)
Targeted Jobs Tax Credit - (1.1) -
Income taxes recognized as a result of a change in tax status - - 30.3
S Corporation income taxed to its share owners - - (33.2)
Other 0.1 1.5 1.5
Effective rate 37.7% 40.1% 34.7%
</TABLE>
The pro forma income data in the accompanying statements of income provides
information as if the Company had been treated as a C Corporation for income
tax purposes for all periods presented.
The significant components of deferred income tax assets and liabilities as
of December 29, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred income tax assets:
Payroll and related $ 788,000 $ 397,000
Allowance for doubtful accounts 156,000 110,000
Other 10,000 176,000
Total deferred income tax assets 954,000 683,000
Deferred income tax liabilities:
Change in tax accounting method (cash to accrual) 1,683,000 2,756,000
Prepaid expenses 428,000 -
Preoperating costs 261,000 303,000
Fixed assets 1,745,000 272,000
Other 537,000 412,000
Total deferred income tax liabilities 4,654,000 3,743,000
Net deferred income tax liabilities $3,700,000 $3,060,000
</TABLE>
No valuation allowance for deferred income tax assets at December 29, 1996
and December 31, 1995 has been recorded as the Company believes it is more
likely than not that the deferred tax assets will be realized in the future.
3. PROPERTY AND EQUIPMENT
At December 29, 1996 and December 31, 1995, property and equipment along
with corresponding estimated useful lives consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
1996 1995 LIFE
<S> <C> <C> <C>
Building and leasehold improvements $ 17,534,761 $ 7,214,706 2-39 years
Telecommunications equipment 51,144,075 16,648,311 3-7 years
Furniture and office equipment 12,301,408 6,175,863 5-7 years
Construction in progress 15,541,922 2,065,989 -
Total property and equipment 96,522,166 32,104,869
Less - accumulated depreciation 18,077,786 8,488,502
Property and equipment, net $ 78,444,380 $ 23,616,367
</TABLE>
The gross cost of equipment capitalized under capital lease obligations
included above is $4,426,032 at December 29, 1996 and December 31, 1995.
At December 29, 1996, the Company had fixed asset purchase commitments of
approximately $4,800,000 related to investments in Customer Contact Centers.
The Company reviews intangible assets and other long-lived assets for
impairment whenever events or circumstances indicate that carrying amounts
may not be recoverable. To date, no such events or changes in circumstances
have occurred. If such events or changes in circumstances occur, the Company
will recognize an impairment loss if the undiscounted future cash flows
expected to be generated by the asset (or acquired business) are less than
the carrying value of the related asset. The impairment loss would adjust
the asset to its fair value.
4. DEBT
In June 1996, the Company entered into a new unsecured line-of-credit
facilities agreement (the "Credit Facility") with a syndicate of banks, and
terminated all prior line-of-credit facilities. The Company has two separate
line-of-credit facilities in place. The credit lines consist of a revolving
facility of $20,000,000 (the "Revolving Facility") and a $20,000,000
revolving credit facility which may be converted into a term loan (the
"Convertible Revolving Facility"). As of December 29, 1996, the Company had
borrowings totaling $15,900,000 under the Credit Facility, which the Company
has classified as current indebtedness, as amounts outstanding fluctuate
based upon the working capital position of the Company. The effective
interest rate on outstanding borrowings under the Credit Facility was 8.25%
at December 29, 1996.
The Revolving Facility matures in May 1999, with two one-year renewal
options which are subject to the lender's acceptance. At December 29, 1996,
the Company had $14,100,000 of unused availability under the Revolving
Facility.
The Convertible Revolving Facility expires in May 2000, unless converted to
a term loan. At any time during the term of the Convertible Revolving
Facility, the Company may elect to convert all or part of the outstanding
draws into a term loan which matures in quarterly installments beginning on
the last day of the calendar quarter during which the term loan was made and
terminates the earlier of the third anniversary of the relevant commencement
date or May 31, 2001. The minimum amount which can be converted at any one
time is $1,000,000. As of December 29, 1996, the Company had $10,000,000 of
unused availability under the Convertible Revolving Facility and has not
elected to convert any of the outstanding balance under this facility to a
term loan.
The Company has several interest rate options available under the Credit
Facility. The options include a domestic rate, an adjusted LIBOR rate, a
treasury rate and a fixed rate. The actual interest rate charged is based on
the existing market rate at the time the rate is selected by the Company,
plus a specified level of basis points, depending on the maintenance of
certain financial covenants. At December 29, 1996, the Company's effective
borrowing rate using the adjusted LIBOR rate would have been 5.6%. The
Company is required to maintain certain financial covenants, and is
restricted in its ability to pay dividends on common shares under terms of
the Credit Facility. At December 29, 1996, the Company was in compliance
with all financial covenants.
In August 1995, the Company refinanced its line-of-credit facilities with a
syndicate of banks. Proceeds from refinancing were used to retire
outstanding credit facilities in the amount of $11,787,520. At December 31,
1995, the Company had no borrowings under these lines of credit.
Long-term debt at December 29, 1996 and December 31, 1995 consists of the
following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Industrial Revenue Bonds, collateralized by a building, payable in varying
monthly installments through June 2008, bearing interest at 7.0%
adjustable semiannually thereafter to 71% of the average yield rate of U.S.
Treasury Bonds with a floor of 7.0% (7.0% in 1996 and 1995) $ 1,397,974 $ 1,466,412
Capital lease obligations, secured by related equipment, payable in varying
monthly installments through 1998, with a weighted average interest rate of
6.9% 73,911 852,700
Total long-term debt 1,471,885 2,319,112
Less - Current maturities 146,474 845,397
Long-term debt, net
$ 1,325,411 $ 1,473,715
</TABLE>
The principal payments of long-term debt mature as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 78,759
1999 85,502
2000 92,842
2001 100,834
2002 and thereafter 967,474
Total long-term debt $1,325,411
</TABLE>
5. LEASE COMMITMENTS
The Company leases its Customer Contact Centers and administrative offices.
Rent expense for the fiscal years ended December 29, 1996, December 31, 1995
and January 1, 1995 was $3,186,855, $1,567,493 and $1,011,185, respectively.
Minimum future rental payments at December 29, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $4,248,485
1998 3,122,030
1999 1,885,329
2000 597,586
2012 84,853
Total $10,038,283
</TABLE>
6. SHARE OWNERS' EQUITY
Effective March 31, 1994, the Company authorized and issued a 60,000-for-1
stock split of common shares. On September 8, 1995, the Company completed a
3.3-for-1 stock split. On May 15, 1996, the Company completed a 2-for-1
stock split in the form of a stock dividend. All per share information
included in these financial statements has been adjusted to reflect these
splits retroactively.
On October 16, 1995, the Company issued 6,600,000 common shares in
connection with an initial public offering.
At December 29, 1996, the Company had reserved 5,915,034 common shares for
issuance in connection with the exercise of stock options or purchases under
the Company's employee stock purchase plan.
As of December 31, 1995, the Company had accrued distributions of
$2,809,000, based upon the undistributed taxable income attributable to the
Company's tax status as an S Corporation prior to the initial public
offering. These distributions were paid in fiscal 1996 to the Company's S
Corporation share owners of record prior to its initial public offering upon
the Company's filing of its corporate income tax returns.
7. STOCK OPTIONS
The Company has granted options to purchase common shares under several
plans. In 1995, the Company adopted an Incentive Stock Plan and a Nonemployee
Director Stock Option Plan. Officers, key employees and non-employee
consultants may be granted non-qualified stock options, incentive stock
options, stock appreciation rights, performance shares and stock awards under
the Incentive Stock Plan. A committee of the Board of Directors administers
the Incentive Stock Plan and is authorized to determine the key employees to
whom, and the times at which, the options and other benefits are to be
granted, the number of shares subject to each option, the applicable vesting
schedule, and the exercise price provided that the exercise price may not be
less than 100% and 85% of the fair market value of the common shares at the
date of grant for incentive stock options and non-qualified stock options,
respectively. The Nonemployee Director Stock Option Plan provides for annual
grants of non-qualified stock options to each non-affiliated director of the
Company. The option will allow such directors to purchase 5,000 common
shares at an amount equal to the fair market value of the common shares on
the date of grant. These options vest equally over a three year period.
Options under both plans expire at periods between ten and fifteen years
after issuance.
On May 26, 1995, the Company granted an officer an option to purchase
565,034 common shares at an aggregate price of $1,764,705, with an average
exercise price of $3.12 per share. Upon sale of all or substantially all of
its assets or stock prior to May 1998, the officer has the right to sell this
option back to the Company for an amount determined with reference to the
amount received in such sale. The option vests 20% on May 31 of each year
through 2000 and has a term of 10 years. The weighted average fair value of
this option at the date of grant was $1.83 per share, based upon the
assumptions described below using the Black-Scholes option pricing model. At
December 29, 1996, 113,007 of these options were vested.
Stock option activity for the Company's stock options plans for the years
ended December 29, 1996, and December 31, 1995, is as follows:
<TABLE>
<CAPTION>
INCENTIVE STOCK PLAN
WEIGHTED AVERAGE
SHARES PRICE RANGE EXERCISE PRICE
<S> <C> <C> <C>
Outstanding as of January 1, 1995
Granted 1,312,784 $6.31-$15.44 $6.43
Exercised - - -
Canceled - - -
Outstanding as of December 31, 1995 1,312,784 $6.31-$15.44 $6.43
Granted 1,170,711 $22.43-$51.75 $28.71
Exercised (273,558) $6.31-$28.63 $6.79
Canceled (218,667) $6.31-$42.88 $13.04
Outstanding as of December 29, 1996 1,991,270 $6.31-$51.75 $18.75
Stock options exercisable at
December 29, 1996 104,817 $6.48
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
WEIGHTED AVERAGE
SHARES PRICE RANGE EXERCISE PRICE
Outstanding as of January 1, 1995
Granted 30,000 $8.00 $ 8.00
Exercised - - -
Canceled - - -
Outstanding as of December 31, 1995 30,000 $8.00 $ 8.00
Granted 15,000 $37.35-$38.12 $37.83
Exercised - - -
Canceled (10,000) $8.00 $ 8.00
Outstanding as of December 29, 1996 35,000 $8.00-$38.12 $20.78
Stock options exercisable at
December 29, 1996 4,000 $ 8.00
</TABLE>
Additional information with respect to options outstanding under the
Incentive Stock Plan at December 29, 1996, includes:
<TABLE>
<CAPTION>
EXERCISE PRICE RANGES
$6.31 TO $22.44 TO $40.75 TO
$15.44 $39.13 $51.75
<S> <C> <C> <C>
Number Outstanding at
December 29, 1996 1,078,375 653,276 259,619
Remaining Life 8.7 years 9.3 years 9.9 years
Weighted Average
Exercise Price $7.89 $28.45 $43.53
Number Exercisable at
December 29, 1996 104,817 - -
Weighted Average
Exercise Price $6.48 - -
</TABLE>
The fair value of each option is estimated on the date of grant based on the
Black-Scholes option pricing model assuming, among other things, no dividend
yield, a risk-free interest rate of 6.5%, Expected volatility of 70% and an
expected life of 7.5 Years.
Had the Company accounted for its stock options in accordance with Statement
123, pro forma net income and pro forma net income per share would have been
approximately $29,830,000 and $0.63 In 1996, and $7,310,000 and $0.18 In
1995, respectively. The pro forma disclosure is not likely to be indicative
of pro forma results which may be expected in future years because of the
fact that options vest over several years, compensation expense is recognized
as the options vest and additional awards may also be granted.
8. COMMITMENTS AND CONTINGENCIES
At December 29, 1996 and December 31, 1995, the Company had guaranteed the
repayment of approximately $773,000 and $974,000, respectively, of the
remaining outstanding community college bond obligations, which were issued
in connection with various job training agreements. At December 29, 1996,
the Company estimates that the deposits made into escrow will be adequate to
cover the cost of the maturing bonds.
9. BENEFIT PLANS
In October 1995, the Company adopted a 401(k) savings plan. Employees
meeting certain eligibility requirements, as defined, may contribute up to
15% of pretax gross wages, subject to certain restrictions. The Company
makes matching contributions of 25% of the first 6% of employee wages
contributed to the plan. Company matching contributions vest 20% per year
over a five year period. For the years ended December 29, 1996 and December
31, 1995 the Company made matching contributions of approximately $102,000
and $16,000 to the plan, respectively.
In 1996, share owners of the Company adopted an employee stock purchase
plan. The plan is administered by the compensation committee and permits
eligible employees to purchase an aggregate of 600,000 common shares at 85%
of the lesser of the current market closing price of the Company's common
shares at the beginning or end of a quarter. Employees may annually purchase
common shares up to the lesser of 15% of their gross wages or $25,000.
During 1996, 12,059 common shares were issued to employees under this plan.
10. TRANSACTIONS WITH RELATED PARTIES
The Company paid distributions in the amount of $2,809,000 in 1996 to its S
Corporation share owners of record prior to the Company's initial public
offering. Such payment related to share owner tax obligations and
undistributed S Corporation taxable income.
Several share owners of the Company sold an aggregate of 6,770,000 and
4,600,000 common shares in February 1996 and October 1996, respectively, in
an underwritten public offering pursuant to a registration rights agreement
which was entered into by the Company and such share owners prior to the
Company's initial public offering. Costs of the February 1996 offering
totalling $360,000 have been included as selling, general and administrative
expense during the year ended December 29, 1996. The selling share owners of
the October 1996 public offering have agreed to reimburse the Company for
costs it incurred on their behalf. At December 29, 1996, the Company has a
receivable from these share owners totaling $300,000.
11. BUSINESS COMBINATION
In January 1996, the Company hired The Shechtman Group, a management
consulting firm, to provide leadership consulting services. On November 29,
1996, the Company issued 54,440 common shares in exchange for a 100% equity
interest in The Shechtman Group. This transaction has been accounted for as
a pooling of interests. All intercompany transactions have been eliminated.
The chief executive officer and managing director of The Shechtman Group is
also a director of the Company.
12. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth Full
For the Fiscal Years Ended Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
December 29, 1996
Net revenue $48,144,496 $65,098,316 $75,360,999 $87,838,695 $276,442,506
Gross profit 13,757,657 19,310,744 22,989,326 26,417,414 82,475,141
Net income 4,714,901 7,120,588 8,620,009 10,094,753 30,550,251
Net income per share $0.10 $0.15 $0.18 $0.21 $0.64
December 31, 1995
Net revenue $17,864,765 $22,777,581 $24,142,850 $36,881,274 $101,666,470
Gross profit 6,383,646 7,068,734 6,706,080 9,526,196 29,684,656
Net income 2,526,099 2,971,597 2,231,587 423,821 8,153,104
Pro forma net income 1,536,832 1,807,864 1,354,656 2,783,752 7,483,104
Pro forma net income per share $ 0.04 $ 0.05 $ 0.03 $ 0.06 $ 0.18
</TABLE>
The Company reduced its annual effective tax rate in the fourth quarter from
39.0% to 37.7% as a result of tax planning strategies which have reduced
state income taxes payable. This change resulted in an effective rate of
34.9% for the fourth quarter.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Share Owners of APAC TeleServices, Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements of APAC TELESERVICES, INC. included in this Form 10-
K and issued our report thereon dated January 28, 1997. Our audits were made
for the purpose of forming an opinion on the basic financial statements taken
as a whole. The schedule of Valuation and Qualifying Accounts is presented
for purposes of complying with the Securities and Exchange Commission rules
and is not a part of the basic financial statements. This schedule has been
subject to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material
respect the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
January 28, 1997
Schedule II
<TABLE>
VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Column A Column B Column C Column D Column E
Additions
Balance at Charged to
Beginning of Costs and Deductions- Balance at End
Description Period Expenses Describe(A) of Period
<S> <C> <C> <C> <C>
Allowance deducted from assets to
which it applies:
Allowance for doubtful accounts:
Year ended January 1, 1995 0 1,167 (1,167) 0
Year ended December 31, 1995 0 246,061 (6,061) 240,000
Year ended December 29, 1996 240,000 120,000 0 360,000
NOTE A - UNCOLLECTED RECEIVABLES WRITTEN OFF.
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item (except for the information regarding
executive officers required by Item 401 of Regulation S-K which is included
in Part I under the caption "Executive Officers of Registrant") is set forth
in the Company's Proxy Statement for the Annual Meeting of Share owners to be
held on May 20, 1997, under the caption "Election of Directors," which
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of Share Owners to be held on May 20, 1997,
under the caption "Compensation of Executive Officers," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of Share Owners to be held on May 20, 1997,
under the caption "Securities Beneficially Owned by Principal Share Owners
and Management," which information is incorporated hereby by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth in the Company's Proxy
Statement for the Annual Meeting of Share Owners to be held on May 20, 1997,
under the caption "Certain Transactions" which information is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)1. FINANCIAL STATEMENTS
The following financial statements of the Company are included in Part
II, Item 8:
(i) Report of Independent Public Accountants
(ii) Balance Sheets as of December 29, 1996 and December 31, 1995
(iii) Statements of Income for the Fiscal Years Ended December 29,
1996, December 31, 1995 and January 1, 1995
(iv) Statements of Share Owners' Equity for the Fiscal Years Ended
December 29, 1996, December 31, 1995 and January 1, 1995
(v) Statements of Cash Flows for the Fiscal Years Ended
December 29, 1996, December 31, 1995 and January 1, 1995
(vi) Notes to Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is submitted as part of
this report:
Schedule II - Valuation and Qualifying Accounts
All other schedules are not submitted because they are not applicable
or are not required under Regulation S-X or because the required
information is included in the financial statements or notes thereto.
3. EXHIBITS
The exhibits required by Item 601 of Regulation S-K are listed in the
Exhibit Index hereto.
(B) REPORTS ON FORM 8-K
The Registrant filed a Current Report on Form 8-K on October 17, 1996
which disclosed its revenues and earnings for each of the thirteen weeks and
thirty-nine weeks ended September 29, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
APAC TeleServices, Inc.
/S/ Theodore G. Schwartz
Theodore G. Schwartz
Chairman of the Board of Directors,
President and Chief Executive Officer
Dated: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ Theodore g. Schwartz Chairman of the Bard of March 28, 1997
Theodore G. Schwartz Directors, President
and Chief Executive
Officer (Principal
Executive Officer)
/s/ Marc S. Simon Chief Financial Officer March 28, 1997
Marc S. Simon and Director,
(Principal Financial
Officer)
/s/ Philip B. Wade Vice President and March 28, 1997
Philip B. Wade Controller (Principal
Accounting Officer)
/s/ Thomas M. Collins Director March 28, 1997
Thomas M. Collins
/s/ Morris R. Shechtman Director March 28, 1997
Morris R. Shechtman
/s/ George D. Dalton Director March 28, 1997
George D. Dalton
/s/ Paul G. Yovovich Director March 28, 1997
Paul G. Yovovich
EXHIBIT INDEX
Exhibit
Number
Description
3.1 Amended and Restated Articles of Incorporation of
APAC TeleServices, Inc. is incorporated herein by
reference to Exhibit 3.1 to APAC TeleServices,
Inc.'s Registration Statement on Form S-3, as
amended, Registration No. 333-14097
3.2 Amended and Restated Bylaws of APAC TeleServices,
Inc. is incorporated herein by reference to
Exhibit 3.2 to APAC TeleServices, Inc.'s
Registration Statement on Form S-1, as amended,
Registration No. 33-95638
4.1 Specimen Common Stock Certificate is incorporated
herein by reference to Exhibit 4.1 to APAC
TeleServices, Inc.'s Registration Statement on
Form S-1, as amended, Registration No. 33-95638
*10.1 Amended and Restated APAC TeleServices, Inc. 1995
Incentive Stock Plan is incorporated herein by
reference to Exhibit 10.1 to APAC TeleServices,
Inc.'s Registration Statement on Form S-1, as
amended, Registration No. 33-95638
*10.2 Amended and Restated APAC TeleServices, Inc. 1995
Nonemployee Director Stock Option Plan is
incorporated herein by reference to Exhibit 10.2
to APAC TeleServices, Inc.'s Registration
Statement on Form S-1, as amended, Registration
No. 33-95638
*10.3 Employment Agreement with Marc S. Simon, as
amended,is incorporated herein by reference to
Exhibit 10.3 to APAC TeleServices, Inc.'s
Registration Statement on Form S-1, as amended,
Registration No. 33-95638
*10.4 Employment Agreement with Donald B. Berryman is
incorporated herein by reference to Exhibit 10.4
to APAC TeleServices, Inc.'s Registration
Statement on Form S-1, as amended, Registration
No. 33-95638
10.5 Credit Agreement is incorporated herein by
reference to Exhibit 10.5 to APAC TeleServices,
Inc.'s Registration Statement on Form S-3, as
amended, Registration No. 333-14097
10.6 Agreement with United Parcel Service General
Services Inc. is incorporated herein
by reference to Exhibit 10.6 to APAC
TeleServices, Inc.'s Registration Statement on
Form S-1, as amended, Registration No. 33-95638
10.7 Registration Rights Agreement is incorporated
herein by reference to Exhibit 10.7 to APAC
TeleServices, Inc.'s Registration Statement on
Form S-1, as amended, Registration No. 33-95638
10.8 Tax Agreement is incorporated herein by reference
to Exhibit 10.8 to APAC TeleServices, Inc.'s
Registration Statement on Form S-1, as amended,
Registration No. 33-95638
10.9 Agreement with J.C. Penney Insurance Company,
dated November 1, 1994 is incorporated herein by
reference to Exhibit 10.9 to APAC TeleServices,
Inc.'s Registration Statement on Form S-1, as
amended, Registration No. 33-95638
*10.10 Amendment No. 1 to Amended and Restated APAC
TeleServices, Inc. 1995 Incentive Stock Plan is
incorporated herein by reference to Exhibit 10.11
to APAC TeleServices, Inc.'s Registration
Statement on Form S-1, as amended, Registration
No. 33-95638
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Arthur Andersen LLP (filed herewith)
27.1 Financial Data Schedule (filed herewith)
* Indicates management employment contracts or compensatory plans or
arrangements.
Exhibit 21.1
APAC Insurance Services Agency, an Illinois corporation
APAC TeleServices General Partner, Inc., an Illinois corporation
APAC TeleServices of Illinois, Inc., an Illinois corporation
APAC TeleServices of Michigan, Inc., a Michigan corporation
APAC TeleServices of Texas, L.P., limited partnership
APAC TeleServices, L.L.C., an Illinois limited liability co.
The Shechtman Group, L.L.C., a Nevada limited liability co.<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-1718 on Form S-8, and Registration Statement
File No. 333-23575 on Form S-3.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 28, 1997<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains fifty-two week summary financial information extracted
from APAC TeleServices, Inc.'s 1996 Annual Report and Form 10-K and is qualified
in its entirety by reference to such Form 10-K filing.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-END> DEC-29-1996
<CASH> 141
<SECURITIES> 0
<RECEIVABLES> 56,509
<ALLOWANCES> 360
<INVENTORY> 0
<CURRENT-ASSETS> 62,284
<PP&E> 96,522
<DEPRECIATION> 18,078
<TOTAL-ASSETS> 141,381
<CURRENT-LIABILITIES> 48,930
<BONDS> 1,325
0
0
<COMMON> 465
<OTHER-SE> 87,741
<TOTAL-LIABILITY-AND-EQUITY> 141,381
<SALES> 0
<TOTAL-REVENUES> 276,443
<CGS> 0
<TOTAL-COSTS> 193,967
<OTHER-EXPENSES> 33,276
<LOSS-PROVISION> 120
<INTEREST-EXPENSE> 309
<INCOME-PRETAX> 49,050
<INCOME-TAX> 18,500
<INCOME-CONTINUING> 30,550
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,550
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.63
</TABLE>
