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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Period Ended June 28, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period From
-------------------- to
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Commission File Number 0-26786
APAC TELESERVICES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
Illinois 36-2777140
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(STATE OR OTHER JURISDICTION OF INCORPORATION OR (IRS EMPLOYER I.D. NUMBER)
ORGANIZATION)
</TABLE>
One Parkway North Center, Suite 510, Deerfield, Illinois 60015
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(847) 374-4980
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Not applicable
----------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Shares, $0.01 par value--49,028,420 shares outstanding as of August 6,
1998.
This Form 10-Q consists of 16 sequentially numbered pages. The Exhibit Index
appears on page 13.
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APAC TELESERVICES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of June 28,
1998, and December 28, 1997........................... 3
Consolidated Condensed Statements of Operations for the
Thirteen and Twenty-Six Weeks Ended June 28, 1998, and
June 29, 1997......................................... 4
Consolidated Condensed Statements of Cash Flows for the
Twenty-Six Weeks Ended June 28, 1998, and June 29,
1997.................................................. 5
Notes to Consolidated Condensed Financial Statements... 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 9-12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 13
Item 6. Exhibits and Reports on Form 8-K.................... 13
Signatures.................................................. 14
Exhibits.................................................... 15-16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APAC TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 28, DECEMBER 28,
1998 1997
(UNAUDITED) (AUDITED, NOTE 1)
----------- -----------------
(000'S OMITTED,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 3,839 $ 219
Accounts receivable, net.................................. 97,966 73,462
Deferred tax assets....................................... 8,620 200
Other current assets...................................... 3,322 2,273
-------- --------
Total current assets................................... 113,747 76,154
PROPERTY AND EQUIPMENT...................................... 156,127 136,291
Less--accumulated depreciation.............................. 51,258 38,825
-------- --------
Property and equipment, net............................ 104,869 97,466
GOODWILL AND OTHER INTANGIBLE ASSETS........................ 152,457 13,522
Less--accumulated amortization.............................. 2,394 894
-------- --------
Goodwill and other intangible assets, net.............. 150,063 12,628
OTHER ASSETS................................................ 4,687 1,497
-------- --------
Total assets........................................... $373,366 $187,745
======== ========
LIABILITIES AND SHARE OWNERS' EQUITY
CURRENT LIABILITIES:
Notes payable............................................. $ 24,500 $ 23,802
Accounts payable.......................................... 10,120 11,156
Income taxes payable...................................... 476 389
Other current liabilities................................. 64,918 20,292
-------- --------
Total current liabilities.............................. 100,014 55,639
LONG-TERM DEBT, NET......................................... 141,781 1,863
DEFERRED INCOME TAXES....................................... 4,290 5,460
OTHER LIABILITIES........................................... 580 --
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, 48,852,000 shares issued and outstanding at
June 28,1998; 48,794,000 shares issued and outstanding
at December 28, 1997................................... 489 488
Additional paid-in capital................................ 92,376 91,788
Retained earnings......................................... 33,836 32,507
-------- --------
Total share owners' equity............................. 126,701 124,783
-------- --------
Total liabilities and share owners' equity.................. $373,366 $187,745
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
3
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APAC TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
--------------------- ----------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1998 1997 1998 1997
--------- -------- --------- ---------
(000'S OMITTED, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenue...................................... $107,248 $91,586 $198,729 $181,904
OPERATING EXPENSES:
Cost of services............................... 86,157 66,036 156,841 131,399
Selling, general and administrative expenses... 15,673 11,353 27,882 22,306
Restructuring charge........................... 9,000 -- 9,000 --
-------- ------- -------- --------
Total operating expenses.................... 110,830 77,389 193,723 153,705
-------- ------- -------- --------
Income (loss) from operations.................. (3,582) 14,197 5,006 28,199
Interest expense, net............................ 1,686 309 2,157 638
-------- ------- -------- --------
Income (loss) before income taxes.............. (5,268) 13,888 2,849 27,561
Provision for income taxes (credit).............. (1,680) 5,275 1,520 10,475
-------- ------- -------- --------
Net income (loss)........................... $ (3,588) $ 8,613 $ 1,329 $ 17,086
======== ======= ======== ========
Net income (loss) per share:
Basic.......................................... $ (0.07) $ 0.18 $ 0.03 $ 0.37
Diluted........................................ $ (0.07) $ 0.18 $ 0.03 $ 0.36
======== ======= ======== ========
Weighted average number of shares outstanding:
Basic.......................................... 48,852 46,729 48,832 46,634
Diluted........................................ 49,585 48,172 49,731 48,058
======== ======= ======== ========
</TABLE>
See notes to consolidated condensed financial statements.
4
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APAC TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
-----------------------
JUNE 28, JUNE 29,
1998 1997
---------- ---------
(000'S OMITTED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 1,329 $ 17,086
Depreciation and amortization............................. 16,089 8,788
Deferred income taxes..................................... (3,851) 700
Change in operating assets and liabilities................ 9,326 (10,705)
--------- --------
Net cash provided by operations........................ 22,893 15,869
INVESTING ACTIVITIES:
Payment for ITI Holdings, Inc., net of cash acquired...... (149,229) --
Purchases of property and equipment, net.................. (3,914) (29,862)
--------- --------
Net cash used by investing activities.................. (153,143) (29,862)
FINANCING ACTIVITIES:
Proceeds from Term Loan................................... 150,000 --
Proceeds from refinancing revolving credit facility....... 15,000 --
Repayment of revolving credit facility with proceeds from
refinancing............................................ (7,500) --
Net borrowings (payments) from revolving credit
facility............................................... (20,250) 5,600
Payments on long-term debt................................ (220) (91)
Increase (decrease) in book overdraft..................... (1,561) 3,161
Proceeds from employee stock transactions, including
related tax benefits................................... 589 5,199
Payment of debt issuance costs............................ (2,188) --
--------- --------
Net cash provided by financing activities.............. 133,870 13,869
--------- --------
NET INCREASE (DECREASE) IN CASH............................. $ 3,620 $ (124)
========= ========
</TABLE>
See notes to consolidated condensed financial statements.
5
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APAC TELESERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 28, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the thirteen and twenty-six week periods
ended June 28, 1998, are not necessarily indicative of the results that may be
expected for the fiscal year ending December 27, 1998. The balance sheet at
December 28, 1997, has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. For
additional information, refer to financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended December
28, 1997.
2. OTHER CURRENT LIABILITIES
The components of other current liabilities included in the consolidated
condensed balance sheets as of June 28, 1998, and December 28, 1997, are as
follows:
<TABLE>
<CAPTION>
1998 1997
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(000'S OMITTED)
<S> <C> <C>
Payroll and related items.......................... $21,918 $14,555
Telecommunication costs............................ 2,629 1,643
Acquisition-related liabilities.................... 23,280 --
Restructuring charge............................... 8,420 --
Other.............................................. 8,671 4,094
------- -------
Total......................................... $64,918 $20,292
======= =======
</TABLE>
3. DEBT
On May 20, 1998, the Company completed a new $250.0 million Senior Secured
Credit Facility ("Senior Facility") and repaid the amount outstanding under a
prior line-of-credit facility. The Senior Facility consists of a $100.0 million
Revolving Facility and a $150.0 million Term Loan. The Senior Facility will
mature in five years with the Term Loan amortizing quarterly. Proceeds from the
Term Loan were used to acquire the common stock of ITI Holdings, Inc. while the
Revolving Facility will be used to provide working capital for general corporate
purposes. The Company has several variable interest rate options available for
the Revolving Facility. The other terms and conditions of the Senior Facility
are similar to the terms and conditions of the Company's prior credit facility.
The Company has entered into interest rate agreements to fix the rate
(7.01% at June 28, 1998) on its Term Loan. As of June 28, 1998, the Company had
an interest rate swap with a notional value of $100.0 million and an interest
rate cap with a notional value of $50.0 million which effectively caps the
30-day LIBOR rate at approximately 6.0%. At June 28, 1998, the carrying value of
the interest rate agreements approximated their fair value as the fixed rate
approximated the current market rate.
6
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APAC TELESERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 28, 1998
(UNAUDITED)
4. ACQUISITION
On May 20, 1998, the Company acquired through merger all of the common
stock of ITI Holdings, Inc. ("ITI") the sole shareholder of ITI Marketing
Services, Inc., a leading teleservices provider based in Omaha, Nebraska. In
exchange for all of the common stock of ITI, the Company paid $149.2 million,
net of cash acquired and will pay up to an additional $12.5 million in cash if
ITI subsequently obtains certain customer contracts. The initial purchase price
was funded with proceeds from a $150.0 Term Loan. ITI provides telephone-based
sales, marketing and customer management services to corporate clients that have
high volumes of incoming and/or outgoing calls through a network of twenty-four
customer optimization centers. The acquisition has been accounted for as a
purchase and accordingly, the assets and liabilities and results of operations
of ITI have been included in the Company's consolidated condensed financial
statements since the date of acquisition.
The excess of purchase price over the fair value of assets acquired,
liabilities assumed and additional liabilities recorded of $138.9 million has
been allocated to intangible assets based upon their fair values. Allocations
are subject to valuations as of the date of the acquisition based on an
appraisal which has not yet completed. Final allocations may be different from
amounts presented as of June 28, 1998. Intangible assets acquired consist of
$3.6 million for assembled workforce, $36.8 million for customer relationships
and $98.5 for goodwill. Intangible assets are amortized over their estimated
useful lives which range from 7 to 25 years.
The pro forma results of operations below give effect to actual results as
if the acquisition had occurred on December 29, 1997, and December 30, 1996,
respectively, and include adjustments for unfavorable telephone contracts,
goodwill and intangible asset amortization, interest expense and income taxes.
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS FIFTY-TWO WEEKS
ENDED ENDED
JUNE 28, 1998 DECEMBER 28, 1997
---------------- -----------------
(000'S OMITTED, EXCEPT PER SHARE
DATA)
(UNAUDITED)
<S> <C> <C>
Net revenue.................................. $261,229 $501,964
Income (loss) before cumulative effect of
accounting change.......................... 1,459 (8,360)
Net income (loss)............................ 1,459 (10,560)
======== ========
Per share data:
Basic:
Income (loss) before cumulative effect
of accounting change.................. $ 0.03 $ (0.17)
Net income (loss)....................... $ 0.03 $ (0.22)
======== ========
Diluted:
Income (loss) before cumulative effect
of accounting change.................. $ 0.03 $ (0.17)
Net income (loss)....................... $ 0.03 $ (0.22)
======== ========
</TABLE>
The pro forma results of operations do not necessarily represent operating
results which would have occurred if the acquisition had taken place on the
basis assumed above, nor are they indicative of future operating results of the
combined companies.
7
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APAC TELESERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 28, 1998
(UNAUDITED)
5. RESTRUCTURING
In connection with the acquisition of ITI, the Company identified
opportunities to improve its operating efficiencies and reduce costs.
Accordingly, on June 24, 1998, the Company adopted a restructuring plan which
included closing four customer optimization centers, reconfiguring certain
administrative support facilities and reducing the workforce by approximately 80
salaried employees. The restructuring charge of $9.0 million includes $4.5
million for write-down of leasehold improvements and equipment, $3.3 million for
employee severance costs and $1.2 million for lease termination costs. The
restructuring is expected to be completed by December 27, 1998. On an after-tax
basis, the restructuring charge amounted to $5.5 million or $0.11 per share.
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("SFAS No. 130") "Reporting
Comprehensive Income," which established standards for reporting of
comprehensive income. This pronouncement requires that all items recognized
under accounting standards as components of comprehensive income, as defined in
the pronouncement, be reported in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income includes
all changes in equity during a period except those resulting from investments by
share owners and distributions to share owners. The financial statement
presentation under SFAS No. 130 is effective for all fiscal years beginning
after December 15, 1997, and is required in all interim period financial
statements. The Company adopted the provisions of SFAS No. 130 in January 1998.
As of June 28, 1998, the Company had no transactions separately identified as
components of "other comprehensive income" under SFAS No. 130.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133") "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contacts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. This pronouncement requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The Company has
not yet quantified the impacts of adopting SFAS No. 133 on its financial
statements and has not determined the timing of or method of adoption of SFAS
No. 133.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
APAC TeleServices, Inc. and Subsidiaries (the "Company") provides high
volume telephone-based sales, marketing and customer management solutions for
corporate clients operating in the business and consumer products, parcel
delivery, financial services, insurance, retail, technology, telecommunications
and utilities industries throughout the United States. The Company's client base
is comprised of large companies with the need for cost-effective means of
contacting and servicing current and prospective customers. The Company has
three service offerings. The Sales Solutions division provides outbound sales
support to consumers and businesses, market research, targeted marketing plan
development and customer lead generation, acquisition and retention. The Service
Solutions division provides inbound customer service, direct mail response,
"help" line support and customer order processing. In August, 1997, the Company
expanded its service offerings through the acquisition of Paragren Technologies,
Inc. ("Paragren") which specializes in software-based consumer marketing to
optimize customer relationships. Paragren's software enables marketing
professionals to perform on-line exploratory analysis, descriptive and
predictive modeling, promotion planning, detailed customer segmentation, and
campaign execution and evaluation. The results of Paragren's operations are
included with the results of operations of the Service Solutions division. In
May 1998, the Company increased its market presence with the acquisition of ITI
Holdings, Inc. ("ITI"), the sole shareholder of ITI Marketing Services, Inc.
ITI, like the Company, provides telephone-based sales, marketing and customer
management services to corporate clients. As of June 28, 1998, the Company
operated and managed approximately 13,800 workstations in 89 customer
optimization centers, including 3,300 workstations and 24 customer optimization
centers acquired with the purchase of ITI.
The Company's results of operations in any single interim period should not
be viewed as an indication of future results of operations. The Company may
experience quarterly variations in net revenue and operating income as a result
of 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. While the effects of seasonality on APAC's business
have 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.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- CONTINUED
The following table sets forth statement of operations data as a percent of
net revenue from services provided by the Company for the thirteen and
twenty-six week periods ended June 28, 1998, and June 29, 1997.
<TABLE>
<CAPTION>
THIRTEEN WEEKS TWENTY-SIX WEEKS
ENDED ENDED
-------------------- --------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue:
Sales solutions................................... 51.5% 56.6% 49.6% 53.7%
Service solutions................................. 48.5 43.4 50.4 46.3
----- ----- ----- -----
Total net revenue.............................. 100.0 100.0 100.0 100.0
Operating expenses:
Cost of services.................................. 80.3 72.1 78.9 72.2
Selling, general and
administrative expenses........................ 14.6 12.4 14.0 12.3
Restructuring charge.............................. 8.4 -- 4.6 --
----- ----- ----- -----
Total operating expenses....................... 103.3 84.5 97.5 84.5
----- ----- ----- -----
Income (loss) from operations..................... (3.3) 15.5 2.5 15.5
Interest expense, net............................... 1.6 0.3 1.1 0.3
----- ----- ----- -----
Income (loss) before income taxes................. (4.9) 15.2 1.4 15.2
Provision for income taxes (credit)................. (1.6) 5.8 0.7 5.8
----- ----- ----- -----
Net income (loss).............................. (3.3)% 9.4% 0.7% 9.4%
===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
Net revenue for the quarter and six months ended June 28, 1998, increased
$15.7 million or 17.1% and $16.8 million or 9.2%, respectively, compared to the
same periods in 1997. Net revenue for the Sales Solutions division for the
quarter and six months ended June 28, 1998, increased $3.4 million or 6.6% and
$0.9 million or 0.9%, respectively, compared to the same periods in 1997 as a
result of the inclusion of revenue from ITI. Revenue from existing Sales
Solutions clients decreased $10.5 million or 10.8% during the first half of 1998
as compared to a year ago due to a decline in call volume from a large
telecommunications client and a reduction in average selling price. The
reduction in selling price resulted from changes in client mix and marketplace
pricing pressures which began in last half of 1997. The Service Solutions
division's net revenue for the quarter and six months ended June 28, 1998,
increased $12.2 million or 30.7% and $16.0 million or 18.9%, respectively, due
to service initiated for a new telecommunications client and the inclusion of
revenue from ITI and Paragren. Growth in revenue from existing Service Solutions
clients during the first half of 1998 principally was offset by a 30% reduction
in revenue from the Company's large parcel delivery client as a result of
improved operating efficiencies in the management of client-owned call centers.
Cost of services as percent of net revenue increased to 80.3% in the second
quarter of 1998 compared to 72.1% in the second quarter of 1997. For the first
six months of 1998, cost of services as a percent of net revenue was 78.9%
compared to 72.2% in the same period in 1997. The increases in cost of services
as a percent of net revenue were due to lower outbound selling prices, excess
outbound capacity and infrastructure resulting from reductions in expected
volumes from several clients and higher direct wages. The Company incurred
higher direct wages and related benefits designed to improve performance.
Selling, general and administrative expenses for the quarter and six months
ended June 28, 1998, increased $4.3 million or 38.1% and $5.6 million or 25.0%,
respectively, compared to the same periods in 1997. Selling, general and
administrative expenses as a percent of net revenue for the quarter and six
months ended
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- CONTINUED
June 28, 1998, increased to 14.6% and 14.0%, respectively, compared to 12.4% and
12.3%, respectively, a year ago. The increase in selling, general and
administrative expenses during the first half of 1998 was due to the inclusion
of selling, general and administrative expenses of ITI and Paragren and to the
amortization of goodwill and other intangible assets acquired in connection with
the acquisitions of both companies. Selling, general and administrative expenses
related to the Company's historical business activities during the first half of
1998 declined approximately 10% compared to the same period in 1997 due to
expense reductions in human resources and other administrative functions.
On June 24, 1998, the Company adopted a restructuring plan and recorded a
$9.0 million charge. On an after tax basis, the restructuring charge amounted to
$5.5 million or $0.11 per share. The restructuring charge provides for the
estimated costs to close four customer optimization centers, reconfigure certain
administrative support facilities and reduce the workforce by approximately 80
salaried employees.
Net interest expense for the quarter and six months ended June 28, 1998,
increased by $1.4 million and $1.5 million, respectively, compared to the same
periods in 1997. These increases reflect interest and amortization of debt
issuance costs on the new senior Secured Credit Facility ("Senior Facility")
used to finance the purchase of ITI on May 20, 1998.
The $1.5 million and $10.5 million provisions for income taxes recognized
for the six months ended June 28, 1998, and June 29, 1997, respectively, are
based upon the Company's estimated annual effective income tax rates. The
increase in the Company's effective income tax rate to 53.4% in 1998 from 38.0%
in 1997 was due to the amortization of non-deductible goodwill related to the
acquisitions of ITI and Paragren.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations during the first six months of 1998 totaled
$22.9 million, up $7.0 million over the first half of 1997. Income adjusted for
non-cash items and deferred taxes amounted to $13.6 million in the first six
months of 1998 compared to $26.6 million in the first half of 1997. The increase
in cash provided by operations in the first half of 1998 compared to a year ago
was due to a decrease in cash required for general working capital purposes as a
result of slower revenue growth from the Company's historical business
activities in 1998 than in 1997. The Company spent $3.9 million in the first
half of 1998 to standardize and upgrade telecommunications and business systems.
These expenditures were funded by cash from operations. A year earlier the $29.9
million investment to expand call center operations was funded by $5.2 million
of proceeds from the sale of stock to employees, $5.6 million of bank borrowings
and cash from operations. The decrease in capital expenditures in 1998 compared
to 1997 resulted from suitable capacity in place to serve current clients'
requirements.
On May 20, 1998, the Company entered into a new $250.0 million Senior
Facility and repaid the amount outstanding under a prior line-of-credit
facility. The Senior Facility consists of a $100.0 million Revolving Facility
and a $150.0 million Term Loan. In connection with securing the Senior Facility
the Company paid fees and expenses of $2.2 million. As of June 28, 1998, the
Company had outstanding borrowings of $10.9 million under the Revolving Facility
and $150.0 million under the Term Loan.
On May 20, 1998, the Company completed the acquisition of all of the common
stock of ITI Holdings, Inc. The purchase price was $149.2 million, net of cash
acquired and was financed with proceeds from the $150.0 million Term Loan
discussed above. The ITI acquisition is expected to contribute positively to the
Company's operating results beginning in fiscal year 1999.
The Company expects that cash from future operations and available
borrowings under the new Senior Facility will be sufficient to meet normal
operating needs as well as fund any additional business growth for the balance
of fiscal year 1998.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- CONTINUED
FORWARD-LOOKING STATEMENTS
Statements contained herein regarding the Company's expected growth,
prospective business opportunities and future expansion plans are
forward-looking statements that involve substantial risks and uncertainties. In
accordance with the Private Securities Litigation Reform Act of 1995, the
following are important factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements.
There can be no assurance that the Company will be able to maintain its growth
rate and effectively manage its profitability. Changes in or events affecting
clients' businesses may have a material impact on the Company's net revenue and
earnings. In the future, the Company may experience excess peak period capacity
when it opens a new customer optimization center or terminates or completes a
large client program. The Company's agreements with its clients generally do not
assure that the Company will generate a specific level of revenue, do not
designate the Company as the client's exclusive service provider, and are
terminable by the clients on relatively short notice. The Company's revenue and
profitability may also be affected by changes in client's use of telemarketing
programs as a method for customer acquisition and available telemarketing
capacity from the Company's competitors. In addition, the amount of revenue the
Company generates from a particular client generally is dependent upon
customers' interest in, and use of, the client's products or services. Readers
are encouraged to review the section captioned "Information Regarding
Forward-Looking Statements" in its annual report on Form 10-K for the year ended
December 28, 1997, which describe other important factors that may impact the
Company's business, results of operations and financial condition.
12
<PAGE> 13
APAC TELESERVICES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
<TABLE>
<S> <C> <C> <C>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Share Owners of the Registrant was held on
May 19, 1998.
(b) Not applicable.
(c) 1. Set forth below is the tabulation of the votes on each
nominee for election as a director:
</TABLE>
<TABLE>
<CAPTION>
NAME FOR WITHHOLD AUTHORITY
---- --- ------------------
<S> <C> <C>
Thomas M. Collins 45,700,153 1,142,834
George D. Dalton 46,456,675 386,312
Theodore G. Schwartz 46,446,423 396,564
Marc S. Simon 46,448,511 394,476
Morris R. Shechtman 46,447,876 395,111
Paul G. Yovovich 46,458,520 384,467
</TABLE>
<TABLE>
<S> <C> <C> <C>
2. Set forth below is the tabulation of the votes for the
proposal to approve the reservation of an additional 4,400,000
Common Shares to be available for issuance pursuant to the
Company's 1995 Stock Incentive Plan.
</TABLE>
<TABLE>
<S> <C>
For............................................. 28,482,336
Against......................................... 13,794,656
Withhold Authority.............................. 44,763
Broker Non-Vote................................. 4,521,232
</TABLE>
<TABLE>
<S> <C> <C> <C>
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are furnished as exhibits and numbered
pursuant to Item 601 of Regulation S-K: Exhibit (11)--Statement
Re: Computation of Earnings Per Share on page 15 and Exhibit
(27)--Financial Data Schedule on page 16.
Reports on Form 8-K. On March 30, 1998, the Company filed a
report on Form 8-K which advised investors about expected
earnings for the first quarter of 1998. On April 10, 1998, the
Company filed a report on Form 8-K which filed an amended and
restated 1995 Incentive Stock Plan. On April 20, 1998, the
Company filed a report on Form 8-K which disclosed its first
quarter results of operations. On May 1, 1998, the Company filed
a report on Form 8-K which announced that it had signed a
definitive agreement to acquire through merger ITI Holdings,
(b)
Inc. On June 14, 1998, the Company filed a report on Form 8-K
dated May 20, 1998, which disclosed that it had acquired through
merger ITI Holdings, Inc. On June 25, 1998, the Company filed a
current report on Form 8-K which announced a restructuring
charge for the second quarter of 1998 and advised investors
about expected earnings for the second, third and fourth
quarters of 1998.
Subsequent to the end of the quarter, the Company filed a report
on Form 8-K dated July 20, 1998, which disclosed its second
quarter results of operations. In addition, on August 3, 1998,
the Company filed a report on Form 8-K/A dated May 20, 1998,
which included audited financial statements for ITI Holdings,
Inc. as of December 31, 1997, 1996 and 1995, and unaudited pro
forma consolidated condensed financial statements for APAC
TeleServices and Subsidiaries consisting of a balance sheet as
of March 28, 1998, statement of operations for the fifty-two
weeks ended December 28, 1997, and statement of income for the
thirteen weeks ended March 29, 1998.
</TABLE>
13
<PAGE> 1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
<TABLE>
<CAPTION>
APAC TELESERVICES, INC.
<S> <C>
August 11, 1998 By: /s/ MARC S. SIMON
- ------------------------------------ -----------------------------------------------------
Date President and
Chief Operating Officer
August 11, 1998 By: /s/ JOHN I. ABERNETHY
- ------------------------------------ -----------------------------------------------------
Date Chief Financial Officer
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains the twenty-six week summary financial information
extracted from APAC TeleServices, Inc. and Subsidiaries' 1998 second quarter
Form 10-Q and is qualified in its entirety by reference to such Form 10-Q
filing.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-27-1997
<PERIOD-END> JUN-28-1998
<CASH> 3,839
<SECURITIES> 0
<RECEIVABLES> 97,966
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 113,747
<PP&E> 156,127
<DEPRECIATION> 51,258
<TOTAL-ASSETS> 373,366
<CURRENT-LIABILITIES> 100,014
<BONDS> 141,781
0
0
<COMMON> 489
<OTHER-SE> 126,212
<TOTAL-LIABILITY-AND-EQUITY> 373,366
<SALES> 0
<TOTAL-REVENUES> 198,729
<CGS> 0
<TOTAL-COSTS> 156,841
<OTHER-EXPENSES> 36,882
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,157
<INCOME-PRETAX> 2,849
<INCOME-TAX> 1,520
<INCOME-CONTINUING> 1,329
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,329
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
