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 March 29, 1998
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
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Parkway North Center, Suite 510 60015
Deerfield, Illinois (Zip Code
(Address of principal executive office)
(847) 374-4980
(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 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 periods 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 48,998,471 shares outstanding as of May 8, 1998.
This Form 10-Q consists of 12 sequentially numbered pages. The Exhibit Index
appears on page 10.
Index
APAC TELESERVICES, INC. AND SUBSIDIARIES
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of
March 29, 1998, and December 28, 1997 3
Consolidated Condensed Statements of Income for
the Thirteen Weeks Ended March 29, 1998, and
March 30, 1997 4
Consolidated Condensed Statements of Cash Flows
for the Thirteen Weeks Ended March 29,
1998, and March 30, 1997 5
Notes to Consolidated Condensed Financial
Statements as of March 29, 1998 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 10
EXHIBITS 11-12
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APAC TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 29, DECEMBER 28,
1998 1997
ASSETS (Unaudited) (Audited, Note 1)
(000's omitted, except share data)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,043 $ 219
Accounts receivable, net 66,762 73,462
Other current assets 2,775 2,473
Total current assets 70,580 76,154
PROPERTY AND EQUIPMENT 138,579 136,291
Less - accumulated depreciation 45,503 38,825
Property and equipment, net 93,076 97,466
Goodwill and other intangible assets 13,522 13,522
Less - accumulated amortization 1,182 894
Goodwill and other intangible assets, net 12,340 12,628
Other assets 2,672 1,497
Total assets $178,668 $187,745
LIABILITIES AND
SHARE OWNERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 13,401 $ 23,802
Accounts payable 7,685 11,156
Income taxes payable 3,146 389
Other current liabilities 18,422 20,292
Total current liabilities 42,654 55,639
LONG-TERM DEBT, NET 1,816 1,863
DEFERRED INCOME TAXES 4,130 5,460
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, 48,849,000 shares issued and
outstanding at March 29, 1998; 48,794,000 shares issued
and outstanding at December 28, 1997 489 488
Additional paid-in capital 92,155 91,788
Retained earnings 37,424 32,507
Total share owners' equity 130,068 124,783
Total liabilities and share owners' equity $178,668 $187,745
See notes to consolidated condensed financial statements.
</TABLE>
APAC TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
MARCH 29, MARCH 30,
1998 1997
(000's omitted, except per share data)
<S> <C> <C>
Net revenue $91,481 $90,318
Operating expenses:
Cost of services 70,684 65,363
Selling, general and
administrative expenses 12,209 10,953
Total operating expenses 82,893 76,316
Income from operations 8,588 14,002
Interest expense, net 471 329
Income before income taxes 8,117 13,673
Provision for income taxes 3,200 5,200
Net income $ 4,917 $8,473
Net income per share:
Basic
$ 0.10 $0.18
Diluted
$ 0.10 $0.18
Weighted average number of
shares outstanding:
Basic 48,812 46,586
Diluted 49,804 48,001
See notes to consolidated condensed financial statements.
</TABLE>
APAC TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE> THIRTEEN WEEKS ENDED
<CAPTION>
MARCH 29, MARCH 30,
1998 1997
(000's omitted)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,917 $ 8,473
Depreciation and amortization 7,061 4,058
Deferred income taxes (1,720) 1,040
Change in operating assets and liabilities 2,481 (8,526)
Net cash provided by operations 12,739 5,045
INVESTING ACTIVITIES--Purchases of property
and equipment, net (2,288) (12,457)
FINANCING ACTIVITIES:
Net borrowings (payments) under credit facilities (10,400) 2,420
Payments on long-term debt (48) (60)
Increase in book overdraft 453 1,070
Exercise of employee stock options, including
related tax benefit 244 3,754
Proceeds from employee stock purchase plan 124 174
Net cash provided by (used in) financing activities (9,627) 7,358
Net increase (decrease) in cash $ 824 ($54)
See notes to consolidated condensed financial statements.
</TABLE>
APAC TELESERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 29, 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 week period ended March 29,
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. 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. 30 in January 1998. As of March 29,
1998, the Company had no transactions separately identified as components of
"other comprehensive income" under SFAS No. 130.
3. SUBSEQUENT EVENT
On April 30, 1998, the Company signed a definitive agreement to acquire through
merger ITI Holdings, Inc. ("ITI"), the sole shareholder of ITI Marketing
Services, Inc., a leading teleservices provider based in Omaha, Nebraska. In
exchange for 100% of the outstanding common stock of ITI, the Company will pay
$155.2 million in cash and up to an additional $12.5 million in cash if ITI
subsequently obtains certain customer contracts. With this purchase the
Company will operate 90 customer optimization centers and over 14,000
workstations. Combined revenue for the two companies for 1997 was approximately
$500 million. In connection with purchase of ITI, the Company has negotiated a
new $250 million Senior Secured Credit Facility ("Senior Facility") with a
syndicate of banks. The Senior Facility consists of a $100 million Revolving
Facility and a $150 million Term Loan. The Senior Facility will mature in five
years with the Term Loan amortizing quarterly. Proceeds from the Senior
Facility will be used to acquire the common stock of ITI, repay outstanding
debt and provide working capital for general corporate purposes. The Company
will be required to fix the interest rate for the Term Loan and will have
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 existing credit facility. The ITI purchase
and new Senior Facility are expected to close by the end of May.
APAC TELESERVICES, INC. AND SUBSIDIARIES
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.
During the first quarter of 1998, the Company operated and managed 10,770
workstations in 68 customer optimization centers.
APAC'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.
The following table sets forth consolidated statements of income data as a
percent of net revenue from services provided by the Company for the thirteen
week periods ended March 29, 1998, and March 30, 1997.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
MARCH 29, MARCH 30,
1998 1997
<S> <C> <C>
Net revenue:
Sales Solutions 47.3% 50.8%
Service Solutions 52.7 49.2
Total net revenue 100.0 100.0
Operating expenses:
Cost of services 77.3 72.4
Selling, general and
administrative expenses 13.3 12.1
Total operating expenses 90.6 84.5
Income from operations 9.4 15.5
Interest expense, net 0.5 0.4
Income before income taxes 8.9 15.1
Provision for income taxes 3.5 5.7
Net income 5.4% 9.4%
</TABLE>
APAC TELESERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED
RESULTS OF OPERATIONS
Net revenue increased 1.3% in the first quarter of 1998 to $91.5 million, up
$1.2 million over the first quarter of 1997. Net revenue for the Service
Solutions division was $48.2 million for the first quarter of 1998, an increase
of 8.3%, when compared to $44.5 million for the first quarter of 1997. The
Sales Solutions division net revenue was $43.3 million, down 5.5% from $45.8
million in the same period a year ago. Client concentration with the Company's
two largest clients, an inbound parcel delivery client and an outbound
telecommunications client, decreased by $14.7 million or 31.2% in the first
quarter of 1998 as compared to the same quarter last year. Revenue from all
other clients, increased by 36.8%, more than offsetting the declines from these
two major customers.
Cost of services as a percent of net revenue increased to 77.3% in the first
quarter of 1998 from 72.4% in the first quarter 1997. This increase was due to
three factors. First, the Company experienced lower margins as a result of
changes in client mix and marketplace pricing pressures arising in the last
half of 1997. Second, the Company absorbed fixed costs relating to excess
outbound capacity and infrastructure, such costs increasing as a percent of
net revenue due to marketing-related reductions in expected volumes from
several large clients. Finally, the Company incurred higher employee benefit
costs as a result of investment in a more comprehensive group health insurance
plan designed to improve employee retention.
Selling, general and administrative expenses increased to $12.2 million in the
first quarter of 1998 from $11.0 million in the first quarter of 1997, an
increase of $1.2 million or 11.5%. As a percent of net revenue, selling,
general and administrative expenses increased to 13.3% in 1998 from 12.2% in
1997. The increase in selling, general, and administrative expenses was due to
the inclusion of Paragren in results of operations in the first quarter of 1998.
The $3.2 million and $5.2 million provisions for income taxes recognized in the
quarters ended March 29, 1998, and March 28, 1997, respectively, are based upon
the Company's estimated annual effective tax rates. The increase in the
Company's effective tax rate to 39.5% in 1998 from 38.0% in 1997 is due to the
amortization of non-deductible goodwill related to the Paragren purchase.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations during the first quarter of 1998 totaled $12.7
million, up $7.7 million over the same quarter last year. The increase in cash
provided by operations in the first quarter of 1998 compared to the first
quarter of 1997 was due to a decrease in cash required for general working
capital purposes as a result of slower revenue growth in 1998 than in 1997.
The Company spent $2.3 million in the first quarter of 1998 to standarize and
upgrade telecommunications and business systems. These expenditures were
funded by cash from operations. A year earlier the $12.5 million investment
to expand call center operations was funded by $3.9 million of proceeds from
the sale of stock to employees, $2.4 million of bank borrowings and cash from
operations. The decrease in capital expenditures in 1998 compared to 1997 was
due to utilization of capacity placed into service in late 1996 and early 1997.
The Company has an $80.0 million Revolving Credit Facility ("Revolving
Facility") available for general working capital purposes and capital
expenditures. As of March 29, 1998, $13.2 million was outstanding under the
Revolving Facility. In connection with the purchase of ITI Marketing Services,
Inc. described in Note 3 to the Consolidated Condensed Financial Statements, the
Company will enter into a new $250 million Senior Secured Credit Facility
("Senior Facility"). 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 1998.
APAC TELESERVICES, INC. AND SUBSIDIARIES
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 or accelerate its growth
rate, effectively manage its growth or maintain its profitability. Changes in
or events affecting clients' businesses may have a material impact on the
Company's net revenue and earnings. There also can be no assurance that the
Company can build-out facilities in a timely and economic manner nor hire and
retain a sufficient number of employees to handle call volumes. In the future,
the Company may experience excess peak period capacity when it opens a new
customer optimization center or terminates, modifies 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. 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.
PART II. OTHER INFORMATION
APAC TELESERVICES, INC. AND SUBSIDIARIES
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 11 and Exhibit (27) - Financial Data Schedule on
page 12.
(b) Reports on Form 8-K. The Company was not required to file any reports on
Form 8-K for the thirteen week period ended March 29, 1998. Subsequent to
the end of the quarter, the Company filed three reports on Form 8-K. On
March 30, 1998, the Company filed a report on Form 8-K to advise investors
about expected first quarter earnings. On April 20, 1998, the Company
filed a report on Form 8-K which disclosed the Company's first quarter
results of operations. On May 1, 1998, the Company filed a report on Form
8-K announcing that it had signed a definitive agreement to acquire through
merger ITI Holdings, Inc.
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.
APAC TELESERVICES, INC.
Date: May 12, 1998 By: /s/ Theodore G. Schwartz
Chairman, President and
Chief Executive Officer
Date: May 12, 1998 By: /s/ John I. Abernethy
Chief Financial Officer
EXHIBITS
APAC TELESERVICES, INC. AND SUBSIDIARIES
EXHIBIT (11) - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
March 29, March 30,
1998 1997
(000's omitted, except per share data)
<S> <C> <C>
Basic shares:
Average shares outstanding 48,810 46,584
Net income $4,917 $8,473
Net income per share $0.10 $0.18
Diluted shares:
Average shares outstanding 48,810 46,586
Net effect of dilutive stock
options - based upon the
treasury stock method using
quarter-end market price 994 1,415
Total shares 49,804 48,001
Net income $4,917 $8,473
Net income per share $0.10 $0.18
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains the thirteen week summary financial information extracted
from APAC TeleServices, Inc. and Subsidiaries 1998 first quarter From 10-Q and
is qualified in its entirety by reference to such Form 10-Q filing.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS <F1>
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-END> MAR-29-1998
<CASH> 1,043
<SECURITIES> 0
<RECEIVABLES> 66,762
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 70,580
<PP&E> 138,579
<DEPRECIATION> 45,503
<TOTAL-ASSETS> 178,668
<CURRENT-LIABILITIES> 42,654
<BONDS> 1,816
0
0
<COMMON> 489
<OTHER-SE> 130,068
<TOTAL-LIABILITY-AND-EQUITY> 178,668
<SALES> 0
<TOTAL-REVENUES> 91,481
<CGS> 0
<TOTAL-COSTS> 70,684
<OTHER-EXPENSES> 12,209
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 471
<INCOME-PRETAX> 8,117
<INCOME-TAX> 3,200
<INCOME-CONTINUING> 4,917
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,917
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
<FN>
<F1> Thirteen weeks
</FN>
</TABLE>
