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 September 27, 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
Deerfield, Illinois 60015
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(Address of principal executive office) (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 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-47,300,715 shares outstanding as of November 9,
1998.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of September 27, 1998, and 3
December 28, 1997
Consolidated Condensed Statements of Income for the Thirteen and
Thirty-Nine Weeks Ended September 27, 1998, and September 28, 1997 4
Consolidated Condensed Statements of Cash Flows for the
Thirty-Nine Weeks Ended September 27, 1998, and
September 28, 1997 5
Notes to Consolidated Condensed Financial Statements as of
September 27, 1998 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBITS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APAC TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 27, DECEMBER 28,
1998 1997
ASSETS (Unaudited) (Audited, Note 1)
------------------------------------------------- ------------------ ----------------
(000's omitted, except share data)
CURRENT ASSETS:
Cash $ 13,252 $ 219
Accounts receivable, net 85,685 73,462
Deferred tax assets 5,875 200
Other current assets 3,530 2,273
----------- -----------
Total current assets 108,342 76,154
PROPERTY AND EQUIPMENT 155,710 136,291
Less - accumulated depreciation 58,769 38,825
----------- -----------
Property and equipment, net 96,941 97,466
GOODWILL AND OTHER INTANGIBLE ASSETS 149,240 13,522
Less - accumulated amortization 4,464 894
----------- -----------
Goodwill and other intangible assets, net 144,776 12,628
OTHER ASSETS 5,136 1,497
----------- -----------
Total assets $ 355,195 $ 187,745
=========== ===========
LIABILITIES AND SHARE OWNERS' EQUITY
- --------------------------------------------------------
CURRENT LIABILITIES:
Notes payable $ 16,819 $ 23,802
Accounts payable 6,964 11,156
Other current liabilities 57,789 20,681
----------- -----------
Total current liabilities 81,572 55,639
LONG-TERM DEBT, NET 137,143 1,863
DEFERRED INCOME TAXES 4,350 5,460
OTHER LIABILITIES 7,167 --
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, 48,881,000 shares issued
at September 27, 1998; 48,794,000 shares
issued and outstanding at December 28, 1997 489 488
Additional paid-in capital 92,866 91,788
Retained earnings 37,259 32,507
Less - treasury shares, at cost; 1,609,000
shares at September 27, 1998 (5,651) --
----------- -----------
Total share owner equity 124,963 124,783
----------- -----------
Total liabilities and share owners' equity $ 355,195 $ 187,745
=========== ===========
See notes to consolidated condensed financial statements
APAC TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------------------- -------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1998 1997
--------------- -------------- -------------- --------------
(000's omitted, except per share data)
Net revenue $119,343 $ 79,841 $318,072 $261,745
Operating expenses:
Cost of services 94,245 64,000 251,086 195,399
Selling, general and
administrative expenses 15,712 11,970 43,594 34,276
Restructuring charge -- -- 9,000 --
-------- -------- -------- --------
Total operating expenses 109,957 75,970 303,680 229,675
-------- -------- -------- --------
Income from operations 9,386 3,871 14,392 32,070
Interest expense, net 2,983 349 5,140 987
-------- -------- -------- --------
Income before income taxes 6,403 3,522 9,252 31,083
Provision for income taxes 2,980 1,504 4,500 11,979
======== ======== ======== ========
Net income $ 3,423 $ 2,018 $ 4,752 $ 19,104
======== ======== ======== ========
Net income per share:
Basic $ 0.07 $ 0.04 $ 0.10 $ 0.40
Diluted $ 0.07 $ 0.04 $ 0.10 $ 0.40
======== ======== ======== ========
Weighted average number of
shares outstanding:
Basic 48,505 47,637 48,773 46,983
Diluted 48,956 48,810 49,590 48,193
======== ======== ======== ========
See notes to consolidated condensed financial statements.
APAC TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THIRTY-NINE WEEKS ENDED
------------------------------------
SEPTEMBER 27, SEPTEMBER 28,
1998 1997
---------------- ---------------
(000's omitted)
OPERATING ACTIVITIES:
Net income $4,752 $19,104
Depreciation and amortization 26,701 15,868
Deferred income taxes (3,425) 1,116
Write-off of in-process research and
development costs -- 600
Change in operating assets and liabilities 27,767 (14,956)
---------------- ---------------
Net cash provided by operations 55,795 21,732
INVESTING ACTIVITIES:
Payments for acquisitions, net of cash
acquired (149,229) (897)
Purchases of property and equipment, net (6,805) (36,921)
---------------- ---------------
Net cash used by investing activities (156,034) (37,818)
FINANCING ACTIVITIES:
Proceeds from Term Loan 150,000 --
Net borrowings (payments) under revolving
credit facilities (21,600) 11,900
Payments on long-term debt (3,689) (126)
Decrease in book overdraft (4,679) (977)
Purchases of treasury shares (5,651) --
Proceeds from employee stock transactions,
including related tax benefits 1,079 5,299
Payment of debt issuance costs (2,188) --
---------------- ---------------
Net cash provided by financing activities 113,272 16,096
---------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $13,033 $10
================ ===============
See notes to consolidated condensed financial statements.
APAC TELESERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 27, 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 thirty-nine week periods
ended September 27, 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. BALANCE SHEET DETAIL
The components of other current liabilities included in the consolidated
condensed balance sheets as of September 27, 1998, and December 28, 1997, are as
follows:
1998 1997
------------ -----------
(000's omitted)
Payroll and related items $20,089 $14,555
Customer deposits 7,213 283
Telecommunication costs 2,048 1,643
Acquisition-related 16,416 --
liabilities
Restructuring charge 4,856 --
Other 7,167 4,200
============ ===========
Total $57,789 $20,681
============ ===========
Other noncurrent liabilities of $7.2 million included in the consolidated
condensed balance sheet as of September 27, 1998, principally consist of
long-term customer deposits.
3. INCOME TAXES
A reconciliation of the statutory Federal income tax rate to the actual
effective income tax rate for the thirty-nine week periods ended September 27,
1998 and September 28, 1997, is as follows:
1998 1997
----------- -----------
Statutory rate 35.0% 35.0%
State taxes, net of Federal
benefit and state credits 4.9 2.7
Goodwill and other intangibles 8.5 0.6
Work Opportunity Tax Credit (2.1) (1.0)
Other 2.3 1.2
=========== ===========
Effective rate 48.6% 38.5%
=========== ===========
APAC TELESERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 27, 1998
(UNAUDITED)
3. INCOME TAXES--CONTINUED
Components of deferred tax assets of $5.9 million included in the consolidated
condensed balance sheet as of September 27, 1998, principally consist of
restructuring reserve of $1.9 million, acquisition-related liabilities of $2.7
million and payroll and related items of $1.3 million.
4. DEBT
On May 20, 1998, the Company entered into a $250.0 million Senior Credit
Facility ("Credit Facility") with a group of lending institutions and at the
same time repaid all amounts outstanding on its prior $80.0 credit facility. On
September 8, 1998, the Credit Facility was amended, reducing the available
borrowings to $225.0 million. The Credit Facility consists of a $150.0 million
Term Loan and a $75.0 million Revolving Facility. The Company is required to
make quarterly principal payments on the Term Loan, ranging from $3.0 million to
$7.0 million per quarter, with a final payment of $61.0 million due June 1,
2003. Proceeds from the Term Loan were used to acquire the outstanding common
stock of ITI Holdings, Inc. Borrowings under the Revolving Facility will be used
to provide working capital. Borrowings under the Credit Facility bear interest
at a rate based on the Company's choice of either the LIBOR index rate for
periods of 30, 60, or 90 days plus an applicable margin ranging from .875% to
1.625% depending on the Company's total debt ratio, as defined, or the base rate
as defined in the Credit Facility. The base rate is the greater of the prime
commercial lending rate of the agent bank or the Federal funds rate plus .5%. At
September 27, 1998, the Company had $2.0 million outstanding under the Revolving
Facility and $147.0 million outstanding under the Term Loan.
The Company has entered into various interest rate agreements with one of the
parties to the Credit Facility. On May 20, 1998, the Company entered into an
interest rate swap agreement ("Swap") and an interest rate cap agreement ("Cap")
to hedge a portion of the interest rate risk associated with its floating rate
debt. Under the terms of the Swap, through June 1, 2003, the Company pays a
fixed interest rate of 6.0% and receives a floating rate payment based on the
30-day LIBOR rate. The Swap had an initial notional amount of $100.0 million and
amortizes, pro rata, with principal payments on the Term Loan. Under the terms
of the Cap, through June 1, 2003, the Company will receive payments any time the
30-day LIBOR rate exceeds 6.0%. The Cap had an initial notional amount of $50.0
million and amortizes, pro rata, with principal payments on the Term Loan.
5. ACQUISITION
On May 20, 1998, the Company acquired through merger all of the common
stock of ITI Holdings, Inc., the sole shareholder of ITI Marketing Services,
Inc. ("ITI"), 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. The initial purchase price was funded with proceeds from a
$150.0 million 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 customer contact 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.
APAC TELESERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 27, 1998
(UNAUDITED)
5. ACQUISITION--CONTINUED
The excess of purchase price over the fair value of assets acquired, liabilities
assumed and additional liabilities recorded of $137.1 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 is
subject to change. Final allocations may be different from amounts presented as
of September 27, 1998. Intangible assets acquired consist of $3.6 million for
assembled workforce, $36.8 million for customer relationships and $96.7 for
goodwill. Intangible assets are amortized over their estimated useful lives
which range from 7 to 25 years. In addition, ITI had accumulated net operating
loss carryforwards of approximately $16.0 million which have not been assigned
value. Any realization of future tax benefits from these net operating loss
carryforwards will result in a reduction of goodwill.
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.
THIRTY-NINE FIFTY-TWO WEEKS
WEEKS ENDED ENDED
SEPTEMBER 27, DECEMBER 28,
1998 1997
----------------- ----------------
(000's omitted, except per share
data)
(Unaudited)
Net revenue $380,572 $501,964
Income (loss) before cumulative
effect of accounting change 4,882 (8,360)
Net income (loss) 4,882 (10,560)
================= ================
Per share data:
Basic:
Income (loss) before
cumulative effect of $0.10 ($0.17)
accounting change
Net income (loss) $0.10 ($0.22)
================= ================
Diluted:
Income (loss) before
cumulative effect of $0.10 ($0.17)
accounting change
Net income (loss) $0.10 ($0.22)
================= ================
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.
6. 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 customer
contact 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 the end of the first quarter of 1999. The restructuring charge net
of applicable income taxes amounted to $5.5 million, or $0.11 per share.
APAC TELESERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 27, 1998
(UNAUDITED)
7. TREASURY STOCK REPURCHASE PROGRAM
On August 31, 1998, the Board of Directors authorized the Company to repurchase,
from time to time at managements' discretion, up to 2.5 million shares of its
outstanding common shares at market prices. At September 27, 1998, the Company
had repurchased 1,609,000 shares at an average price of $3.50 per share.
8. LEGAL PROCEEDINGS
The Company, certain of its officers and directors and the lead underwriters of
a public offering of the Company's securities were named as defendants in three
purported class action lawsuits filed in federal district court for the Southern
District of New York in December 1997 and January 1998. The lawsuits were
consolidated in April 1998 into one lawsuit. The lawsuit alleges violations of
the federal securities laws in connection with the Company's November 1996
Prospectus and other public statements which are alleged to have omitted certain
disclosures with respect to the Company's agreement with a large parcel delivery
client. The complaint as amended seeks, among other things, unspecified damages
and an award of attorney's fees, costs and expenses. The Company filed a motion
to dismiss the lawsuit on September 10, 1998, which is pending. The Company
denies all allegations of wrongdoing and continues to believe that it has
meritorious defenses.
9. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") 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 September 27, 1998, the Company had no transactions separately identified
as components of "other comprehensive income" under SFAS No. 130.
In June 1998, the FASB 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.
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., the sole shareholder of ITI Marketing Services, Inc. ("ITI").
ITI, like the Company, provides telephone-based sales, marketing and customer
management services to corporate clients. As of September 27, 1998, the Company
operated and managed approximately 13,600 workstations in 86 customer contact
centers.
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.
The following table sets forth statement of income data as a percent of net
revenue from services provided by the Company for the thirteen and thirty-nine
week periods ended September 27, 1998, and September 28, 1997.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
----------------------------- -----------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1998 1997
Net revenue:
Sales solutions
Service solutions 47.3% 50.1% 48.7% 52.6%
52.7 49.9 51.3 47.4
------------- ------------ ------------ -------------
Total net revenue 100.0 100.0 100.0 100.0
Operating expenses:
Cost of services 79.0 80.2 79.0 74.6
Selling, general and
administrative expenses 13.1 15.0 13.7 13.1
Restructuring charge -- -- 2.8 --
------------- ------------ ------------ -------------
Total operating expenses 92.1 95.2 95.5 87.7
------------- ------------ ------------ -------------
Income from operations 7.9 4.8 4.5 12.3
Interest expense, net 2.5 0.4 1.6 0.4
------------- ------------ ------------ -------------
Income before income taxes 5.4 4.4 2.9 11.9
Provision for income taxes 2.5 1.9 1.4 4.6
============= ============ ============ =============
Net income 2.9% 2.5% 1.5% 7.3%
============= ============ ============ =============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED
RESULTS OF OPERATIONS
Net revenue for the quarter and nine months ended September 27, 1998, increased
$39.5 million or 49.5% and $56.3 million or 21.5%, respectively, compared to the
same periods in 1997. The increases are primarily attributed to the inclusion of
the results of ITI from the acquisition date of May 1998. Net revenue for the
Sales Solutions division for the quarter and nine months ended September 27,
1998, increased $16.4 million or 41.0% and $17.2 million or 12.5%, respectively,
compared to last year as a result of the inclusion of revenue from ITI. Revenue
from financial services clients declined in the third quarter of 1998 due in
part to consolidation in the financial services industry. Increasing revenue
from the Company's largest telecommunications client offset these declines.
Sales Solutions' average selling prices in 1998 declined as compared to 1997 due
to client mix and marketplace pricing pressures. The Service Solutions
division's net revenue for the quarter and nine months ended September 27, 1998,
increased $23.1 million or 58.1% and $39.1 million or 31.5%, respectively,
compared to last year due to service initiated for a new telecommunications
client and the inclusion of revenue from ITI and Paragren. Service Solutions
revenue growth during the first nine months of 1998 was partially offset by a
25% 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 a percent of net revenue increased to 79.0% in the first
nine months of 1998 compared to 74.6% in the same period in 1997. This increase
reflects the reduction of profit margins due to lower selling prices, excess
capacity resulting from reductions in expected call volumes in the Sales
Solutions division and higher direct wages and benefits in both divisions. In
the third quarter cost of services as percent of net revenue decreased from
80.2% in 1997 to 79.0% in 1998. The decrease was due to the net effect of lower
selling prices, higher direct wages and benefits, the receipt of non-recurring
cost reimbursements, during the third quarter and non-recurring costs associated
with a labor strike at a large parcel delivery client a year ago.
Selling, general and administrative expenses for the quarter and nine months
ended September 27, 1998, increased $3.7 million or 31.3% and $9.3 million or
27.2%, respectively, compared to the same periods in 1997 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. Amortization of goodwill and other
intangible assets for the quarter and nine months ended September 27, 1998,
amounted to $2.1 million and $3.9 million, respectively. In the third quarter
selling, general and administrative expenses as a percent of net revenue
decreased from 15.0% in 1997 to 13.1% in 1998 due to workforce reduction
achieved through a restructuring plan adopted in the second quarter of 1998 and
reduced payments under performance-based pay programs.
In June 1998, the Company adopted a restructuring plan and recorded a $9.0
million charge. The after tax impact of the restructuring charge in the second
quarter amounted to $5.5 million or $0.11 per share. The restructuring charge
provides for the estimated costs to close customer optimization centers,
reconfigure certain administrative support facilities and reduce the workforce
by approximately 80 salaried employees.
Net interest expense for the quarter and nine months ended September 27, 1998,
increased by $2.6 million and $4.2 million, respectively, compared to the same
periods in 1997. These increases reflect interest and amortization of debt
issuance costs on the new Credit Facility used to finance the purchase of ITI on
May 20, 1998, as well as increased average borrowing levels.
The $4.5 million and $12.0 million provisions for income taxes recognized for
the nine months ended September 28, 1998, and September 28, 1997, respectively,
are based upon the Company's estimated annual
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED
RESULTS OF OPERATIONS--CONTINUED
effective income tax rates. The increase in the Company's effective income tax
rate to 48.6% for the first nine months of 1998 from 38.5% in the same period a
year ago was principally due to goodwill amortization related to the
acquisitions of ITI and Paragren not being deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations during the first nine months of 1998 totaled $55.8
million. Income adjusted for non-cash items and deferred income taxes amounted
to $28.0 million in the first nine months of 1998. Reflected in total cash from
operations is the receipt of customer deposits of $10.5 million, $6.5 million
from a reduction in days sales outstanding resulting from improvement in
collections of accounts receivable, and a decrease in cash required for general
working capital purposes. The Company spent $6.8 million in the first nine
months of 1998 to standardize and upgrade telecommunications equipment and
systems. These expenditures were funded by cash from operations. Capital
expenditures in 1998 are lower than in 1997 due to increased utilization of
capacity placed into service in late 1996 and early 1997.
On May 20, 1998, the Company entered into a new $250.0 million Credit Facility
and at the same time repaid all amounts outstanding under its prior $80.0
million credit facility. On September 8, 1998, the Credit Facility was amended,
reducing the available borrowings to $225.0 million. The Credit Facility
consists of a $150.0 million Term Loan and $75.0 million Revolving Facility. The
Company is required to make quarterly principal payments over the next twelve
months amounting to $13.0 million. In connection with securing the Credit
Facility, the Company paid fees and expenses of $2.2 million. As of September
27, 1998, the Company had outstanding borrowings of $2.0 million under the
Revolving Facility and $147.0 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.
In June 1998, the Company adopted a restructuring plan which included closing
customer contact centers, reconfiguring certain administrative support
facilities and reducing the workforce by approximately 80 salaried employees.
The restructuring charge of $9.0 million included $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. During the third quarter the
Company made payments of $1.8 million for employee severance and lease
termination costs.
On August 31, 1998, the Board of Directors authorized the Company to repurchase
up to 2.5 million shares of its outstanding common shares at market prices. At
September 27, 1998, the Company had repurchased 1,609,000 shares at a cost of
$5.6 million.
The Company expects that cash from future operations and available borrowings
under the new Credit Facility will be sufficient to meet normal operating needs
as well as fund any additional business growth for the balance of fiscal year
1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED
YEAR 2000 COMPLIANCE
The Year 2000 issue, common to most companies, concerns the inability of
information and non-information systems to recognize and process date-sensitive
information after 1999 due to the use of only the last two digits to refer to a
year. Time sensitive computer equipment and software with embedded technology
may recognize a date using "00" as the year 1900 rather than the year 2000. The
problem could affect both computer equipment and software and other equipment
that relies on microprocessors.
During the last four months Senior Information Technology Management under the
direction of the Audit Committee of the Board of Directors has completed a
company-wide evaluation of the impact of a potential Year 2000 problem on its
computer systems, applications and other date-sensitive equipment. Equipment and
systems that are not Year 2000 compliant have been identified and will be
corrected through equipment replacement, remediation of code in software
programs, or migration to a Year 2000 compliant platform. The Company estimates
that approximately 20% of the remediation of code in software programs was
completed as of October 31, 1998. All Year 2000 compliance issues are expected
to be corrected by July 1, 1999. Through September 27, 1998, the Company has
spent approximately $500,000 to address Year 2000 issues. Total costs required
to correct Year 2000 issues are currently estimated to be approximately $3.0
million and principally consist of equipment upgrades and software code
remediation.
While the Company believes that its efforts will adequately address its internal
Year 2000 concerns, it is possible that the Company will be adversely affected
by problems encountered by key customers and suppliers. The Company is in the
process of initiating discussions with significant customers and suppliers in an
effort to determine and assess those parties' Year 2000 compliance status. The
Company is dependent on computer and telecommunications companies for computer
equipment and software and telephone systems and service. The Company expects to
complete its evaluation of customers and suppliers by December 31, 1998. Based
upon the results of its assessments of customers and suppliers compliance
status, the Company will develop appropriate contingency plans. The Company
expects contingency plans will be in place by May 1, 1999. The Company would be
unable to perform its work without access to outbound and/or inbound telephony
capabilities, resulting in the loss of revenue, the extent and materiality of
which would depend on the length of the time required to restore access.
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
contact 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 net revenue and profitability may also be
affected by changes in clients' 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, certain of its officers and directors and the lead underwriters of
certain public offerings of the Company's securities were named as defendants in
three purported class action lawsuits filed in federal district court for the
Southern District of New York in December 1997 and January 1998. The lawsuits
were consolidated in April 1998 into one lawsuit. The lawsuit alleges violations
of the federal securities laws in connection with the Company's November 1996
Prospectus and other public statements which are alleged to have omitted certain
disclosures with respect to the Company's agreement with a large parcel delivery
client. The complaint as amended seeks, among other things, unspecified damages
and an award of attorney's fees, costs and expenses. The Company filed a motion
to dismiss the lawsuit on September 10, 1998, which is pending. The Company
denies all allegations of wrongdoing and continues to believe that it has
meritorious defenses. The lawsuits were first disclosed in the Company's annual
report on Form 10-K for the fiscal year ended December 28, 1997, and there have
been no other disclosures in the Company's filings.
ITEM 5. OTHER INFORMATION
The Company's By-Laws provide that share owners seeking to bring nominations and
other business before the annual meeting of share owners must give written
notice not later than the close of business on the 90th day, nor earlier than
the close of business on the 120th day, prior to the first anniversary of the
preceding year's annual meeting of share owners. Such notice must be delivered
or mailed by first class United States mail, postage prepaid, to the Secretary
of the Company at the principal executive offices of the Company and must
include certain information regarding any proposed nominee or proposed business
and the share owner giving the notice. In order for a notice to be timely with
respect to matters to be brought before the Company's 1999 annual meeting of
share owners, pursuant to the Company's By-Laws, such notice must be received by
the Secretary of the Company not earlier than the close of business on January
19, 1999, nor later than the close of business on February 18, 1999. These
requirements are separate from and in addition to the requirements a share owner
must meet to have a proposal included in the Company's proxy statement. Any
share owner desiring a copy of the Company's By-Laws will be furnished one upon
written request to the Secretary of the Company.
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
Number Description
------------- ----------------------------------------------
3.2 By-Laws as amended through October 21, 1998
10 Amended and Restated Credit Agreement and
First Amendment to Agreement
11 State Re: Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K. On July 20, 1998, the Company filed a report on Form
8-K which disclosed its second quarter results of operations. 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. On August 31, 1998, the Company filed a current report on Form 8-K
which announced the repurchase of up to 2.5 million shares of its outstanding
common shares. Subsequent to the end of the quarter, the Company filed a report
on Form 8-K dated October 19, 1998, which disclosed its third quarter results of
operations.
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: November 12, 1998 By: /s/ Marc S. Simon
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President and
Chief Operating Officer
Date: November 12, 1998 By: /s/ Philip B. Wade
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Vice President and Controller