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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 28, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __ to ___
Commission file number: 0-26786
APAC TELESERVICES, INC.
(Exact name of registrant as specified in its charter)
Illinois 36-2777140
(I.R.S. Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)
One Parkway North Center, Suite 510, Deerfield, Illinois 60015
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 374-4980
Securities registered pursuant to Section 12(b) of the Act:
Names of each exchange
Title of Each Class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $0.01 Par Value
(Title of class)
Indicate by check mark whether the Registrant (l) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of March 23, 1998, 48,993,647 Common Shares were outstanding.
The aggregate market value of the Registrant's Common Shares held by
nonaffiliates on March 23, 1998 was approximately $1,015,580,148.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Annual Report to Share Owners
are incorporated by reference in Part II
Certain portions of the Registrant's Proxy Statement for Annual Meeting
of Share Owners to be held on May 19, 1998 are incorporated by reference in
Part III
PART I
ITEM 1. BUSINESS.
GENERAL
APAC TeleServices, Inc. and its subsidiaries ("APAC" or 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 operates and manages 10,770 workstations in 68 Customer Optimization
Centers. The Customer Optimization Centers are managed centrally through the
application of extensive telecommunications and computer technology to promote
the consistent delivery of quality service. The Company's net revenue for fiscal
1997 was $356.4 million, an increase of $80.0 million or 28.9% compared to
fiscal 1996. The Company had a net loss for fiscal 1997 of $1.2 million or
$0.03 per share compared to net income of $30.6 million or $0.64 per share for
fiscal 1996. The Company recorded special charges of $23.0 million in fiscal
1997 related to acquired in-process research and development and associated
software impairment in connection with the acquisition of Paragren Technologies,
Inc. ("Paragren"). In addition, in the fourth quarter of fiscal 1997 the
Company adopted an accounting change requiring it to expense formerly
capitalized and unamortized business process reengineering costs related to the
installations of internal computer systems; the Company recorded a net charge of
$2.2 million as the cumulative effect of such change. Prior to the impact of
the special charges and the cumulative effect of the accounting change, net
income for fiscal 1997 was $22.8 million or $0.47 per share. The Company has
three primary service offerings: Outbound Sales and Marketing Solutions ("Sales
Solutions"), Inbound Customer Service Solutions ("Service Solutions"), and
Paragren software and services.
SALES SOLUTIONS
Services. Sales Solutions provides outbound sales support to consumers and
businesses, market research, targeted marketing plan development and customer
lead generation, acquisition and retention. Sales Solutions generated $182.9
million of net revenue, or 51.3% of the Company's total net revenue, in fiscal
1997, an increase of $41.0 million or 28.9% compared to fiscal 1996.
Sales Solutions activities typically begin when APAC calls a consumer or
business prospect targeted by one of its clients to offer the client's products
or services. Prospect information, which APAC typically receives electronically
from its clients, is selected to match the demographic profile of the targeted
customer for the product or service being offered. APAC's data management system
sorts the prospect information and delivers it to one of the Sales Solutions
Customer Optimization Centers. Computerized call-management systems utilizing
predictive dialers automatically dial the telephone numbers, determine if a live
connection is made, and present connected calls to a telephone sales
representative who has been specifically trained for the client's program. When
a call is presented, the prospect's name, other information about the prospect,
and the program script simultaneously appear on the telephone sales
representative's computer screen. The telephone sales representative then uses
the script to solicit an order for the client's product or service or to request
information which will be added to the client's database. APAC's advanced
systems permit on-line monitoring of marketing campaigns allowing its clients to
refine programs while in progress.
Clients. APAC targets those companies with large customer bases and the
greatest potential to generate recurring revenue driven by their ongoing
telephone-based direct sales and marketing needs. Sales Solutions currently
specializes in three industries:
Telecommunications - APAC provides Sales Solutions services to the
telecommunications industry, primarily servicing long distance, regional and
wireless telecommunications companies. The Company's services include new
account acquisition, direct sales of custom calling features, personalized
"800" and long distance services and other customer retention services in
both the business and consumer market segments. The Company's most
significant relationship in this industry is with AT&T Corporation ("AT&T"),
which accounted for 25.7% of the Company's Sales Solutions net revenue in
fiscal 1997. Sales Solutions' net revenue from telecommunications industry
clients represented 33.7%, 39.0% and 12.9% of the Company's total Sales
Solutions net revenue, and 17.3%, 20.0% and 9.3% of the Company's total net
revenue, in fiscal years 1997, 1996 and 1995, respectively.
Insurance - APAC is a major marketer of insurance products across the United
States. The Company works with large consumer insurance companies and their
agents, marketing products such as life, accident, health, and property and
casualty insurance. The Company employs over approximately 430 insurance
agents licensed to sell insurance to consumers in a total of 49 states and
the District of Columbia. APAC has sold or issued certificates to purchase
approximately 7.6 million insurance policies for its clients since 1991.
Significant relationships in this industry include Mass Marketing Insurance
Group, J.C. Penney Life Insurance Company and American Bankers Insurance
Group, which clients accounted for 14.5%, 7.6% and 3.3%, respectively, of the
Company's Sales Solutions net revenue in fiscal 1997. Sales Solutions net
revenue from insurance industry clients represented 33.2%, 32.9% and 48.0% of
the Company's total Sales Solutions net revenue, and 17.0%, 16.9% and 34.3%
of the Company's total net revenue, in fiscal years 1997, 1996 and 1995,
respectively.
Financial Services - APAC provides sales and marketing services to many of
the largest U.S. credit card issuers. The Company's services include customer
account acquisition, credit line expansion, balance consolidation, cardholder
retention and sales of other banking products and services. Sales Solutions
net revenue from financial service industry clients represented 31.6%, 24.2%
and 32.2% of the Company's total Sales Solutions net revenue, and 16.2%,
12.4% and 23.0% of the Company's total net revenue, in fiscal years 1997,
1996 and 1995, respectively.
Sales Solutions provided services to 39 clients in fiscal 1997. Sales
Solutions operates generally under contracts that may be terminated or modified
on short notice. However, the Company tends to establish long-term relationships
with its clients. The Company generally is paid a fixed fee for each hour that
it provides a telephone sales representative under its Sales Solutions
contracts. Except for AT&T in fiscal 1997 and 1996 and Mass Marketing Insurance
Group in fiscal 1995, no Sales Solutions' client accounted for more than ten
percent of the Company's total net revenue in fiscal 1997, fiscal 1996 or fiscal
1995.
APAC also offers business-to-business account management services. These
services, positioned as APAC SalesSource, include obtaining customer record
updates, conducting customer satisfaction and preference surveys and cross-
selling client products. SalesSource services are designed to provide pro-active
customer management with the objective of account expansion and enhanced
customer retention. SalesSource services accounted for approximately 1.5% of
the Company's Sales Solutions net revenue, and 0.8% of the Company's total net
revenue, in fiscal 1997.
SERVICE SOLUTIONS
Services. Service Solutions provides inbound customer service, direct mail
response, "help" line support, and customer order processing. Certain Service
Solutions clients rely upon the Company to provide specialized telephone service
representatives such as insurance agents and computer technicians, capable of
responding to more technical inquiries from customers and prospects. Service
Solutions, which initiated full-scale offerings in late fiscal 1993, generated
$173.6 million of net revenue, or 48.7% of the Company's total net revenue, in
fiscal 1997, an increase of $39.0 million or 28.9% when compared to fiscal 1996.
APAC believes significant opportunities to generate new business in Service
Solutions exist as more companies move to outsource all or a portion of their
telephone-based marketing and customer service functions.
Service Solutions involves the receipt of a call from a client's customer or
prospect, and the identification and routing of the call to the appropriate APAC
telephone service representative. The caller typically uses a toll-free "800"
number to request product or service information, place an order for a product
or service or obtain assistance regarding a previous order or purchase. APAC
utilizes automated call distributors and digital switches to identify each
inbound call by "800" number and route the call to an APAC telephone service
representative trained for the client's program. Simultaneously with receipt of
the call, the telephone service representative's computer screen displays
customer, product and service information relevant to the call. The Company
reports information and results captured during the call to its client for order
processing, customer service and database management.
Clients. Service Solutions directs its business development efforts toward
large companies with inbound annual call volume in excess of 500,000 calls.
Within this market segment, APAC targets those companies that operate in high-
cost metropolitan areas or that are currently utilizing inefficient or expensive
technology in their customer service operations. Service Solutions provided
services to 37 clients in fiscal 1997. The Company's significant relationships
include United Parcel Service ("UPS"), AT&T, and John H. Harland Company, which
accounted for 51.3%, 7.5% and 5.1%, respectively, of the Company's Service
Solutions net revenue in fiscal 1997. In October 1997, the Company entered into
a five-year agreement to provide a major long distance telecommunications
company with inbound customer service to existing customers.
Service Solutions operates under contracts with terms up to five years.
Typically, these contracts may be terminated or modified on short notice. The
Company is generally paid a fixed fee for each hour that it provides a telephone
service representative under its Service Solutions contracts, regardless of the
number of calls handled. The client works with the Company to determine the
number of telephone representatives which are necessary to efficiently handle
the expected volume of inbound calls. Except for a major parcel delivery
company, no Service Solutions client of the Company accounted for more than ten
percent of the Company's total net revenue in fiscal 1997, fiscal 1996 or fiscal
1995.
PARAGREN
On August 19, 1997, the Company acquired all of the common and preferred
stock of Paragren Technologies, Inc. ("Paragren"). Paragren is a specialist in
software-based marketing products that help its clients maximize their customer
relationships. Its software helps its clients analyze market, customer and
sales data on a real-time basis so that they can respond more effectively to
rapidly changing opportunities and competitive challenges. Paragren's One-By-
One suite of customer intelligence software applications allows marketers to
develop strategic insights into their marketing plans and make real-time
tactical decisions. It enables users to retrieve and analyze information from
multiple sources for customer profiling and potential; marketing segmentation
and targeting; and full campaign execution and evaluation. In addition to its
software solutions, systems integration and consulting services, Paragren
designs, develops and manages consumer-panel research. This research helps
businesses learn more about their competition, customer preferences and
marketplace environment through actual purchase and behavioral data collected
over time. Panels are dedicated to specific industries, such as
telecommunications, to ensure relevance to each client's opportunities and
issues. The Company anticipates that Paragren clients will be potential clients
of the Company's Sales Solutions and Service Solutions operations and, in turn,
that Sales Solution and Service Solution clients will be potential users of
Paragren's software-based marketing products. Paragren employs approximately
174 people, primarily at its Reston, Virginia headquarters. APAC intends to
continue to operate the business conducted by Paragren.
TECHNOLOGY RESOURCES
APAC has successfully integrated call management and database marketing and
management information systems within its Customer Optimization Centers. This
proprietary Advanced Technology Platform ("ATP") provides telephone service
representatives with real-time access to customer and product information and
allows the Company to design and implement application software for each
client's program. ATP incorporates PC-based workstations, object-oriented
software modules, relational database management systems, call tracking and
workforce management systems, computer telephony integration and interactive
voice response. This technology enables telephone service representatives to
focus on assisting the customer, rather than on the technology, by providing all
necessary customer information at call arrival. In addition, ATP also helps to
decrease training time and increase call handling efficiencies.
Supporting the integration of the call handling technologies and call
management systems is First Alert, a proprietary agent productivity system,
which provides real-time information on each customer contact. First Alert
captures all call information and reports on each telephone service
representative's activities so that the Company and its clients can make real-
time decisions with respect to quality and performance.
The UNIX-based computer system that the Company has developed utilizes a "hub
and spoke" configuration to electronically link each Customer Optimization
Center's systems to the Company's operational headquarters. This open
architecture system provides APAC with the flexibility to integrate its client
server and mid-range systems with the variety of systems maintained by its
clients. By integrating with its clients' systems, APAC is able to receive calls
and data directly from its clients' in-house systems, forward calls to its
clients' in-house telephone representatives when appropriate, and report, on a
real-time basis, the status and results of the Company's services. APAC's
custom software is built on relational database technology that enables the
Company to quickly design tailored software applications that enhance the
efficiency of its call services, while providing flexible scripting and readily
accessible screen navigation.
The Company recognizes the need to ensure its operations will not be
adversely impacted by year 2000 software failures. Specifically, computational
errors are a known risk with respect to dates after December 31, 1999. The
Company is in the process of assessing its computer and telecommunications
equipment and internal computer applications to prepare for the year 2000 with
its vendors. Although the Company has not yet estimated the total costs needed
for year 2000 compliance, the Company currently believes it will be able to
upgrade and maintain its computer systems to recognize years beginning with
2000, and that the costs to do so will not have a material impact on its results
of operations and financial position. Although the Company is committed to
making its systems year 2000 compliant as soon as practical, it is uncertain as
to the extent its clients and vendors may be affected by year 2000 issues that
require commitment of significant resources and may cause disruptions in the
clients' and vendors' businesses.
SALES AND MARKETING
The Company seeks to differentiate itself from other providers of telephone-
based services by offering customized solutions that address the specialized
needs of its clients. It focuses on certain targeted industries with the highest
potential for outsourcing. The Company has developed a targeted approach to
identifying new clients and additional needs of existing clients. Often, APAC
initially develops a pilot program for a new client to demonstrate the Company's
abilities and effectiveness in telephone-based marketing and customer service.
The Company's sales personnel also assist clients in identifying high potential
customers and developing programs to reach those customers, communicate results
of the program and assist clients in modifying programs for future use. The
Company markets its services by expanding relationships with existing clients,
responding to requests for proposals, pursuing client referrals, participating
in trade shows and advertising in business publications. The Company believes
its increasingly consultative approach will enhance its ability to successfully
identify additional business opportunities and secure new business.
PEOPLE AND LEARNING
The Company believes a key component of APAC's success is the quality of its
employees. Therefore, the Company is continually refining its systematic
approach to hiring, training and managing qualified personnel. APAC locates
Customer Optimization Centers primarily in small to mid-sized communities in an
effort to lower its operating costs and attract a high quality, dedicated work
force. The Company believes that by employing a significant number of full-time
employees it is able to maintain a more stable work force and reduce the
Company's recruiting and training expenditures. At each Customer Optimization
Center, the Company utilizes a management structure designed to ensure that its
telephone representatives are properly supervised, managed and developed.
The Company offers extensive classroom and on-the-job training programs for
its people including instruction about the client's company and its product and
service offerings as well as proper telephone-based sales or customer service
techniques. Once hired, each new telephone representative receives on-site
training lasting from three to seventeen days. The amount of initial training
each employee receives varies depending upon whether the employee will be
performing outbound or inbound services and the nature of the services being
offered. In addition, the Company offers one and two week courses to its
telephone representatives who are preparing for the insurance agent license
exam. The Company also has developed a three-month leadership training program
designed to provide a timely source of well-trained managers. The Company
continues to develop the Center for Learning Solutions (formerly "APAC
University"), a centralized source of learning for employees which offers a
variety of learning experiences. The Company believes in developing and
challenging all employees to grow personally and professionally.
For employee recruitment and job tracking, the addition of the SMART System
(SiMple Accurate Record Tracking) will assist the Company in selecting people
who can meet and exceed expectations. SMART System is a comprehensive
electronic process for applicant tracking and performance evaluation. The
process begins with an applicant's search of a database to find available
positions, review job information, and learn more about the Company. After a
candidate completes a series of online templates and tests, a recruiter reviews
qualifications and skills, sets appointments and tracks progress of the
application.
The Company had approximately 15,600 full- and part-time employees on March
1, 1998. None of APAC's employees is subject to a collective bargaining
agreement. The Company considers its relations with its employees to be good.
QUALITY ASSURANCE
Because APAC's services involve direct contact with its clients' customers,
the Company's reputation for quality service is critical to acquiring and
retaining clients. Therefore, the Company and its clients monitor the Company's
telephone representatives for strict compliance with the client's script and to
maintain quality and efficiency. The Company also regularly measures the quality
of its services by benchmarking such factors as sales per hour, level of
customer complaints, call abandonment rates and average speed of answer. The
Company's information systems enable APAC to provide clients with reports on a
real-time basis as to the status of an ongoing campaign and can transmit summary
data and captured information electronically to clients. This data enables APAC
and its clients to modify or enhance an ongoing campaign to improve its
effectiveness. In addition to daily contact with its clients, APAC asks each
client to rate the Company's performance quarterly using specific quality
measures.
COMPETITION
The industry in which the Company operates is very competitive and highly
fragmented. APAC's competitors range in size from very small firms offering
specialized applications or short term projects, to large independent firms and
the in-house operations of many clients and potential clients. A number of
competitors have capabilities and resources equal to, or greater than, the
Company's. The market includes non-captive telemarketing and customer service
operations such as MATRIXX Marketing Inc., SITEL Corporation, ITI Marketing
Services, Inc., West Teleservices Corporation, TeleService Resources, Precision
Response Corporation, Electronic Data Systems Corporation and TeleTech Holdings,
Inc., as well as in-house telemarketing and customer service organizations
throughout the United States. In-house telemarketing and customer service
organizations comprise by far the largest segment of the industry. In addition,
some of the Company's services also compete with other forms of direct marketing
such as mail, television and radio. The Company believes the principal
competitive distinctions in the telephone-based marketing and customer service
industry are reputation for quality, sales and marketing results, price,
technological expertise, and the ability to promptly provide clients with
customized solutions to their sales, marketing and customer service needs.
GOVERNMENT REGULATION
Telephone sales practices are regulated at both the Federal and state level.
The Federal Communications Commission's (the "FCC") rules under the Federal
Telephone Consumer Protection Act of 1991 (the "TCPA") prohibit the initiation
of telephone solicitations to residential telephone subscribers before 8:00 a.m.
or after 9:00 p.m., local time, and prohibit the use of automated telephone-
dialing equipment to call certain telephone numbers. In addition, the FCC rules
require the maintenance of a list of residential consumers who have stated that
they do not want to receive telephone solicitations and avoidance of making
calls to such consumers' telephone numbers.
The Federal Telemarketing and Consumer Fraud and Abuse Protection Act of 1994
(the "TCFAPA") broadly authorizes the Federal Trade Commission (the "FTC") to
issue regulations prohibiting misrepresentation in telephone sales. In August,
1995, the FTC issued rules under the TCFAPA. These rules generally prohibit
abusive telephone solicitation practices and impose disclosure and record
keeping requirements.
A number of states have enacted or are considering legislation to regulate
telephone solicitations. For example, telephone sales in certain states cannot
be final unless a written contract is delivered to and signed by the buyer and
may be cancelled within three business days. At least one state also prohibits
telemarketers from requiring credit card payment and several other states
require that certain telemarketers obtain licenses and post bonds. From time to
time, bills are introduced in Congress which, if enacted, would regulate the use
of credit information. The Company cannot predict whether this legislation will
be enacted and what effect, if any, it would have on the Company or its
industry.
The Company believes that it is in compliance with the TCPA and the FCC rules
thereunder and with the FTC's rules under the TCFAPA. The Company trains its
telephone sales representatives to comply with the FTC and FCC rules and state
laws and programs its call management system to avoid telephone calls during
restricted hours or to individuals maintained on APAC's "do-not-call" list.
Subject to certain limitations, APAC generally undertakes to indemnify its
clients against claims and expenses resulting from any failure by APAC to comply
with federal and state laws regulating telephone solicitation practices.
The industries served by the Company are also subject to varying degrees of
government regulation. Generally, the Company relies on its clients and their
advisors to develop the scripts to be used by APAC in making consumer
solicitations. The Company generally requires its clients to indemnify APAC
against claims and expenses arising in connection with a client's failure to
provide purchased products or services to customers, any defect or deficiency in
such products or services or any written or oral presentation furnished by the
client to APAC. The Company has never been held responsible for regulatory
noncompliance by a client. APAC employees who complete the sale of insurance
products are required to be licensed by various state insurance commissions and
participate in regular continuing education programs, which are currently
provided in-house by the Company.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in Deerfield, Illinois in
leased facilities consisting of approximately 16,500 square feet of office
space. The term of this lease expires in March, 2001. The Company's operational
headquarters is located in approximately 96,000 square feet of office space in
Cedar Rapids, Iowa. This office space is located on eight floors which are owned
and/or leased by the Company and is part of an office condominium. The Company
also leases approximately 22,000 square feet of office space in the Atlanta
region. Paragren Technologies, Inc. leases approximately 21,000 square feet of
office space in Reston, Virginia and 2,300 square feet in Pleasanton,
California.
The Company also leases the facilities listed below, except for the Newport
News, Fort Worth, High Point and Boynton Beach facilities which are not leased
by the Company, but are managed, staffed and operated by the Company on behalf
of a major parcel delivery client. As of December 28, 1997, the Company
operated the following Customer Optimization Centers:
SALES SOLUTIONS CUSTOMER OPTIMIZATION CENTERS
Current Number of
Location Date Opened Workstations
Dubuque, Iowa . . . . . . . . . September, 1990 80
Clinton, Iowa . . . . . . . . . October, 1990 96
Burlington, Iowa . . . . . . . October, 1991 80
Oskaloosa, Iowa . . . . . . . . September, 1992 96
Waterloo, Iowa . . . . . . . . February, 1993 96
Cedar Falls, Iowa . . . . . . . February, 1993 64
Iowa City, Iowa . . . . . . . . March, 1993 64
Mt. Pleasant, Iowa . . . . . . September, 1993 64
Ottumwa, Iowa . . . . . . . . . November, 1993 144
Decorah, Iowa . . . . . . . . . January, 1994 80
Marshalltown, Iowa . . . . . . February, 1994 80
Fort Madison, Iowa . . . . . . March, 1994 96
Keokuk, Iowa . . . . . . . . . May, 1994 80
Mason City, Iowa . . . . . . . December, 1994 80
Newton, Iowa . . . . . . . . . March, 1995 64
Knoxville, Iowa . . . . . . . . March, 1995 80
Fort Dodge, Iowa . . . . . . . March, 1995 80
Woodlawn, Maryland . . . . . . April, 1995 96
Muscatine, Iowa . . . . . . . . April, 1995 96
Estherville, Iowa . . . . . . . April, 1995 64
Spencer, Iowa . . . . . . . . . May, 1995 64
Indianola, Iowa . . . . . . . . July, 1995 80
Hiawatha, Iowa . . . . . . . . July, 1995 80
Algona, Iowa . . . . . . . . . September, 1995 64
Webster City, Iowa . . . . . . September, 1995 64
SALES SOLUTIONS CUSTOMER OPTIMIZATION CENTERS
(continued)
Davenport, Iowa . . . . . . . . February, 1996 464
Maquoketa, Iowa . . . . . . . . February, 1996 96
Kewanee, Illinois . . . . . . . February, 1996 96
Dixon, Illinois . . . . . . . . February, 1996 96
Quincy, Illinois . . . . . . . February, 1996 160
Kalamazoo, Michigan . . . . . . February, 1996 192
Danville, Illinois . . . . . . February, 1996 96
Freeport, Illinois . . . . . . . .March, 1996 96
Normal, Illinois . . . . . . . . .March, 1996 64
Rock Falls, Illinois . . . . . . .March, 1996 96
Waverly, Iowa . . . . . . . . . . .March, 1996 64
Decatur, Illinois . . . . . . . . .April, 1996 80
Jacksonville, Illinois . . . . . .April, 1996 96
Canton, Illinois . . . . . . . . .May, 1996 96
Lincoln, Illinois . . . . . . . . .May, 1996 80
Pekin, Illinois . . . . . . . . . .May, 1996 96
Peoria, Illinois . . . . . . . . .May, 1996 96
Galesburg, Illinois . . . . . . . .June, 1996 96
Mount Vernon, Illinois . . . . . .June, 1996 80
Vincennes, Indiana . . . . . . . .June, 1996 80
Washington, Indiana . . . . . . . .June, 1996 80
Alton, Illinois . . . . . . . . . .December, 1996 192
Marion, Illinois . . . . . . . . .December, 1996 192
Belleville, Illinois . . . . . . .December, 1996 96
Granite City, Illinois . . . . . .December, 1996 96
Freemont, Ohio . . . . . . . . . .March, 1997 96
New Philadelphia, Ohio . . . . . .March, 1997 96
Alliance, Ohio . . . . . . . . . .May, 1997 96
Newark, Ohio . . . . . . . . . . .May, 1997 96
Bucyrus, Ohio . . . . . . . . . . .March, 1997 96
Tiffin, Ohio . . . . . . . . . . .June, 1997 96
Total Sales Solutions . . . . . . . . . . . . . 5,584
SERVICE SOLUTIONS CUSTOMER OPTIMIZATION CENTERS
CURRENT NUMBER OF
LOCATION DATE OPENED WORKSTATIONS
Cedar Rapids, Iowa 22nd Avenue January, 1994(1) 145
Cedar Rapids, Iowa 3rd Avenue . August, 1994 203
Cedar Rapids, Iowa Park Place I January, 1995 126
Cedar Rapids, Iowa Park Place II November, 1995 162
Newport News, Virginia . . . . August, 1995 746
Fort Worth, Texas . . . . . . . October, 1995 787
High Point, North Carolina . . November, 1995 591
Boynton Beach, Florida . . . . February, 1996 506
Waterloo, Iowa . . . . . . . . . .October, 1996 300
Corpus Christi, Texas . . . . . . .October, 1996 726
Columbia, South Carolina . . . . .December, 1996 544
LaCrosse, Wisconsin . . . . . . . .May, 1997 350
Total Service Solutions . . . . . . . . . . 5,186
(1) The Cedar Rapids-22nd Avenue was originally opened as a Sales Solutions
center in June 1990 and was converted to a Service Solutions center in
January 1994.
The leases of these Customer Optimization Centers have terms ranging from two to
twelve years and typically contain renewal options and early termination
buyouts. Sales Solutions centers are leased for periods of two to three years
while Service Solutions centers are leased for periods of five to twelve years.
The Company believes that its existing facilities are suitable and adequate for
its current operations, but additional facilities will be required to support
growth. The Company intends to continue to add Customer Optimization Centers
and workstations as required by demand for its services. APAC believes that
suitable additional or alternative space will be available as needed to expand
its business on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company, certain of its officers and directors and the lead underwriters
of certain public offerings of the Company's securities have been named as
defendants in three purported class action lawsuits. The suits were filed in
federal district court for the Southern District of New York on December 11,
1997, December 19, 1997 and January 5, 1998, respectively. Each 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 UPS.
The complaints seek, among other things, unspecified compensatory damages and an
award of attorney's fees, costs and expenses. The Company denies all
allegations of wrongdoing asserted against it in the complaints and believes
that it has meritorious defenses.
Additionally, the Company is subject to occasional lawsuits, investigations
and claims arising out of the normal conduct of its business. Management does
not believe the outcome of any pending claims will have a materially adverse
impact on the Company's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION
Theodore G. Schwartz 44 Chairman, Chief Executive Officer and Director
Marc S. Simon 49 President, Chief Operating Officer and Director
John I. Abernethy 40 Chief Financial Officer
Donald B. Berryman 40 Senior Vice President-Sales & Marketing
Kenneth G. Culver 53 Senior Vice President-Facilities
John C. Dontje 53 Senior Vice President- Information Technology
Richard H. Kremer 53 Senior Vice President-People & Learning
William S. Lipsman 48 Vice President, General Counsel and Secretary
James M. Nikrant 58 Senior Vice President-Operations
Philip B. Wade 50 Vice President and Controller
Theodore G. Schwartz has served as the Company's Chairman and Chief
Executive Officer since its formation in May 1973.
Marc S. Simon became President and Chief Operating Officer of the Company in
March 1998. Mr. Simon joined the Company as Chief Financial Officer in June
1995 and was elected as a Director of the Company in August 1995. Prior to
joining the Company, Mr. Simon was a partner practicing corporate and business
law at the law firm of Neal, Gerber & Eisenberg in Chicago, Illinois for more
than 7 years. Mr. Simon is a certified public accountant.
John I. Abernethy joined the Company as Chief Financial Officer in January
1998. From 1992 to August 1997, Mr. Abernethy was with CCH Incorporated, where
he most recently served as Executive Vice President.
Donald B. Berryman joined the Company as Vice President/General Manager-
Service Solutions in March 1993 and became Senior Vice President-Sales and
Marketing in October 1995.
Kenneth G. Culver joined the Company as Vice President-Operations and
Marketing in March 1990 and became Senior Vice President-Facilities in October
1995.
John C. Dontje joined the Company as Vice President in May 1996 and became
Senior Vice President-Information Technology in November 1997. From November
1994 to May 1996. Mr. Dontje was Regional Manager of a division of Electronic
Data Systems Corporation that operated multi-location inbound and outbound call
centers. From March 1991 to November 1994, Mr. Dontje was a managing director of
Bernard C. Harris Publishing Company, Inc.
Richard H. Kremer joined the Company as Senior Vice President-People &
Learning in December 1996. From February 1996 through November 1996, Mr. Kremer
was a consultant for The Shechtman Group, a management consulting firm which had
been owned by Morris Shechtman, a director of the Company, and was acquired by
the Company on November 29, 1996. From 1994 to November 1995, Mr. Kremer was
with Allmerica Financial and from 1991 to 1994 he was the Chief Marketing
Officer for the Individual Strategic Business Unit of Union Central Life
Insurance Company, a mutual company.
William S. Lipsman joined the Company as General Counsel in March 1996,
became Vice President and General Counsel in March 1997 and was also appointed
the Company's Secretary in March 1998. From January 1976 to September 1995, Mr.
Lipsman was an attorney with Sara Lee Corporation where he most recently served
as Associate General Counsel.
James M. Nikrant joined the Company as Senior Vice President-Operations in
May 1996. From July 1993 to February 1996, Mr. Nikrant was with Montgomery Ward
and Company, Inc. where he most recently served as Senior Vice President
Logistics/Product Service.
Philip B. Wade joined the Company as Controller in May 1995 and became a Vice
President in February 1997. From 1986 to 1994, Mr. Wade was with Penford
Products Co., where he most recently served as Vice President, Finance.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHARE OWNER MATTERS
The Company completed an initial public offering on October 10, 1995 (the
"Initial Public Offering") at a price of $8.00 per share. Since the Initial
Public Offering, the Company's Common Shares have been quoted on the Nasdaq
National Market under the symbol "APAC." Prior to the Initial Public Offering,
the Common Shares were not listed or quoted on any organized market system. The
information presented throughout this Report reflects a two-for-one stock split
in the form of a dividend paid by the Company on May 15, 1996. The following
table sets forth for the periods indicated the high and low sale prices of the
Common Shares as reported on the Nasdaq National Market during such period.
High Low
Fiscal 1995:
Fourth Quarter (from October 11, 1995) . . $17.44 $8.94
Fiscal 1996:
First Quarter . . . . . . . . . . . . . . . 36.13 13.31
Second Quarter . . . . . . . . . . . . . . 43.88 30.25
Third Quarter . . . . . . . . . . . . . . . 58.00 32.25
Fourth Quarter . . . . . . . . . . . . . . 59.00 35.00
Fiscal 1997:
First Quarter . . . . . . . . . . . . . . . 41.00 23.75
Second Quarter . . . . . . . . . . . . . . 30.50 8.75
Third Quarter . . . . . . . . . . . . . . . 19.63 10.75
Fourth Quarter . . . . . . . . . . . . . . 15.56 11.25
As of March 23, 1998, there were 277 holders of record of the Common Shares.
The Company currently intends to retain future earnings to finance its growth
and development and therefore does not anticipate paying any cash dividends in
the foreseeable future. In addition, the Company's Credit Facility restricts the
payment of cash dividends by the Company. Payment of any future dividends will
depend upon the future earnings and capital requirements of the Company and
other factors which the Board of Directors considers appropriate. For certain
information regarding distributions made by the Company prior to its Initial
Public Offering in fiscal 1995, see the Company's Consolidated Financial
Statement and the Notes thereto included elsewhere in this report.
In consideration for the acquisition of Paragren, the Company issued
1,991,385 Common Shares to the Paragren stockholders and converted existing
Paragren stock options into stock options for an additional 189,199 Common
Shares. The number of Common Shares of the Company issued in connection with the
acquisition was determined by an arms-length negotiation between the Company the
principal stockholders of Paragren. Such Common Shares were issued in reliance
on the exemption from registration provided in Section 4(2) of the Securities
Act of 1933, as amended. See Item 13 "Certain Relationships and Related
Transactions."
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements of the Company and notes thereto included
elsewhere in this Report. The statements of operations data and balance sheet
data for and as of the end of each of the fiscal years in the five-year period
ended December 28, 1997, are derived from the audited Consolidated Financial
Statements of the Company.
For the Fiscal Years Ended(1)
1997 1996 1995 1994 1993
(In thousands, except per share and statistical data)
OPERATING DATA:
Net revenue . . . . . . . . . . . . . . . . . . $ 356,390 $ 276,443 $ 101,667 $ 46,618 $ 28,912
Cost of services . . . . . . . . . . . . . . . 269,326 193,967 71,982 30,666 19,790
Selling, general and administrative expenses . 48,784 33,397 16,398 9,322 5,070
Special charges (2) . . . . . . . . . . . . . . 23,038 - - - -
Income from operations . . . . . . . . . . . . 15,242 49,079 13,287 6,630 4,052
Interest expense, net . . . . . . . . . . . . . 1,489 29 804 664 203
Income taxes (3) . . . . . . . . . . . . . . . 12,770 18,500 4,330 - -
Cumulative effect of change in accounting (4) . (2,200) - - - -
Net income . . . . . . . . . . . . . . . . . . ($1,217) $ 30,550 $ 8,153 $ 5,966 $ 3,849
Pro Forma Income Data:
Net income as reported . . . . . . . . . . . $ 8,153 $ 5,966 $ 3,849
Pro forma adjustment for income taxes (5) . . 670 2,070 1,500
Pro forma net income (5) . . . . . . . . . . $ 7,483 $ 3,896 $ 2,349
Net income (loss) per share (pro forma for
fiscal 1993 through 1995):
Basic . . . . . . . . . . . . . . . . . . . . ($0.03) $0.66 $0.19 $0.10 $0.06
Diluted . . . . . . . . . . . . . . . . . . . ($0.03) $0.64 $0.18 $0.10 $0.06
Weighted average shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . 47,453 46,350 40,425 40,086 40,086
Diluted . . . . . . . . . . . . . . . . . . . 48,505 47,935 41,624 40,086 40,086
STATISTICAL DATA:
Number of Customer Optimization Centers . . . . 68 62 33 17 12
Number of workstations . . . . . . . . . . . . 10,770 8,450 4,210 1,630 934
Balance Sheet Data:
Cash and short-term investments . . . . . . . . $ 219 $ 141 $ 30,186 $ 1 $ 58
Working capital . . . . . . . . . . . . . . . . 20,515 13,354 33,045 2,877 454
Capital expenditures, net . . . . . . . . . . . 44,127 64,417 16,626 6,526 2,314
Total assets . . . . . . . . . . . . . . . . . 187,745 141,381 74,332 21,181 11,501
Long-term debt, less current maturities . . . . 1,863 1,325 1,474 8,218 3,073
Share owners' equity . . . . . . . . . . . . . 124,783 88,206 52,707 5,722 4,183
(1) The Company has a 52-/53- week fiscal year that ends on the Sunday closest
to December 31. All periods presented consisted of 52 weeks.
(2) Special charges recorded in fiscal 1997 reflect the write-off of acquired
in-process research and development in connection with the Paragren
Technologies, Inc. purchase of $19,800,000 and provision for software
impairment of $3,238,000 as a result of plans to replace software platforms
used by the Company with technologies being developed by Paragren.
(3) Prior to an initial public offering, the Company was an S Corporation and
not subject to Federal and certain state corporate income taxes. On October
16, 1995, the Company changed its tax status from an S Corporation to a C
Corporation, recorded deferred income taxes totaling $3,780,000 and began
providing for Federal and state corporate income taxes. See Note 4 to the
Company's Consolidated Financial Statements.
(4) Cumulative effect of accounting change reflects the adoption of EITF
Bulletin No. 97-13 which requires that business process reengineering costs
be expensed as incurred. All previously capitalized and unamortized
reengineering costs at November 20, 1997, were expensed as the cumulative
effect of the accounting change, net of income taxes of $1,349,000.
(5) The operating data reflects a pro forma adjustment for income taxes as if
the Company were subject to Federal and state corporate income taxes for
all periods. The pro forma provisions for income taxes represent a combined
Federal and state tax rate of 43%, less applicable Federal and state job
creation tax credits, which resulted in effective tax rates ranging from
35% to 40%. See Note 4 to the Company's Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the Company's historical results of operations
and of its liquidity and capital resources should be read in conjunction with
the Selected Financial and Operating Data and the Consolidated Financial
Statements of the Company and related notes thereto appearing elsewhere in this
Report.
DESCRIPTION OF BUSINESS
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. In fiscal 1997, the Company had two primary 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. The Company expanded its service offerings during the
year through the acquisition of 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 Company operates and
manages 10,770 workstations in 68 Customer Optimization Centers.
RESULTS OF OPERATIONS
The following tables set forth client concentration data and consolidated
statements of operations data as a percentage of net revenue from services
provided by the Company for the years ended December 28, 1997, December 29,
1996, and December 31, 1995.
Client Concentration Data
1997 1996 1995
Net revenue (in millions):
All other clients $206.2 $118.7 $79.5
Parcel delivery client 90.2 106.7 14.1
Telecommunications client 60.0 51.0 8.1
Total net revenue $356.4 $276.4 $101.7
Annual revenue growth rates:
All other clients 73.7% 49.3% 70.5%
Parcel delivery client (15.5) 656.7 n.m.
Telecommunications client 17.6 529.6 n.m.
Combined 28.9 171.9 118.1
Operations Data
1997 1996 1995
Net revenue:
Sales Solutions 51.3% 51.3% 71.5%
Service Solutions 48.7 48.7 28.5
Total net revenue 100.0 100.0 100.0
Operating expenses:
Cost of services 75.5 70.1 70.8
Selling, general and
administrative expenses 13.7 12.1 16.1
Acquired in-process research and
development 5.6 - -
Provision for software impairment 0.9 - -
Total operating expenses 95.7 82.2 86.9
Income from operations 4.3 17.8 13.1
Interest expense, net 0.4 - 0.8
Income before income taxes and
cumulative effect of accounting
change 3.9 17.8 12.3
Income taxes (pro forma 1995) 3.6 6.7 4.9
Income before cumulative effect of
accounting change 0.3 11.1 7.4
Cumulative effect of accounting
change, less income taxes (0.6) - -
Net income (loss) (0.3)% 11.1% 7.4%
FISCAL 1997 COMPARED TO FISCAL 1996
Net revenue increased to $356.4 million in fiscal 1997 from $276.4 million
in fiscal 1996, an increase of $80.0 million or 28.9%. The Company was
successful in decreasing its concentration of business with its two largest
clients in fiscal 1997 by increasing net revenue from other clients by 73.7%
during the year. Sales Solutions net revenue increased by $41.0 million during
fiscal 1997. Of this increase, approximately 45% was attributable to services
initiated for new clients, while the balance was due to higher call volumes from
existing clients. The $39.0 million increase in Service Solutions net revenue
during fiscal 1997 was due to services initiated for new clients and the
inclusion of Paragren's software and consulting revenue. Revenue from existing
Service Solutions clients was unchanged for the year as increased revenue from
higher inbound call volumes with an existing large telecommunications client was
offset by a 15.5% revenue reduction from the Company's large parcel delivery
client. The revenue reduction from the large parcel delivery client was due to
improved operating efficiencies in the management of client-owned call centers
and the effects of a three-week labor strike against the client.
Cost of services as a percent of net revenue increased to 75.5% in fiscal
1997 from 70.1% in fiscal 1996. This increase was due to four factors. First,
the Company experienced lower margins as a result of client mix and marketplace
pricing pressures. Second, a more expensive group health insurance plan was
implemented during fiscal 1997 to improve employee retention. Third, the
Company's large parcel delivery client reduced the number of billable positions
in the client-owned call centers by approximately 20%, resulting in the Company
absorbing payroll costs during a three-month adjustment period that otherwise
would have been billed to the client. Finally, the Company absorbed fixed costs
relating to excess capacity and infrastructure, such fixed costs increasing as a
percent of net revenue, due to marketing-related volume reductions by its large
telecommunications client and the effects of a labor strike against the large
parcel delivery client.
Selling, general and administrative expenses increased to $48.8 million in
fiscal 1997 from $33.4 million in fiscal 1996, an increase of $15.4 million or
46.1%. As a percent of net revenue, selling, general and administrative
expenses increased to 13.7% in fiscal 1997 from 12.1% in fiscal 1996. The
increase in selling, general and administrative expenses during fiscal 1997 was
due to expansion of sales and marketing efforts, investments in human resources
and administrative functions to support the Company's larger revenue base, and
the inclusion of Paragren's selling, general and administrative expenses. The
expenses of Paragren are higher per dollar of revenue than the Company's
expenses due to sales and marketing and research and development required to
support software sales and consulting efforts.
Special charges recorded during fiscal 1997 included the write-off of
acquired in-process research and development of $19.8 million in connection with
the Paragren purchase and a provision for software impairment of $3.2 million as
a result of plans to replace software platforms used by the Company with
technologies being developed by Paragren. Acquired in-process research and
development, which was determined by an independent appraisal, includes the
value of software in the development stage and not considered to have reached
technological feasibility. Generally accepted accounting principles require
that research and development costs be expensed as incurred.
Net interest expense increased by $1.5 million in fiscal 1997 from fiscal
1996. This increase reflects interest income earned on temporary investments in
fiscal 1996 with cash raised in the initial public offering of the Company's
Common Shares compared to interest expense incurred on outstanding borrowings in
fiscal 1997 as the result of investment in Customer Optimization Centers during
the fourth quarter of fiscal 1996 and fiscal 1997.
The effective income tax rate in fiscal 1997 increased to 92.9% from 37.7%
in fiscal 1996 principally due to the special charge to operations for acquired
in-process research and development related to the Paragren purchase for which
no tax benefit was available. The effective income tax rate in fiscal 1997
before the impact of acquired in-process research and development was 43.7%.
The change between the actual income tax rate in fiscal 1996 and the adjusted
income tax rate in fiscal 1997 was due to the amortization of goodwill related
to the Paragren purchase and other non-deductible expenses.
The cumulative effect of the accounting change of $2.2 million, net of
applicable income taxes, reflects the adoption during fiscal 1997 of Emerging
Issues Task Force Bulletin No. 97-13 ("EITF No. 97-13"), "Accounting for the
Costs Incurred in Connection with a Consulting Contract or an Internal Project
That Combines Business Process Reengineering and Information Technology
Transformation". EITF No. 97-13 requires that business process reengineering
costs be expensed as incurred and that any unamortized reengineering costs at
November 20, 1997, also be expensed and reported as a cumulative effect of
accounting change. The Company had been capitalizing reengineering costs
related to the installation of computer software purchased to provide
enterprise-wide business management systems.
FISCAL 1996 COMPARED TO FISCAL 1995
Net revenue increased 171.9% in fiscal 1996 to $276.4 million, up $174.7
million from fiscal 1995. Service Solutions net revenue increased by $105.5
million during fiscal 1996. This increase principally was due to the
commencement of a four-year agreement to manage 4 client-owned call centers for
a large parcel delivery client. Sales Solutions net revenue increased by $69.2
million during fiscal 1996. Of this increase, approximately 85% was attributed
to services initiated for new clients, principally outbound call activity for a
large telecommunications client, while the balance was due to higher call
volumes from existing clients.
Cost of services as a percent of net revenue decreased from 70.8% in fiscal
1995 to 70.1% in fiscal 1996. Exclusive of start-up activities related to new
parcel delivery business, cost of services as a percent of net revenue increased
by 1.1% in fiscal 1996 as compared to fiscal 1995. This increase reflects the
shift in service mix to the management of client-owned call centers. The
management of client-owned call centers has a lower gross margin compared to the
Company's other service offerings because of the nature of the outsourced
services provided for the large parcel delivery client. Recruiting, training
and facility costs incurred in advance of full-scale operations of 29 new
Customer Optimization Centers during fiscal 1996 also contributed to the higher
service costs.
Selling, general and administrative expenses increased 103.7% in fiscal
1996 to $33.4 million, up $17.0 million over fiscal 1995. Approximately 75% of
the growth in overhead was due to investments in additional management personnel
and systems to support the Company's increased revenue base, with the balance
due to expenses associated with the new parcel delivery business. Selling,
general and administrative expenses as a percent of net revenue declined as a
result of economies of scale associated with spreading fixed and semi-variable
costs over a larger revenue base. Selling, general and administrative expenses
as a percent of net revenue were 12.1% for fiscal 1996 compared to 16.1% for
fiscal 1995.
Net interest expense decreased $0.8 million from fiscal 1995 to fiscal
1996. The decrease was due to a reduction of average outstanding borrowings as
a result of debt retired in fiscal 1995 with cash raised from the initial public
offering of the Company's Common Shares in October 1995.
The provision for income taxes of $18.5 million recognized in fiscal 1996
was based upon the Company's estimated effective tax rate of 37.7%. Prior to
the initial public offering of the Company's Common Shares in fiscal 1995, the
Company included its income and expenses with those of its share owners for
Federal and certain state income tax purposes (an S Corporation election). In
connection with the Company's initial public offering, the Company terminated
its S Corporation election. The pro forma income tax rate of 40.1% in fiscal
1995 assumed that the Company was treated as a C Corporation for the entire year
and reflects Federal taxes at the statutory rate of 35% plus state taxes, net of
Federal benefit and state job creation credits. The change between the pro
forma income tax rate in fiscal 1995 and the actual income tax rate in fiscal
1996 was due to tax planning strategies which have reduced state income taxes
payable.
NEW ACCOUNTING STANDARDS
As described in Notes 3 and 12 to the Consolidated Financial Statements,
the Company adopted SFAS No. 128 and EITF 97-13 during fiscal 1997 and will
adopt SFAS Nos. 130 and 131 in fiscal 1998. As of December 31, 1997, the impact
of adopting SFAS Nos. 130 and 131 has not been determined.
INFLATION
The effects of inflation on the Company's operations were not significant
during the years presented in the consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth consolidated statements of cash flows data
for the Company for years ended December 28, 1997, December 29, 1996, and
December 31, 1995.
Cash Flows Data
1997 1996 1995
(In millions)
Net cash provided by operating activities $32.0 $12.0 $15.2
Net cash used by investing activities (45.0) (38.4) (42.6)
Net cash provided by financing activities 13.0 22.3 31.6
Cash provided by operating activities during fiscal 1997 totaled $32.0
million, up $20.0 million over fiscal 1996 and $16.8 million over fiscal 1995.
Income adjusted for non-cash items amounted to $47.6 million in fiscal 1997
compared to $42.0 million in fiscal 1996 and $15.3 million in fiscal 1995. The
increase in cash provided by operations in fiscal 1997 compared to fiscal 1996
was due to a decrease in cash required for general working capital purposes as a
result of slower revenue growth in 1997 than in 1996.
Cash from investing activities was used to expand the number of Customer
Optimization Centers and to standardize and upgrade the Company's
telecommunications and business management systems. Capital expenditures
amounted to $44.1 million in fiscal 1997, $64.4 million in fiscal 1996 and $15.3
million in fiscal 1995. The increase in capital expenditures in fiscal 1996
compared to fiscal 1995 was due to the construction of 26 Sales Solutions
centers and 3 Service Solutions centers with a combined capacity of 4,240 seats.
New capacity was added during 1996 to meet the service needs of a large
telecommunications client and to position the Company for growth in 1997. The
decrease in capital expenditures in fiscal 1997 compared to fiscal 1996 was due
to the utilization of capacity placed into service at the end of 1996 and slower
revenue growth in 1997 than in 1996. Capital expenditures in fiscal 1997
included $11.0 million to standardize and upgrade the Company's technology
platform and business management systems. Funds required for capital investment
over the past two years were provided by the sale of $26.0 million in short-term
investments, borrowings under the Company's Credit Facility described below and
excess cash from operations.
Cash from financing activities during the last three fiscal years was
provided by proceeds from the sale of the Company's Common Shares and borrowings
under the Company's Credit Facility. On October 16, 1995, the Company completed
the initial public offering of Common Shares raising $48.2 million for business
growth and general working capital purposes. Cash distributions to share owners
during fiscal 1995 and fiscal 1996 represent dividends to cover share owners'
income taxes related to the Company's former S Corporation status.
On August 19, 1997, the Company completed the acquisition of Paragren
Technologies, Inc. The purchase price was approximately $32.9 million
consisting of 1,991,385 shares of the Company's Common Shares and stock options
for an additional 189,199 shares of the Company's Common Shares which resulted
from the conversion of existing Paragren stock options. The Paragren
acquisition is expected to contribute positively to the Company's operating
results beginning in fiscal year 1998.
In June, 1996, the Company entered into a new unsecured Credit Facility
with a syndicate of banks and repaid amounts outstanding under prior line-of-
credit facilities. In June 1997, the Company amended its Credit Facility
increasing the total available line-of-credit from $40.0 million to $80.0
million. As of December 28, 1997, the Company had borrowings totaling $23.6
million under the Credit Facility classified as current indebtedness, as amounts
outstanding fluctuate based upon the working capital position of the Company.
The Company intends to use funds generated by future operations and
available credit under its Credit Facility to meet normal operating needs as
well as fund planned capital expenditures during fiscal 1998.
QUARTERLY RESULTS
The Company's operating results in any single period should not be viewed
as indicative of future operating results as the services offered by the Company
are subject to variations in profitability. The Company could experience
variations in net revenue and operating results due to result of many factors,
including the timing of clients' marketing campaigns and customer service
programs, the timing of additional selling, general and administrative expenses
to acquire and support such new business and changes in the Company's revenue
mix among its various service offerings. In connection with certain contracts,
the Company could incur costs in periods prior to recognizing revenue under
those contracts. In addition, the Company must plan its operating expenditures
based on revenue forecasts, and a revenue shortfall below such forecast in any
quarter would likely adversely affect the Company's operating results for that
quarter. While the effects of seasonality on the Company's business have
historically been obscured by its growing net revenue, the Company's business
tends to be slower in the first and third quarters of its fiscal year due to
client marketing programs which are typically slower in the postholiday and
summer months.
YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure its operations will not be
adversely impacted by year 2000 software failures. Specifically, computational
errors are a known risk with respect to dates after December 31, 1999. The
Company is in the process of assessing its computer and telecommunications
equipment and internal computer applications to prepare for the year 2000 with
its vendors. Although the Company has not yet estimated the total costs needed
for year 2000 compliance, the Company currently believes it will be able to
upgrade and maintain its computer systems to recognize years beginning with
2000, and that the costs to do so will not have a material impact on its results
of operations and financial position. Although the Company is committed to
making its systems year 2000 compliant as soon as practical, it is uncertain as
to the extent its clients and vendors may be affected by year 2000 issues that
require commitment of significant resources and may cause disruptions in the
clients' and vendors' businesses.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the foregoing "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in this Report,
including those regarding APAC's expected growth, prospective business
opportunities and future expansion plans, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
including, but not limited to, general economic and business conditions,
competition, changing trends in customer profiles and changes in governmental
regulations. Although the Company believes that its expectations with respect
to the forward-looking statements are based upon reasonable assumptions within
the bounds of its knowledge of its business and operations, there can be no
assurance that actual results, performance or achievements of the Company will
not differ materially from any future results, performance or achievements
expressed or implied by such forward looking statements.
In addition to the risks and uncertainties of ordinary business operations,
the forward-looking statements of the Company contained in this Annual Report on
Form 10-K are also subject to the following risks and uncertainties:
RELIANCE ON MAJOR CLIENTS
Because a substantial portion of the Company's revenue is generated from
relatively few clients, the loss of a significant client or clients could have a
materially adverse effect on the Company. The Company had clients which
individually accounted for more than 10% of the Company's net revenue for fiscal
1997, 1996 and 1995. The Company's ten and four largest clients collectively
accounted for 72.1% and 55.7%, respectively, of the Company's net revenue in
fiscal 1997. The Company's largest clients in fiscal 1997 were a major parcel
delivery company and a large telecommunications company, which accounted for
25.3% and 16.8%, respectively, of the Company's net revenue in fiscal 1997. The
Company's third largest client in fiscal 1997 was Mass Marketing Insurance
Group, which accounted for 7.5% of the Company's net revenue during that period.
The insurance products sold by Mass Marketing Insurance Group are currently
underwritten by J.C. Penney Life Insurance Company. During fiscal 1997, J.C.
Penney Life Insurance Company accounted for 3.9% of the Company's net revenue.
The Company's fourth largest client in fiscal 1997 was Canadian National Bancorp
which accounted for 6.1% of the Company's net revenue during the period. In
fiscal 1996, two clients accounted for 38.6% and 18.4% of the Company's net
revenue and in fiscal 1995, two clients accounted for 15.6% and 14.1% of the
Company's net revenue, respectively. Many of the Company's clients are
concentrated in the business and consumer products, parcel delivery, financial
services, insurance, retail, technology, telecommunications and utilities
industries. A significant downturn in any of these industries or a trend in any
of these industries not to use, or to reduce their use of, telephone-based
sales, marketing or customer management solutions could have a materially
adverse effect on the Company's business. The Company generally operates under
contracts which may be terminated on short notice, most of which do not have
minimum volume requirements.
FACTORS AFFECTING ABILITY TO MANAGE AND SUSTAIN GROWTH
The Company has experienced rapid growth over the past several years and
anticipates continued growth to be driven primarily by industry trends towards
outsourcing of telephone-based sales, marketing, and customer service operations
and increased penetration by the Company of new and existing clients and
markets. Future growth will depend on a number of factors, including the
effective and timely initiation and development of client relationships, opening
of new Customer Optimization Centers, and recruitment, motivation and retention
of qualified personnel. Sustaining growth will also require the implementation
of enhanced operational and financial systems and will require additional
management, operational and financial resources. There can be no assurance that
the Company will be able to manage its expanding operations effectively or that
it will be able to maintain or accelerate its growth.
COMPETITIVE AND FRAGMENTED INDUSTRY; POTENTIAL FUTURE COMPETING TECHNOLOGIES AND
TRENDS
The industry in which the Company competes is extremely competitive and
highly fragmented. The Company's competitors range in size from very small
firms offering special applications or short term projects to large independent
firms and the in-house operations of many clients and potential clients. A
number of competitors have capabilities and resources equal to, or greater than,
the Company's. Some of the Company's services also compete with direct mail,
television, radio and other advertising media. There can be no assurance that,
as the Company's industry continues to evolve, additional competitors with
greater resources than the Company will not enter the industry (or particular
segments of the industry) or that the Company's clients will not choose to
conduct more of their telephone-based sales, marketing or customer service
activities internally.
The development of new forms of direct sales and marketing techniques, such
as interactive home shopping through television, computer networks and other
media, could have an adverse effect on the demand for the Company's Sales
Solutions services. In addition, the increased use of new telephone-based
technologies, such as interactive voice response systems and increased use of
the Internet, could reduce the demand for certain of the Company's Service
Solutions offerings. Moreover, the effectiveness of marketing by telephone
could also decrease as a result of consumer saturation and increased consumer
resistance to this direct marketing tool. Although the Company attempts to
monitor industry trends and respond accordingly, there can be no assurance that
the Company will be able to anticipate and successfully respond to such trends
in a timely manner.
RELIANCE ON TECHNOLOGY
The Company has invested significantly in sophisticated and specialized
telecommunications and computer technology, and has focused on the application
of this technology to provide customized solutions to meet its clients needs.
The Company anticipates that it will be necessary to continue to select, invest
in and develop new and enhanced technology on a timely basis in the future in
order to maintain its competitiveness. The Company's future success will depend
in part on its ability to continue to develop information technology solutions
which keep pace with evolving industry standards and changing client demands.
In addition, the Company's business is highly dependent on its computer and
telephone equipment and software systems, and the temporary or permanent loss of
such equipment or systems, through casualty or operating malfunction, could have
a materially adverse effect on the Company's business.
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends in large part upon the abilities and
continued service of its executive officers and other key employees. There can
be no assurance that the Company will be able to retain the services of such
officers and employees. The loss of key personnel could have a materially
adverse effect on the Company. The Company has non-competition agreements with
certain of its existing key personnel. However, courts are at times reluctant
to enforce such agreements. In order to support growth, the Company will be
required to effectively recruit, develop and retain additional qualified
management personnel.
DEPENDENCE ON LABOR FORCE
The Company's industry is very labor intensive and has experienced high
personnel turnover. Many of the Company's employees receive modest hourly wages
and a significant number are employed on a part-time basis. A higher turnover
rate among the Company's employees would increase the Company's recruiting and
training costs and decrease operating efficiencies and productivity. Some of
the Company's operations, particularly insurance product sales and technology-
based inbound customer service, require specially trained employees. Growth in
the Company's business will require it to recruit and train qualified personnel
at an accelerated rate from time to time. There can be no assurance that the
Company will be able to continue to hire, train and retain a sufficient labor
force of qualified employees. A significant portion of the Company's costs
consists of wages to hourly workers. An increase in hourly wages, costs of
employee benefits or employment taxes could materially adversely effect the
Company.
DEPENDENCE ON TELEPHONE SERVICE
The Company's business is materially dependent on service provided by
various local and long distance telephone companies. A significant increase in
the cost of telephone services that is not recoverable through an increase in
the price of the Company's services, or any significant interruption in
telephone services, could have a materially adverse impact on the Company.
GOVERNMENT REGULATION
The Company's business is subject to various Federal and state laws and
regulations. The Company's industry has become subject to an increasing amount
of Federal and state regulation in the past five years. The FCC rules under the
TCPA limit the hours during which telemarketers may call consumers and prohibit
the use of automated telephone dialing equipment to call certain telephone
numbers. The TCFAPA broadly authorizes the FTC to issue regulations prohibiting
misrepresentation in telemarketing sales. In August 1995, the FTC issued
regulations under the TCFAPA which, among other things, require telemarketers to
make certain disclosures when soliciting sales. The Company's operating
procedures comply with the telephone solicitation rules of the FCC and FTC.
However, there can be no assurance that additional Federal or state legislation,
or changes in regulatory implementation, would not limit the activities of the
Company or its clients in the future or significantly increase the cost of
regulatory compliance.
Several of the industries in which the Company's clients operate are
subject to varying degrees of government regulation, particularly the
telecommunications, insurance and financial services industries. Generally,
compliance with these regulations is the responsibility of the Company's
clients. However, the Company could be subject to a variety of enforcement or
private actions for its failure or the failure of its clients to comply with
such regulations. The Company's telephone representatives who sell insurance
products are required to be licensed by various state insurance commissions and
participate in regular continuing education programs, thus requiring the Company
to comply with the extensive regulations of these state commissions. As a
result, changes in these regulations or their implementation could materially
increase the Company's operating costs.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company could experience quarterly variations in revenues and operating
income as a result of many factors, including the timing of clients' marketing
campaigns and customer service programs, the timing of additional selling,
general and administrative expenses to acquire and support such new business and
changes in the Company's revenue mix among its various service offerings. In
connection with certain contracts, the Company could incur costs in periods
prior to recognizing revenue under those contracts. In addition, the Company
must plan its operating expenditures based on revenue forecasts, and a revenue
shortfall below such forecast in any quarter would likely adversely affect the
Company's operating results for that quarter. The effects of seasonality on the
Company's business have historically been obscured by its growing net revenue.
However, the Company's business tends to be slower in the first and third
quarters due to client marketing programs which are typically slower in the
post-holiday and summer months.
CONTROL BY PRINCIPAL SHARE OWNER
Mr. Schwartz, the Company's Chairman, President and Chief Executive
Officer, beneficially owns approximately 40.2% of the outstanding Common Shares.
As a result, Mr. Schwartz is able to exercise significant control over the
outcome of substantially all matters requiring action by the Company's share
owners. Such voting concentration may have the effect of discouraging, delaying
or preventing a change in control of the Company. In addition, two trusts each
beneficially own approximately 5.3% of the outstanding Common Shares.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in Exhibit 13.1 (which
contains excerpts from the Company's Annual Report to Share Owners) under
the captions "Consolidated Balance Sheets," "Consolidated Statements of
Operations," "Consolidated Statements of Share Owners' Equity,"
"Consolidated Statements of Cash Flows," "Notes to Consolidated Financial
Statements" and "Report of Independent Public Accountants" which
information is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item (except for the information regarding
executive officers required by Item 401 of Regulation S-K which is included in
Part I under the caption "Executive Officers of Registrant") is set forth in the
Company's Proxy Statement for the Annual Meeting of Share owners to be held on
May 19, 1998, under the caption "Election of Directors," which information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of Share Owners to be held on May 19, 1998,
under the caption "Compensation of Executive Officers," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of Share Owners to be held on May 19, 1998,
under the caption "Securities Beneficially Owned by Principal Share Owners and
Management," which information is incorporated hereby by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth in the Company's Proxy
Statement for the Annual Meeting of Share Owners to be held on May 19, 1998,
under the caption "Certain Transactions" which information is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)1. FINANCIAL STATEMENTS
The following financial statements of the Company are included in Part II,
Item 8:
(i)
Report of Independent Public Accountants
(ii)
Consolidated Balance Sheets as of December 28, 1997 and December 29, 1996
(iii)
Consolidated Statements of Operations for the Fiscal Years Ended December 28,
1997, December 29, 1996, and December 31, 1995
(iv)
Consolidated Statements of Share Owners' Equity for the Fiscal Years Ended
December 28, 1997, December 29, 1996 and December 31, 1995
(v)
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 28,
1997, December 29, 1996, and December 31, 1995
(vi)
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is submitted as part of this
report:
(i)
Report of Independent Public Accountants
(ii)
Schedule II - Valuation and Qualifying Accounts
All other schedules are not submitted because they are not applicable or are
not required under Regulation S-X or because the required information is
included in the financial statements or notes thereto.
3. EXHIBITS
The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit
Index hereto.
(B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on October 22, 1997, which
disclosed its revenues and earnings for each of the thirteen weeks and thirty-
nine weeks ended September 28, 1997.
On November 3, 1997, the Company amended its Current Report on Form 8-K which
had initially been filed on August 19, 1997 (which initial Form 8-K describes
the acquisition of Paragren Technologies, Inc. by the Company). The amended
Form 8-K/A discloses the financial statements of Paragren Technologies, Inc. for
the period ending June 30, 1997 and the pro forma condensed consolidated
financial statement for the Company, which give effect to the acquisition of
Paragren Technologies, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
APAC TeleServices, Inc.
/s/ Theodore G. Schwartz
Theodore G. Schwartz
Chairman of the Board of Directors
and Chief Executive Officer
Dated: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
s/ Theodore G.Schwartz Chairman of the Board March 27, 1998
Theodore G. Schwartz of Directors and Chief
Executive Officer
(Principal Executive
Officer)
/s/ Marc S. Simon President, Chief March 27, 1998
Marc S. Simon Operating Officer and
Director
/s/ John I. Abernethy Chief Financial Officer March 27, 1998
John I. Abernethy (Principal Financial
Officer)
/s/ Philip B. Wade Vice President and March 27, 1998
Philip B. Wade Controller (Principal
Accounting Officer)
/s/ Thomas M. Collins Director March 27, 1998
Thomas M. Collins
/s/ Morris R. Shechtman Director March 27, 1998
Morris R. Shechtman
/s/ George D. Dalton Director March 27, 1998
George D. Dalton
/s/ Paul G. Yovovich Director March 27, 1998
Paul G. Yovovich
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Share Owners of APAC TeleServices, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of APAC TeleServices, Inc. and issued our
unqualified opinion thereon dated January 30, 1998. Our audits were made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule of Valuation and Qualifying Accounts is presented for
purposes of additional analysis and is not a part of the basic financial
statements. This schedule has been subject to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects in relation to the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Chicago, Illinois
January 30, 1998
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Column A Column B Column C Column D Column E
Additions
Balance at Charged to
Beginning of Costs and Deductions- Balance at End
Description Period Expenses Describe(A) of Period
Allowance deducted from assets to
which it applies:
Allowance for doubtful accounts:
Year ended December 31, 1995 -- 246 (6) 240
Year ended December 29, 1996 240 120 -- 360
Year ended December 28, 1997 360 300 213 447
NOTE A - UNCOLLECTED RECEIVABLES WRITTEN OFF.
EXHIBIT INDEX
Exhibit
Number
Description
3.1 Amended and Restated Articles of Incorporation of
APAC TeleServices, Inc. is incorporated herein by
reference to Exhibit 3.1 to APAC TeleServices,
Inc.'s Registration Statement on Form S-3, as
amended, Registration No. 333-14097
3.2 Amended and Restated Bylaws of APAC TeleServices,
Inc. is incorporated herein by reference to
Exhibit 3.2 to APAC TeleServices, Inc.'s
Registration Statement on Form S-1, as amended,
Registration No. 33-95638
4.1 Specimen Common Stock Certificate is incorporated
herein by reference to Exhibit 4.1 to APAC
TeleServices, Inc.'s Registration Statement on
Form S-1, as amended, Registration No. 33-95638
*10.1 Amended and Restated APAC TeleServices, Inc. 1995
Incentive Stock Plan is incorporated herein by
reference to Exhibit 10.1 to APAC TeleServices,
Inc.'s Registration Statement on Form S-1, as
amended, Registration No. 33-95638
*10.2 Amended and Restated APAC TeleServices, Inc. 1995
Nonemployee Director Stock Option Plan is
incorporated herein by reference to Exhibit 10.2
to APAC TeleServices, Inc.'s Registration
Statement on Form S-1, as amended, Registration
No. 33-95638
*10.3 Employment Agreement with Marc S. Simon, as
amended, is incorporated herein by reference to
Exhibit 10.3 to APAC TeleServices, Inc.'s
Registration Statement on Form S-1, as amended,
Registration No. 33-95638
*10.4 Employment Agreement with Donald B. Berryman is
incorporated herein by reference to Exhibit 10.4
to APAC TeleServices, Inc.'s Registration
Statement on Form S-1, as amended, Registration
No. 33-95638
10.5 Credit Agreement dated June 3, 1997 (filed
herewith)
10.6 Agreement with United Parcel Service General
Services Inc. is incorporated herein by reference
to Exhibit 10.6 to APAC TeleServices, Inc.'s
Registration Statement on Form S-1, as amended,
Registration No. 33-95638
10.7 Registration Rights Agreement is incorporated
herein by reference to Exhibit 10.7 to APAC
TeleServices, Inc.'s Registration Statement on
Form S-1, as amended, Registration No. 33-95638
10.8 Tax Agreement is incorporated herein by reference
to Exhibit 10.8 to APAC TeleServices, Inc.'s
Registration Statement on Form S-1, as amended,
Registration No. 33-95638
10.9 Agreement with J.C. Penney Insurance Company,
dated November 1, 1994 is incorporated herein by
reference to Exhibit 10.9 to APAC TeleServices,
Inc.'s Registration Statement on Form S-1, as
amended, Registration No. 33-95638
*10.10 Amendment No. 1 to Amended and Restated APAC
TeleServices, Inc. 1995 Incentive Stock Plan is
incorporated herein by reference to Exhibit 10.11
to APAC TeleServices, Inc.'s Registration
Statement on Form S-1, as amended, Registration
No. 33-95638
13.1 Excerpts from 1997 Annual Report to Share Owners
(filed herewith)
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Arthur Andersen LLP (filed herewith)
27.1 Financial Data Schedule (filed herewith)
*Indicates management employment contracts or compensatory plans or
arrangements.