United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended June 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From _________________ to _____________________
Commission file number 0-26786
APAC TELESERVICES, INC.
(Exact name of registrant as specified in its charter)
Illinois 36-2777140
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
One Parkway North Center,
Suite 510 60015
Deerfield, Illinois
(Address of principal (Zip Code)
executive office)
(847) 945-0055
(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--46,316,231 shares outstanding as of August 8,
1996.
INDEX
APAC TELESERVICES, INC.
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets--June 30, 1996 and December 31, 1995
Condensed Statements of Income--Thirteen and Twenty-Six Weeks
Ended June 30, 1996 and July 2, 1995
Condensed Statements of Cash Flows--Twenty-Six Weeks Ended
June 30, 1996 and July 2, 1995
Notes to Condensed Financial Statements--June 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBITS
PART I. FINANCIAL INFORMATION
APAC TELESERVICES, INC.
CONDENSED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1996 1995
ASSETS (Unaudited) (Audited, Note 1)
(000's omitted, except share data)
CURRENT ASSETS
Cash and cash equivalents $14 $4,186
Short-term investments 5,700 26,000
Accounts receivable, net 40,851 18,736
Deferred preoperating costs 324 1,142
Prepaid expenses 325 652
Total Current Assets 47,214 50,716
PROPERTY, PLANT AND EQUIPMENT 57,279 32,105
Less--Accumulated depreciation and amortization (12,374) (8,489)
Property, Plant and Equipment, Net 44,905 23,616
Total Assets $92,119 $74,332
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $2,000 $ -
Accounts payable 5,999 3,068
Income taxes payable 1,630 1,263
Other current liabilities 13,320 13,340
Total Current Liabilities 22,949 17,671
LONG-TERM DEBT, NET 1,380 1,474
DEFERRED INCOME TAXES 1,950 2,480
SHAREHOLDERS' EQUITY
Preferred shares, $0.01 par value; 50,000,000 shares
authorized; none issued and outstanding
Common shares, $0.01 par value; 100,000,000
shares authorized; 46,276,708 shares issued and
outstanding at June 30, 1996; 46,200,000 shares
issued and outstanding at December 31, 1995 463 462
Other shareholders' equity 65,377 52,245
Total Shareholders' Equity 65,840 52,707
Total Liabilities and Shareholders' Equity $92,119 $74,332
See Notes to Condensed Financial Statements.
APAC TELESERVICES, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
JUNE 30, JULY 2, JUNE 30, JULY 2,
1996 1995 1996 1995
(000's omitted, except for per share data)
Net revenue $65,099 $22,777 $113,243 $40,642
Operating expenses:
Cost of services 45,789 15,709 80,175 27,190
Selling, general and
administrative expenses 7,592 3,776 13,783 7,392
Total operating expenses 53,381 19,485 93,958 34,582
Income from operations 11,718 3,292 19,285 6,060
Interest income (expense) 51 (320) 279 (562)
Income before income taxes 11,769 2,972 19,564 5,498
Income taxes 4,648 - 7,728 -
Net income $7,121 $2,972 $11,836 $5,498
Pro forma income data:
Net income as reported $2,972 $5,498
Pro forma adjustment to
recognize "C" corporation
provision for income taxes (1,164) (2,153)
Pro forma net income $1,808 $3,345
Net income per share:
Net income as reported $0.15 $0.07 $0.25 $0.13
Pro forma adjustment - (0.03) - (0.05)
Net income as adjusted $0.15 $0.04 $0.25 $0.08
Weighted average number of
shares outstanding 48,060 40,086 47,869 40,086
See Notes to Condensed Financial Statements.
APAC TELESERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
JUNE 30, JULY 2,
1996 1995
(000's omitted)
OPERATING ACTIVITIES
Net income $11,836 $5,498
Depreciation and amortization 4,756 1,713
Deferred income taxes (990) -
Change in operating assets and liabilities (17,625) (1,057)
Net Cash Provided (Used) by Operations (2,023) 6,154
INVESTING ACTIVITIES
Sales of short-term investments 20,300 -
Purchases of property, plant and equipment (25,175) (9,552)
Net Cash Used by Investing Activities (4,875) (9,552)
FINANCING ACTIVITIES
Proceeds from long-term debt - 6,690
Payments on long-term debt (546) (1,366)
Net proceeds under Revolving Credit facility 2,000 -
Increase in book overdraft 2,784 185
Exercise of employee stock options 1,297 -
S corporation distributions (2,809) (2,067)
Net Cash Provided by Financing Activities 2,726 3,442
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ($4,172) $44
See Notes to Condensed Financial Statements.
APAC TELESERVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the thirteen and
twenty-six week periods ended June 30, 1996, are not necessarily indicative
of the results that may be expected for the fiscal year ending December 29,
1996. The Balance Sheet information as of December 31, 1995, 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 annual report on Form 10-K for the year ended December 31, 1995.
NOTE 2--INCOME TAXES
Prior to its initial public offering completed on October 16, 1995, the
Company had elected to be treated for Federal and certain state income tax
purposes as an S corporation. As a result, earnings of the Company have been
taxed directly to the shareholders of the Company, rather than to the
Company. Dividends paid to shareholders of $2.8 million in 1996 and $2.1
million in 1995 represent cash distributions to shareholders to cover taxes
related to the Company's former S corporation status. The pro forma income
data in the Statements of Income provides information as if the Company had
been treated as a C corporation for income tax purposes for the thirteen and
twenty-six week periods ended July 2, 1995.
NOTE 3--RELATED PARTY TRANSACTIONS
In February, 1996, Theodore G. Schwartz, Chairman and Chief Executive Officer
of the Company, and two Schwartz Family Trusts sold 2,875,000 shares of the
Company's Common Shares reducing the family's ownership to 65%. Costs
associated with the Schwartz family's secondary offering of Common Shares
amounting to approximately $360,000 have been incurred and expensed by the
Company and are included in selling, general and administrative expenses for
the twenty-six week period ended June 30, 1996.
NOTE 4--SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
Net income per share amounts are computed based upon the weighted average
number of common shares and common share equivalents outstanding during each
of the periods presented. Shareholders' equity and per share data have been
adjusted for all periods presented to reflect a two-for-one stock split in
the form of a stock dividend paid on May 15, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
APAC provides telephone-based sales, marketing and customer management
services. The Company has two primary service offerings. Sales Solutions
provides outbound sales support to consumers and businesses, database
analysis and management, market research, targeted marketing plan development
and customer lead generation, acquisition and retention. Service Solutions
provides inbound customer service, direct mail response, "help" line support
and catalog order processing.
APAC's results of operations in any single interim period should not be
viewed as an indication of future results of operations. The Company may
experience quarterly variations in net revenue and operating income as a
result of the timing of clients' marketing campaigns and customer service
programs, the timing of additional selling, general and administrative
expenses to acquire and support such new business and changes in the
Company's revenue mix among its various service offerings. While the effects
of seasonality on APAC's business have been obscured by its growing net
revenue, the Company's business tends to be slower in the first and third
quarter of its fiscal year due to client marketing programs which are
typically slower in the post-holiday and summer months.
RESULTS OF OPERATIONS
Net revenue increased 185.8% in the second quarter of 1996 to $65.1 million,
up $42.3 million over the second quarter of 1995. For the first six months
net revenue of $113.2 million was 178.6% higher than the same period in 1995.
Approximately fifty percent of the revenue growth is attributed to Service
Solutions revenue from the commencement of a four year contract to operate
and manage four United Parcel Services' (UPS) customer service facilities.
The remaining increase was due to higher Sales Solutions call volume from
existing clients and the addition of new clients from within the
telecommunications industry.
Cost of services as a percentage of net revenue increased to 70.3% in the
second quarter of 1996 compared to 69.0% in the second quarter of 1995. For
the first six months cost of services as a percentage of net revenue was
70.8% as compared to 66.9% in the same period in 1995. The increase in the
cost of services reflects the shift in service mix to UPS which has a lower
gross margin compared to the Company's other service offerings. Recruiting,
training and facility costs incurred in advance of full-scale operations on
the start up of twenty-one new Sales Solutions calling centers during the
first half of 1996 also contributed to the higher service costs.
Selling, general and administrative expenses increased 101.1% in the second
quarter of 1996 to $7.6 million, up $3.8 million over the second quarter of
1995. For the first six months selling, general and administrative expenses
of $13.8 million were 86.5% higher than in the same period in 1995.
Approximately seventy-five percent of the growth in overhead was due to
investments in systems and management to support the Company's increased
revenue base, with the balance due primarily to expenses associated with the
new UPS business. Selling general and administrative expenses as a
percentage of revenue have continued to decline 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 percentage
of net revenue were approximately 12% for the three- and six-month periods
ended June 30, 1996 as compared to 16.6% for the second quarter of 1995 and
18.2% for the first six months of 1995.
The $841,000 change from interest expenses in the first six months of 1995 to
interest income in the first six months of 1996 reflects income earned on
short-term investments in 1996 and expense eliminated as a result of debt
retired in 1995 with cash raised from the initial public offering of the
Company's stock in October, 1995.
The $4.6 million and $7.7 million provision for income taxes recognized in
the three- and six-month periods ended June 30, 1996 are based upon the
Company's effective tax rate of 39.5% in 1996. Prior to the initial public
offering, the Company included its income and expenses with those of its
shareholders for Federal and certain state income tax purposes (an S
corporation election). The pro forma tax rate of 39.2% in 1995 reflect
Federal taxes at the statutory rate of 35% plus state taxes net of Federal
benefit and state job creation credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $5.7 million in short-term investments at June 30, 1996. The
Company also has a $40.0 million revolving credit agreement that replaces an
agreement that was entered into in 1995 which consisted of a $10.0 million
revolving credit agreement and a $21.1 million line of credit available for
use in funding capital expenditures. At June 30, 1996, $2.0 million was
outstanding under the revolving credit agreement.
During the first six months of 1996, operations used $2.0 million in cash
compared to $6.2 million in cash provided by operations in the same period in
1995. Although net income for the first half of 1996 increased by $6.2
million or 115.3% when compared to 1995, cash provided by operations
decreased by $8.2 million due to higher accounts receivable balances
generated through larger sales volumes and extended billing cycles with
several new clients. The Company also invested $25.2 million in capital
expenditures in 1996. Funds for operating needs and capital to add
approximately 2,000 workstations in twenty-one new calling centers opened in
the first six months of 1996 were provided by use of cash and cash equivalent
balances of $4.2 million and proceeds from the sale of $20.3 million in
short-term investments. The Company expects that cash generated by future
operations and short-term investments will be sufficient to meet normal
operating needs as well as fund business growth for the last half of 1996.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the Registrant was held on
May 21, 1996.
(b) Not applicable
(c) 1. Set forth below is the tabulation of the votes on each nominee
for election as a director:
Name For Withhold
Authority
Theodore G. Schwartz 21,564,354 46,360
Marc S. Simon 21,564,354 46,360
Thomas M. Collins 21,572,754 37,960
Morris R. Shechtman 21,563,254 47,460
2. Set forth below is the tabulation of the votes with respect to
a proposal to approve the APAC TeleServices, Inc. Employee
Stock Purchase Plan:
For 21,459,339
Against 98,104
Withhold authority 19,241
Broker Non-Votes 34,030
3. Set forth below is the tabulation of the votes with respect to
a proposal to amend Registrant's Articles of Incorporation to
increase the number of authorized Common Shares from 100,000,000
to 200,000,000:
For 20,330,893
Against 1,229,891
Withhold authority 15,900
Broker Non-Votes 34,030
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are furnished as exhibits and numbered pursuant
to Item 601 of Regulation S-K: Exhibit (11) -- Statement Re: Computation of
Earnings Per Share on page 10 and Exhibit (27) -- Financial Data Schedule on
page 11.
(b) The registrant was not required to file any reports on Form 8-K for the
thirteen weeks ended June 30, 1996.
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: August 8, 1996 By: /s/ Theodore G. Schwartz
Chairman, President and
Chief Executive Officer
Date: August 8, 1996 By: /s/ Marc S. Simon
Chief Financial Officer