1
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 29, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Parkway North Center, Suite 510
Deerfield, Illinois 60015
- --------------------------------------- --------------------------------
(Address of principal executive office) (Zip Code)
(847) 945-0055
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(Registrant's telephone number, including area code)
Not applicable
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(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-- 46,813,728 shares outstanding as of August 6,
1997.
This Form 10-Q consists of 14 sequentially numbered pages. The Exhibit Index
appears on page 11.
2
INDEX
APAC TELESERVICES, INC.
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets as of June 29, 1997, and December 29, 1996 3
Condensed Statements of Income for the Thirteen and Twenty-Six
Weeks Ended June 29, 1997, and June 30, 1996 4
Condensed Statements of Cash Flows for the Twenty-Six Weeks Ended
June 29, 1997, and June 30, 1996 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
EXHIBITS 13-14
Page 2 of 14
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PART I. FINANCIAL INFORMATION
APAC TELESERVICES, INC.
CONDENSED BALANCE SHEETS
JUNE 29, DECEMBER 29,
1997 1996
ASSETS (Unaudited) (Audited, Note 1)
- ------------------------------------------------ ----------- -----------------
(000's omitted, except share data)
CURRENT ASSETS:
Cash and cash equivalents $17 $141
Accounts receivable, net 61,228 59,473
Other current assets 3,089 2,670
-------- --------
Total current assets 64,334 62,284
PROPERTY AND EQUIPMENT 126,384 96,522
Less - accumulated depreciation (26,607) (18,078)
-------- --------
Property and equipment, net 99,777 78,444
OTHER ASSETS 1,589 653
-------- --------
Total assets $165,700 $141,381
======== ========
LIABILITIES AND
SHARE OWNERS' EQUITY
- ------------------------------------------------
CURRENT LIABILITIES:
Notes payable $21,592 $16,047
Accounts payable 14,811 17,080
Income taxes payable 2,718 453
Other current liabilities 10,899 15,350
-------- --------
Total current liabilities 50,020 48,930
LONG-TERM DEBT, NET 1,289 1,325
DEFERRED INCOME TAXES 3,900 2,920
SHARE OWNERS' EQUITY:
Preferred shares, $0.01 par value; 50,000,000 shares
authorized; none issued and outstanding
Common shares, $0.01 par value; 200,000,000
shares authorized, 46,809,000 shares issued and
outstanding at June 29, 1997; 46,540,000 shares
issued and outstanding at December 29, 1996 468 465
Additional paid-in capital 59,213 54,017
Retained earnings 50,810 33,724
-------- --------
Total share owners' equity 110,491 88,206
-------- --------
Total liabilities and share owners' equity $165,700 $141,381
======== ========
See notes to condensed financial statements.
Page 3 of 14
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APAC TELESERVICES, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------ -------------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
1997 1996 1997 1996
-------- -------- -------- --------
(000's omitted, except per share data)
Net revenue $91,586 $65,099 $181,904 $113,243
Operating expenses:
Cost of services 66,036 45,789 131,399 80,175
Selling, general and
administrative expenses 11,353 7,592 22,306 13,783
------- ------ ------- -------
Total operating expenses 77,389 53,381 153,705 93,958
------- ------ ------- -------
Income from operations 14,197 11,718 28,199 19,285
Interest income (expense), net (309) 51 (638) 279
------- ------ ------- -------
Income before income taxes 13,888 11,769 27,561 19,564
Provision for income taxes 5,275 4,648 10,475 7,728
------- ------ ------- -------
Net income $8,613 $7,121 $17,086 $11,836
======= ======= ======= =======
Net income per share $0.18 $0.15 $0.36 $0.25
======= ======= ======= =======
Weighted average number of
shares outstanding 48,172 48,060 48,058 47,869
======= ======= ======= =======
See notes to condensed financial statements.
Page 4 of 14
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APAC TELESERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
--------------------------------
JUNE 29, JUNE 30,
1997 1996
---------- ---------
(000's omitted)
OPERATING ACTIVITIES:
Net income $ 17,086 $ 11,836
Depreciation and amortization 8,788 4,756
Deferred income taxes 700 (990)
Change in operating assets and liabilities (10,705) (17,625)
-------- --------
Net cash provided (used) by operations 15,869 (2,023)
INVESTING ACTIVITIES:
Sales of short-term investments - 20,300
Purchases of property and equipment, net (29,862) (25,175)
-------- --------
Net cash used by investing activities (29,862) (4,875)
FINANCING ACTIVITIES:
Net borrowings from revolving credit facility 5,600 2,000
Payments on long-term debt (91) (546)
Increase in book overdraft 3,161 2,784
Exercise of employee stock options, including
related tax benefit 4,835 1,260
Proceeds from employee stock purchase plan 364 37
S corporation distributions - (2,809)
-------- --------
Net cash provided by financing activities 13,869 2,726
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NET DECREASE IN CASH AND CASH EQUIVALENTS ($124) ($4,172)
======== ========
See notes to condensed financial statements.
Page 5 of 14
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APAC TELESERVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 29, 1997
(UNAUDITED)
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 29,
1997, are not necessarily indicative of the results that may be expected for
the fiscal year ending December 28, 1997. The balance sheet at December 29,
1996, has been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. For
additional information, refer to financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
December 29, 1996.
2. SHARE OWNERS' 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. In February 1997, the Financial Accounting Standards
Board issued SFAS No. 128 (Earnings per Share) which the Company is required to
adopt effective for the year ending December 28, 1997. Had the Company adopted
SFAS No. 128 for the thirteen and twenty-six week periods ended June 29, 1997,
basic and comprehensive earnings per share would be the same as earnings per
share disclosed.
3. RELATED PARTY TRANSACTIONS
In February 1996, several shareholders of the Company sold an aggregate of
6,770,000 common shares in an underwritten public offering pursuant to a
registration rights agreement which was entered into by the Company and such
shareholders prior to the Company's initial public offering. The offering
costs, totaling approximately $360,000, were paid by the Company and have been
classified under selling, general and administrative expenses for the
twenty-six week period ended June 30, 1996. The Company did not receive any
proceeds from the sale of these common shares.
4. NOTES PAYABLE
In June 1997, the Company renegotiated its revolving credit facility (the
"credit facility") increasing borrowing capacity under the credit facility from
$40.0 million to $80.0 million. Terms and conditions of the new agreement are
essentially the same as terms and conditions of the previous agreement.
Borrowings outstanding under the credit facility amounted to $21.5 million at
June 29, 1997.
Page 6 of 14
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APAC TELESERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
APAC TeleServices, Inc. provides telephone-based sales, marketing and customer
management solutions for corporate clients operating in the telecommunications,
insurance, financial services, parcel delivery, utilities and entertainment
industries throughout the United States. The Company's client base is
comprised of large companies with growing needs for cost-effective means of
contacting and servicing current and prospective customers. The Company has
two primary service offerings. The Sales Solutions division 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. The Service Solutions division provides
inbound customer service, direct mail response, "help" line support and
customer 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 quarters of its fiscal year due to
client marketing programs which are typically slower in the post-holiday and
summer months.
The following table sets forth income statement data as a percent of net
revenue from services provided by the Company for the thirteen and twenty-six
week periods ended June 29, 1997, and June 30, 1996.
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
---------------------- ----------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
1997 1996 1997 1996
------- ------- ------- -------
Net revenue:
Sales solutions 56.6% 55.4% 53.7% 54.9%
Service solutions 43.4 44.6 46.3 45.1
----- ----- ----- -----
Total net revenue 100.0 100.0 100.0 100.0
Operating expenses:
Cost of services 72.1 70.3 72.2 70.8
Selling, general and
administrative expenses 12.4 11.7 12.3 12.2
----- ----- ----- -----
Total operating expenses 84.5 82.0 84.5 83.0
----- ----- ----- -----
Income from operations 15.5 18.0 15.5 17.0
Interest income (expense), net (0.3) - (0.3) 0.3
----- ----- ----- -----
Income before income taxes 15.2 18.0 15.2 17.3
Provision for income taxes 5.8 7.1 5.8 6.8
----- ----- ----- -----
Net income 9.4% 10.9% 9.4% 10.5%
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Page 7 of 14
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APAC TELESERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED
RESULTS OF OPERATIONS
Net revenue for the quarter and six months ended June 29, 1997, increased $26.5
million or 40.7% and $68.7 million or 60.6%, respectively, compared to net
revenue in the same periods in 1996. Net revenue for the Sales Solutions
division for the quarter and six months ended June 29, 1997, increased $15.8
million or 43.7% and $35.5 million or 57.1%, respectively, compared to the same
periods in 1996 as a result of increased call volume from new and existing
clients spread equitably over the Company's primary service industries,
insurance, financial services and telecommunications. The Service Solutions
division's net revenue for the quarter and six months ended June 29, 1997,
increased $10.7 million or 36.9% and $33.2 million or 65.0%, respectively,
compared to the same periods in 1996 as a result of higher call volumes
associated with AT&T Corporation ("AT&T") inbound call activity and long-term
contracts to manage four United Parcel Services ("UPS") customer service
facilities and process customer orders for John H. Harland Company ("Harland").
Calls taken for UPS reached mature levels in the fourth quarter of 1996 while
the first half of 1997 reflects calls taken for new accounts with AT&T and
Harland which call volumes were not present a year ago.
Cost of services as a percent of net revenue increased to 72.1% in the second
quarter of 1997 compared to 70.3% in the second quarter of 1996. For the first
six months of 1997 cost of services as a percentage of net revenue was 72.2% as
compared to 70.8% in the same period in 1996. These increases primarily
reflect the mutual decision between UPS and the Company to change the staffing
requirements in the UPS customer service facilities. UPS has the ability under
its facilities management agreement with the Company to determine service
levels. During the first quarter of 1997, UPS reduced the number of billable
service representatives and support positions by approximately 20% resulting in
the Company absorbing payroll costs that otherwise would have been billed to
UPS. The Company has taken steps to reduce payroll costs and improve margins
on the UPS contract in its third and fourth quarters of 1997 by eliminating
service representatives and other support positions. For additional
information concerning the Company's relationship with UPS, see Other
Information on page 9.
Selling, general and administrative expenses for the quarter and six months
ended June 29, 1997, increased $3.8 million or 49.5% and $8.5 million or 61.8%,
respectively, compared to the same periods in 1996. Selling, general and
administrative expenses as a percent of net revenue for the quarter and six
months increased to 12.4% and 12.3%, respectively, compared to 11.7% and 12.2%,
respectively, a year earlier. The increases in expenses as a percent of
revenue is a result of growth in overhead due to continued investments in
systems and management to support the Company's increased revenue base and
expenses associated with long-term service contracts.
The $917,000 unfavorable change in interest from the first six months of 1996
to the first six months of 1997 reflects interest income earned on temporary
investments in 1996 with cash raised in the initial public offering of the
Company's common stock, compared to interest expense incurred on outstanding
borrowings in 1997 as a result of expansion of call center operations in the
fourth quarter of 1996 and the first half of 1997.
The provisions for income taxes of $10.5 million for the six months ended June
29, 1997, and $7.7 million for the same period in 1996 are based upon the
Company's estimated annual effective tax rate of 38.0 and 39.5%, respectively.
The decrease in the effective tax rate from 1996 to 1997 is due to tax planning
strategies initiated in the fourth quarter of 1996 which have reduced state
income taxes.
Page 8 of 14
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APAC TELESERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED
OTHER INFORMATION
UPS, the Company's largest client, was struck by the International Brotherhood
of Teamsters at 12:01 a.m. on August 4, 1997. While the outcome of the labor
strike and negotiations at UPS is uncertain, an extended strike would have a
negative effect on the Company's revenues and earnings in its third and fourth
quarters of 1997.
In addition, the Company's second largest client, AT&T, has announced decisions
to reduce its investment in telephone-based sales and marketing for the last
half of 1997 and consolidate both its outbound and inbound teleservices
outsourcers. While AT&T has informed APAC that the Company will remain as one
of its principal teleservices outsourcers, AT&T's cost reduction initiatives
also could have a negative impact on the Company's revenues and earnings during
the third and fourth quarters of 1997. UPS and AT&T accounted for
approximately 50% of the Company's business in the first six months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Operations provided $15.9 million of cash in the first six months of 1997
compared to the use of $2.0 million of cash in the first six months of 1996.
Approximately 30% of the $17.9 million increase in operating cash flow in 1997
was generated by an increase in net income, while the balance was due to higher
depreciation and related tax benefits arising from capital investment in 1996
and first six months of 1997. Capital expenditures in the first six months of
1997 amounted to $29.9 million. Funds used to expand call center operations
and the Company's data management systems were provided by cash from
operations, bank borrowings of $5.6 million and proceeds from the sale of $5.2
million in common stock to employees. Investment in call center operations in
1996 of $25.2 million was funded primarily with proceeds from the sale of $20.3
million in short-term investments and liquidation of $4.2 million in cash
equivalent balances.
In June 1997, the Company amended its revolving credit facility (the "credit
facility") increasing borrowing capacity under the credit facility from $40.0
million to $80.0 million. The credit facility is available for general working
capital purposes and capital expenditures. As of June 29, 1997, $21.5 million
was outstanding under the credit facility. The Company expects that cash from
future operations and available borrowings will be sufficient to meet normal
operating needs as well as fund business growth for the balance of 1997.
FORWARD-LOOKING STATEMENTS
Statements contained herein regarding APAC's expected growth, prospective
business opportunities and future expansion plans are forward-looking
statements that involve substantial risks and uncertainties. In accordance
with the Private Securities Litigation Reform Act of 1995, the following are
important factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements. There can be no
assurance that the Company will be able to maintain or accelerate its growth
rate, effectively manage its rapid growth or maintain its profitability.
Changes in or events affecting clients' businesses may have a material impact
on the Company's revenue and earnings. There also can be no assurance that the
Company can build-out facilities in a timely and economic manner. In the
future, the Company may experience excess peak period capacity when it opens a
new call center or terminates or completes a
Page 9 of 14
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APAC TELESERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED
FORWARD-LOOKING STATEMENTS--CONTINUED
large client program. The Company's agreements with its clients generally do
not assure that the Company will generate a specific level of revenue, do not
designate the Company as the client's exclusive service provider, and are
terminable by the clients on relatively short notice. In addition, the amount
of revenue the Company generates from a particular client generally is
dependent upon customers' interest in, and use of, the client's products or
services. Readers are encouraged to review the section captioned "Information
Regarding Forward-Looking Statements" in its Annual Report on Form 10-K for the
year ended December 29, 1996, which describe other important factors that may
impact the Company's business, results of operations and financial condition.
Page 10 of 14
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PART II. OTHER INFORMATION
APAC TELESERVICES, INC.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Share Owners of the Registrant was held on May 20,
1997.
(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
---- ---------- ------------------
Thomas M. Collins 45,677,156 92,355
George D. Dalton 45,677,156 92,355
Theodore G. Schwartz 45,673,018 96,493
Marc S. Simon 45,677,156 92,355
Morris R. Shechtman 45,672,044 92,355
Paul G. Yovovich 45,677,156 97,467
2. Not applicable.
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are furnished as exhibits and numbered pursuant to
Item 601 of Regulation S-K: Exhibit (11) - Statement Re: Computation of
Earnings Per Share on page 13 and Exhibit (27) - Financial Data Schedule on
page 14.
(b) Reports on Form 8-K. In a report filed on Form 8-K dated April 25, 1997,
the Company reported its 1997 first quarter revenues and earnings previously
included in a press release dated April 21, 1997. Subsequent to June 29,
1997, the Company filed an additional report on Form 8-K dated August 5, 1997,
which disclosed that the Company's largest client, UPS, was struck by the
International Brotherhood of Teamsters on August 4, 1997, and that an extended
strike could have a negative impact on APAC's future revenue and earnings.
Page 11 of 14
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PART II. OTHER INFORMATION
APAC TELESERVICES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
APAC TELESERVICES, INC.
Date: August 12, 1997 By: /s/ Theodore G. Schwartz
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Chairman, President and
Chief Executive Officer
Date: August 12, 1997 By: /s/ Marc S. Simon
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Chief Financial Officer
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