United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended September 29, 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 jurisdiction (I.R.S. Employer
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 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-- 46,421,260 shares outstanding as of October 28,
1996.
INDEX
APAC TELESERVICES, INC.
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets--September 29, 1996 3
and December 31, 1995
Condensed Statements of Income--Thirteen and
Thirty-Nine Weeks Ended 4
September 29, 1996 and October 1, 1995
Condensed Statements of Cash Flows--Thirty-
Nine Weeks Ended 5
September 29, 1996 and October 1, 1995
Notes to Condensed Financial Statements-- 6-7
September 29, 1996
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 11
EXHIBITS 12-13
PART I. FINANCIAL INFORMATION
APAC TELESERVICES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 29, DECEMBER 31, 1995
1996 (Audited, Note 1)
ASSETS (Unaudited)
(000's omitted, except share data)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $13 $4,186
Short-term investments - 26,000
Accounts receivable, net 52,224 18,736
Deferred preoperating costs 150 1,142
Prepaid expenses 937 652
Total Current Assets 53,324 50,716
PROPERTY, PLANT AND EQUIPMENT 67,886 32,105
Less--Accumulated depreciation and amortization (14,999) (8,489)
Property, Plant and Equipment, Net 52,887 23,616
Total Assets $106,211 $74,332
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts and notes payable $13,765 $3,068
Income taxes payable 758 1,263
Other current liabilities 11,708 13,340
Total Current Liabilities 26,231 17,671
LONG-TERM DEBT, NET 1,349 1,474
DEFERRED INCOME TAXES 1,910 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; 200,000,000
shares authorized, 46,412,000 shares issued and
outstanding at September 29, 1996; 100,000,000
shares authorized, 46,200,000 shares issued and
outstanding at December 31, 1995 464 462
Other shareholders' equity 76,257 52,245
Total Shareholders' Equity 76,721 52,707
Total Liabilities and Shareholders' Equity $106,211 $74,332
See Notes to Condensed Financial Statements.
</TABLE>
APAC TELESERVICES, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
SEPTEMBER 29, OCTOBER 1, SEPTEMBER 29, OCTOBER 1,
1996 1995 1996 1995
(000's omitted, except for per share data)
<S> <C> <C> <C> <C>
Net revenue $75,361 $24,143 $188,604 $64,785
Operating expenses:
Cost of services 52,372 17,437 132,547 44,627
Selling, general and
administrative expenses 8,979 4,209 22,762 11,601
Total operating expenses 61,351 21,646 155,309 56,228
Income from operations 14,010 2,497 33,295 8,557
Interest income (expense), net (39) (266) 240 (828)
Income before income taxes 13,971 2,231 33,535 7,729
Income taxes 5,351 - 13,079 -
Net income $8,620 $2,231 $20,456 $7,729
Pro forma income data:
Net income as reported $2,231 $7,729
Pro forma adjustment to
recognize C corporation
income taxes (877) (3,030)
Pro forma net income $1,354 $4,699
Net income per share:
Net income as reported $0.18 $0.05 $0.43 $0.19
Pro forma adjustment - (0.02) - (0.07)
Net income as adjusted $0.18 $0.03 $0.43 $0.12
Weighted average number of
shares outstanding 48,116 40,086 47,815 40,086
See Notes to Condensed Financial Statements.
</TABLE>
APAC TELESERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
SEPTEMBER 29, OCTOBER 1,
1996 1995
(000's omitted)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $20,456 $7,729
Depreciation and amortization 7,556 2,823
Deferred income taxes (1,060) -
Change in operating assets and
liabilities (27,427) 765
Net Cash Provided (Used) by
Operations (475) 11,317
INVESTING ACTIVITIES
Sales of short-term investments 26,000 -
Purchases of property, plant
and equipment, net (35,781) (12,099)
Net Cash Used by Investing
Activities (9,781) (12,099)
FINANCING ACTIVITIES
Proceeds from refinanced
credit facilities - 11,788
Retirement of credit facilities - (11,788)
Proceeds from long-term debt - 6,874
Payments on long-term debt (776) (1,981)
Increase (decrease) in book overdraft 6,110 (1,210)
Exercise of employee stock options 1,498 -
Tax benefit from employee
stock options excercised 2,060 -
S corporation distributions (2,809) (2,565)
Net Cash Provided by 6,083 1,118
Financing Activities
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS ($4,173) $336
See Notes to Condensed Financial Statements.
</TABLE>
APAC TELESERVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 29, 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 thirty-nine week periods ended September
29, 1996, are not necessarily indicative of the results that may be expected for
the fiscal year ending December 29, 1996. The Balance Sheet at 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 prior to the initial
public offering have been taxed directly to the shareholders of the Company,
rather than to the Company. 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 thirty-nine week
periods ended October 1, 1995.
NOTE 3--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.
NOTE 4--RELATED PARTY TRANSACTIONS
As of December 31, 1995, the Company had accrued dividends of $2.8 million based
upon the undistributed taxable income attributable to the Company's tax status
as an S corporation prior to the initial public offering. These dividends were
paid in 1996 to the Company's S Corporation shareholders of record prior to its
initial public offering when the Company finalized its corporate income tax
returns.
In January, 1996, the Company hired The Shechtman Group, a management consulting
firm, to provide various human resource consulting services. The Chief
Executive Officer and Managing Director of The Shechtman Group is also a
director of the Company. As of September 29, 1996, the Company has incurred
consulting expenses of approximately $635,000 relating to the services provided
by The Shechtman Group. These consulting expenses are classified under selling,
general and administrative expenses for the thirteen and thirty-nine week
periods ended September 29, 1996.
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 thirty-
nine week period ended September 29, 1996. The Company did not receive any
proceeds from the sale of these Common Shares.
NOTE 5--SUBSEQUENT EVENT
In November 1996, several shareholders of the Company sold an aggregate of
4,600,000 Common Shares in an underwritten public offering. For additional
information, refer to Amendment No. 2 to Form S-3 Registration Statement dated
November 1, 1996.
APAC TELESERVICES, INC.
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.
The following table sets forth income statement and other data as a percentage
of net revenue from services provided by the Company for the thirteen and
thirty-nine week periods ended September 29, 1996 and October 1, 1995.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
SEPTEMBER 29, OCTOBER 1, SEPTEMBER 29, OCTOBER 1,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net revenue:
Sales Solutions 51.2% 72.2% 53.4% 76.9%
Service Solutions 48.8 27.8 46.6 23.1
Total net revenue 100.0 100.0 100.0 100.0
Operating expenses:
Cost of services 69.5 72.2 70.3 68.9
Selling, general and
administrative expenses 11.9 17.5 12.1 17.9
Total operating expenses 81.4 89.7 82.4 86.8
Income from operations 18.6 10.3 17.6 13.2
Interest income (expense), net (0.1) (1.1) 0.1 (1.3)
Income before income taxes 18.5 9.2 17.7 11.9
Actual/proforma income taxes 7.1 3.6 6.9 4.7
Net income 11.4% 5.6% 10.8% 7.2%
</TABLE>
RESULTS OF OPERATIONS
Net revenue increased 212.1% in the third quarter of 1996 to $75.4 million, up
$51.2 million over the third quarter of 1995. For the first nine months net
revenue of $188.6 million was 191.1% 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. As a
result of this growth, Service Solutions represents 46.6% of the Company's net
revenue in 1996 as compared to 23.1% in 1995. The remaining increase in net
revenue was due to higher Sales Solutions call volume from existing clients and
the additions of new clients from within the telecommunications industry.
Cost of services as a percentage of net revenue decreased from 72.2% in the
third quarter of 1995 to 69.5% in the third quarter of 1996. The decrease in
cost of services as a percentage of net revenue was due to nonrecurring costs
associated with the start up of new UPS business which were incurred in the
third quarter of 1995, but not in 1996. For the first nine months cost of
services as a percentage of net revenue was 70.3% as compared to 68.9% in the
same period in 1995. The increase in the cost of services reflects the shift in
service mix to UPS. The UPS business has no facilities and telecommunications
costs as they are provided by UPS, and therefore, 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 113.3% in the third
quarter of 1996 to $9.0 million, up $4.8 million over the third quarter of 1995.
For the first nine months selling, general and administrative expenses of $22.8
million were 96.2% 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 nine-month periods ended September 29, 1996 as compared to
17.5% for the third quarter of 1995 and 17.9% for the first nine months of 1995.
The Company generated $0.2 million in net interest income for the nine months
ended September 29, 1996 compared to $0.8 million of net interest expense for
the first nine months of 1995. This change resulted from income earned on
short-term investments in 1996 and the reduction of average outstanding
borrowings 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 $5.4 million and $13.1 million provisions for income taxes recognized in the
three- and nine-month periods ended September 29, 1996 are based upon the
Company's estimated effective tax rate. The Company reduced its annual
effective tax rate in the third quarter by 0.5% to 39% due to changes in state
taxes payable. This change resulted in an effective tax rate of 38.3% for the
third quarter. Prior to the initial public offering of the Company's stock, 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 reflects Federal taxes at the statutory
rate of 35% plus state taxes net of Federal benefit and state job creation
credits.
LIQUIDITY AND CAPITAL RESOURCES
In June 1996, the Company entered into new unsecured credit facilities with a
group of three banks. These facilities consist of a $20.0 million committed
revolving credit facility and a $20.0 million revolving credit facility which
may be converted into a term loan. The credit facilities are available for
general working capital purposes and capital expenditures. As of September 29,
1996, no amounts were outstanding under the credit facilities.
During the first nine months of 1996, operations used $0.5 million in cash
compared to $11.3 million in cash provided by operations in the same period in
1995. Although net income for the first nine months of 1996 increased by $12.7
million or 164.7% when compared to 1995, cash provided by operations decreased
by $11.8 million due to higher accounts receivable balances generated through
larger sales volumes and extended billing cycles with several new clients. The
Company also has invested $35.8 million in capital expenditures in 1996. Funds
for operating needs and capital to add approximately 2,000 workstations in
twenty-one new call centers opened in the first six months of 1996, and 1,575
workstations in three call centers under construction during the third quarter
were provided by cash and cash equivalent balances of $4.2 million and proceeds
from the sale of $26.0 million in short-term investments. The Company intends
to use funds generated by future operations and available credit under its
credit facilities to meet normal operating needs as well as fund planned capital
expenditures of approximately $17.0 million for the remainder of 1996.
PART II. OTHER INFORMATION
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 12 and Exhibit (27) -- Financial Data Schedule on
page 13.
(b) The registrant was not required to file any reports on Form 8-K for the
thirteen week period ended September 29, 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: November 12, 1996 By: /s/ Theodore G. Schwartz
Chairman, President and
Chief Executive Officer
Date: November 12, 1996 By: /s/ Marc S. Simon
Chief Financial Officer
EXHIBITS
APAC TELESERVICES, INC.
EXHIBIT (11)--STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
SEPTEMBER 29, OCTOBER 1, SEPTEMBER 29, OCTOBER 1,
1996 1995 1996 1995
(000's omitted, except for per share data)
<S> <C> <C> <C> <C>
Primary shares:
Average shares outstanding 46,342 39,600 46,261 39,600
Net effect of dilutive stock
options - based upon the
treasury stock method using
average market price 1,774 486 1,554 486
Totals 48,116 40,086 47,815 40,086
Fully diluted shares:
Average shares outstanding 46,342 39,600 46,261 39,600
Net effect of dilutive stock
options - based upon the
treasury stock method using
quarter-end market price 2,150 486 1,938 486
Totals 48,492 40,086 48,199 40,086
Net income $8,620 $2,231 $20,456 $7,729
Pro forma income data:
Net income as reported $2,231 $7,729
Pro forma adjustment to
recognize C corporation
income taxes (877) (3,030)
Pro forma net income $1,354 $4,699
Primary per share amounts:
Net income as reported $0.18 $0.05 $0.43 $0.19
Pro forma adjustment - (0.02) - (0.07)
Net income as adjusted $0.18 $0.03 $0.43 $0.12
Fully diluted per share amounts:
Net income as reported $0.17 $0.05 $0.42 $0.19
Pro forma adjustment - (0.02) - (0.07)
Net income as adjusted $0.17 $0.03 $0.42 $0.12
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains thirty-nine week summary financial information extracted
from APAC TeleServices, Inc.'s 1996 third quarter Form 10-Q and is qualified in
its entirety by reference to such Form 10-Q filing.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-29-1996
<CASH> 13
<SECURITIES> 0
<RECEIVABLES> 52,224
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 53,324
<PP&E> 67,886
<DEPRECIATION> 14,999
<TOTAL-ASSETS> 106,211
<CURRENT-LIABILITIES> 26,231
<BONDS> 1,349
0
0
<COMMON> 464
<OTHER-SE> 76,257
<TOTAL-LIABILITY-AND-EQUITY> 106,211
<SALES> 0
<TOTAL-REVENUES> 188,604
<CGS> 0
<TOTAL-COSTS> 132,547
<OTHER-EXPENSES> 22,762
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 33,535
<INCOME-TAX> 13,079
<INCOME-CONTINUING> 20,456
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,456
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.42
</TABLE>
