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 October 3, 1999
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 CUSTOMER SERVICES, INC.
(Exact name of registrant as specified in its charter)
Illinois 36-2777140
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Parkway North Center, Suite 510
Deerfield, Illinois 60015
(Address of principal executive office) (Zip Code)
(847) 374-4980
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Shares, $0.01 par value--47,563,167 shares outstanding as of
November 15, 1999.
Index
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of October 3, 1999, and
January 3, 1999 3
Consolidated Condensed Statements of Income for the Thirteen and
Thirty-Nine Weeks Ended October 3, 1999, and September 27, 1998 4
Consolidated Condensed Statements of Cash Flows for the Thirty-
Nine Weeks Ended October 3, 1999, and September 27, 1998 5
Notes to Consolidated Condensed Financial Statements as of
October 3, 1999 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Litigation 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
EXHIBIT INDEX 18
EXHIBITS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
OCTOBER 3, JANUARY 3,
1999 1999
ASSETS (Unaudited) (Audited, Note 1)
- ------------------------------------------------------------------ ---------------------- ----------------------
(000's omitted, except share data)
CURRENT ASSETS:
Cash and cash equivalents $250 $3,543
Accounts receivable, net 86,955 76,618
Recoverable income taxes 4,570 5,825
Deferred income tax assets 6,930 8,790
Prepaid expenses 3,909 3,058
Net assets of discontinued operations 10,096 7,096
---------------------- ----------------------
Total current assets 112,710 104,930
PROPERTY AND EQUIPMENT 139,656 152,195
Less--accumulated depreciation 67,162 57,602
---------------------- ----------------------
Property and equipment, net 72,494 94,593
GOODWILL AND OTHER INTANGIBLE ASSETS 62,850 68,850
Less--accumulated amortization 7,403 3,975
---------------------- ----------------------
Goodwill and other intangible assets, net 55,447 64,875
OTHER ASSETS 4,019 3,104
---------------------- ----------------------
Total assets $244,670 $ 267,502
====================== ======================
LIABILITIES AND
SHARE OWNERS' EQUITY
- ------------------------------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $17,144 $16,122
Revolving credit facility 3,625 0
Accounts payable 10,271 5,705
Other current liabilities 39,443 65,355
---------------------- ----------------------
Total current liabilities 70,483 87,182
LONG-TERM DEBT, LESS CURRENT MATURITIES 120,104 132,427
DEFERRED INCOME TAXES 0 1,670
OTHER LIABILITIES 8,894 4,399
COMMITMENTS AND CONTINGENCIES
SHARE OWNERS' EQUITY:
Preferred shares, $0.01 par value; 50,000,000 shares
authorized; none issued and outstanding 0 0
Common shares, $0.01 par value; 200,000,000
shares authorized; 49,104,350 shares issued
at October 3, 1999; 48,893,873 shares issued at
January 3, 1999 491 489
Additional paid-in capital 94,289 93,799
Retained deficit (43,940) (46,813)
Less--treasury shares at cost; 1,609,000 shares at
October 3, 1999, and January 3, 1999 (5,651) (5,651)
---------------------- ----------------------
Total share owners' equity 45,189 41,824
====================== ======================
Total liabilities and share owners' equity $244,670 $ 267,502
====================== ======================
See notes to consolidated condensed financial statements.
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
THIRTEEN (13) WEEKS ENDED THIRTY-NINE (39) WEEKS ENDED
--------------------------------- ----------------------------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
1999 1998* 1999 1998*
-------------- --------------- -------------- -----------------
(000's omitted, except per share data)
NET REVENUE:
Service Solutions $66,392 $59,521 $193,154 $155,063
Sales Solutions 36,796 56,440 120,430 154,936
-------------- --------------- -------------- -----------------
Total net revenue 103,188 115,961 313,584 309,999
OPERATING EXPENSES:
Cost of services 82,775 92,601 254,550 247,195
Selling, general and administrative
expenses 11,940 13,727 35,989 37,661
Restructuring charges 1,627 0 7,600 9,000
-------------- --------------- -------------- -----------------
Total operating expenses 96,342 106,328 298,139 293,856
-------------- --------------- -------------- -----------------
Operating income 6,846 9,633 15,445 16,143
INTEREST EXPENSE, NET 3,417 2,983 10,372 5,155
-------------- --------------- -------------- -----------------
Income from continuing operations
before income taxes 3,429 6,650 5,073 10,988
PROVISION FOR INCOME TAXES 1,500 3,037 2,200 4,980
-------------- --------------- -------------- -----------------
Income from continuing operations 1,929 3,613 2,873 6,008
LOSS FROM DISCONTINUED OPERATIONS,
net of income tax benefit of
$57 and $480, respectively, for
the 13 and 39 weeks in 1998 0 (190) 0 (1,256)
-------------- --------------- -------------- -----------------
NET INCOME $ 1,929 $3,423 $2,873 $4,752
============== =============== ============== =================
INCOME (LOSS) PER SHARE:
Basic:
Continuing operations $0.04 $0.07 $0.06 $0.12
Discontinued operations 0.00 (0.00) 0.00 (0.02)
-------------- --------------- -------------- -----------------
Net income $0.04 $0.07 $0.06 $0.10
============== =============== ============== =================
Diluted:
Continuing operations $0.04 $0.07 $0.06 $0.12
Discontinued operations 0.00 (0.00) 0.00 (0.02)
-------------- --------------- -------------- -----------------
Net income $0.04 $0.07 $0.06 $0.10
============== =============== ============== =================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 48,973 48,505 48,946 48,773
Diluted 49,572 49,956 49,198 49,590
============== =============== ============== =================
*Reclassified to conform to current year's classifications.
See notes to consolidated condensed financial statements.
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THIRTY-NINE (39) WEEKS ENDED
----------------------------------------------
OCTOBER 3, SEPTEMBER 27,
1999 1998*
-------------------- -------------------
(000's omitted)
OPERATING ACTIVITIES:
Net income from continuing operations $2,873 $6,008
Depreciation and amortization 25,789 25,295
Deferred income taxes 3,140 (1,987)
Restructuring charges 7,600 9,000
Change in operating assets and liabilities (21,449) 6,005
-------------------- -------------------
Net cash provided by continuing operations 17,953 44,321
Cash used by discontinued operations (3,000) (1,885)
-------------------- -------------------
Net cash provided by operations 14,953 42,436
INVESTING ACTIVITIES:
ITI Holdings, Inc. acquisition costs, net of cash acquired 0 (149,229)
Purchases of property and equipment, net (5,583) (6,007)
-------------------- -------------------
Net cash used by investing activities (5,583) (155,236)
FINANCING ACTIVITIES:
Proceeds from term loan 0 150,000
Repayment of revolving credit facility with proceeds from
refinancing 0 (7,500)
Net borrowings (payments) under revolving
credit facilities 3,625 (14,100)
Payments on long-term debt (11,301) (3,689)
Increase (decrease) in book overdraft 3,390 (4,679)
Payment of debt issuance costs 0 (2,188)
Increase (decrease) in customer deposits (8,869) 12,229
Purchase of treasury shares 0 (5,651)
Stock and warrant transactions, including related
income tax benefits 492 1,378
-------------------- -------------------
Net cash provided (used) by financing activities (12,663) 125,800
-------------------- -------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ($3,293) $ 13,000
==================== ===================
*Reclassified to conform to current year's classifications.
See notes to consolidated condensed financial statements.
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
OCTOBER 3, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the thirteen and thirty-nine week periods ended October 3, 1999, are not
necessarily indicative of the results that may be expected for the fiscal
year ending January 2, 2000. The balance sheet at January 3, 1999, 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 the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended
January 3, 1999.
2. GOODWILL AND INTANGIBLE ASSETS
At October 3, 1999, goodwill and intangible assets consisted of the
following:
ACCUMULATED NET
COST AMORTIZATION BOOK VALUE
------------------ ------------------ ------------------
(000's omitted)
Goodwill $30,757 $3,219 $27,538
Customer relationships 28,493 3,483 25,010
Assembled workforce 3,600 701 2,899
------------------ ------------------ ------------------
Total $62,850 $7,403 $55,447
================== ================== ==================
In connection with the acquisition of ITI Holdings, Inc. in May 1998, the
Company recorded deferred income tax assets and provided for costs to close
facilities and terminate unfavorable contracts. During the third quarter of
fiscal 1999, the Company revalued certain deferred income tax assets and
reduced its estimates of costs to close facilities and renegotiate
contracts, resulting in a $6.0 million reduction in goodwill.
3. OTHER CURRENT LIABILITIES
The components of other current liabilities included in the consolidated
condensed balance sheets are as follows:
OCTOBER 3, JANUARY 3,
1999 1999
-------------- --------------
(000's omitted)
Payroll and related items $20,239 $19,494
Customer deposits 2,254 11,123
Telecommunication costs 4,480 9,529
Acquisition-related costs 2,370 14,377
Restructuring charges 3,140 3,199
Other 6,960 7,633
============== ==============
Total $39,443 $65,355
============== ==============
4. RESTRUCTURING CHARGES
During the first nine months of fiscal 1999, the Company recorded three
restructuring charges totaling $7.6 million associated with closing 21
Sales Solutions call centers and reducing the supporting salaried
workforce. The $2.0 million restructuring charge recorded in the first
quarter included $1.4 million for the write-down of property and equipment
and $0.6 million for employee severance costs. The $4.0 million
restructuring charge recorded in the second quarter included $2.7 million
for the write-down of property and equipment, $0.3 million for employee
severance costs and $1.0 million for lease termination costs. Finally, the
$1.6 million restructuring charge recorded in the third quarter included
$1.3 million for the write-down of property and equipment and $0.3 million
for lease termination costs. The amount remaining in the fiscal 1999
restructuring reserve at October 3, 1999, was $2.8 million. This amount is
expected to be used by January 2, 2000.
In the second quarter of fiscal 1998, the Company recorded a restructuring
charge of $9.0 million. This charge related to a restructuring plan
involving the closure of Sales Solutions call centers, reconfiguration of
certain administrative support facilities and reduction in the salaried
workforce. The restructuring charge included $4.5 million for the
write-down of property and equipment, $3.3 million for employee severance
costs and $1.2 million for lease termination costs. As of October 3, 1999,
the amount remaining in the fiscal 1998 restructuring reserve was $0.3
million. This amount is expected to be utilized by January 2, 2000.
5. LEGAL PROCEEDINGS
The Company is engaged in arbitration proceedings initiated by the former
owner of an acquired business. The Company believes the claim is without
merit. The Company has other claims against the same party which it
believes do have merit and which it intends to pursue vigorously. Although
the Company does not believe that the arbitration proceedings will result
in a material adverse effect on its consolidated financial position, no
assurance to that effect can be given.
Reference is made to Item 3 of the Company's Annual Report on Form 10-K for
the fiscal year ended January 3, 1999 for a description of a certain legal
action presently pending. On November 12, 1999, the court denied the
Company's motion to dismiss the complaint in the action, captioned "In re
APAC TeleServices, Inc. Securities Litigation, 97 Civ. 9145 (BSJ)." The
litigation is continuing.
6. DISCONTINUED OPERATIONS
In December 1998, the Company's management approved a plan to sell
Paragren. The Company expects to sell Paragren during the fourth quarter of
fiscal 1999. Accordingly, Paragren is reported as a discontinued operation,
and the consolidated condensed financial statements have been reclassified
to segregate the operating results and net assets of the business. The net
loss from discontinued operations for the first nine months of fiscal 1999
of $4.2 million has been offset against provisions for anticipated loss
recorded at January 3, 1999, and additional proceeds expected from the sale
of the net assets of the business. In fiscal 1999 the Company revised its
estimate of expected sales proceeds based upon current market estimates of
the fair value of the business. Net assets of discontinued operations at
October 3, 1999 amounted to $10.1 million and consisted of working capital
of $2.8 million, property and equipment of $1.5 million, capitalized
software of $1.7 million, and intangible assets of $4.1 million.
7. SEGMENT INFORMATION
The Company has three reportable segments organized around operating
divisions providing separate and distinct services to clients. The
operating divisions are managed separately because the service offerings
require different technology and marketing strategies and have different
operating models and performance metrics. The Service Solutions division
provides inbound customer service, direct mail response, "help" line
support and customer order processing. The Sales Solutions division
provides outbound sales support to customers and businesses, market
research, targeted marketing plan development and customer lead generation,
acquisition and retention. Paragren Technologies, Inc. ("Paragren")
specializes in software-based consumer marketing to optimize customer
relationships. In December 1998, the Company adopted a plan to sell
Paragren. Accordingly, the operating results of Paragren have been
segregated from continuing operations and are reported separately as
discontinued operations. Information about discontinued operations is
reported in Note 6 to these consolidated condensed financial statements.
All operating net revenue and expenses are included in the results of the
business segments. Other income and expense, principally interest expense
and gain and loss on the disposal of assets, are excluded from the
determination of business segment results.
Segment information for continuing operations for the thirteen and
thirty-nine weeks ended October 3, 1999 and September 27, 1998 is as
follows:
SERVICE SALES
PERIOD ENDED SOLUTIONS SOLUTIONS COMBINED
----------------------------------- ------------ ------------ ------------
(000's omitted)
THIRTEEN WEEKS:
October 3, 1999:
Net revenue $66,392 $36,796 $103,188
Operating income (loss) 7,349 (503) 6,846
Restructuring charge 0 1,627 1,627
============ ============ ============
September 27, 1998:
Net revenue $59,521 $56,440 $115,961
Operating income 6,461 3,172 9,633
============ ============ =============
THIRTY-NINE WEEKS:
October 3, 1999:
Net revenue $193,154 $120,430 $313,584
Operating income (loss) 20,402 (4,957) 15,445
Restructuring charges 0 7,600 7,600
============ ============ ============
September 27, 1998:
Net revenue $155,063 $154,936 $309,999
Operating income 12,592 3,551 16,143
Restructuring charge 2,400 6,600 9,000
============ ============ ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DESCRIPTION OF BUSINESS
APAC Customer Services, Inc. and Subsidiaries (the "Company") provides high
volume telephone-based sales, marketing and customer management solutions
for corporate clients operating in the consumer products, parcel delivery,
financial services, insurance, retail, and telecommunications industries
throughout the United States. The Company's client base is comprised of
large companies with the need for cost-effective means of contacting and
servicing current and prospective customers. The Company has three service
offerings. The Service Solutions division provides inbound customer
service, direct mail response, "help" line support and customer order
processing. 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. In
August 1997, the Company acquired Paragren Technologies, Inc. ("Paragren")
which specializes in software-based consumer marketing products that help
its clients analyze market, customer and sales data on a real-time basis.
In December 1998, the Company's management approved a plan to sell
Paragren's software development business. The Company does not believe that
additional investment in the software development business is consistent
with its long-term strategic goals and objectives. Accordingly, Paragren is
reported as a discontinued operation, and the consolidated condensed
financial statements for the periods presented have been reclassified to
segregate the operating results and net assets of the business. In May
1998, the Company acquired ITI Holdings, Inc., the sole shareholder of ITI
Marketing Services, Inc. ("ITI"). ITI provides telephone-based sales,
marketing and customer management services to corporate clients. As of
October 3, 1999, the Company operated and managed approximately 11,000
workstations in 62 call centers.
RESULTS OF OPERATIONS
The following table sets forth consolidated condensed statements of income
data as a percentage of net revenue from services provided by the Company for
the thirteen and thirty-nine week periods ended October 3, 1999 and
September 27, 1998.
THIRTEEN (13) WEEKS ENDED THIRTY-NINE (39) WEEKS ENDED
------------- -- ----------------- ------------- -- -----------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
1999 1998* 1999 1998*
------------- ----------------- ------------- -----------------
NET REVENUE:
Service Solutions 64.3% 51.3% 61.6% 50.0%
Sales Solutions 35.7 48.7 38.4 50.0
------------- ----------------- ------------- -----------------
Total net revenue 100.0 100.0 100.0 100.0
OPERATING EXPENSES:
Cost of services 80.2 79.9 81.2 79.7
Selling, general and administrative
expenses 11.6 11.8 11.5 12.2
Restructuring charges 1.6 0.0 2.4 2.9
------------- ----------------- ------------- -----------------
Total operating expenses 93.4 91.7 95.1 94.8
------------- ----------------- ------------- -----------------
Operating income 6.6 4.9 5.2
INTEREST EXPENSE, NET 3.3 2.6 3.3 1.7
------------- ----------------- ------------- -----------------
Income from continuing operations
before income taxes 3.3 5.7 1.6 3.5
PROVISION FOR INCOME TAXES 1.4 2.6 0.7 1.6
------------- ----------------- ------------- -----------------
Income from continuing operations 1.9 3.1 0.9 1.9
LOSS FROM DISCONTINUED OPERATIONS, NET 0.0 (0.1) 0.0 (0.4)
------------- ----------------- ------------- -----------------
NET INCOME 1.9% 3.0% 0.9% 1.5%
============= ================= ============= =================
*Reclassified to conform to current year's classifications.
COMPARISON OF THIRD QUARTER RESULTS
The Company's net revenue decreased 11.0% in the third quarter of fiscal
1999 to $103.2 million, a decrease of $12.8 million compared to the third
quarter of fiscal 1998. Net revenue for the Company's inbound operations,
the Service Solutions division, was $66.4 million for the third quarter of
fiscal 1999, an increase of 11.5% compared to $59.5 million for the third
quarter of fiscal 1998. The increase in Service Solutions net revenue was
due to higher call volumes from existing clients and the start-up of
programs for several new clients. Net revenue for the Company's outbound
operations, the Sales Solutions division, was $36.8 million for the third
quarter of fiscal 1999, a decrease of 34.8% compared to $56.5 million for
the third quarter of fiscal 1998. In response to reduced call volume from
certain large clients over the last twelve months, the Company has adopted
a strategy of balancing Sales Solutions' call center capacity with current
client demand.
Cost of services as a percentage of net revenue increased to 80.2% in the
third quarter of fiscal 1999 from 79.9% in the third quarter of fiscal
1998. This increase reflects higher recruiting and training costs incurred
in advance of full-scale operations under new client programs in the
Service Solutions division and decreased net revenue and the cost of
underutilized capacity in the Sales Solutions division. Changes in cost of
services as a percent of net revenue also include the effects of
nonrecurring credits recorded in each quarter. During the third quarter of
fiscal 1999, the Company reversed $1.2 million of accrued telephone charges
recorded in the fourth quarter of fiscal 1998. This reversal resulted from
the Company negotiating favorable dispositions of costs associated with
certain guaranteed minimum usage telecommunications contracts during the
third quarter of fiscal 1999. During the third quarter of fiscal 1998, the
Company received $1.5 million in reimbursement of excess training costs
absorbed during the first half of fiscal 1998.
Selling, general and administrative expenses decreased 13.0% in the third
quarter of fiscal 1999 to $11.9 million, a decrease of $1.8 million
compared to the third quarter of fiscal 1998. This decrease was due to the
consolidation of the administrative functions of ITI and a reduction in the
amortization of goodwill and intangible assets. During the fourth quarter
of fiscal 1998, the Company adjusted the carrying value of the Sales
Solutions division's long-lived assets to their fair value. This adjustment
resulted in a non-cash impairment charge of $69.7 million to write-off
goodwill and intangible assets acquired with acquisition of ITI.
During the third quarter of fiscal 1999, the Company recorded a
restructuring charge of $1.6 million in connection with the continued
consolidation of Sales Solutions call centers. The restructuring charge
included $1.3 million for the write-down of property and equipment and $0.3
million for lease termination costs.
The Company generated operating income of $6.8 million during the third
quarter of fiscal 1999. Prior to the restructuring charge, operating income
for the third quarter of fiscal 1999 was $8.4 million compared with
operating income of $9.6 million for the third quarter of fiscal 1998. For
the Service Solutions division, operating income for the third quarter of
fiscal 1999 was $7.3 million, or 11.1% of net revenue, compared with
operating income of $6.5 million, or 10.9% of net revenue, for the same
period in fiscal 1998. For the Sales Solutions division, operating income
(before restructuring charge) was $1.1 million, or 3.1% of net revenue, in
the third quarter of fiscal 1999 compared with operating income of $3.2
million, or 5.6 % of net revenue, for the same period in fiscal 1998. The
reduction in Sales Solutions operating performance in fiscal 1999 was due
to decreased net revenue and the cost of underutilized call center capacity
as execution of the Company's current strategy of balancing capacity
utilization with client demand had not been in place throughout the entire
period. Partially offsetting the reduction in operating performance during
the third quarter of fiscal 1999 was the reversal of $1.2 million of
accrued telephone charges recorded in the fourth quarter of fiscal 1998.
Net interest expense for the third quarter of fiscal 1999 increased by $0.4
million compared to the same period in fiscal 1998. This increase reflects
higher interest rates assessed on the $150.0 million term loan used to
finance the purchase of ITI as a result of amendments to the Company's
credit agreement in April 1999.
Net loss on discontinued operations for the third quarter of fiscal 1998 of
$0.2 million reflects the reclassification of net loss sustained by the
Company during the quarter on the operation of its Paragren software
development business. Net loss on discontinued operations for the third
quarter of fiscal 1999 of $1.4 million has been offset against a provision
for anticipated losses during the phase-out period.
COMPARISON OF YEAR-TO-DATE RESULTS
The Company's net revenue increased 1.2% in the first nine months of fiscal
1999 to $313.6 million, an increase of $3.6 million from the first nine
months of fiscal 1998. Net revenue during the first nine months of 1999
included three full quarters of results of ITI. Net revenue for the
Company's Service Solutions division, was $193.2 million for the first nine
months of fiscal 1999, an increase of 24.6% compared to $155.1 million for
the first nine months of fiscal 1998. The increase in Service Solutions net
revenue was due to the inclusion of the results of ITI and growth in call
volumes with existing clients. Net revenue for the Company's Sales
Solutions division was $120.4 million for the first nine months of fiscal
1999, a decrease of 22.3% compared to $154.9 million for the first nine
months in fiscal 1998. This decrease reflects the Company's current
strategy to balance call center capacity with demand for outbound
telemarketing services. During the first nine months of fiscal 1999,
consolidation of certain large clients substantially reduced outbound
telemarketing call volumes available to the Company.
Cost of services as a percentage of net revenue increased to 81.2% in the
first nine months of fiscal 1999 from 79.7% in the first nine months of
fiscal 1998. This increase reflects the reduction in profit margin due to
underutilized call center capacity resulting from decreases in call volumes
in the Sales Solutions division and higher direct wages in both divisions.
Changes in cost of services as a percent of net revenue also include the
effects of nonrecurring credits recorded during the first nine months of
fiscal 1999. In the first nine months of fiscal 1999, the Company reversed
$4.9 million of accrued telephone charges recorded in the fourth quarter of
fiscal 1998. This reversal resulted from the Company negotiating favorable
dispositions of costs associated with certain guaranteed minimum usage
telecommunications contracts during the second and third quarters of fiscal
1999.
Selling, general and administrative expenses decreased 4.4% in the first
nine months of fiscal 1999 to $36.0 million, a decrease of $1.7 million
compared to the first nine months of fiscal 1998. This decrease was
principally due to reductions in workforce and related expenses achieved
through restructuring initiatives and the consolidation of the
administrative functions of ITI.
During the first nine months of fiscal years 1999 and 1998, the Company
recorded restructuring charges of $7.6 million and $9.0 million,
respectively, in connection with the consolidation of Sales Solutions call
centers and reductions in the salaried workforce. The fiscal 1999
restructuring charge included $5.4 million for the write-down of property
and equipment, $0.9 million for employee severance costs and $1.3 million
for lease termination costs. The fiscal 1998 restructuring charge included
$4.5 million for the write-down of property and equipment, $3.3 million for
employee severance costs and $1.2 million for lease termination costs.
During the past fifteen months, the Company has provided for the closure of
32 call centers containing approximately 2,600 seats and for reduction in
the salaried workforce by 100 employees.
The Company generated operating income of $15.4 million for the first nine
months of fiscal 1999. Prior to restructuring charges, operating income for
the first nine months of fiscal 1999 was $23.0 million compared to $25.1
million for the first nine months of fiscal 1998. For the Service Solutions
division, operating income for the first nine months of fiscal 1999 was
$20.4 million, or 10.6% of net revenue, compared to operating income
(before restructuring charge) of $15.0 million, or 9.7% of net revenue, for
the same period in fiscal 1998. The increase in Service Solutions operating
income was principally due to increased net revenue and a more profitable
client mix. Prior to restructuring charges, operating income for the Sales
Solutions division for the first nine months of fiscal 1999 was $2.6
million, or 2.2% of net revenue, compared to operating income of $10.2
million, or 6.6% of net revenue, for the same period in fiscal 1998. The
reduction in operating performance in the first nine months of fiscal 1999
was due to decreased net revenue, the cost of underutilized call center
capacity and higher direct wages, offset in part by the reversal of $4.9
million in accrued telephone charges recorded in the fourth quarter of
fiscal 1998.
Net interest expense for the first nine months of fiscal 1999 increased by
$5.2 million compared to the same period in fiscal 1998. This increase
principally reflects three full quarters of interest and related debt costs
in fiscal 1999 on the $150.0 million term loan used to finance the purchase
of ITI.
The provision for income taxes recognized for the nine months ended October
3, 1999 and September 27, 1998 are based upon the Company's estimated
annual effective income tax rates. The decrease in the Company's effective
income tax rate to 43.4% in fiscal 1999 from 45.3% in fiscal 1998 was due
to changes as a percentage of taxable income in the amortization of
non-deductible goodwill related to the ITI purchase and Work Opportunity
Tax Credit benefits.
Net loss on discontinued operations for the first nine months of fiscal
1998 of $1.3 million reflects the reclassification of net loss sustained by
the Company in the first nine months of fiscal 1998 on the operation of its
Paragren software development business. Net loss on discontinued operations
for the first nine months of fiscal 1999 of $4.2 million has been offset
against a provision for anticipated losses during the phase-out period.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations during the first nine months of fiscal 1999
totaled $15.0 million, a decrease of $27.5 million compared to the same
period in fiscal 1998. This decrease was principally due to higher accounts
receivable balances of $10.3 million resulting from the temporary extension
of billing cycles with several clients, payments against
acquisition-related and restructuring reserves of $7.4 million and the
non-cash reversal of $4.9 million in accrued telephone charges to income.
The Company spent $5.6 million during the first nine months of fiscal 1999
to construct additional call center capacity for Service Solutions clients
and to upgrade equipment in existing centers. These capital expenditures
were funded with cash provided by operations.
In connection with the acquisition of ITI on May 1998, the Company provided
acquisition-related reserves of $18.8 million to close facilities,
terminate unfavorable contacts, and reduce the salaried workforce. During
the first nine months of fiscal years 1999 and 1998, the Company recorded
restructuring charges of $7.6 million and $9.0 million, respectively, in
connection with the consolidation of Sales Solutions call centers and
reductions in the salaried workforce. During the first nine months of
fiscal 1999, the Company made payments against acquisition-related and
restructuring reserves amounting to $5.0 million and $2.4 million,
respectively, for employee severance and lease termination costs and
telecommunications contract penalties.
At January 3, 1999, the Company had received $11.1 million in nonrecurring
customer deposits for services to be provided in future periods. These
amounts are to be offset against future billings. During the first nine
months of fiscal 1999, $8.9 million of customer deposits were offset
against invoices for services rendered. In the second quarter of fiscal
1999, the Company received a $5.0 million refund from the Internal Revenue
Service for overpayment of estimated taxes during fiscal 1998.
The Company has a $75.0 million revolving credit facility (the "Revolving
Facility") available for general working capital purposes and capital
expenditures. Availability of up to $35.0 million of the total $75.0
million Revolving Facility is restricted subject to the attainment of
trailing four quarters EBITDA of at least $75.0 million. The Company is
also limited to $15.0 million in annual capital expenditures. As of October
3, 1999, there were $3.6 million of borrowings outstanding under the
Revolving Facility. The Company made $10.0 million of scheduled repayments
on its term loan during the first nine months of fiscal 1999 resulting in a
balance outstanding at October 3, 1999, of $134.0 million.
The Company expects that cash from future operations and available
borrowings under the Revolving Facility will be sufficient to meet normal
operating needs as well as fund any additional business growth for the
balance of fiscal 1999.
YEAR 2000 COMPLIANCE
The Year 2000 issue, common to most companies, concerns the inability of
information and non-information systems to recognize and process
date-sensitive information after 1999 due to the use of only the last two
digits to refer to a year. Time sensitive computer equipment and software
with embedded technology may recognize a date using "00" as the year 1900
rather than the year 2000. The problem could affect both computer equipment
and software and other equipment that relies on microprocessors.
On October 31, 1998, Senior Information Technology Management under the
direction of the Audit Committee of the Board of Directors completed a
company-wide evaluation of the impact of potential Year 2000 problem on its
computer systems, applications and other date-sensitive equipment.
Equipment and systems that were not Year 2000 compliant were identified. As
of October 3, 1999, 100% of the identified equipment and systems have been
remediated, tested and placed in production. Through October 3, 1999, the
Company had spent approximately $2.5 million to address Year 2000 issues.
While the estimated cost to address Year 2000 issues is subject to change
as the effort continues, total costs required to assess and remediate Year
2000 issues are currently estimated to be approximately $3.0 million and
principally consist of equipment upgrades and software code remediation.
While the Company believes that its efforts will adequately address its
internal Year 2000 concerns, it is possible that the Company will be
adversely affected by problems encountered by key clients and suppliers.
The Company initiated discussion with significant clients and suppliers in
an effort to determine and assess those parties' Year 2000 compliance
status. The Company is dependent on computer and telecommunications
companies for computer equipment and software and telephone systems and
services. On February 15, 1999, the Company completed its evaluation of
clients and suppliers. Based upon the results of this assessment,
completion of interoperability tests with all of its clients and suppliers
on September 30, 1999, and the receipt of compliance certificates from key
suppliers, the Company believes that most of its clients and suppliers are
prepared for the Year 2000. The Company continues to retest critical
systems.
Although the Company does not currently anticipate any material adverse
impact on its operations as a result of Year 2000 issues, no assurance can
be given that the Company's or its clients' failure to detect and remedy
Year 2000-related problems in its or their computer and information systems
would not have a material adverse effect on the business, financial
condition and results of operations of the Company. A reasonably likely
worst case scenario might include failure of third parties to provide
services, such as power and telecommunications services, or the loss of use
of the Company's automated call distributors or dialers. If the Company
were to lose access to outbound and/or inbound telephony capabilities, it
would experience a loss of revenue. The materiality of such revenue loss to
the Company would depend on the length of time required to restore access
to necessary services.
For clients and suppliers that failed to demonstrate Year 2000 compliance,
the Company has developed suitable contingency plans. The Company's Year
2000 Coordination Team is currently being trained to administer the
contingency plans. A complete rollout of the contingency plans is planned
for December 15, 1999.
This discussion of Year 2000 compliance is based on the Company's current
best estimates, which were derived using numerous assumptions regarding
future events, including the continued availability and future costs of
technological and other resources, third-party remediation actions and
other factors. Given the complexity of Year 2000 issues and possible
unidentified risks associated with such issues, actual results may vary
materially from those anticipated and discussed herein. Specific factors
that might cause a material variation include, among others, the
availability and the cost of personnel trained to identify and resolve Year
2000 issues, the Company's ability to locate and correct all affected
computer code, and the timing and success of Year 2000 remediation efforts
by clients and suppliers.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Report on Form 10-Q
may contain forward-looking statements that reflect the Company's current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
which could cause future results to differ materially from historical
results or those anticipated. The words "believe," "expect," "anticipate,"
"intend," "estimate," "goals," "would," "could," "should," and other
expressions which indicate future events and trends identify
forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. If no date is provided, such statements speak only as of the date of
this Report on Form 10-Q. The Company undertakes no obligation to publicly
update or revise any forward-looking statements in connection with new
information or future events or otherwise. Factors that could cause future
results to differ materially from historical results or those anticipated
include, but are not limited to, reliance by the Company on a small number
of principal clients for a substantial proportion of its total revenue;
possible changes in or events affecting the businesses of the Company's
clients, including changes in customers' interest in, and use of, clients'
products and services; fluctuations in quarterly results of operations due
to the timing of clients' initiation and termination of large programs;
changes in competitive conditions affecting the Company's industry; the
ability of the Company's clients to terminate contracts with the Company on
relatively short notice; changes in the availability and cost of qualified
employees; the potential impact of Year 2000 issues; variations in the
performance of the Company's automated systems and other technological
factors; changes in government regulations affecting the teleservices and
telecommunications industries; and competition from other outside providers
of customer relationship management solutions and in-house customer
relationship operations. See the Company's filings with the Securities and
Exchange Commission for further discussion of the risks and uncertainties
associated with the Company's business. In particular, see the discussion under
the caption "Information Regarding Forward-Looking Statements" in Item 7
(Management's Discussion and Analysis of Financial Condition and Results of
Operations) of the Company's Annual Report on Form 10-K for the fiscal year
ended January 3, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial and commodity market prices and rates. The Company is
exposed to market risk in the areas of changes in U. S. interest rates.
This exposure is directly related to its normal operating and funding
activities. Because the Company's obligations under its bank credit
agreement bear interest at floating rates, the Company is sensitive to
changes in prevailing interest rates. The Company uses derivative
instruments to manage its long-term debt interest rate exposure, rather
than for trading purposes. A 10% increase or decrease in market interest
rates that affect the Company's financial instruments would not have a
material impact on earnings during the remainder of fiscal 1999, and would
not materially affect the fair value of the Company's financial
instruments.
PART II. OTHER INFORMATION
ITEM 1. LITIGATION
The Company is engaged in arbitration proceedings initiated by the former
owner of an acquired business. The Company believes the claim is without
merit. The Company has other claims against the same party which it
believes do have merit and which it intends to pursue vigorously. Although
the Company does not believe that the arbitration proceedings will result
in a material adverse effect on its consolidated financial position, no
assurance to that effect can be given.
Reference is made to Item 3 of the Company's Annual Report on Form 10-K for
the fiscal year ended January 3, 1999 for a description of a certain legal
action presently pending. On November 12, 1999, the court denied the
Company's motion to dismiss the complaint in the action, captioned "In re
APAC TeleServices, Inc. Securities Litigation, 97 Civ. 9145 (BSJ)." The
litigation is continuing.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following documents are furnished as exhibits and
numbered pursuant to Item 601 of Regulation S-K:
Exhibit
Number Description
------------------- -------------------------------------------------
3.1 Articles of Incorporation of APAC Customer
Services, Inc., as amended
3.2 Amended and Restated Bylaws of APAC Customer
Services, Inc., as amended through September
29, 1999
4 Specimen Common Stock Certificate
10.1* Amendment, dated September 22, 1999, to
Agreement for In-Bound Telemarketing with
United Parcel Service General Services Co.
10.2 Peter M. Leger Employment Agreement
11 Statement Re: Computation of Earnings Per Share
27 Financial Data Schedule
* Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
(b) REPORTS ON FORM 8-K. The Company filed a Current Report on Form 8-K,
dated September 22, 1999, disclosing that the Company had signed an
amendment to extend for three years its agreement for inbound
telemarketing with United Parcel Service General Services Co.
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 CUSTOMER SERVICES, INC.
Date: November 17, 1999 By: /s/ Theodore G. Schwartz
-----------------------------
Chairman and
Chief Executive Officer
Date: November 17, 1999 By: /s/ Gary S. Holter
-----------------------------
Senior Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description
------------------- -------------------------------------------------
3.1 Articles of Incorporation of APAC Customer
Services, Inc., as amended
3.2 Amended and Restated Bylaws of APAC Customer
Services, Inc., as amended through September
29, 1999
4 Specimen Common Stock Certificate
10.1* Amendment, dated September 22, 1999, to
Agreement for In-Bound Telemarketing with
United Parcel Service General Services Co.
10.2 Peter M. Leger Employment Agreement
11 Statement Re: Computation of Earnings Per Share
27 Financial Data Schedule
* Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.