<PAGE>
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 April 4, 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 TeleServices, 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--47,505,941 shares outstanding as of May 7, 1999.
<PAGE>
Index
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of April 4, 1999, and
January 3, 1999 3
Consolidated Condensed Statements of Operations for the Thirteen
Weeks Ended April 4, 1999, and March 29, 1998 4
Consolidated Condensed Statements of Cash Flows for the Thirteen
Weeks Ended April 4, 1999, and March 29, 1998 5
Notes to Consolidated Condensed Financial Statements as of
April 4, 1999 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Part II. Other Information
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
Exhibits 15-16
</TABLE>
Page 2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
APAC TeleServices, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
<TABLE>
<CAPTION>
April 4, January 3,
1999 1999
Assets (Unaudited) (Audited, Note 1)
- -------------------------------------------------------------- ------------------- -------------------
(000's omitted, except share data)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 3,790 $ 3,543
Accounts receivable, net 80,157 76,618
Refundable Federal income taxes 6,722 5,825
Deferred income tax assets 8,430 8,790
Prepaid expenses 3,728 3,058
Net assets of discontinued operations 10,509 7,096
------------------- -------------------
Total current assets 113,336 104,930
Property and equipment 152,329 152,195
Less--accumulated depreciation 62,660 57,602
------------------- -------------------
Property and equipment, net 89,669 94,593
Goodwill and other intangible assets 68,850 68,850
Less--accumulated amortization 5,117 3,975
------------------- -------------------
Goodwill and other intangible assets, net 63,733 64,875
Other assets 2,985 3,104
------------------- -------------------
Total assets $269,723 $267,502
=================== ===================
Liabilities and
Share Owners' Equity
- --------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt $ 16,830 $ 16,122
Revolving credit facility 10,000 0
Accounts payable 5,829 5,705
Other current liabilities 60,604 65,355
------------------- -------------------
Total current liabilities 93,263 87,182
Long-term debt, less current maturities 128,338 132,427
Deferred income taxes 1,900 1,670
Other liabilities 4,383 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; 48,923,788 shares issued and
outstanding at April 4, 1999; 48,893,873 shares
issued and outstanding at January 3, 1999 490 489
Additional paid-in capital 94,015 93,799
Retained deficit (47,015) (46,813)
Less--treasury shares at cost; 1,609,000 shares at
April 4, 1999, and January 3, 1999 (5,651) (5,651)
------------------- -------------------
Total share owners' equity 41,839 41,824
------------------- -------------------
Total liabilities and share owners' equity $269,723 $267,502
=================== ===================
</TABLE>
See notes to consolidated condensed financial statements.
Page 3
<PAGE>
APAC TeleServices, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------------------------
April 4, March 29,
1999 1998*
---------------- -----------------
(000's omitted, except per share data)
<S> <C> <C>
Net revenue $107,420 $89,153
Operating expenses:
Cost of services 90,448 69,788
Selling, general and administrative
expenses 11,920 10,247
Restructuring charge 1,987 0
---------------- -----------------
Total operating expenses 104,355 80,035
---------------- -----------------
Operating income 3,065 9,118
Interest expense, net 3,407 445
---------------- -----------------
Income (loss) from continuing operations
before income taxes (342) 8,673
Provision (benefit) for income taxes (140) 3,320
---------------- -----------------
Income (loss) from continuing operations (202) 5,353
Loss from discontinued operations, net of
income tax benefit of $120 in 1998 0 (436)
---------------- -----------------
Net income (loss) ($202) $ 4,917
================ =================
Income (loss) per share:
Basic:
Continuing operations ($0.00) $ 0.11
Discontinued operations 0.00 (0.01)
---------------- -----------------
Net income (loss) ($0.00) $ 0.10
================ =================
Diluted:
Continuing operations ($0.00) $ 0.11
Discontinued operations 0.00 (0.01)
---------------- -----------------
Net income (loss) ($0.00) $ 0.10
================ =================
Weighted average number of shares
outstanding:
Basic 48,915 48,810
Diluted 49,114 49,804
================ =================
</TABLE>
*Reclassified to conform to current year's classifications.
See notes to consolidated condensed financial statements.
Page 4
<PAGE>
APAC TeleServices, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
----------------------------------------------
April 4, March 29,
1999 1998*
-------------------- -------------------
(000's omitted)
<S> <C> <C>
Operating activities:
Net income (loss) from continuing operations ($202) $ 5,353
Depreciation and amortization 9,156 6,648
Deferred income taxes 590 (1,700)
Restructuring charge 1,987 0
Change in operating assets and liabilities (6,504) (523)
-------------------- -------------------
Net cash provided by continuing operations 5,027 9,778
Cash used by discontinued operations (3,413) (516)
-------------------- -------------------
Net cash provided by operations 1,614 9,262
Investing activities--Purchases of property
and equipment, net (4,439) (1,701)
Financing activities:
Net borrowings (payments) under revolving
credit facilities 10,000 (10,400)
Payments on long-term debt (3,381) (48)
Increase in book overdraft 0 453
Increase (decrease) in customer deposits (3,764) 2,021
Stock option and warrant transactions, including
related income tax benefits 127 289
Proceeds from employee stock purchase plan 90 124
-------------------- -------------------
Net cash provided by (used in) financing activities 3,072 (7,561)
-------------------- -------------------
Net increase in cash $ 247 $ 0
==================== ===================
</TABLE>
*Reclassified to conform to current year's classificiations.
See notes to consolidated condensed financial statements.
Page 5
<PAGE>
APAC TeleServices, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
April 4, 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 week period ended April 4,
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 financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended January 3, 1999.
2. Balance Sheet Detail
The components of other current liabilities included in the consolidated
condensed balance sheets are as follows:
<TABLE>
<CAPTION>
April 4, January 3,
1999 1999
--------------- ---------------
(000's omitted)
<S> <C> <C>
Payroll and related items $20,378 $19,494
Customer deposits 7,359 11,123
Telecommunication expenses 10,077 9,529
Acquisition-related costs 13,230 14,377
Restructuring charges 3,206 3,199
Other 6,354 7,633
--------------- ---------------
Total $60,604 $65,355
=============== ===============
</TABLE>
3. Restructuring Charges
In the second quarter of fiscal 1998, the Company recorded a restructuring
charge of $9.0 million. The restructuring plan involved closing Sales Solutions
Customer Contact Centers, reconfiguring certain administrative support
facilities and reducing the salaried workforce. The $9.0 million 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 April 4, 1999, the amount remaining in the fiscal 1998
restructuring reserve was $2.6 million and is expected to be fully utilized by
June 1999.
During the first quarter of fiscal 1999, the Company recorded an additional
restructuring charge of $2.0 million. This restructuring plan involved closing 7
Sales Solutions Customer Contact Centers and reducing the salaried workforce by
approximately 15 employees. The $2.0 million restructuring charge included $1.4
million for the write-down of property and equipment and $0.6 million for
employee severance costs. The fiscal 1999 restructuring reserve of $0.6 million
at April 4, 1999, is expected be used within the next year.
Page 6
<PAGE>
APAC TeleServices, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements--Continued
April 4, 1999
(Unaudited)
4. Discontinued Operations
In December 1998, the Company's management approved a plan to sell Paragren. The
Company does not believe that additional investment in the software development
business is consistent with its long-term strategic goals and objectives. The
Company expects to sell Paragren during 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. At January 3, 1999, the Company recorded a provision for
anticipated losses until disposal of $3.0 million ($1.9 million, net of income
tax benefit). Actual losses for the first quarter of fiscal 1999 of $2.3 million
($1.5 million, net of income tax benefit) have been offset against the provision
for anticipated losses. Net assets of discontinued operations are as follows:
<TABLE>
<CAPTION>
April 4, January 3,
1999 1999
--------------- ----------------
(000's omitted)
<S> <C> <C>
Current assets $ 4,673 $ 3,349
Property and equipment 1,948 1,767
Goodwill and other intangibles 4,832 4,992
Capitalized software 1,660 1,561
--------------- ----------------
Total assets 13,113 11,669
--------------- ----------------
Current liabilities 1,871 2,351
Deferred income taxes 322 322
Provision for loss until disposal, net
of income tax benefit of $830 in
1999 and $1,100 in 1998 411 1,900
--------------- ----------------
Total liabilities 2,604 4,573
--------------- ----------------
Net assets of discontinued operations $10,509 $ 7,096
=============== ================
</TABLE>
5. 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. The Software Development division is
managed by the Company's wholly-owned subsidiary, Paragren Technologies, Inc.
("Paragren"), which 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 4 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
Page 7
<PAGE>
expense and gain and loss on the disposal of assets, are excluded from the
determination of business segment results.
APAC TeleServices, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements--Continued
April 4, 1999
(Unaudited)
5. Segment Information-Continued
Segment information for the thirteen week periods ended April 4, 1999, and March
29, 1998, is as follows:
<TABLE>
<CAPTION>
Software
Service Sales Develop-
Quarter Ended Solutions Solutions ment Combined
- ------------------------ ----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
(000's omitted)
April 4, 1999:
Net revenue $64,593 $42,827 $0 $107,420
Operating income (loss) 6,299 (3,234) 0 3,065
Restructuring charge 0 1,987 0 1,987
======= ======= == ========
March 29, 1998:
Net revenue $45,861 $43,292 $0 $ 89,153
Operating income 4,667 4,451 0 9,118
======= ======= == ========
</TABLE>
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
APAC TeleServices, Inc. and Subsidiaries (the "Company") provides high volume
telephone-based sales, marketing and customer management solutions for corporate
clients operating in the business and consumer products, parcel delivery,
financial services, insurance, retail, 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 expanded its service
offerings through the acquisition of 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 the 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 increased its market
presence with the acquisition of ITI Holdings, Inc., the sole shareholder of ITI
Marketing Services, Inc. ("ITI"). ITI, like the Company, provides telephone-
based sales, marketing and customer management services to corporate clients. As
of April 4, 1999, the Company operated and managed approximately 11,760
workstations in 69 Customer Contact Centers.
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
historically tended 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. As the Company transitions to its client centric
business model, it is unclear what the impact of seasonality will be on a
prospective basis.
The following table sets forth consolidated condensed statements of operations
data as a percent of net revenue from services provided by the Company for the
thirteen week periods ended April 4, 1999, and March 29, 1998.
Page 9
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Continued
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------------------------
April 4, March 29,
1999 1998
---------------- ----------------
<S> <C> <C>
Net revenue:
Service Solutions 60.1% 51.4%
Sales Solutions 39.9 48.6
---------------- ----------------
Total net revenue 100.0 100.0
Operating expenses:
Cost of services 84.2 78.3
Selling, general and administrative
expenses 11.1 11.5
Restructuring charge 1.8 --
---------------- ----------------
Total operating expenses 97.1 89.8
---------------- ----------------
Operating income 2.9 10.2
Interest expense, net 3.2 0.5
---------------- ----------------
Income (loss) from continuing
operations before income taxes (0.3) 9.7
Provision (benefit) for income taxes (0.1) 3.7
---------------- ----------------
Income (loss) from continuing operations (0.2) 6.0
Loss from discontinued operations, net -- (0.5)
---------------- ----------------
Net income (loss) (0.2)% 5.5%
================ ================
</TABLE>
Results of Operations
The Company's net revenue increased 20.5% in the first quarter of fiscal 1999 to
$107.4 million, up $18.3 million over the first quarter of fiscal 1998. Net
revenue for the Service Solutions division was $64.6 million for the first
quarter of fiscal 1999, an increase of 40.8%, when compared to $45.9 million for
the first quarter of fiscal 1998. These increases in net revenue were due to the
inclusion of the results of ITI in the first quarter of fiscal 1999. Partially
offsetting the Service Solutions division increase was an 18% drop in net
revenue attributable to the managed facilities contract with the Company's large
parcel delivery client. The Sales Solutions division net revenue for the first
quarter of fiscal 1999 was $42.8 million, down 1.1% from $43.3 million in the
same period a year ago. Exclusive of ITI revenue, the Company's Sales Solutions
net revenue declined $12.2 million or 28.2% principally due to declines in
client acquisition programs in the financial services industry. In April 1999,
AT&T Corporation ("AT&T") notified the Company that it intends to redefine its
marketing strategy for long-distance. As a result of this change, AT&T will de-
emphasize its use of outbound teleservices for customer acquisition and
retention for the remainder of 1999. The Company anticipates that the change in
AT&T's telemarketing strategy will result in the loss of approximately $20.0
million in anticipated Sales Solutions net revenue over the remainder of the
year. While the Company has initiated plans to replace the work, there can be no
assurances it will be able to do so within the time period and on the terms and
conditions similar to those of the AT&T contract.
Cost of services as a percent of net revenue increased to 84.2% in the first
quarter of fiscal 1999 from 78.3% in the first quarter of fiscal 1998. This
increase reflects the reduction in profit margins due to lower selling prices
and underutilized capacity resulting from reductions in call volumes in the
Sales Solutions division, and higher direct wages in both divisions designed to
improve employee performance.
Page 10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
Selling, general and administrative expenses increased 16.3% in the first
quarter of fiscal 1999 to $11.9 million, up $1.7 million over the first quarter
of fiscal 1998. The increase in selling, general and administrative expenses was
due to the inclusion of selling, general and administrative expenses of ITI and
amortization of goodwill and other intangible assets acquired with the purchase
of ITI. Amortization of goodwill and other intangible assets for the first
quarter of fiscal 1999 amounted to $1.1 million. As a percent of net revenue,
selling, general and administrative expenses decreased from 11.5% in fiscal
1998 to 11.1% in fiscal 1999 principally due to workforce reductions achieved
through restructuring initiatives.
During the first quarter of fiscal 1999, the Company recorded an additional
restructuring charge of $2.0 million. This restructuring plan involved
closing 7 Sales Solutions Customer Contact Centers and reducing the salaried
workforce by approximately 15 employees. The facility closure charge included
$1.4 million for write-down of property and equipment and $0.6 million for
employee severance costs. The Company's profitability is significantly
influenced by its Customer Contact Center capacity utilization. The Company's
Service Solutions operations tend to be utilized primarily during normal
business hours on weekdays and to a limited extent on weekends. The Company's
Sales Solutions operations tend to be utilized primarily in the early evening
hours on weekdays and to a limited extent on weekends. The Company is in the
process of developing a comprehensive plan to better manage Customer Contact
Center capacity utilization in all its operations in order to achieve higher
levels of fixed cost absorption. The plan may include the additional closure of
certain Customer Contact Centers that have become technologically obsolete or
are located in high-wage labor markets. The plan will also include utilization
of certain Customer Contact Centers to perform work for both Service and Sales
Solutions customers. The Company carefully plans the development and opening of
new Customer Contact Centers to minimize the financial impact resulting from
excess capacity. To enable the Company to respond rapidly to changing market
demands, implement new programs and expand existing programs, additional
Customer Contact Center capacity may be required in the future.
Operating income for the first quarter of fiscal 1999 was $3.1 million.
Excluding the restructuring charge, operating income for fiscal 1999 was $5.1
million compared to $9.1 million in the first quarter of fiscal 1998. For the
Service Solutions division, operating income for the first quarter of fiscal
1999 was $6.3 million or 9.8% of net revenue compared with operating income of
$4.7 million or 10.2% of net revenue in same period a year ago. This change in
operating performance was due to increased net revenue offset by higher wages
and amortization on goodwill and other intangible assets acquired with the
purchase of ITI. The Sales Solutions division incurred an operating loss of $3.2
million for the first quarter of fiscal 1999. Prior to the restructuring charge,
the operating loss for fiscal 1999 was $1.2 million compared to operating income
of $4.4 million in the first quarter of fiscal 1998. The deterioration in
operating performance from fiscal 1998 to fiscal 1999 was due to lower selling
prices, higher direct wages and the cost of underutilized capacity resulting
from reductions in call volumes.
Net interest expense for the first quarter of fiscal 1999 increased by $3.0
million compared to the first quarter of fiscal 1998. This increase reflects
interest and amortization of debt issuance costs and amendment fees on the
$150.0 million Term Loan used to finance the purchase of ITI on May 20, 1998.
The provision (benefit) for income taxes recognized for the quarters ended
April
4, 1999, and March 29, 1998, are based upon the Company's estimated annual
effective income tax rates. The increase in the Company's effective income tax
rate to 41.0% in fiscal 1999 from 38.3% in fiscal 1998 is due to the
amortization of non-deductible goodwill related to the ITI purchase.
Liquidity and Capital Resources
Cash provided by operations during the first quarter of fiscal 1999 totaled $1.6
million, down $7.6 million
Page 11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
from the first quarter of fiscal 1998. The decrease in cash provided by
operations principally was due to changes in the various components of working
capital for continuing operations and additional cash investment of $3.4 million
required to fund discontinued operations. The Company spent $4.4 million during
the first quarter of fiscal 1999 to construct additional Customer Contact Center
capacity for Service Solutions clients and to upgrade equipment in existing
centers. These capital expenditures were funded with short-term bank borrowings.
In June 1998, the Company adopted a restructuring plan and recorded a $9.0
million charge to income. The restructuring charge included $4.5 million for
the write-down of property and equipment, $3.3 million for severance costs and
$1.2 million for lease termination costs. During the first quarter of fiscal
1999, the Company made payments totaling $0.5 million for employee severance and
lease termination costs.
In December 1998, the Company's management approved a plan to sell Paragren. The
Company expects to sell Paragren during fiscal 1999 and realize approximately
$10.5 million of cash from the sale, net of cash required to fund operations
during the disposal period.
At April 4, 1999, the Company had $6.7 million in refundable Federal income
taxes recorded primarily as a result of $5.0 million in required estimated tax
payments made during the first half of fiscal 1998. On April 28, 1999, the
Company received a $5.0 refund from the Internal Revenue Service for
overpayments made during fiscal 1998.
The Company has a $75.0 million Revolving Credit Facility ("Revolving Facility")
available for general working capital purposes and capital expenditures.
Availability of up to $35.0 million of the $75.0 million Revolving Facility is
restricted subject to the attainment of trailing four quarters EBITDA of at
least $62.5 million. The Company is also limited to $15.0 million in annual
capital expenditures. As of April 4, 1999, $10.0 million was outstanding under
the Revolving Facility.
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 a potential Year 2000 problem on its computer
systems, applications and other date-sensitive equipment. Equipment and systems
that are not Year 2000 compliant have been identified and will be corrected
through equipment replacement, remediation of code in software programs, or
migration to a Year 2000 compliant platform. The Company estimates that
approximately 70% of the remediation of code in software programs was completed
as of April 30, 1999. All Year 2000 compliance issues are expected to be
corrected by July 1, 1999. Through April 4, 1999, the Company had spent
approximately $1.1 million to address Year 2000 issues. In addition at April 4,
1999, the Company had open purchase commitments in the amount of $1.5 million to
purchase Year 2000 equipment upgrades. Total costs required to correct Year 2000
issues are currently estimated to be approximately $3.0 million and principally
consist of equipment upgrades and software code remediation.
Page 12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
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 customers and suppliers. The Company has
initiated discussions with significant customers 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 service. The Company completed its
evaluation of customers and suppliers on February 28, 1999. Based upon the
results of its assessments of customers and suppliers compliance status, the
Company is developing contingency plans where appropriate. The Company expects
contingency plans will be in place by May 31, 1999. The Company would be unable
to perform its work without access to outbound and/or inbound telephony
capabilities, resulting in the loss of revenue, the extent and materiality of
which would depend on the length of the time required to restore access.
Forward-Looking Statements
Statements contained herein regarding the Company'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 growth or maintain its profitability. Changes in or events affecting
clients' businesses may have a material impact on the Company's net revenue and
earnings. There also can be no assurance that the Company can build-out
facilities in a timely and economic manner nor hire and retain a sufficient
number of employees to handle call volumes. In the future, the Company may
experience excess peak period capacity when it opens a new Customer Contact
Center or terminates or completes a 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. The Company's net revenue and profitability may also be
affected by changes in clients' use of telemarketing programs as a method for
customer acquisition and available telemarketing capacity from the Company's
competition. 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 January 3, 1999, which describes
other important factors that may impact the Company's business, results of
operations and financial condition.
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 area 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 effect the Company's financial instruments would have not 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.
Page 13
<PAGE>
Part II. Other Information
Item 5. Other Information
The Company previously disclosed in its Annual Report on Form 10-K for the year
ended January 3, 1999, that it had received notice that the Nasdaq believed that
APAC did not meet the Nasdaq National Market continued listing rules. The
Company was given until May 5, 1999, to demonstrate compliance with the listing
requirements. On May 5, 1999, the Company received a letter from Nasdaq stating
that APAC is in compliance with the Nasdaq National Market continued listing
rules, and that Nasdaq has closed its review.
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 15 and Exhibit (27)-- Financial Data Schedule on
page 16.
(b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K dated
April 2, 1999, which disclosed the Company's fiscal year 1998 results of
operations.
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: May 10, 1998 By: /s/ Theodore G. Schwartz
-----------------------------------
Chairman, President and
Chief Executive Officer
Date: May 10, 1998 By: /s/ Mark O. Remissong
-----------------------------------
Chief Financial Officer
Page 14
<PAGE>
Exhibits
APAC TeleServices, Inc. and Subsidiaries
Exhibit (11)--Statement Re: Computation of Earnings Per Share
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
----------------------------------------
April 4, March 29,
1999 1998
------------------- -----------------
(000's omitted, except per share data)
<S> <C> <C>
Basic shares:
Average shares outstanding 48,915 48,810
Income (loss):
Continuing operations ($202) $ 5,353
Discontinued operations 0 (436)
------------------- -----------------
Net income (loss) ($202) $ 4,917
=================== =================
Income (loss) per share:
Continuing operations ($0.00) $ 0.11
Discontinued operations 0.00 (0.01)
------------------- -----------------
Net income (loss) ($0.00) $ 0.10
=================== =================
Diluted shares:
Average shares outstanding 48,915 48,810
Net effect of dilutive stock
options - based upon the
treasury stock method using
quarter-end market price 199 994
------------------- -----------------
Total shares 49,114 49,804
=================== =================
Income (loss):
Continuing operations ($202) $ 5,353
Discontinued operations 0 (436)
------------------- -----------------
Net income (loss) ($202) $ 4,917
=================== =================
Income (loss) per share:
Continuing operations ($0.00) $ 0.11
Discontinued operations 0.00 (0.01)
------------------- -----------------
Net income (loss) ($0.00) $ 0.10
=================== =================
</TABLE>
Page 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains the thirteen week summary financial information
extracted from APAC TeleServices, Inc. and Subsidiaries 1999 first quarter Form
10-Q and is qualified in its entirety by reference to Form 10-Q filing.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JAN-02-2000 JAN-03-1999
<PERIOD-START> JAN-04-1999 DEC-28-1997
<PERIOD-END> APR-04-1999 MAR-28-1998
<CASH> 3,790 17<F1>
<SECURITIES> 0 0
<RECEIVABLES> 80,157 67,961
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 113,336 86,022
<PP&E> 152,329 135,407
<DEPRECIATION> 62,660 43,958
<TOTAL-ASSETS> 269,723 179,464
<CURRENT-LIABILITIES> 93,263 40,555
<BONDS> 128,338 1,816
0 0
0 0
<COMMON> 490 489
<OTHER-SE> 41,349 129,904
<TOTAL-LIABILITY-AND-EQUITY> 269,723 179,464
<SALES> 0 0
<TOTAL-REVENUES> 107,420 89,153
<CGS> 0 0
<TOTAL-COSTS> 90,448 69,788
<OTHER-EXPENSES> 13,907 10,247
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,407 445
<INCOME-PRETAX> (342) 8,673
<INCOME-TAX> (140) 3,320
<INCOME-CONTINUING> (202) 5,353
<DISCONTINUED> 0 (436)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (202) 4,917
<EPS-PRIMARY> 0 0.10
<EPS-DILUTED> 0 0.10
<FN>
<F1> Period ended March 28, 1998 reclassified for discontinued operations to
conform to current year's classifications.
</FN>
</TABLE>
