<PAGE> 1
- --------------------------------------------------------------------------------
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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 JULY 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 CUSTOMER SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(847) 374-4980
(Registrant's telephone number, including area code)
APAC TELESERVICES, INC.
(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 -- 47,541,192 shares outstanding as of
August 9, 1999.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of July 4, 1999,
and January 3, 1999.................................... 1
Consolidated Condensed Statements of Operations for the
Thirteen and Twenty-Six Weeks Ended July 4, 1999, and
June 28, 1998.......................................... 2
Consolidated Condensed Statements of Cash Flows for the
Twenty-Six Weeks Ended July 4, 1999, and June 28,
1998................................................... 3
Notes to Consolidated Condensed Financial Statements as of
July 4, 1999........................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................... 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 13
Item 6. Exhibits and Reports on Form 8-K.................... 13
SIGNATURES.................................................. 14
EXHIBITS....................................................
</TABLE>
i
<PAGE> 3
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JULY 4, JANUARY 3,
1999 1999
(UNAUDITED) (AUDITED, NOTE 1)
------------ ------------------
(000'S OMITTED, EXCEPT SHARE DATA)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 546 $ 3,543
Accounts receivable, net.................................. 77,891 76,618
Recoverable income taxes.................................. 4,090 5,825
Deferred income tax assets................................ 5,620 8,790
Prepaid expenses.......................................... 3,578 3,058
Net assets of discontinued operations..................... 10,458 7,096
-------- --------
Total current assets.............................. 102,183 104,930
PROPERTY AND EQUIPMENT...................................... 144,604 152,195
Less -- accumulated depreciation............................ 63,361 57,602
-------- --------
Property and equipment, net....................... 81,243 94,593
GOODWILL AND OTHER INTANGIBLE ASSETS........................ 68,850 68,850
Less -- accumulated amortization............................ 6,260 3,975
-------- --------
Goodwill and other intangible assets, net......... 62,590 64,875
OTHER ASSETS................................................ 2,861 3,104
-------- --------
Total assets...................................... $248,877 $267,502
======== ========
LIABILITIES AND SHARE OWNERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 17,523 $ 16,122
Accounts payable.......................................... 6,953 5,705
Other current liabilities................................. 47,585 65,355
-------- --------
Total current liabilities......................... 72,061 87,182
LONG-TERM DEBT, less current maturities..................... 124,222 132,427
DEFERRED INCOME TAXES....................................... 410 1,670
OTHER LIABILITIES........................................... 9,059 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; 48,957,578 shares issued at July 4, 1999;
48,893,873 shares issued at January 3, 1999............ 490 489
Additional paid-in capital................................ 94,155 93,799
Retained deficit.......................................... (45,869) (46,813)
Less -- treasury shares at cost; 1,609,000 shares at July
4, 1999, and January 3, 1999........................... (5,651) (5,651)
-------- --------
Total share owners' equity........................ 43,125 41,824
-------- --------
Total liabilities and share owners' equity........ $248,877 $267,502
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
1
<PAGE> 4
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN (13) WEEKS TWENTY-SIX (26) WEEKS
ENDED ENDED
------------------- ---------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1999 1998* 1999 1998*
-------- -------- --------- ---------
(000'S OMITTED, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NET REVENUE:
Service Solutions................................ $ 62,169 $ 49,681 $126,762 $ 95,542
Sales Solutions.................................. 40,807 55,204 83,634 98,496
-------- -------- -------- --------
Total net revenue........................ 102,976 104,885 210,396 194,038
OPERATING EXPENSES:
Cost of services................................. 81,327 84,806 171,775 154,594
Selling, general and administrative
expenses...................................... 12,129 13,687 24,049 23,934
Restructuring charges............................ 3,986 9,000 5,973 9,000
-------- -------- -------- --------
Total operating expenses................. 97,442 107,493 201,797 187,528
-------- -------- -------- --------
Operating income (loss).......................... 5,534 (2,608) 8,599 6,510
INTEREST EXPENSE, NET.............................. 3,548 1,727 6,955 2,172
-------- -------- -------- --------
Income (loss) from continuing operations before
income taxes.................................. 1,986 (4,335) 1,644 4,338
PROVISION (BENEFIT) FOR INCOME TAXES............... 840 (1,377) 700 1,943
-------- -------- -------- --------
Income (loss) from continuing operations......... 1,146 (2,958) 944 2,395
LOSS FROM DISCONTINUED OPERATIONS, net of income
tax benefit of $303 and $423, respectively, for
the 13 and 26 weeks in 1998...................... 0 (630) 0 (1,066)
-------- -------- -------- --------
NET INCOME (LOSS).................................. $ 1,146 (3,588) $ 944 $ 1,329
======== ======== ======== ========
INCOME (LOSS) PER SHARE:
Basic:
Continuing operations......................... $ 0.02 $ (0.06) $ 0.02 $ 0.05
Discontinued operations....................... 0.00 (0.01) 0.00 (0.02)
-------- -------- -------- --------
Net income (loss)............................. $ 0.02 $ (0.07) $ 0.02 $ 0.03
======== ======== ======== ========
Diluted:
Continuing operations......................... $ 0.02 $ (0.06) $ 0.02 $ 0.05
Discontinued operations....................... 0.00 (0.01) 0.00 (0.02)
-------- -------- -------- --------
Net income (loss)............................. $ 0.02 $ (0.07) $ 0.02 $ 0.03
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic............................................ 48,951 48,852 48,939 48,832
Diluted.......................................... 49,126 49,585 49,122 49,731
======== ======== ======== ========
</TABLE>
- ---------------
* Reclassified to conform to current year's classifications.
See notes to consolidated condensed financial statements.
2
<PAGE> 5
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-SIX (26) WEEKS
ENDED
----------------------
JULY 4, JUNE 28,
1999 1998*
--------- ----------
(000'S OMITTED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income from continuing operations..................... $ 944 $ 2,395
Depreciation and amortization............................. 17,449 14,830
Deferred income taxes..................................... 1,910 (3,790)
Restructuring charges..................................... 5,973 9,000
Change in operating assets and liabilities................ (8,409) (1,142)
-------- ---------
Net cash provided by continuing operations........ 17,867 21,293
Cash used by discontinued operations...................... (3,362) (1,218)
-------- ---------
Net cash provided by operations................... 14,505 20,075
INVESTING ACTIVITIES:
ITI Holdings, Inc. acquisition costs, net of cash
acquired............................................... 0 (149,229)
Purchases of property and equipment, net.................. (4,948) (3,214)
-------- ---------
Net cash used by investing activities............. (4,948) (152,443)
FINANCING ACTIVITIES:
Proceeds from Term Loan................................... 0 150,000
Repayment of revolving credit facility with proceeds from
refinancing............................................ 0 (7,500)
Net payments under revolving credit facilities............ 0 (5,250)
Payments on long-term debt................................ (6,804) (220)
Decrease in book overdraft................................ 0 (1,561)
Payment of debt issuance costs............................ 0 (2,188)
Increase (decrease) in customer deposits.................. (6,107) 1,953
Stock and warrant transactions, including related income
tax benefits........................................... 357 760
-------- ---------
Net cash provided (used) by financing
activities...................................... (12,554) 135,994
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ $ (2,997) $ 3,626
======== =========
</TABLE>
- ---------------
* Reclassified to conform to current year's classifications.
See notes to consolidated condensed financial statements.
3
<PAGE> 6
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JULY 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 and twenty-six week periods
ended July 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. GOODWILL AND INTANGIBLE ASSETS
At July 4, 1999, goodwill and intangible assets consisted of the following:
<TABLE>
<CAPTION>
ACCUMULATED NET
COST AMORTIZATION BOOK VALUE
------- ------------ ----------
(000'S OMITTED)
<S> <C> <C> <C>
Goodwill............................................ $36,757 $2,791 $33,966
Customer relationships.............................. 28,493 2,896 25,597
Assembled workforce................................. 3,600 573 3,027
------- ------ -------
Total..................................... $68,850 $6,260 $62,590
======= ====== =======
</TABLE>
3. OTHER CURRENT LIABILITIES
The components of other current liabilities included in the consolidated
condensed balance sheets are as follows:
<TABLE>
<CAPTION>
JULY 4, JANUARY 3,
1999 1999
------- ----------
(000'S OMITTED)
<S> <C> <C>
Payroll and related items................................... $18,946 $19,494
Customer deposits........................................... 5,016 11,123
Telecommunication expenses.................................. 6,254 9,529
Acquisition-related costs................................... 6,280 14,377
Restructuring charges....................................... 3,750 3,199
Other....................................................... 7,339 7,633
------- -------
Total............................................. $47,585 $65,355
======= =======
</TABLE>
4. RESTRUCTURING CHARGES
During the first and second quarters of fiscal 1999, the Company recorded
restructuring charges of $2.0 million and $4.0 million, respectively, associated
with closing 16 Sales Solutions call centers and reducing its salaried
workforce. 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 $4.0 million restructuring charge included $2.7 million for the
write-down of property and equipment, $0.3 million for employee severance costs
4
<PAGE> 7
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
and $1.0 million for lease termination costs. The fiscal 1999 restructuring
reserve at July 4, 1999, was $1.4 million and 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 restructuring plan involved closing Sales Solutions
call 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
July 4, 1999, the amount remaining in the fiscal 1998 restructuring reserve was
$2.3 million and is expected to be fully utilized by January 2, 2000.
5. 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. Net loss on discontinued
for the first six months of fiscal 1998 of $1.1 million (on net revenue of $4.7
million) reflects the Company's loss on the operation of its Paragren software
development business during the period. The net loss from discontinued
operations for the first six months of fiscal 1999 of $2.7 million (on net
revenue of $4.8 million) has been offset against a provision for anticipated
loss during the phase-out period recorded at January 3, 1999, and additional
proceeds expected from the sale of the net assets of the business. During the
second quarter, 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 July 4, 1999, amounted to $10.5 million and
consisted of working capital of $2.6 million, property and equipment of $1.8
million and capitalized software and other intangible assets of $6.1 million.
6. 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 5 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.
5
<PAGE> 8
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
Segment information for continuing operations for the first half of fiscal
years 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
SERVICE SALES
PERIOD ENDED SOLUTIONS SOLUTIONS COMBINED
- ------------ --------- --------- --------
(000'S OMITTED)
<S> <C> <C> <C>
First Quarter:
April 4, 1999:
Net revenue..................................... $ 64,593 $42,827 $107,420
Operating income (loss)......................... 6,299 (3,234) 3,065
Restructuring charge............................ 0 1,987 1,987
-------- ------- --------
March 29, 1998:
Net revenue..................................... $ 45,861 $43,292 $ 89,153
Operating income................................ 4,667 4,451 9,118
-------- ------- --------
Second Quarter:
July 4, 1999:
Net revenue..................................... $ 62,169 $40,807 $102,976
Operating income (loss)......................... 6,754 (1,220) $ 5,534
Restructuring charge............................ 0 3,986 3,986
-------- ------- --------
June 28, 1998:
Net revenue..................................... $ 49,681 $55,204 $104,885
Operating income (loss)......................... 1,464 (4,072) (2,608)
Restructuring charge............................ 2,400 6,600 9,000
-------- ------- --------
Year-To-Date:
July 4, 1999:
Net revenue..................................... $126,762 $83,634 $210,396
Operating income (loss)......................... 13,053 (4,454) 8,599
Restructuring charge............................ 0 5,973 5,973
-------- ------- --------
June 28, 1998:
Net revenue..................................... $ 95,542 $98,496 $194,038
Operating income................................ 6,131 379 6,510
Restructuring charge............................ 2,400 6,600 9,000
-------- ------- --------
</TABLE>
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 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 July 4, 1999, the Company operated and managed approximately
11,100 workstations in 64 call centers.
The Company'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.
7
<PAGE> 10
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 and twenty-six week periods ended July 4, 1999, and
June 28, 1998.
<TABLE>
<CAPTION>
THIRTEEN (13) WEEKS TWENTY-SIX (26) WEEKS
ENDED ENDED
-------------------- ----------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1999 1998* 1999 1998*
------- -------- ------- --------
<S> <C> <C> <C> <C>
NET REVENUE:
Service Solutions................................. 60.4% 47.4% 60.2% 49.2%
Sales Solutions................................... 39.6 52.6 39.8 50.8
----- ----- ----- -----
Total net revenue......................... 100.0 100.0 100.0 100.0
OPERATING EXPENSES:
Cost of services.................................. 79.0 80.9 81.7 79.8
Selling, general and administrative expenses...... 11.8 13.0 11.4 12.3
Restructuring charges............................. 3.9 8.6 2.8 4.6
----- ----- ----- -----
Total operating expenses.................. 94.7 102.5 95.9 96.7
----- ----- ----- -----
Operating income (loss)........................ 5.3 (2.5) 4.1 3.3
INTEREST EXPENSE, NET............................... 3.4 1.6 3.3 1.1
----- ----- ----- -----
Income (loss) from continuing operations before
income taxes................................. 1.9 (4.1) 0.8 2.2
PROVISION (BENEFIT) FOR INCOME TAXES................ 0.8 (1.3) 0.3 1.0
----- ----- ----- -----
Income (loss) from continuing operations....... 1.1 (2.8) 0.5 (1.2)
LOSS FROM DISCONTINUED OPERATIONS, NET.............. 0.0 (0.6) 0.0 (0.5)
----- ----- ----- -----
NET INCOME (LOSS)................................... 1.1% (3.4)% 0.5% 0.7%
===== ===== ===== =====
</TABLE>
- ---------------
* Reclassified to conform to current year's classifications.
RESULTS OF OPERATIONS
The Company's net revenue increased 8.4% in the first six months of fiscal
1999 to $210.4 million, up $16.4 million from the first six months of fiscal
1998. Net revenue during the first half of 1999 included two full quarters of
results of ITI, which was acquired on May 20, 1998.
Net revenue for the Company's inbound operations, the Service Solutions
division, for the second quarter and the first six months of fiscal 1999
increased $12.5 million or 25.1% and $31.2 million or 32.7%, respectively,
compared to the same periods in fiscal 1998. These increases were due in part to
the inclusion of the results of ITI and growth in inbound call volume with a
large telecommunications client. Partially offsetting the Service Solutions
increase was a 15% reduction in net revenue, largely as a result of improved
operating efficiencies in the management of client-owned call centers,
attributable to the managed facilities contract with the Company's large parcel
delivery client. Net revenue for the Company's outbound operations, the Sales
Solutions division, for the second quarter and first six months of fiscal 1999
decreased by $14.4 million or 26.1% and $14.9 million or 15.1%, respectively,
compared to the same periods in fiscal 1998. These decreases resulted from
consolidation in the financial services industry and reduction in the use of
telemarketing services for customer acquisition and retention by the
telecommunications industry. In April 1999, AT&T Corporation ("AT&T"), the
Company's large outbound telecommunications client, changed its marketing
strategy for long-distance services. As a result of this change, AT&T
de-emphasized its use of outbound telemarketing for customer acquisition and
retention. The Company estimates the change in AT&T's marketing strategy
resulted in the loss of approximately $5.5 million in net revenue for the second
quarter of fiscal 1999. While the Company has initiated plans to replace the
AT&T call volume, 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.
8
<PAGE> 11
Cost of services as a percent of net revenue for the second quarter of
fiscal 1999 decreased to 79.0% from 80.9% in the second quarter of fiscal 1998.
This reduction reflects the reversal in the second quarter of fiscal 1999 of
$3.7 million of accrued telephone charges recorded in the fourth quarter of
fiscal 1998. The reversal resulted from the Company's having negotiated
favorable dispositions of costs associated with certain guaranteed minimum usage
telecommunications contracts during the second quarter of fiscal 1999. Cost of
services as a percent of net revenue increased to 81.7% in the first six months
of fiscal 1999 from 79.8% in the first six months of fiscal 1998. This increase
reflects the reduction in profit margin due to underutilized call center
capacity resulting from reductions in call volumes in the Sales Solutions
division and higher direct wages in both divisions designed to improve employee
performance.
Selling, general and administrative expenses decreased 11.4% in the second
quarter of fiscal 1999 to $12.1 million, down $1.6 million from the second
quarter of fiscal 1998. The decrease in selling, general and administrative
expenses 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 and second quarters of fiscal 1999 and the second quarter
of fiscal 1998, the Company recorded restructuring charges of $2.0 million, $4.0
million, and $9.0 million, respectively, in connection with the consolidation of
Sales Solutions call centers and reductions in its salaried workforce. The
accumulated restructuring charge of $15.0 million is comprised of $8.6 million
for the write-down of property and equipment, $4.2 million for employee
severance costs and $2.2 million for lease termination costs. During the last
twelve months, the Company closed 27 call centers containing 2,300 seats and
reduced its salaried workforce by approximately 100 employees. The Company's
profitability is significantly influenced by its call center capacity
utilization. This utilization has been declining in its outbound Sales Solutions
business due to reduced opportunities in certain industries previously
generating significant portions of revenue. As a result, the Company has decided
to reduce its capacity and improve its utilization. The ability of the Company
to improve the Sales Solutions division to historic profitability levels is
dependent on its ability to match call center capacity with existing and future
client demand.
The Company generated operating income of $5.5 million during the second
quarter of fiscal 1999 compared to an operating loss of $2.6 million for the
second quarter of fiscal 1998. Prior to restructuring charges, operating income
for fiscal 1999 was $9.5 million compared with operating income of $6.4 million
for fiscal 1998. For the Service Solutions division, operating income for the
second quarter of fiscal 1999 was $6.8 million or 10.9% of net revenue compared
with operating income (before restructuring charge) of $3.9 million or 7.8% of
net revenue in the same period a year ago. The Sales Solutions division
operations incurred a loss of $1.2 million for the second quarter of fiscal 1999
compared with a loss of $4.1 million in the same period a year ago. Before
restructuring charges, the Sales Solutions division generated operating income
of $2.8 million or 6.8% of net revenue in the second quarter of fiscal 1999
compared with operating income of $2.5 million or 4.6% of net revenue in the
same period a year ago. The improvement in operating performance principally
reflects better call center capacity utilization resulting from center
consolidation.
Operating income increased 32.1% for the first six months of fiscal 1999 to
$8.6 million, up $2.1 million from the first six months of fiscal 1998. Prior to
restructuring charges, operating income for fiscal 1999 was $14.6 million
compared to $15.5 million for fiscal 1998. For the Service Solutions division,
operating income for the first six months of fiscal 1999 was $13.1 million or
10.3% of net revenue compared with operating income (before restructuring
charge) of $8.5 million or 8.9% of net revenue for the same period a year ago.
The increase in Service Solutions operating income was due to increased net
revenue and a more profitable client mix. For the Sales Solutions division,
operating income before restructuring charges for the first six months of fiscal
1999 was $1.5 million or 1.8% of net revenue compared to income of $7.0 million
or 7.1% of net revenue for the first six months of fiscal 1998. The
deterioration in operating performance from fiscal 1998 to fiscal 1999 was due
to the cost of underutilized call center capacity resulting from reductions in
call volumes and higher direct wages.
Net interest expense for the second quarter and first six months of fiscal
1999 increased by $1.8 million and $4.8 million, respectively, compared to the
same periods in fiscal 1998. The increases reflect interest and
9
<PAGE> 12
amortization of debt issuance costs and amendment fees on the $150.0 million
Term Loan used to finance the purchase of ITI.
The provision (benefit) for income taxes recognized for the second quarter
and six months ended July 4, 1999, and June 28, 1998, are based upon the
Company's estimated annual effective income tax rates. The decrease in the
Company's effective income tax rate to 42.6% in fiscal 1999 from 44.8% in fiscal
1998 is due to changes in the amortization of non-deductible goodwill related to
the ITI purchase and Work Opportunity Tax Credit benefits as percents of taxable
income (loss).
Net loss on discontinued operations for the first six months of fiscal 1998
of $1.1 million reflects the reclassification of net loss sustained by the
Company in 1998 on the operation of its Paragren software development business.
Net loss on discontinued operations for the first six months of fiscal 1999 of
$2.7 million has been offset against a provision for anticipated loss during the
phase-out period recorded at January 3, 1999, and additional proceeds expected
from the sale of the net assets of the business. During the second quarter, the
Company revised its estimate of expected sales proceeds based upon current
market estimates of the fair value of the business.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations during the first six months of fiscal 1999
totaled $14.5 million, down $5.6 million from the same period in 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 $4.9 million during the first six 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 the first and second quarters of fiscal 1999 and the second quarter of
fiscal 1998, the Company recorded restructuring charges of $2.0 million, $4.0
million and $9.0 million, respectively, in connection with the consolidation of
Sales Solutions call centers and reductions in its salaried workforce. The
accumulated restructuring charge of $15.0 million is comprised of $8.6 million
for the write-down of property and equipment, $4.2 million for employee
severance costs and $2.2 million for lease termination costs. During the first
six months of fiscal 1999, the Company made payments totaling $1.8 million for
employee severance and lease termination costs.
At January 3, 1999, the Company had received $11.1 million in customer
deposits for services to be provided in future periods. These amounts are to be
offset against future billings. During the first six months of fiscal 1999, $6.1
million of customer deposits were offset against invoices for services rendered.
During 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.
In December 1998, the Company's management approved a plan to sell
Paragren. The Company expects to sell Paragren during fourth quarter of fiscal
1999 and realize approximately $10.5 million of cash from the sale, net of cash
required to fund operations during the disposal period.
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 July 4, 1999, there were no borrowings
outstanding under the Revolving Facility. The Company made $6.0 million of
scheduled repayments on its Term Loan during the first six months of fiscal 1999
resulting in a balance outstanding at July 4, 1999, of $138.0 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.
10
<PAGE> 13
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 July 4, 1999,
100% of the identified equipment and systems have been remediated and tested
with 98% of the equipment and systems placed in production. The Company expects
the remaining 2% to be placed in production by September 30, 1999. Through July
4, 1999, the Company had spent approximately $2.3 million to address Year 2000
issues. 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.
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 has
initiated discussion with key 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 80% of its clients and
suppliers, 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 and to perform
interoperability tests with clients and suppliers where such testing has not
been performed. The Company expects to complete all interoperability testing by
September 30, 1999. For clients and suppliers that fail to demonstrate Year 2000
compliance, the Company will develop suitable contingency plans. Contingency
plans are expected to be developed and tested by October 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 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 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 match its call
center capacity with client demand 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 call 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
11
<PAGE> 14
for the year ended January 3, 1999, which describe 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 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 effect the Company's financial
instruments would have 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.
12
<PAGE> 15
PART II.
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Share Owners of the Company was held on May 18,
1999.
(b) Not applicable.
(c) 1. Set forth below is the tabulation of the votes on each nominee for
election as a director:
<TABLE>
<CAPTION>
WITHHOLD AUTHORITY
NAME FOR (INCLUDING BROKER NON-VOTE)
---- --- ---------------------------
<S> <C> <C>
Thomas M. Collins................ 33,393,318 1,573,323
George D. Dalton................. 34,392,818 573,823
Theodore G. Schwartz............. 34,392,818 573,823
Marc S. Simon.................... 34,392,818 573,823
Paul G. Yovovich................. 34,392,818 573,823
</TABLE>
2. Set forth below is the tabulation of the votes for the proposal to
approve an amendment to the Company's Amended and Restated Articles of
Incorporation to change the Company's name from APAC TeleServices, Inc. to
APAC Customer Services, Inc.
<TABLE>
<S> <C>
For...................................................... 33,760,648
Against.................................................. 1,184,388
Withhold Authority (Including Broker Non-Vote)........... 21,605
</TABLE>
3. Set forth below is the tabulation of the votes for the proposal to
approve the reservation of an additional 150,000 Common Shares to be
available for issuance pursuant to the Company's 1995 Nonemployee Director
Stock Incentive Plan.
<TABLE>
<S> <C>
For...................................................... 32,311,244
Against.................................................. 2,605,196
Withhold Authority (Including Broker Non-Vote)........... 50,201
</TABLE>
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are furnished as exhibits and numbered pursuant
to Item 601 of Regulation S-K: Exhibit (11) -- Statement Re: Computation of
Earnings Per Share on page 15 and Exhibit (27)-- Financial Data Schedule on page
16.
(b) Reports on Form 8-K. The Company filed a Current Report on Form 10-K on
April 7, 1999, which disclosed the Company's fiscal year 1998 results of
operations.
13
<PAGE> 16
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: August 18, 1999 By: /s/ THEODORE G. SCHWARTZ
----------------------------------
Chairman, President and
Chief Executive Officer
Date: August 18, 1999 By: /s/ GARY S. HOLTER
----------------------------------
Senior Vice President
and Chief Financial Officer
14
<PAGE> 1
EXHIBITS
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
EXHIBIT (11)--STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN (13) WEEKS ENDED TWENTY-SIX (26) WEEKS ENDED
------------------------- ---------------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1999 1998* 1999 1998*
-------- -------- -------- --------
(000's omitted, except per share data)
<S> <C> <C> <C> <C>
Basic shares:
Average shares outstanding 48,951 48,852 48,939 48,832
Income (loss):
Continuing operations $ 1,146 $ (2,958) $ 944 $ 2,395
Discontinued operations 0 (630) 0 (1,066)
-------- -------- -------- --------
Net income (loss) $ 1,146 $ (3,588) $ 944 $ 1,329
======== ======== ======== ========
Income (loss) per share:
Continuing operations $ 0.02 $ (0.06) $ 0.02 $ 0.05
Discontinued operations 0.00 (0.01) 0.00 (0.02)
-------- -------- -------- --------
Net income (loss) $ 0.02 $ (0.07) $ 0.02 $ 0.03
======== ======== ======== ========
Diluted shares:
Average shares outstanding 48,951 48,852 48,939 48,832
Net effect of dilutive stock
options - based upon the
treasury stock method using
quarter-end market price 175 733 183 899
-------- -------- -------- --------
Total shares 49,126 49,585 49,122 49,731
======== ======== ======== ========
Income (loss):
Continuing operations $ 1,146 $ (2,958) $ 944 $ 2,395
Discontinued operations 0 (630) 0 (1,066)
-------- -------- -------- --------
Net income (loss) $ 1,146 $ (3,588) $ 944 $ 1,329
======== ======== ======== ========
Income (loss) per share:
Continuing operations $ 0.02 $ (0.06) $ 0.02 $ 0.05
Discontinued operations 0.00 (0.01) 0.00 (0.02)
-------- -------- -------- --------
Net income (loss) $ 0.02 $ (0.07) $ 0.02 $ 0.03
======== ======== ======== ========
</TABLE>
*Reclassified to conform to current year's classifications.
Page 17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS THE TWENTY-SIX WEEK SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES 1999 SECOND QUARTER
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q
FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> JAN-02-2000 JAN-03-1999
<PERIOD-END> JUL-04-1999 JUN-28-1998<F1>
<CASH> 546 3,643
<SECURITIES> 0 0
<RECEIVABLES> 77,891 97,120
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 102,183 127,562
<PP&E> 144,604 153,855
<DEPRECIATION> 63,361 50,505
<TOTAL-ASSETS> 248,877 372,958
<CURRENT-LIABILITIES> 72,061 96,544
<BONDS> 124,222 141,781
0 0
0 0
<COMMON> 490 489
<OTHER-SE> 42,635 126,665
<TOTAL-LIABILITY-AND-EQUITY> 248,877 372,958
<SALES> 0 0
<TOTAL-REVENUES> 210,396 194,038
<CGS> 0 0
<TOTAL-COSTS> 171,775 154,594
<OTHER-EXPENSES> 30,022 32,934
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,955 2,172
<INCOME-PRETAX> 1,644 4,338
<INCOME-TAX> 700 1,943
<INCOME-CONTINUING> 944 2,395
<DISCONTINUED> 0 (1,066)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 944 1,329
<EPS-BASIC> 0.02 0.03
<EPS-DILUTED> 0.02 0.03
<FN>
<F1>PERIOD ENDED JUNE 28, 1998, RECLASSIFIED FOR DISCONTINUED OPERATIONS TO
CONFORM TO CURRENT YEAR'S CLASSIFICATIONS.
</FN>
</TABLE>
