<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Period Ended October 1, 2000
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
SIX PARKWAY NORTH CENTER, SUITE 400, DEERFIELD, ILLINOIS 60015
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 374-4980
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 49,696,834 shares outstanding as of November 10,
2000.
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<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of October 1, 2000, and 3
January 2, 2000.
Consolidated Condensed Statements of Operations for the Thirteen and
Thirty-Nine Weeks Ended October 1, 2000, and October 3, 1999. 4
Consolidated Condensed Statements of Cash Flows for the Thirty-Nine Weeks
Ended October 1, 2000, and October 3, 1999. 5
Notes to Consolidated Condensed Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Litigation 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
Page 2
<PAGE>
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 1,
2000 JANUARY 2,
ASSETS (Unaudited) 2000
------------------------------------------------------------------ ---------------------- ----------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $38,423 $18,876
Accounts receivable, net 69,478 72,031
Net assets of discontinued operations - 10,028
Other current assets 15,472 14,346
---------------------- ----------------------
Total current assets 123,373 115,281
PROPERTY AND EQUIPMENT 138,382 133,960
Less--accumulated depreciation 84,390 68,076
---------------------- ----------------------
Property and equipment, net 53,992 65,884
GOODWILL AND OTHER INTANGIBLE ASSETS 61,009 61,009
Less--accumulated amortization 11,607 8,468
---------------------- ----------------------
Goodwill and other intangible assets, net 49,402 52,541
OTHER ASSETS 7,320 2,774
---------------------- ----------------------
Total assets $234,087 $236,480
====================== ======================
LIABILITIES AND
SHARE OWNERS' EQUITY
------------------------------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $18,482 $16,808
Accounts payable 6,881 7,588
Other current liabilities 41,293 38,928
---------------------- ----------------------
Total current liabilities 66,656 63,324
LONG-TERM DEBT, LESS CURRENT MATURITIES 90,624 115,987
DEFERRED INCOME TAXES 2,649 2,623
OTHER LIABILITIES 5,958 5,924
COMMITMENTS AND CONTINGENCIES
SHARE OWNERS' EQUITY:
Preferred shares, $0.01 par value; 50,000,000 shares
authorized; none issued and outstanding - -
Common shares, $0.01 par value; 200,000,000
shares authorized; 49,671,372 shares issued
at October 1, 2000; 49,079,617 shares issued at
January 2, 2000 497 491
Additional paid-in capital 99,846 94,945
Accumulated deficit (28,941) (41,163)
Less--treasury shares at cost; 913,348 and 1,609,000 shares at
October 1, 2000, and January 2, 2000, respectively (3,202) (5,651)
---------------------- ----------------------
Total share owners' equity 68,200 48,622
---------------------- ----------------------
Total liabilities and share owners' equity $234,087 $236,480
====================== ======================
</TABLE>
See notes to consolidated condensed financial statements
Page 3
<PAGE>
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THIRTEEN (13) WEEKS ENDED THIRTY-NINE (39) WEEKS ENDED
-------------------------------------- ----------------------------------------
OCTOBER 1, OCTOBER 3, OCTOBER 1, OCTOBER 3,
2000 1999 2000 1999
---------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
NET REVENUE: $113,311 $103,188 $350,269 $313,584
OPERATING EXPENSES:
Cost of services 88,459 82,775 268,092 254,550
Selling, general and administrative
expenses 15,023 11,940 54,432 35,989
Restructuring charges - 1,627 - 7,600
---------------- ---------------- ---------------- ------------------
Total operating expenses 103,482 96,342 322,524 298,139
---------------- ---------------- ---------------- ------------------
Operating income 9,829 6,846 27,745 15,445
INTEREST EXPENSE, NET 2,240 3,417 7,566 10,372
---------------- ---------------- ---------------- ------------------
Income from continuing operations
before income taxes 7,589 3,429 20,179 5,073
PROVISION FOR INCOME TAXES 3,036 1,500 8,072 2,200
---------------- ---------------- ---------------- ------------------
Income from continuing operations 4,553 1,929 12,107 2,873
DISCONTINUED OPERATIONS
Gain on Sale of Paragren Technologies,
Inc. less income tax provision of $77 - - 115 -
---------------- ---------------- ---------------- ------------------
NET INCOME $4,553 $1,929 $12,222 $2,873
================ ================ ================ ==================
INCOME PER SHARE:
Basic:
Continuing operations $0.09 $0.04 $0.25 $0.06
Discontinued operations 0.00 0.00 0.00 0.00
---------------- ================ ================ ------------------
Net income $0.09 $0.04 $0.25 $0.06
================ ================ ================ ==================
Diluted:
Continuing operations $0.09 $0.04 $0.24 $0.06
Discontinued operations 0.00 0.00 0.00 0.00
---------------- ---------------- ---------------- ------------------
Net income $0.09 $0.04 $0.24 $0.06
================ ================ ================ ==================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 48,544 48,973 48,178 48,946
Diluted 51,379 49,572 51,462 49,198
</TABLE>
See notes to consolidated condensed financial statements.
Page 4
<PAGE>
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTY-NINE (39) WEEKS ENDED
----------------------------------------------
OCTOBER 1, OCTOBER 3,
2000 1999
-------------------- -------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $12,222 $2,873
Depreciation and amortization 23,918 25,789
Deferred income taxes (266) 3,140
Restructuring charges - 7,600
Change in operating assets and liabilities (7,450) (21,449)
-------------------- -------------------
Net cash provided by continuing operations 28,424 17,953
Cash used by discontinued operations - (3,000)
-------------------- -------------------
Net cash provided by operating activities 28,424 14,953
INVESTING ACTIVITIES:
Proceeds from sale of Paragren Technologies, Inc. 17,000 -
Purchases of property and equipment, net (8,563) (5,583)
-------------------- -------------------
Net cash provided (used) by investing activities 8,437 (5,583)
FINANCING ACTIVITIES:
Net borrowings under revolving credit facilities - 3,625
Payments on long-term debt (23,689) (11,301)
Increase in bank overdraft - 3,390
Decrease in customer deposits (983) (8,869)
Sale of treasury shares 5,000 -
Stock and warrant transactions, including related
income tax benefits 2,358 492
-------------------- -------------------
Net cash used by financing activities (17,314) (12,663)
-------------------- -------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 19,547 (3,293)
BEGINNING CASH BALANCE 18,876 3,543
-------------------- -------------------
ENDING CASH BALANCE $38,423 $250
==================== ===================
</TABLE>
See notes to consolidated condensed financial statements.
Page 5
<PAGE>
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT AS OTHERWISE INDICATED)
(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 1, 2000, are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2000. The balance sheet at
January 2, 2000, 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
2, 2000.
2. GOODWILL AND INTANGIBLE ASSETS
At October 1, 2000, goodwill and intangible assets consisted of the following:
<TABLE>
<CAPTION>
ACCUMULATED NET
COST AMORTIZATION BOOK VALUE
------------------ ----------------- ------------------
(In thousands)
<S> <C> <C> <C>
Goodwill $ 28,916 $ 4,564 $ 24,352
Customer relationships 28,493 5,830 22,663
Assembled workforce 3,600 1,213 2,387
------------------ ------------------ ------------------
Total $ 61,009 $ 11,607 $ 49,402
================== ================== ==================
</TABLE>
3. OTHER CURRENT LIABILITIES
The components of other current liabilities included in the consolidated
condensed balance sheets are as follows:
<TABLE>
<CAPTION>
OCTOBER 1, JANUARY 2,
2000 2000
-------------- --------------
(000's omitted)
<S> <C> <C>
Payroll and related items $24,693 $22,248
Accrued Relocation/Severance 5,247 998
Telecommunication costs 1,715 3,619
Accrued professional fees 1,848 977
Acquisition-related costs 371 1,145
Customer deposits 506 1,489
Restructuring charges 902 2,250
Other 6,011 6,202
============== ==============
Total $41,293 $38,928
============== ==============
</TABLE>
Page 6
<PAGE>
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS EXCEPT AS OTHERWISE INDICATED)
(UNAUDITED)
4. RESTRUCTURING CHARGE
During the first nine months of fiscal 1999, the Company recorded
restructuring charges totaling $7.6 million. The restructuring plans involved
closing 21 Customer Acquisition Interaction Centers and reducing the salaried
workforce. The restructuring charges 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 $2.0 million of the restructuring charges recorded in the first
quarter of 1999 were fully utilized by year end. Of the remaining $5.6 million
of restructuring charges, $3.4 million was also utilized in 1999. During the
first nine months of fiscal 2000, the Company utilized $1.3 million of the $2.2
million remaining restructuring accruals related to restructuring charges
recorded in the second and third quarters of fiscal 1999. The remaining balance
of $0.9 million at October 1, 2000 represents $0.3 million for the write-down of
property and equipment, $0.2 million for employee severance costs and $0.4
million for lease termination costs, which will be utilized during fiscal 2000.
5. LEGAL PROCEEDINGS
On January 5, 2000, APAC, Inc. filed suit against the Company in the
U.S. District Court for the Northern District of Georgia (Atlanta Division)
alleging that the Company's use of "APAC" in the Company's name infringes a
trademark of APAC, Inc. The suit asserts violations of the federal Lanham Act
and various Georgia state statues, as well as a breach by the Company of an
agreement between APAC, Inc. and the Company. On October 19, 2000, the Court
entered an order denying Plaintiff's motion for a preliminary injunction,
finding that plaintiff had not shown a significant likelihood of success on the
merits of its trademark infringement or breach of contract claims to warrant the
entry of a preliminary injunction. Discovery is in process and will be completed
shortly. The Company intends to defend itself vigorously.
Additionally, the Company is subject to occasional lawsuits,
governmental investigations and claims arising out of the normal conduct of its
business. Management does not believe the outcome of any pending claims will
have a materially adverse impact on the Company's consolidated financial
position.
6. DISCONTINUED OPERATIONS
In December 1998, the Company's management approved a plan to sell Paragren.
Accordingly, Paragren was reported as a discontinued operation, and the
consolidated condensed financial statements were 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 was offset
against provisions for anticipated loss recorded at January 3, 1999.
In January 2000, pursuant to an agreement executed in December 1999, the Company
sold the stock of Paragren Technologies, Inc. and received $17 million in cash
proceeds. In addition, the Company may receive up to an additional $1 million in
proceeds subject to the terms of the escrow agreement. After selling expenses
and other costs, $11 million of the proceeds were used to reduce outstanding
borrowings under the Term Loan in accordance with the financial covenants
concerning the sale of assets. The operations and anticipated disposal of
Paragren did not affect the Company's results of operations in the first nine
months of fiscal 2000 as the loss provision established in fiscal 1998, was
sufficient to absorb these losses. The Company recorded a gain on the sale of
Paragren of $0.1 million in the first quarter of fiscal 2000.
Page 7
<PAGE>
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS EXCEPT AS OTHERWISE INDICATED)
(UNAUDITED)
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 Customer Care business unit provides inbound customer service,
direct mail response, "help" line support and customer order processing. The
Customer Acquisition business unit provides outbound sales support to customers
and businesses, market research, targeted marketing plan development and
customer lead generation, acquisition and retention. CustomerAssistance.com
provides Web-based customer relationship management products and services for
Fortune 1000 and "dot.com" companies. 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 after full allocation of selling
general and administrative expenses for the thirteen and thirty-nine weeks ended
October 1, 2000, and October 3, 1999, is as follows:
<TABLE>
<CAPTION>
CUSTOMER CUSTOMER CUSTOMERASSISTANCE
PERIOD ENDED CARE ACQUISITION .COM COMBINED
--------------------------------- ------------------ ------------------- ----------------------- ------------------
(In thousands)
<S> <C> <C> <C> <C>
THIRTY-NINE (39) WEEKS:
October 1, 2000
Net revenue $219,807 $126,911 $3,551 $350,269
Operating income (loss) 17,401 16,593 (6,249) 27,745
October 3, 1999*
Net revenue $201,552 $112,032 - $313,584
Operating income (loss) 20,399 (4,954) - 15,445
Restructuring Charges - 7,600 - 7,600
THIRTEEN (13) WEEKS:
October 1, 2000
Net revenue $71,652 $39,816 $1,843 $113,311
Operating income (loss) 6,403 5,364 (1,938) 9,829
October 3, 1999*
Net revenue $69,247 $33,941 - $103,188
Operating income (loss) 7,605 (759) - 6,846
Restructuring charge - 1,627 - 1,627
</TABLE>
*Restated to conform to current year presentation.
Page 8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DESCRIPTION OF BUSINESS
The Company provides multimedia customer relationship management ("CRM")
solutions for corporate clients operating in the parcel delivery, financial
services, insurance, retail, health care and pharmaceuticals, and
telecommunications industries throughout the United States. The Customer Care
business unit provides inbound customer service, direct mail response,
integrated voice response, "help" line support and customer order processing
through its own customer interaction centers as well as through facilities
managed by the Company but owned /operated by its clients. The Customer
Acquisition business unit provides customer lead generation, acquisition and
retention through outbound sales support to consumers and businesses, market
research and targeted marketing plan development. In December 1999, the
Company formed a wholly-owned subsidiary, CustomerAssistance.com, Inc., which
provides electronic CRM ("e-CRM") products and services including e.PAC-SM-,
a multimedia platform that supports a broad range of integrated,
e-commerce-based interaction capabilities. The Company has developed a new
product service offering called Aligned Customer Relationship Solutions
("ACRS"). ACRS will leverage the company's flexible business model and focus
on aligning with clients to implement customer care solutions specific to
their needs by providing customers with solutions which comprise consulting,
systems integration, multimedia technology platforms and operations and
implementation of our e.PAC-SM- platform. As of October 1, 2000, the Company
operated and managed approximately 10,500 workstations in 55 customer
interaction centers.
In January 2000, pursuant to an agreement executed in December 1999, the Company
sold the stock of Paragren Technologies, Inc. and received $17 million in cash
proceeds. In addition, the Company may receive up to an additional $1 million in
proceeds subject to the terms of the escrow agreement. After selling expenses
and other costs, $11 million of the proceeds were used to reduce outstanding
borrowings under the Term Loan in accordance with the financial covenants
concerning the sale of assets. The operations and anticipated disposal of
Paragren did not affect the Company's results of operations in the first nine
months of fiscal 2000 as the loss provision established in fiscal 1998, was
sufficient to absorb these losses. The Company recorded a gain on the sale of
Paragren of $0.1 million in the first quarter of fiscal 2000.
Page 9
<PAGE>
Results of Operations
The following table sets forth consolidated condensed statements of income data
as a percent of net revenue from services provided by the Company for the
thirteen and thirty-nine week periods ended October 1, 2000, and October 3,
1999.
<TABLE>
<CAPTION>
THIRTEEN (13) WEEKS ENDED THIRTY-NINE (39) WEEKS ENDED
-------------------------------- ----------------------------------
OCTOBER 1, OCTOBER 3, OCTOBER 1, OCTOBER 3,
2000 1999* 2000 1999*
------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
NET REVENUE:
Customer Care 63.2% 67.1% 62.8% 64.3%
Customer Acquisition 35.2 32.9 36.2 35.7
CustomerAssistance.com 1.6 - 1.0 -
------------- --------------- -------------- ---------------
Total net revenue 100.0 100.0 100.0 100.0
OPERATING EXPENSES:
Cost of services 78.1 80.2 76.5 81.2
Selling, general and administrative
expenses 13.2 11.6 15.6 11.5
Restructuring charges - 1.6 - 2.4
------------- --------------- -------------- ---------------
Total operating expenses 91.3 93.4 92.1 95.1
------------- --------------- -------------- ---------------
Operating income 8.7 6.6 7.9 4.9
INTEREST EXPENSE, NET 2.0 3.3 2.1 3.3
------------- --------------- -------------- ---------------
Income from continuing operations
before income taxes 6.7 3.3 5.8 1.6
PROVISION FOR INCOME TAXES 2.7 1.4 2.3 0.7
------------- --------------- -------------- ---------------
Income from continuing operations 4.0 1.9 3.5 0.9
GAIN ON SALE OF PARAGREN TECHNOLOGIES,
INC., NET - -
============= =============== ============== ===============
NET INCOME 4.0% 1.9% 3.5% 0.9%
============= =============== ============== ===============
</TABLE>
*Restated to conform to current year presentation.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED OCTOBER 1, 2000
AND OCTOBER 3, 1999
Net revenue increased 9.8% to $113.3 million in the third quarter of fiscal 2000
from $103.2 million in the same period of fiscal 1999, an increase of $10.1
million. Customer Care net revenue increased by $2.4 million or 3.5% over
comparable fiscal 1999 levels. The increase in Customer Care net revenue was due
primarily to volume from new clients partially offset by the reduction in
volumes from under performing contracts. Customer Acquisition net revenue
increased by $5.9 million or 17.3%. This increase in Customer Acquisition net
revenue was primarily due to higher call volume related to new programs with
existing clients and newly selected client programs. CustomerAssistance.com
contributed $1.8 million of revenue.
Cost of services increased $5.7 million in the third quarter of fiscal 2000, or
6.9% to $88.5 million from $82.8 million in the same quarter of fiscal 1999.
This increase on a 9.8% revenue growth was due to operational improvements in
both Customer Care and Customer Acquisition. Cost of services for 1999 include
the reversal of $1.2 million of accrued telephone charges which had been
recorded in the fourth quarter of 1998. Cost of services in 2000 includes $0.9
million of such credits as well as approximately $0.8 million of offsetting
additional recruiting and training costs incurred in the quarter for anticipated
fourth quarter revenue increases. Customer Acquisition gross profit margins
Page 10
<PAGE>
improved to 26.2% in the third quarter of fiscal 2000 from 16.3% in the
previous year on improved business mix, better capacity utilization,
increased productivity and a reduction in fixed costs which resulted from the
restructuring plans implemented in fiscal 1999 that reduced the number of
workstations and corresponding excess capacity. Customer Care gross profit
margins were 21.1% in the third quarter of 2000 down slightly from 21.5% in
the same period of 1999. This reduction reflects additional recruiting and
training costs incurred in the third quarter of 2000 for anticipated fourth
quarter revenue increases.
Selling, general and administrative expenses increased to $15.0 million in
the third quarter of fiscal 2000 from $11.9 million in fiscal 1999, an
increase of $3.1 million or 25.8%. As a percent of net revenue, selling,
general and administrative expenses increased to 13.2% in fiscal 2000 from
11.6% in fiscal 1999. This increase was primarily due to additional costs in
the areas of people, adding marketing, sales and senior management personnel,
and non-recurring costs related to the development of a new technology
platform, ePAC-SM-, the development of new product service offerings related to
CustomerAssistance.com ("CA.com") and Aligned Customer Relations Solutions
("ACRS"), management and infrastructure required for CA.com, and the new
headquarters facilities and associated personnel relocation.
During the third quarter of fiscal 1999, the Company recorded a restructuring
charge of $1.6 million in connection with the closure of 5 Customer
Acquisition Interaction Centers and reductions in the salaried workforce. The
facility closure charge included $1.3 million for the write-down of property
and equipment, $0.3 million for lease termination costs.
The Company generated operating income of $9.8 million in the third quarter
of fiscal 2000 compared to $6.8 million for fiscal 1999. For the Customer
Care business unit, operating income for the third quarter of 2000 was $6.4
million, or 8.9% of net revenue, compared to operating income of $7.6
million, or 11.0% of net revenue, for the same period in the prior year as
the increase in gross profit dollars in 2000 resulting from higher revenues
were offset by the allocation of higher selling, general and administrative
expenses primarily due to development costs as previously discussed. The
Customer Acquisition business unit generated operating income of $5.4 million
in the third quarter of fiscal 2000, compared to $0.9 million before
restructuring charges, for the same period in fiscal 1999. The positive
operating performance of the Customer Acquisition business unit in fiscal
2000 was primarily due to increased net revenue and the significant
improvement in gross margins related to the successful implementation of the
restructuring plans initiated in fiscal 1999 to reduce excess capacity and
improve operating performance.
Net interest expense for the third quarter of fiscal 2000 decreased by $1.2
million compared to the same period in fiscal 1999. This decrease reflects
the reduction in term debt from the end of the third quarter of fiscal 1999
to October 1, 2000, the positive results from the Company's working capital
management efforts that have contributed to increased cash balances and
interest income related to short term cash investments.
The Company's effective income tax rate is 40.0 % for the third quarter of
fiscal 2000, down from 43.7% in the prior year period.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
1, 2000 AND OCTOBER 3, 1999
Net revenue increased 11.7% to $350.3 million in the first nine months of
fiscal 2000 from $313.6 million in the same period of fiscal 1999, an
increase of $36.7 million. Customer Care net revenue increased by $18.3
million or 9.0% over comparable fiscal 1999 levels. The increase in Customer
Care net revenue was due primarily to volume from new and existing clients
partially offset by the reduction in volumes from under performing contracts.
Customer Acquisition net revenue increased by $14.9 million or 13.3%. This
increase in Customer Acquisition net revenue was primarily due to rate
increases, new programs for existing clients, newly selected client programs
and a more favorable business mix. CustomerAssistance.com contributed $3.6
million of revenue.
Page 11
<PAGE>
Cost of services increased $13.5 million in the first nine months of fiscal
2000, or 5.3% to $268.1 million from $254.6 million in the first nine months
of fiscal 1999. This increase on 11.7% revenue growth was due to operational
improvements in both Customer Care and Customer Acquisition. Cost of services
for the first nine months of 1999 include the reversal of $4.9 million of
accrued telephone charges that had been recorded in the fourth quarter of
1998. Cost of services in 2000 includes $0.9 million of such credits recorded
in the third quarter as well as approximately $0.8 million of offsetting
additional recruiting and training costs incurred in the third quarter for
anticipated fourth quarter revenue increases. Customer Acquisition gross
profit margins improved to 27.3% in the first nine months of fiscal 2000 from
15.8% in the previous year on improved business mix, better capacity
utilization, increased productivity and a reduction in fixed costs which
resulted from the restructuring plans implemented in the first nine months of
fiscal 1999 that reduced the number of workstations and corresponding excess
capacity. Customer Care also contributed with an increase in gross profit to
22.4% in fiscal 2000 from 20.5% in the first nine months of fiscal 1999. This
increase resulted from improved workforce management efforts.
Selling, general and administrative expenses increased to $54.4 million in
the first nine months of fiscal 2000 from $36.0 million in fiscal 1999, an
increase of $18.4 million or 51.2%. As a percent of net revenue, selling,
general and administrative expenses increased to 15.6% in fiscal 2000 from
11.5% in fiscal 1999. This increase was primarily due to additional costs in
the areas of people, adding marketing, sales and senior management personnel,
and non-recurring costs related to the development of a new technology
platform, ePAC-SM-, the development of new product service offerings related
to CustomerAssistance.com ("CA.com") and Aligned Customer Relations Solutions
("ACRS"), management and infrastructure required for CustomerAssistance.com,
and the new headquarters facilities and associated personnel relocation.
During the first nine months of fiscal 1999, the Company recorded restructuring
charges of $7.6 million in connection with the closure of 21 Customer
Acquisition Interaction Centers and reductions in the salaried workforce. The
facility closure 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 Company generated operating income of $27.7 million in the first nine months
of fiscal 2000 compared to $15.4 million for fiscal 1999. For the Customer Care
business unit, operating income for the first nine months of 2000 was $17.4
million, or 7.9% of net revenue, compared to operating income of $20.4 million,
or 10.1% of net revenue, for the same period in the prior year, as the 39.2%
increase in gross profit dollars in 2000 resulting from higher gross profit
margins were offset by the allocation of higher selling, general and
administrative expenses, primarily due to development costs, as previously
discussed. The Customer Acquisition business unit generated operating income of
$16.6 million in the first nine months of fiscal 2000, compared to $2.6 million
before restructuring charges, for the same period in fiscal 1999. The positive
operating performance of the Customer Acquisition business unit in fiscal 2000
was primarily due to increased net revenue and the significant improvement in
gross margins related to the successful implementation of the restructuring
plans initiated in fiscal 1999 to reduce excess capacity and improve operating
performance.
Net interest expense for the first nine months of fiscal 2000 decreased by $2.8
million compared to the same period in fiscal 1999. This decrease reflects the
reduction in term debt during the twelve months ended October 1, 2000, and
positive results from the Company's working capital management efforts that have
contributed to increased cash balances and, interest income related to short
term investments.
The Company's effective income tax rate is 40.0 % at the end of the first nine
months of fiscal 2000, compared to 43.4% for the first nine months of fiscal
1999.
Page 12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth consolidated statements of cash flow data for the
Company for the thirty-nine week periods ended October 1, 2000, and October 3,
1999 respectively.
<TABLE>
<CAPTION>
2000 1999
------------- -------------
(In millions)
<S> <C> <C>
Net cash provided by operating activities $28,424 $14,953
Net cash provided (used) by investing activities 8,437 (5,583)
Net cash used by financing activities (17,314) (12,663)
------------- -------------
Net increase (decrease) in cash $19,547 $(3,293)
============= =============
</TABLE>
Cash provided by operations during the first three quarters of fiscal 2000
totaled $28.4 million, an increase of $13.5 million from the comparable period
in fiscal 1999. This increase resulted primarily from significantly improved
operating results, a decrease in accounts receivable in 2000, and changes in
other working capital accounts. The Company spent $8.6 million and $5.6 million,
net of disposals and retirements during the first three quarters of fiscal 2000
and 1999, respectively, for capital expenditures, primarily information
technology in fiscal 2000, and construction of additional customer interaction
center capacity for Customer Care clients and to upgrade equipment in existing
centers in 1999. These capital expenditures were funded with cash provided by
operations. In conjunction with the move to the new headquarters facility in
Deerfield, the Company has spent approximately $5 million for furniture,
renovations and technology equipment in the first nine months of fiscal 2000. On
March 28, 2000 the Company sold an aggregate of 695,652 common shares held in
treasury to a member of the Board of Directors, for $5,000,000 in cash, or
$7.1875 per share.
At January 2, 2000, the Company had a $75.0 million Revolving Credit Facility
("Revolving Facility") available for general working capital purposes and
capital expenditures. On January 20, 2000, the Company amended the Credit
Facility, reducing the Revolving Facility to $50.0 million. As of October 1,
2000, there were no borrowings outstanding under the Revolving Facility for the
first nine months of 2000. The Company made $23.0 million of repayments on its
term loan during the first nine months of fiscal 2000, $11 million of which was
made as a result of the sale of Paragren, resulting in a balance outstanding at
October 1, 2000, of $107 million. $4.0 million in scheduled principal payments
will be made in the last quarter of fiscal 2000.
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 to fund any planned capital expenditures during fiscal year 2000.
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
Page 13
<PAGE>
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; ability to predict the
potential volume or profitability of any future technology or consulting sales;
changes in competitive conditions affecting the Company's industry as a result
of new entrants into the customer care market causing increased price
competition or loss of clients; 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; lower than anticipated customer
interaction center capacity utilization; variations in the performance of the
Company's automated systems and other technological factors; higher than
anticipated startup costs associated with new business opportunities; 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 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 2, 2000.
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 not have a
material impact on earnings during the remainder of fiscal 2000, and would not
materially affect the fair value of the Company's financial instruments.
Page 14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LITIGATION
On January 5, 2000, APAC, Inc. filed suit against the Company in the
U.S. District Court for the Northern District of Georgia (Atlanta Division)
alleging that the Company's use of "APAC" in the Company's name infringes a
trademark of APAC, Inc. The suit asserts violations of the federal Lanham Act
and various Georgia state statues, as well as a breach by the Company of an
agreement between APAC, Inc. and the Company. On October 19, 2000, the Court
entered an order denying Plaintiff's motion for a preliminary injunction,
finding that plaintiff had not shown a significant likelihood of success on the
merits of its trademark infringement or breach of contract claims to warrant the
entry of a preliminary injunction. Discovery is in process and will be completed
shortly. The Company intends to defend itself vigorously.
Additionally, the Company is subject to occasional lawsuits,
governmental investigations and claims arising out of the normal conduct of its
business. Management does not believe the outcome of any pending claims will
have a materially adverse impact on the Company's consolidated financial
position. For additional information refer to Item 3 (Legal Proceedings),
included in the Company's Annual Report on Form 10K for the year ended January
2, 2000 and Item 1. (Litigation) in the Form 10Q for the periods ended April 2,
2000, and July 2, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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:
<TABLE>
<CAPTION>
Exhibit
Number Description
------------------- -------------------------------------------------
<S> <C>
10.1 Management Incentive Plan
27.1 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K. None.
Page 15
<PAGE>
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 15, 2000 By: /s/ Gary S. Holter
------------------------------------
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 15, 2000 By: /s/ Kenneth R. Batko
------------------------------------
Vice President and Controller
(Principal Accounting Officer)
Page 16
