<PAGE>
================================================================================
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 JULY 2, 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 49,671,372 shares outstanding as of August 11,
2000.
================================================================================
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of July 2, 2000, and
January 2, 2000. 3
Consolidated Condensed Statements of Operations for the Thirteen and
Twenty-Six Weeks Ended July 2, 2000, and July 4, 1999. 4
Consolidated Condensed Statements of Cash Flows for the Twenty-Six Weeks
Ended July 2, 2000, and July 4, 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 16
</TABLE>
Page 2
<PAGE>
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 2,
2000 JANUARY 2,
ASSETS (Unaudited) 2000
--------------------------------------------------------------------------- -------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 29,060 $ 18,876
Accounts receivable, net 77,377 72,031
Net assets of discontinued operations -- 10,028
Other current assets 14,697 14,346
-------- --------
Total current assets 121,134 115,281
PROPERTY AND EQUIPMENT 133,678 133,960
Less--accumulated depreciation 78,339 68,076
-------- --------
Property and equipment, net 55,339 65,884
GOODWILL AND OTHER INTANGIBLE ASSETS 61,009 61,009
Less--accumulated amortization 10,560 8,468
-------- --------
Goodwill and other intangible assets, net 50,449 52,541
OTHER ASSETS 7,086 2,774
-------- --------
Total assets $234,008 $236,480
======== ========
LIABILITIES AND
SHARE OWNERS' EQUITY
---------------------------------------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 16,483 $ 16,808
Accounts payable 5,862 7,588
Other current liabilities 42,080 38,928
-------- --------
Total current liabilities 64,425 63,324
LONG-TERM DEBT, LESS CURRENT MATURITIES 96,758 115,987
DEFERRED INCOME TAXES 2,649 2,623
OTHER LIABILITIES 7,254 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; 49,517,865 shares issued
at July 2, 2000; 49,079,617 shares issued at
January 2, 2000 495 491
Additional paid-in capital 99,122 94,945
Accumulated deficit (33,493) (41,163)
Less--treasury shares at cost; 913,348 and 1,609,000 shares at
July 2, 2000, and January 2, 2000, respectively (3,202) (5,651)
-------- --------
Total share owners' equity 62,922 48,622
-------- --------
Total liabilities and share owners' equity $234,008 $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 TWENTY-SIX (26)WEEKS ENDED
-------------------------- --------------------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET REVENUE: $118,594 $102,976 $236,958 $210,396
OPERATING EXPENSES:
Cost of services 88,611 81,327 179,633 171,775
Selling, general and administrative
expenses 20,729 12,129 39,409 24,049
Restructuring charges -- 3,986 -- 5,973
-------- -------- -------- --------
Total operating expenses 109,340 97,442 219,042 201,797
-------- -------- -------- --------
Operating income 9,254 5,534 17,916 8,599
INTEREST EXPENSE, NET 2,590 3,548 5,326 6,955
-------- -------- -------- --------
Income from continuing operations
before income taxes 6,664 1,986 12,590 1,644
PROVISION FOR INCOME TAXES 2,666 840 5,036 700
-------- -------- -------- --------
Income from continuing operations 3,998 1,146 7,554 944
DISCONTINUED OPERATIONS
Gain on Sale of Paragren Technologies,
Inc. less income tax provision of $77 -- -- 115 --
-------- -------- -------- --------
NET INCOME $ 3,998 $ 1,146 $ 7,669 $ 944
======== ======== ======== ========
INCOME PER SHARE:
Basic:
Continuing operations $ 0.08 $ 0.02 $ 0.16 $ 0.02
Discontinued operations 0.00 0.00 0.00 0.00
-------- -------- -------- --------
Net income $ 0.08 $ 0.02 $ 0.16 $ 0.02
======== ======== ======== ========
Diluted:
Continuing operations $ 0.08 $ 0.02 $ 0.15 $ 0.02
Discontinued operations 0.00 0.00 0.00 0.00
-------- -------- -------- --------
Net income $ 0.08 $ 0.02 $ 0.15 $ 0.02
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 48,352 48,851 48,018 48,939
Diluted 51,581 49,126 51,152 49,122
</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>
TWENTY-SIX (26) WEEKS ENDED
---------------------------
JULY 2, JULY 4,
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 7,669 $ 944
Depreciation and amortization 16,547 17,449
Deferred income taxes 215 1,910
Restructuring charges -- 5,973
Change in operating assets and liabilities (13,648) (8,409)
-------- --------
Net cash provided by continuing operations 10,783 17,867
Cash used by discontinued operations -- (3,362)
-------- --------
Net cash provided by operating activities 10,783 14,505
INVESTING ACTIVITIES:
Proceeds from sale of Paragren Technologies, Inc. 17,000 --
Purchases of property and equipment, net (3,692) (4,948)
-------- --------
Net cash provided (used) by investing activities 13,308 (4,948)
FINANCING ACTIVITIES:
Payments on long-term debt (19,554) (6,804)
Decrease in customer deposits (983) (6,107)
Sale of treasury shares 5,000 --
Stock and warrant transactions, including related
income tax benefits 1,630 357
-------- --------
Net cash used by financing activities (13,907) (12,554)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,184 (2,997)
BEGINNING CASH BALANCE 18,876 3,543
-------- --------
ENDING CASH BALANCE $ 29,060 $ 546
======== ========
</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 twenty-six week periods
ended July 2, 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 July 2, 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 $ 4,232 $24,684
Customer relationships 28,493 5,243 23,250
Assembled workforce 3,600 1,085 2,515
------- ------- -------
Total $61,009 $10,560 $50,449
======= ======= =======
</TABLE>
3. OTHER CURRENT LIABILITIES
The components of other current liabilities included in the consolidated
condensed balance sheets are as follows:
<TABLE>
<CAPTION>
JULY 2, JANUARY 2,
2000 2000
------- -------
(000's omitted)
<S> <C> <C>
Payroll and related items $23,680 $22,248
Accrued Relocation/Severance 5,486 998
Telecommunication costs 3,880 3,619
Accrued professional fees 2,617 977
Acquisition-related costs 436 1,145
Customer deposits 506 1,489
Restructuring charges 956 2,250
Other 4,519 6,202
------- -------
Total $42,080 $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 and second quarters of fiscal 1999, the Company recorded
restructuring charges of $2.0 million and $4.0 million, respectively. The
restructuring plans involved closing 16 Customer Acquisition Interaction Centers
and reducing the salaried workforce. The $2.0 million restructuring charge which
included $1.4 million for the write-down of property and equipment and $0.6
million for employee severance costs was fully utilized by the end of fiscal
1999. 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
and $1.0 million for lease termination costs.
During the first half of fiscal 2000, the Company utilized $1.3 million of
the $2.2 million restructuring accruals related to fiscal 1999 restructuring
charges recorded in the second and third quarters of fiscal 1999. The remaining
balance of $0.9 million at July 2, 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
The Company was previously engaged in two arbitration proceedings and one
lawsuit, all with the former owner of Paragren Technologies, Inc. In April 2000
all proceedings against such former owner were settled. The settlement did not
have a material impact on the Company's results of operations or consolidated
financial position.
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 half of fiscal 1999 of $2.7 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 half of fiscal 2000 as the loss provision
Page 7
<PAGE>
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS EXCEPT AS OTHERWISE INDICATED)
(UNAUDITED)
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.
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 twenty-six weeks ended
July 2, 2000, and July 4, 1999, is as follows:
<TABLE>
<CAPTION>
CUSTOMER CUSTOMER CUSTOMERASSISTANCE
PERIOD ENDED CARE ACQUISITION .COM COMBINED
--------------------------------------- -------- ----------- ------- --------
(In thousands)
<S> <C> <C> <C> <C>
TWENTY-SIX (26) WEEKS:
July 2, 2000
Net revenue $148,155 $ 87,095 $ 1,708 $236,958
Operating income (loss) 10,998 11,229 (4,311) 17,916
July 4, 1999*:
Net revenue $132,305 $ 78,091 -- $210,396
Operating income (loss) 12,794 (4,195) -- 8,599
Restructuring Charges -- 5,973 -- 5,973
THIRTEEN (13) WEEKS:
July 2, 2000
Net revenue $ 73,985 $ 43,572 $ 1,037 $118,594
Operating income (loss) 5,633 5,551 (1,930) 9,254
July 4, 1999*:
Net revenue $ 66,082 $ 36,894 -- $102,976
Operating income (loss) 6,887 (1,353) -- 5,534
Restructuring charge -- 3,986 -- 3,986
</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 is also developing 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, if required. As of July 2, 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 quarter 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 twenty-six week periods ended July 2, 2000, and July 4, 1999.
<TABLE>
<CAPTION>
THIRTEEN (13) WEEKS ENDED TWENTY-SIX (26) WEEKS ENDED
------------------------- ---------------------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999* 2000 1999*
----- ----- ----- -----
<S> <C> <C> <C> <C>
NET REVENUE:
Customer Care 62.4% 64.2% 62.5% 62.9%
Customer Acquisition 36.7 35.8 36.8 37.1
CustomerAssistance.com .9 -- .7 --
----- ----- ----- -----
Total net revenue 100.0 100.0 100.0 100.0
OPERATING EXPENSES:
Cost of services 74.7 79.0 75.8 81.7
Selling, general and administrative
expenses 17.5 11.8 16.6 11.4
Restructuring charges -- 3.9 -- 2.8
----- ----- ----- -----
Total operating expenses 92.2 94.7 92.4 95.9
Operating income 7.8 5.3 7.6 4.1
INTEREST EXPENSE, NET 2.2 3.4 2.3 3.3
----- ----- ----- -----
Income from continuing operations
before income taxes 5.6 1.9 5.3 0.8
PROVISION FOR INCOME TAXES 2.2 .8 2.1 0.3
----- ----- ----- -----
Income from continuing operations 3.4 1.1 3.2 0.5
GAIN ON SALE OF PARAGREN TECHNOLOGIES,
INC., NET -- -- -- --
----- ----- ----- -----
NET INCOME 3.4% 1.1% 3.2% 0.5%
===== ===== ===== =====
</TABLE>
*Restated to conform to current year presentation.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED JULY 2, 2000
AND JULY 4, 1999
Net revenue increased 15.2% to $118.6 million in the second quarter of fiscal
2000 from $103.0 million in the same period of fiscal 1999, an increase of
$15.6 million. Customer Care net revenue increased by $7.9 million or 12.0%
over comparable fiscal 1999 levels. The increase in Customer Care net revenue
was due primarily to volume from new and existing clients. Customer
Acquisition net revenue increased by $6.7 million or 18.1%. This increase in
Customer Acquisition net revenue was primarily due to higher call volume from
existing clients. CustomerAssistance.com contributed $1.0 million of revenue.
Cost of services increased $7.3 million in the second quarter of fiscal 2000,
or 9.0% to $88.6 million from $81.3 million in the second quarter of fiscal
1999. Second quarter 1999 cost of services included the reversal of $3.7
million of accrued telephone charges which had been recorded in the fourth
quarter of 1998. Excluding this reversal cost of services would have
increased only $3.6 million or 4.4%. This modest increase on a 15.2% revenue
growth was due to operational improvements in both Customer Care and Customer
Acquisition. Customer Acquisition gross profit margins improved to 28.6% in
the second quarter of fiscal 2000 from 21.4% 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
Page 10
<PAGE>
capacity. Customer Care also contributed with an increase in gross profit to
24.6% in fiscal 2000 from 20.8% in the second quarter of fiscal 1999. This
increase resulted from improved workforce management efforts.
Selling, general and administrative expenses increased to $20.7 million in the
second quarter of fiscal 2000 from $12.1 million in fiscal 1999, an increase of
$8.6 million or 70.9%. As a percent of net revenue, selling, general and
administrative expenses increased to 17.5% in fiscal 2000 from 11.8% 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, 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 second quarter of fiscal 1999, the Company recorded a restructuring
charge of $4.0 million in connection with the closure of 9 Customer Acquisition
Interaction Centers and reductions in the salaried workforce. The facility
closure charge included $2.7 million for the write-down of property and
equipment, $0.3 million for employee severance costs and $1.0 million for lease
termination costs.
The Company generated operating income of $9.3 million in the second quarter of
fiscal 2000 compared to $5.5 million for fiscal 1999. For the Customer Care
business unit, operating income for the second quarter of 2000 was $5.6 million,
or 7.6% of net revenue, compared to operating income of $6.9 million, or 10.4%
of net revenue, for the same period in the prior year as the 32.2% increase in
gross profit dollars in 2000 resulting from higher revenues and 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
$5.6 million in the second quarter 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 second quarter of fiscal 2000 decreased by $1.0
million compared to the same period in fiscal 1999. This decrease reflects the
reduction in term debt from the end of the second quarter of fiscal 1999 to July
2, 2000 and positive results from the Company's working capital management
efforts that have contributed to increased cash balances.
The Company's effective income tax rate is 40.0 % for the second quarter of
fiscal 2000, virtually unchanged from the prior year period.
COMPARISON OF RESULTS OF OPERATIONS FOR THE TWENTY-SIX WEEKS ENDED JULY 2, 2000
AND JULY 4, 1999
Net revenue increased 12.6% to $237.0 million in the first half of fiscal
2000 from $210.4 million in the same period of fiscal 1999, an increase of
$26.6 million. Customer Care net revenue increased by $15.9 million or 12.0%
over comparable fiscal 1999 levels. The increase in Customer Care net revenue
was due primarily to volume from new and existing clients. Customer
Acquisition net revenue increased by $9.0 million or 11.5%. This increase in
Customer Acquisition net revenue was primarily due to rate increases for
existing clients and a more favorable business mix. CustomerAssistance.com
contributed $1.7 million of revenue.
Cost of services increased $7.8 million in the first half of fiscal 2000, or
4.6% to $179.6 million from $171.8 million in the first half of fiscal 1999. The
cost of services for the first half of 1999 included the reversal in the second
quarter of $3.7 million of accrued telephone charges which had been recorded in
the fourth quarter of 1998. Excluding this reversal cost of services would have
increased $4.1 million or 2.4%. This modest increase on 12.6%
Page 11
<PAGE>
revenue growth was due to operational improvements in both Customer Care and
Customer Acquisition. Customer Acquisition gross profit margins improved to
27.8% in the first half of fiscal 2000 from 15.2% 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 half of fiscal 1999 that reduced the number of workstations and
corresponding excess capacity. Customer Care also contributed with an increase
in gross profit to 23.2% in fiscal 2000 from 20.2% in the first half of fiscal
1999. This increase resulted from improved workforce management efforts.
Selling, general and administrative expenses increased to $39.4 million in the
first half of fiscal 2000 from $24.0 million in fiscal 1999, an increase of
$15.4 million or 63.9%. As a percent of net revenue, selling, general and
administrative expenses increased to 16.6% in fiscal 2000 from 11.4% 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,
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 half of fiscal 1999, the Company recorded restructuring charges
of $6.0 million in connection with the closure of 16 Customer Acquisition
Interaction Centers and reductions in the salaried workforce. The facility
closure charge included $4.1 million for the write-down of property and
equipment, $0.9 million for employee severance costs and $1.0 million for lease
termination costs.
The Company generated operating income of $17.9 million in the first half of
fiscal 2000 compared to $8.6 million for fiscal 1999. For the Customer Care
business unit, operating income for the first half of 2000 was $11.0 million, or
7.4% of net revenue, compared to operating income of $12.8 million, or 9.7% of
net revenue, for the same period in the prior year, as the 27.7% 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 $11.2 million in the
first half of fiscal 2000, compared to $1.8 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 half of fiscal 2000 decreased by $1.6 million
compared to the same period in fiscal 1999. This decrease reflects the reduction
in term debt during the twelve months ended July 2, 2000 and positive results
from the Company's working capital management efforts that have contributed to
increased cash balances.
The Company's effective income tax rate is 40.0 % at the end of the first half
of fiscal 2000, virtually unchanged from the first half 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 twenty-six week periods ended July 2, 2000, and July 4, 1999
respectively.
<TABLE>
<CAPTION>
2000 1999
-------- --------
(In millions)
<S> <C> <C>
Net cash provided by operating activities $ 10,783 $ 14,505
Net cash provided (used) by investing activities 13,308 (4,948)
Net cash used by financing activities (13,907) (12,554)
-------- --------
Net increase (decrease) in cash $ 10,184 $ (2,997)
======== ========
</TABLE>
Cash provided by operations during the first half of fiscal 2000 totaled $10.8
million, a decrease of $3.7 MILLION from the comparable period in fiscal 1999.
This decrease resulted primarily from an increase in accounts receivable in
2000, due to timing of collections of certain accounts, and changes in other
working capital accounts. The Company spent $3.7 million and $4.9 million, net
of disposals and retirements during the first half of fiscal 2000 and 1999,
respectively, for capital expenditures, primarily information technology in
fiscal 2000, and construction of additional call 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
committed to spend approximately $5 million for furniture, renovations and
technology equipment of which $1.8 million was incurred in the first half of
fiscal 2000. On March 28, 2000 the Company sold an aggregate of 695,652 common
shares held in treasury to Clark E. McLeod, 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. Availability of up
to $10.0 million of the $50.0 million total was restricted subject to the
attainment of trailing four quarters EBITDA of at least $60.0 million. In May,
2000 this restriction was eliminated based on this covenant being met by the
Company at the end of the first quarter. As of July 2, 2000, there have been no
borrowings outstanding under the Revolving Facility for the first half of 2000.
The Company made $19.0 million of repayments on its term loan during the first
half of fiscal 2000, $11 million of which was made as a result of the sale of
Paragren, resulting in a balance outstanding at July 2, 2000, of $111.0 million.
$8.0 million in scheduled principal payments will be made over the last half 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 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
Page 13
<PAGE>
publicly update or revise any forward-looking statements in connection with new
information or future events or otherwise. Factors that could cause future
results to differ materially from historical results or those anticipated
include, but are not limited to, reliance by the Company on a small number of
principal clients for a substantial proportion of its total revenue; possible
changes in or events affecting the businesses of the Company's clients,
including changes in customers' interest in, and use of, clients' products and
services; fluctuations in quarterly results of operations due to the timing of
clients' initiation and termination of large programs; 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
The Company was previously engaged in two arbitration proceedings and one
lawsuit, all with the former owner of Paragren Technologies, Inc. In April 2000
all proceedings against such former owner were settled. The settlement did not
have a material impact on the Company's results of operations or consolidated
financial position.
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 period ended April 2, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of the Share Holders of the Company was held on
June 9, 2000.
(b) Not applicable
(c) 1. Set forth below is the tabulation of the votes for each nominee
for election as a director of the Company
<TABLE>
<CAPTION>
Withhold Authority
For (Including Broker Non-vote)
--- ---------------------------
<S> <C> <C>
Thomas M. Collins 45,327,130 127,966
George D. Dalton 45,334,631 120,465
Peter M. Leger 45,348,450 106,646
Clark E. McLeod 45,352,256 102,840
Theodore G. Schwartz 45,342,853 112,243
Marc S. Simon 45,328,784 126,312
Paul G. Yovovich 45,349,031 106,065
</TABLE>
2. Set forth below is the tabulation of the votes for the
proposal to approve an amendment to increase the maximum
number of shares that may be subject to options granted to any
one participant in any calendar year under the Incentive Stock
Plan.
<TABLE>
<S> <C>
For 44,649,182
Against 752,219
Withhold Authority (Including Broker non-vote) 53,695
</TABLE>
Page 15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following documents are furnished as exhibits and numbered
pursuant to Item 601of Regulation S-K:
<TABLE>
<CAPTION>
Exhibit
Number Description
------------ -----------------------------------------------------------------
<S> <C>
10.1 Second Amended and Restated 1995 Incentive Stock Plan
10.2 First Amendment to the Second Amended and Restated 1995 Incentive
Stock Plan
10.3 Form of Employment Security Agreement between the Company and its
Senior Management Team
10.4 Employment Agreement with Marc Simon dated June 1, 2000
27.1 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K. None.
Page 16
<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: August 16, 2000 By: /s/ Gary S. Holter
------------------------------------
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 16, 2000 By: /s/ Kenneth R. Batko
------------------------------------
Vice President and Controller
(Principal Accounting Officer)
Page 17
