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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

 

For the quarterly period ended March 28, 2004

 

 

 

or

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

 

For the Transition Period From                   to               

 

Commission file number 0-26786

 

APAC Customer Services, Inc.

(Exact name of registrant as specified in its charter)

 

Illinois

 

36-2777140

(State or other jurisdiction
of incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

Six Parkway North Center, Suite 400, Deerfield, Illinois 60015

(Address of Principal Executive Offices, Zip Code)

 

 

 

Registrant’s telephone number, including area code:   (847) 374-4980

 

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 ý            No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act).

 

Yes ý            No o

 

There were 49,453,092 common shares, $0.01 par value per share, outstanding as of May 5, 2004.

 

 



 

Index

 

Part I.  Financial Information

3

 

 

Item 1.  Financial Statements (Unaudited):

3

 

 

 

Consolidated Condensed Balance Sheets as of March 28, 2004, and December 28, 2003.

3

 

 

 

 

Consolidated Condensed Statements of Operations for the Thirteen Weeks Ended March 28, 2004, and March 30, 2003.

4

 

 

 

 

Consolidated Condensed Statements of Cash Flows for the Thirteen Weeks Ended March 28, 2004, and March 30, 2003.

5

 

 

 

 

Notes to Consolidated Condensed Financial Statements

6

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

10

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

14

 

 

Item 4.  Controls and Procedures

15

 

 

Part II.  Other Information

16

 

 

Item 1.  Legal Proceedings

16

 

 

Item 6.  Exhibits and Reports on Form 8-K

16

 

2



 

Part I. Financial Information

 

Item 1. Financial Statements

 

APAC Customer Services, Inc. and Subsidiaries

Consolidated Condensed Balance Sheets

(Unaudited)

(In thousands)

 

 

 

March 28,
2004

 

December 28,
2003

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

6,790

 

$

11,428

 

Accounts receivable, net

 

45,377

 

46,896

 

Other current assets

 

10,643

 

9,218

 

Total current assets

 

62,810

 

67,542

 

 

 

 

 

 

 

Property and equipment, net

 

22,469

 

24,147

 

 

 

 

 

 

 

Goodwill

 

23,876

 

23,876

 

 

 

 

 

 

 

Other intangible assets, net

 

14,448

 

15,035

 

 

 

 

 

 

 

Deferred taxes

 

3,122

 

3,072

 

Other assets

 

813

 

921

 

Total assets

 

$

127,538

 

$

134,593

 

 

 

 

 

 

 

Liabilities and
Shareholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of long-term debt

 

$

397

 

$

389

 

Accounts payable

 

2,685

 

4,046

 

Accrued payroll and related items

 

17,010

 

18,367

 

Income taxes payable

 

16,082

 

17,952

 

Other accrued liabilities

 

10,362

 

11,107

 

Total current liabilities

 

46,536

 

51,861

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

211

 

313

 

 

 

 

 

 

 

Other liabilities

 

1,750

 

1,689

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Common shares, $0.01 par value; 200,000,000  shares authorized; 49,695,699 shares issued at March 28, 2004, and December 28, 2003

 

497

 

497

 

Additional paid-in capital

 

99,591

 

99,620

 

Accumulated deficit

 

(20,066

)

(18,413

)

Accumulated other comprehensive income

 

(129

)

(82

)

Treasury shares: 242,607 and 254,107 shares, respectively, at cost

 

(852

)

(892

)

Total shareholders’ equity

 

79,041

 

80,730

 

Total liabilities and shareholders’ equity

 

$

127,538

 

$

134,593

 

 

See notes to consolidated condensed financial statements

 

3



 

APAC Customer Services, Inc. and Subsidiaries

Consolidated Condensed Statements of Operations

(Unaudited)

(In thousands, except per share data)

 

 

 

Thirteen Weeks Ended

 

 

 

March 28,
2004

 

March 30,
2003

 

 

 

 

 

 

 

Net revenue

 

$

71,404

 

$

86,197

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

60,130

 

69,428

 

Selling, general and administrative expenses

 

10,819

 

12,996

 

Restructuring and other charges

 

851

 

 

Asset impairment charges

 

2,110

 

 

 

Total operating expenses

 

73,910

 

82,424

 

Operating income (loss)

 

(2,506

)

3,773

 

 

 

 

 

 

 

Interest expense, net

 

160

 

353

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(2,666

)

3,420

 

Provision (benefit) for income taxes

 

(1,013

)

1,300

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,653

)

$

2,120

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

Basic

 

$

(0.03

)

$

0.04

 

Diluted

 

$

(0.03

)

$

0.04

 

 

 

 

 

 

 

Weighted average number of shares outstanding:

 

 

 

 

 

Basic

 

49,447

 

49,422

 

Diluted

 

49,498

 

49,444

 

 

See notes to consolidated condensed financial statements.

 

4



 

APAC Customer Services, Inc. and Subsidiaries

Consolidated Condensed Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Thirteen Weeks Ended

 

 

 

March 28,
2004

 

March 30,
2003

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,653

)

$

2,120

 

Depreciation and amortization

 

2,720

 

3,131

 

Non-cash restructuring charges

 

47

 

 

Asset impairment charges

 

2,110

 

 

Deferred income taxes

 

(78

)

(80

)

Change in operating assets and liabilities

 

(5,156

)

(3,541

)

Net cash provided (used) by operating activities

 

(2,010

)

1,630

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment, net

 

(2,545

)

(2,564

)

Net cash used by investing activities

 

(2,545

)

(2,564

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Payments on long-term debt

 

(94

)

(160

)

Repayments under revolving credit facility, net

 

 

(1,500

)

Stock and warrant transactions

 

11

 

34

 

Net cash used by financing activities

 

(83

)

(1,626

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(4,638

)

(2,560

)

 

 

 

 

 

 

Beginning cash balance

 

11,428

 

14,530

 

 

 

 

 

 

 

Ending cash balance

 

$

6,790

 

$

11,970

 

 

See notes to consolidated condensed financial statements

 

5



 

APAC Customer Services, Inc. and Subsidiaries

Notes to Consolidated Condensed Financial Statements

(Unaudited)

(Dollars in thousands, except as otherwise indicated)

 

1.   Basis of Presentation

 

The accompanying unaudited consolidated condensed financial statements of APAC Customer Services, Inc. and its subsidiaries (collectively, the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the thirteen week period ended March 28, 2004, are not necessarily indicative of the results that may be expected for the fiscal year ending January 2, 2005.  The balance sheet at December 28, 2003, 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 December 28, 2003.

 

2.   Other Current Liabilities

 

The components of other accrued liabilities included in the consolidated condensed balance sheets are as follows:

 

 

 

March 28,
2004

 

December 28,
2003

 

 

 

 

 

 

 

Accrued workers compensation insurance

 

$

3,097

 

$

3,097

 

Restructuring charges

 

2,145

 

2,706

 

Accrued professional fees

 

914

 

795

 

Accrued relocation

 

600

 

607

 

Accrued telecommunications

 

639

 

573

 

Other

 

2,967

 

3,329

 

Total

 

$

10,362

 

$

11,107

 

 

3.   Intangible Assets

 

 The identifiable intangible assets of the Company represent acquired customer relationships with a gross carrying value of $28,493 and accumulated amortization of $14,045 and $11,698 as of March 28, 2004, and March 30, 2003, respectively.  Under the provisions of SFAS No. 142, identifiable intangible assets with finite lives are amortized.  The customer relationship intangible assets have been amortized on a straight-line basis over the expected period of benefit of 12 years. Total amortization of intangible assets as of March 28, 2004 and March 30, 2003, was $587 per quarter, respectively. Annual amortization expense is expected to be $2.3 million for fiscal 2004 through 2009 and $1.0 million in fiscal 2010.

 

6



 

4.   Accounting for Stock-Based Compensation

 

For stock-based employee compensation plans, the Company has elected to use the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”).  In accordance with APB No. 25, no compensation expense is recognized for stock options issued to employees when the option price equals or exceeds the fair market value of the Company’s common shares at the date of grant.  Stock-based compensation expense for non-employees is recognized in accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation” (“SFAS No. 123”).

 

The following table illustrates the effect on net income and earnings per share if the Company had adopted the fair value recognition provisions of SFAS No. 123.

 

 

 

Thirteen Weeks Ended

 

 

 

March 28,
2004

 

March 30,
2003

 

 

 

 

 

 

 

Net income (loss) as reported

 

$

(1,653

)

$

2,120

 

Less–compensation expense on stock options, net of income tax benefit

 

(420

)

(972

)

Net income (loss) pro forma

 

$

(2,073

)

$

1,148

 

Earnings (loss) per share – basic

 

 

 

 

 

As reported

 

$

(0.03

)

$

0.04

 

Pro forma

 

$

(0.04

)

$

0.02

 

Earnings (loss) per share – diluted

 

 

 

 

 

As reported

 

$

(0.03

)

$

0.04

 

Pro forma

 

$

(0.04

)

$

0.02

 

 

In order to calculate the pro forma information set forth above, the fair value of each option is estimated on the date of grant based on the Black-Scholes option-pricing model.   Assumptions include no dividend yield, risk-free interest rates ranging from 4% to 7%, expected volatility ranging between 50% and 90%, and an expected life ranging from 7 years to 10 years.

 

5.   Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)

 

Comprehensive income (loss) is as follows:

 

 

 

Thirteen Weeks Ended

 

 

 

March 28,
2004

 

March 30,
2003

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,653

)

$

2,120

 

Foreign currency translation (loss)

 

(47

)

 

Total comprehensive income (loss)

 

$

(1,700

)

$

2,120

 

 

7



 

The foreign currency translation loss in the first quarter of fiscal 2004 relates to the impact of a change in exchange rates on net assets located outside of the United States.

 

6.   Legal Proceedings

 

In December of 2000 the Company entered into a contract with Apogee Enterprises, Inc. to provide call center services and to develop software applications supporting those services for its Harmon Glass Solutions division (“Harmon”).  Apogee sold Harmon to the Dwyer Group in 2004.  The Company’s revenues under this contract in fiscal 2003 and the first quarter of fiscal 2004 were $5.1 million and $1.1 million, respectively.  Disputes and claims under this contract are the subject of an arbitration proceeding filed on April 8, 2004, with the American Arbitration Association. Harmon has alleged that the Company breached its obligations under the contract thereby damaging Harmon’s business. The Company contends that it has performed its obligations under the contract, and claims that Harmon has breached the contract and owes the Company damages and a termination fee as provided for in the contract.  The Company intends to vigorously assert its claims and defenses.  However, given the preliminary nature of this matter and the uncertainties inherent in any litigation, it is not possible to predict the outcome of this proceeding and there can be no assurance that the Company will be successful or that an adverse outcome would not be material.

 

In addition, 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 such pending claims will have a material adverse impact on the Company’s consolidated financial position, annual results of operations or liquidity.  Although the Company does not believe that any of these proceedings will result in a material adverse effect, no assurance to that effect can be given.

 

7.   Long Term Debt

 

On December 20, 2002, the Company entered into an Amended and Restated Credit Agreement (“Credit Agreement”) replacing the previous Amended and Restated Credit Facility.  Under the terms of the Credit Agreement, the Company has a revolving credit facility, which expires in December 2005.  The facility initially provided $65.0 million of credit availability.  Beginning on March 31, 2003, the facility is being reduced by $1.25 million of availability each quarter until the facility reaches $55.0 million at December 31, 2004.  Availability is also reduced by outstanding borrowings and any outstanding letters of credit.  As of March 28, 2004, there were no outstanding borrowings under the facility and approximately $3.0 million was utilized through the issuance of standby letters of credit primarily to support self-insurance reserves.  Net availability as of March 28, 2004, under the Credit Agreement was $57.0 million.

 

The Credit Agreement is secured principally by a grant of a security interest in all personal property and fixtures of the Company.  Under the terms of the Credit Agreement, the Company is also required to maintain certain financial covenants which limit the Company’s ability to incur additional indebtedness, repurchase outstanding common shares, create liens, acquire, sell or dispose of certain assets, engage in certain mergers and acquisitions and make certain restricted payments.

 

Borrowings under the Credit Agreement incur a floating interest rate usually based on the LIBOR index rate, although the Company has the option of using an alternate base rate defined in the agreement.  In addition, the Company pays a commitment fee on the unused portion of the revolving facility as well as quarterly fees on the outstanding letters of credit.

 

8



 

8.   Restructuring and Other Charges/Asset Impairment Charges

 

The Company recorded $0.9 million of restructuring charges in the first quarter of fiscal 2004 related to the closure of one Customer Interaction Center and the elimination of certain administrative and support positions. These charges included severance costs of $0.8 million resulting from the elimination of 22 administrative and support positions, and $0.1 million for the write down of property and lease termination and other costs. Cash charges totaling $0.2 million relating to the restructuring have been paid through March 28, 2004. The remaining $0.6 million of cash charges, primarily related to severance costs, is payable over the next two years.  The Company also recorded $2.1 million of asset impairment charges relating to the write-off of unutilized software assets.

 

Following is a summary of the fiscal 2004 year-to-date activity in the reserves established in connection with the Company’s restructuring initiatives:

 

 

 

Balance
12/28/03

 

2004
Charges

 

Asset
Write-down

 

Cash
Payments

 

Balance
3/28/04

 

 

 

 

 

 

 

 

 

 

 

 

 

2002

 

 

 

 

 

 

 

 

 

 

 

Employee severance costs

 

$

112

 

$

(43

)

$

 

$

(36

)

$

33

 

Lease obligations and other

 

1,261

 

(26

)

 

(246

)

989

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

 

 

 

 

 

 

 

 

 

 

Employee severance costs

 

1,295

 

29

 

 

(587

)

737

 

Write down of property and equipment

 

48

 

35

 

(72

)

 

11

 

Lease obligations and other

 

337

 

 

 

(87

)

250

 

 

 

 

 

 

 

 

 

 

 

 

 

2004

 

 

 

 

 

 

 

 

 

 

 

Employee severance costs

 

 

807

 

 

(195

)

612

 

Write down of property and equipment

 

 

12

 

(12

)

 

 

Lease obligations and other

 

 

37

 

 

(34

)

3

 

Total

 

$

3,053

 

$

851

 

(84

)

$

(1,185

)

$

2,635

 

 

9.   Income Taxes

 

The Company accounts for income taxes using the asset and liability approach.  Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Valuation allowances are recorded when management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized in the future.  The Company records a reserve for tax contingencies until management believes it is probable that the deductions giving rise to these contingencies will not be successfully challenged.

 

The Company’s effective income tax rate is 38.0% for the three months ended March 28, 2004 and March 30, 2003.

 

9



 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The Company is a leading provider of customer interaction solutions for market leaders in the communications, financial services, insurance, health care, logistics and travel and hospitality industries. To help its clients better manage their customer relationships, APAC Customer Services develops and delivers customer care and customer acquisition programs. The Company operates and manages approximately 7,000 workstations in 27 Customer Interaction Centers. The Customer Interaction Centers are managed centrally through the application of telecommunications and computer technology to promote the consistent delivery of quality service.  The Company consists of a single operating segment that offers customer interaction solutions to its clients.

 

The following discussion of the Company’s results of operations and liquidity and capital resources should be read in conjunction with the Consolidated Condensed Financial Statements of the Company and related notes thereto appearing elsewhere in this report.

 

Results of Operations

 

The following table sets forth the Consolidated Condensed Statements of Operations data as a percent of net revenue from services provided by the Company for the quarters ended March 28, 2004, and March 30, 2003, respectively.

 

 

 

Thirteen Weeks Ended

 

 

 

March 28,
2004

 

March 30,
2003

 

 

 

 

 

 

 

Net revenues

 

100.0

%

100.0

%

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Cost of services

 

84.2

 

80.5

 

Selling, general and administrative expenses

 

15.2

 

15.1

 

Restructuring and other charges

 

1.2

 

 

Asset impairment charges

 

2.9

 

 

Total operating expenses

 

103.5

 

95.6

 

Operating income (loss)

 

(3.5

)

4.4

 

 

 

 

 

 

 

Interest expense, net

 

.2

 

.4

 

Income (loss) before income taxes

 

(3.7

)

4.0

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

(1.4

)

1.5

 

Net income (loss)

 

(2.3

)%

2.5

%

 

10



 

Comparison of Results of Operations for the thirteen weeks ended March 28, 2004, and March 30, 2003

 

Net revenue decreased 17.2% to $71.4 million in the first quarter of fiscal 2004 from $86.2 million in the same period of fiscal 2003, a decrease of $14.8 million. The revenue decline from the first quarter of fiscal 2003 was attributable to the decision by Comcast, a major client of the Company, to bring in-house certain marketing programs, reduced consumer acquisition volumes related to the impact of the rollout of the national Do Not Call (“DNC”) registry on October 1, 2003, and softness in the credit card acquisition and mortgage servicing business.

 

Cost of services decreased $9.3 million in the first quarter of fiscal 2004, or 13.4%, to $60.1 million from $69.4 million in the same period of fiscal 2003. Approximately 70% of the decrease in cost of services resulted from lower direct costs associated with the decline in revenue, while the remaining reduction related to cutbacks in overhead spending, including savings associated with center closings, partially offset by higher wages. As a percent of revenue, cost of services increased to 84.2% in the first quarter of fiscal 2004 from 80.5% in the first quarter of fiscal 2003 principally due to the effect of lower capacity utilization, higher labor costs and softening prices in certain client programs.

 

Selling, general and administrative expenses decreased to $10.8 million in the first quarter of fiscal 2004 from $13.0 million in the same period of fiscal 2003, a decrease of $2.2 million or 16.8%. Expenses declined from the prior year primarily due to lower salary expenses resulting from headcount reductions and reduced overhead spending. As a percent of net revenue, selling, general and administrative expenses were 15.2% in first quarter of fiscal 2004 versus 15.1% in the same period of fiscal 2003.

 

The Company recorded $0.9 million of restructuring charges in the first quarter of fiscal 2004 related to the closure of one Customer Interaction Center and the elimination of certain administrative and support positions. These charges included severance costs of $0.8 million resulting from the elimination of 22 administrative and support positions, and $0.1 million for the write down of property and lease termination and other costs. Cash charges totaling $0.2 million relating to the restructuring have been paid through March 28, 2004. The remaining $0.6 million of cash charges, primarily related to severance costs, is payable over the next two years.  The Company also recorded $2.1 million of asset impairment charges relating to the write-off of unutilized software assets.

 

The Company generated a net loss of $1.7 million in the first quarter of fiscal 2004 compared to $2.1 million of net income for the same period of fiscal 2003. The decrease is primarily due to the lower gross profit margins, and $3.0 million of restructuring, and asset impairment charges in the first quarter of fiscal 2004, partially offset by a reduction of selling, general and administrative expenses, as previously discussed.

 

Net interest expense for the first quarter of fiscal 2004 decreased $0.2 million from the same period of fiscal 2003. This decrease reflects the pay down of substantially all debt in fiscal 2003.

 

The Company’s effective income tax rate was 38.0% for the thirteen weeks ended March 28, 2004 and March 30, 2003.

 

Critical Accounting Policies and Estimates

 

The preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company believes its estimates and assumptions are reasonable; however, actual results and the timing of the recognition of such amounts could differ from those estimates. The Company has identified the following critical accounting policies and estimates utilized by management in the preparation of the Company’s financial statements: revenue recognition, accounting for long-lived assets, allowance for doubtful accounts, accounting for employee benefits and income taxes. Any deviation from these policies or estimates could have a material impact on the financial statements of the Company.

 

11



 

Revenue recognition

 

The Company recognizes customer services revenue as services are performed for our clients. Client contracts generally require that clients be billed for the Company’s services on the basis of time spent by Company representatives providing services. The Company’s services are also occasionally priced on a pay-for-performance basis, pursuant to which the Company typically receives fees that are a combination of base-rate plus fee per sale. The Company is often subject to performance standards, such as sales per hour, average handle time, occupancy rate and abandonment rate.  The Company’s performance against such standards may provide bonus opportunities or conversely may subject the Company to penalties, which are recognized as earned or incurred.

 

Accounting for long-lived assets

 

The Company’s long-lived assets consist primarily of property and equipment, capitalized software and intangible assets. In addition to the original cost of these assets, their recorded value is impacted by a number of policy elections made by the Company, including estimated useful lives and salvage values. In addition, any decision by the Company to reduce capacity by closing Customer Interaction Centers or to abandon software may result in a write-off of the net book value of these affected assets. In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company records impairment charges on long-lived assets used in operations when events and circumstances indicate that the assets may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. In this circumstance, the impairment charge is determined based upon the amount the net book value of the assets exceeds their fair market value. In making these determinations, the Company utilizes certain assumptions, including, but not limited to, the estimated fair market value of the assets, which are based on additional assumptions such as asset utilization, length of time the asset will be used in the Company’s operations and estimated salvage values.

 

Allowance for doubtful accounts

 

The Company records an allowance for doubtful accounts based on a quarterly assessment of the probable estimated losses in trade accounts receivable. This estimate is based on specific allowances for identified problem receivables and an additional allowance for estimated losses on all other receivables based on their age and the Company’s collection history.

 

Accounting for employee benefits

 

The Company records an accrued liability for group health and workers compensation claims based on an estimate of claims incurred, but not reported, as well as asserted claims at the end of the period. This estimate is derived from an analysis performed by actuaries hired by the Company who have expertise in this area.  Although these estimates are generally reliable, changes in the employee mix and unforeseen events could result in an adjustment to these estimates.

 

The balances of these accounts at March 28, 2004, and March 30, 2003, were:

 

 

 

(in thousands)

 

 

 

2004

 

2003

 

Group Health Insurance

 

$

3,519

 

$

3,737

 

Workers Compensation

 

3,097

 

3,231

 

 

Income Taxes

 

The Company accounts for income taxes using the asset and liability approach.  Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between

 

12



 

the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Valuation allowances are recorded when management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized in the future.  The Company records a reserve for tax contingencies until management believes it is probable that the deductions giving rise to these contingencies will not be successfully challenged.

 

Liquidity and Capital Resources

 

The following table sets forth consolidated statements of cash flow data for the Company for the thirteen-week periods ended March 28, 2004, and March 30, 2003, respectively.

 

 

 

2004

 

2003

 

 

 

(In thousands)

 

 

 

 

 

 

 

Net cash provided (used) by operating activities

 

$

(2,010

)

$

1,630

 

Net cash used by investing activities

 

(2,545

)

(2,564

)

Net cash used by financing activities

 

(83

)

(1,626

)

Net decrease in cash

 

$

(4,638

)

$

(2,560

)

 

Cash from operating activities decreased $3.6 million versus the first three months of fiscal 2003, primarily due to  $1.2 million of payments related to restructuring charges in the first quarter of fiscal 2004, lower operating margins and a reduction in depreciation and amortization.

 

Net cash used by investing activities was $2.5 million in the first quarter of fiscal 2004 primarily due to expenditures related to the buildout of additional seats in the Philippines and computer equipment upgrades. Capital expenditures of $2.6 million in the first three months of fiscal 2003 were primarily related to the initial buildout of a facility in the Philippines and equipment upgrades.

 

Net cash used by financing activities primarily related to the repayment of capital lease payments in fiscal 2003 and 2004 and $1.5 million of bank debt in 2003.

 

The Company expects that its cash balances, cash flows from future operations and available borrowings under its Credit Agreement will be sufficient to meet normal operating needs, fund any planned capital expenditures and repay debt obligations payable during fiscal 2004.  However, a significant change in operating cash flow could impact the Company’s ability to meet its cash requirement needs and comply with covenants of its Credit Agreement.

 

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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 and other documents that the Company files with the SEC 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. Except as required under the Federal securities laws and rules and regulations of the SEC, the Company undertakes no obligation to publicly update or revise any forward-looking statements in connection with new information or future events or otherwise. Factors that could cause future results to differ materially from historical results or those anticipated include, but are not limited to, reliance by the Company on a small number of principal clients for a substantial proportion of its total revenue; possible changes in or events affecting the business 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 timing of clients’ initiation and termination of large programs; risks in conducting business internationally; changes in competitive conditions affecting the Company’s industry; the ability of the Company’s clients to terminate contracts with the Company on a relatively short notice; changes in the availability and cost of qualified employees; variations in the performance of the Company’s automated system and other technological factors; changes in government regulations affecting the teleservices and telecommunications industries; and competition from other outside providers of customer interaction solutions and in-house customer interaction operations.

 

See the Company’s filings with the SEC 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 December 28, 2003.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Historically, the Company has been exposed to the impact of U.S. interest rate changes directly related to its normal operating and funding activities. From time to time, the Company has entered into derivatives in order to minimize these risks, but not for trading purposes. The Company does not have any derivative agreements due to the low levels of current borrowings.

 

The Company prepared a sensitivity analysis of its average debt for the first quarter of fiscal 2004 assuming a one-percentage point adverse change in interest rates. Holding all other variables constant, the hypothetical adverse change would not significantly increase interest expense. The sensitivity analysis assumes no changes in the Company’s financial structure.

 

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Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) under the Securities Exchange Act, as amended (the “Exchange Act”)), as of the end of the period covered by this report.  Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

 

Internal Control Over Financial Reporting

 

There have not been changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)), during the first fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

15



 

Part II. Other Information

 

Item 1.  Legal Proceedings

 

In December of 2000 the Company entered into a contract with Apogee Enterprises, Inc. to provide call center services and to develop software applications supporting those services for its Harmon Glass Solutions division (“Harmon”).  Apogee sold Harmon to the Dwyer Group in 2004.  The Company’s revenues under this contract in fiscal 2003 and the first quarter of fiscal 2004 were $5.1 million and $1.1 million, respectively.  Disputes and claims under this contract are the subject of an arbitration proceeding filed on April 8, 2004, with the American Arbitration Association. Harmon has alleged that the Company breached its obligations under the contract thereby damaging Harmon’s business. The Company contends that it has performed its obligations under the contract, and claims that Harmon has breached the contract and owes the Company damages and a termination fee as provided for in the contract.  The Company intends to vigorously assert its claims and defenses.  However, given the preliminary nature of this matter and the uncertainties inherent in any litigation, it is not possible to predict the outcome of this proceeding and there can be no assurance that the Company will be successful or that an adverse outcome would not be material.

 

In addition, 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 such pending claims will have a material adverse impact on the Company’s consolidated financial position, annual results of operations or liquidity.  Although the Company does not believe that any of these proceedings will result in a material adverse effect, no assurance to that effect can be given.

 

Item 6.  Exhibits and Reports on Form 8-K

 

 

(a)

Exhibits

 

 

 

 

 

 

 

Exhibit 3.2

Amended and Restated Bylaws of APAC Customer Services, Inc. as amended through March 10, 2004.

 

 

 

 

 

 

Exhibit 31.1

Certification of Chief Executive Officer pursuant to Rule 13a-15(e) and Rule 15d-15(e)  of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

Exhibit 31.2

Certification of Chief Financial Officer pursuant to Rule 13a-15(e)  and Rule 15d-15(e)  of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

Exhibit 32.1

Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

(b)

Reports on Form 8-K

 

 

 

 

 

 

On February 17, 2004, the Company filed a current report on Form 8-K setting forth the earnings release for the fiscal quarter ended December 28, 2003.

 

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, thereunto duly authorized.

 

 

 

 

APAC Customer Services, Inc.

 

 

 

 

 

 

 

 

 

Date:    May 7, 2004

By:

/s/ Marc T. Tanenberg

 

 

 

Senior Vice President and

 

 

 

Chief Financial Officer
(Principal Financial Officer
and duly authorized officer)

 

 

 

 

 

 

 

 

 

Date:    May 7, 2004

By:

/s/ Kenneth R. Batko

 

 

 

Vice President and Controller
(Principal Accounting Officer
and duly authorized officer)

 

 

17



 

Exhibit Index

 

Exhibit
Number

 

Description

 

 

 

3.2

 

 

Amended and Restated Bylaws of APAC Customer Services, Inc. as amended through March 10, 2004.

 

 

 

 

31.1

 

 

Certification of Chief Executive Officer pursuant to Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

31.2

 

 

Certification of Chief Financial Officer pursuant to Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

32.1

 

 

Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

18