Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934. |
For the quarterly period ended June 29, 2008
or
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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)
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| Illinois
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36-2777140 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
Six Parkway North, 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 the 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 period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company (See the definitions of “large accelerated
filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
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| Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer* o
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Smaller reporting company o |
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(*Do not check if a smaller reporting company) |
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Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
There were 50,473,312 common shares, $0.01 par value per share, outstanding as of June 29, 2008.
Forward-Looking Statements and Factors That May Affect Future Results
In passing the Private Securities Litigation Reform Act of 1995 (the “Reform Act”), Congress
encouraged public companies to make “forward-looking statements” by creating a “safe harbor” to
protect companies from securities law liability in connection with forward-looking statements. We
intend to qualify our written and oral forward-looking statements for protection under the Reform
Act and any other similar safe harbor provisions. Unless the context indicates otherwise, the words
“Company,” “we,” “our,” and “us” when used in this Quarterly Report on Form 10-Q refer collectively
to APAC Customer Services, Inc. and its wholly-owned subsidiaries.
Generally, forward-looking statements include expressed expectations, estimates and projections of
future events and financial performance and the assumptions on which these expressed expectations,
estimates and projections are based. Statements that are not historical facts, including statements
about our beliefs and expectations and our management, are forward-looking statements. Sometimes
these statements will contain words such as “believes,” “expects,” “anticipates,” “intends,”
“estimates,” “goals,” “would,” “could,” “should,” “plans,” and other similar words. All
forward-looking statements are inherently uncertain as they are based on various expectations and
assumptions about future events, and they are subject to known and unknown risks and uncertainties
that can cause actual events and results to differ materially from historic results and those
projected.
Due to such uncertainties, the investment community is cautioned not to place undue reliance on our
written or oral forward-looking statements, which speak only as of the date on which they were
made. If no date is provided, such statements speak only as of the date of this Quarterly Report on
Form 10-Q. We expressly undertake no obligation to publicly update or revise any forward-looking
statements as a result of changed assumptions, new information, future events or otherwise.
Forward-looking statements are contained in this Quarterly Report on Form 10-Q, primarily in Items
2 and 3. Moreover, through our senior management, we may from time to time make forward-looking
statements about matters described herein or about other matters concerning us.
There are numerous factors that could prevent us from achieving our goals and cause future results
to differ materially from historic results or those expressed or implied by our forward-looking
statements including, but not limited to, the following:
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Our revenue is generated from a limited number of clients and the loss of one or more of them, or a reduction in their
demand for our services, could materially affect our financial results. |
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Our financial results depend on our ability to effectively manage our production capacity and our workforce. |
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Our success is subject to the terms of our client contracts. |
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Our success depends on our return to profitability. |
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Our success depends on our ability to continue to reduce costs and achieve efficiencies. |
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Our business may be affected by our cash flows from operations and our ability to comply with, or obtain waivers of or
changes to, our debt covenants. |
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Our principal shareholder can exercise significant control over us. |
3
| • |
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Our financial results may be affected by risks associated with international operations and expansion, including
foreign currency fluctuations. |
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Our success depends on key personnel. |
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Our business operates in a highly competitive market. |
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Circumstances outside our control such as typhoons, earthquakes, floods and other acts of God, political instability,
equipment malfunction, telephone or data service interruptions, changes in the telecommunications market, war and
terrorism could seriously harm our domestic or off-shore business. |
| • |
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Our inability to attract and retain a sufficient number of qualified employees could negatively impact our business. |
| • |
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Our business and our clients’ businesses are subject to federal and state regulation and industry standards, including
laws and industry standards regarding consumer privacy and information security. |
See our filings with the Securities and Exchange Commission for further discussion of the risks and
uncertainties associated with our business, in particular, the discussion in Item 1A of Part I of
our Annual Report on Form 10-K for the fiscal year ended December 30, 2007, and in Item 1A of Part
II of our Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2008.
In various places throughout this Quarterly Report on Form 10-Q we use certain non-GAAP financial
measures when describing our performance. A “non-GAAP financial measure” is defined as a numerical
measure of a company’s financial performance that excludes or includes amounts so as to be
different than the most directly comparable measure calculated and presented in accordance with
GAAP in the statements of operations, balance sheets or statements of cash flows of a company. We
believe that non-GAAP financial measures provide meaningful supplemental information and are useful
in understanding our results of operations and analyzing of trends because they exclude certain
charges such as interest, taxes and depreciation and amortization expenses that are not part of our
ordinary business operations. We also believe that non-GAAP financial measures are useful to
investors and analysts in allowing for greater transparency with respect to the supplemental
information used by us in our financial and operational decision-making. In addition, we believe
investors, analysts and lenders benefit from referring to non-GAAP measures when assessing our
performance and expectations of our future performance. However, this information should not be
used as a substitute for our GAAP financial information; rather it should be used in conjunction
with financial statement information contained in our condensed consolidated financial statements
prepared in accordance with GAAP. We discuss non-GAAP financial measures in Item 2 of this
Quarterly Report on Form 10-Q under the caption “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Non-GAAP Financial Measures.” Pursuant to the requirements of
Regulation G, we have provided a reconciliation of all non-GAAP financial measures to the most
directly comparable GAAP financial measure in Item 2 of this Quarterly Report on Form 10-Q.
4
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
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June 29, |
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December 30, |
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2008 |
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2007 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
1,633 |
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$ |
1,426 |
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Accounts receivable, net |
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31,715 |
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34,468 |
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Other current assets |
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3,615 |
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5,971 |
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Total current assets |
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36,963 |
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41,865 |
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Property and equipment, net |
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24,221 |
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26,772 |
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Goodwill |
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13,338 |
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13,338 |
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Other intangible assets, net |
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4,712 |
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5,891 |
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Other assets |
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1,624 |
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2,060 |
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Total assets |
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$ |
80,858 |
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$ |
89,926 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Short-term debt |
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$ |
17,743 |
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$ |
12,307 |
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Current portion of long-term debt |
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— |
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2,400 |
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Accounts payable |
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1,904 |
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2,287 |
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Income taxes payable |
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220 |
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220 |
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Accrued payroll and related items |
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17,888 |
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15,954 |
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Accrued liabilities |
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13,352 |
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11,123 |
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Total current liabilities |
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51,107 |
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44,291 |
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Long-term debt |
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— |
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11,600 |
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Other liabilities |
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2,335 |
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654 |
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Commitments and contingencies |
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— |
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— |
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Shareholders’ equity: |
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Common shares, $0.01 per share; authorized 200,000,000 shares;
50,499,296 shares issued and 50,473,312 shares outstanding at
June 29, 2008, and 50,379,296 shares issued and outstanding
at December 30, 2007 |
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506 |
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504 |
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Additional paid-in capital |
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103,812 |
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102,647 |
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Accumulated deficit |
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(76,850 |
) |
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(72,760 |
) |
Accumulated other comprehensive (loss) income |
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(25 |
) |
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2,990 |
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Treasury shares: 25,984 and 0 shares at cost at June 29, 2008, and
December 30, 2007, respectively |
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(27 |
) |
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— |
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Total shareholders’ equity |
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27,416 |
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33,381 |
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Total liabilities and shareholders’ equity |
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$ |
80,858 |
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$ |
89,926 |
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See Notes to Condensed Consolidated Financial Statements.
5
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
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Thirteen Weeks Ended |
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Twenty-Six Weeks Ended |
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June 29, |
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July 1, |
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June 29, |
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July 1, |
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2008 |
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2007 |
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2008 |
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2007 |
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Net revenue |
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$ |
60,710 |
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$ |
53,819 |
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$ |
124,227 |
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$ |
106,203 |
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Cost of services |
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49,978 |
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49,729 |
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105,724 |
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95,796 |
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Gross profit |
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10,732 |
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4,090 |
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18,503 |
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10,407 |
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Operating expenses: |
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Selling, general and
administrative
expenses |
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7,827 |
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7,187 |
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16,395 |
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15,080 |
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Restructuring and other
charges: |
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Restructuring charges |
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(23 |
) |
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1,559 |
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(20 |
) |
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1,557 |
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Other severance charges |
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460 |
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— |
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2,798 |
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— |
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Total operating expenses |
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8,264 |
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|
8,746 |
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19,173 |
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16,637 |
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Operating income (loss) |
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2,468 |
|
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|
(4,656 |
) |
|
|
(670 |
) |
|
|
(6,230 |
) |
Other income |
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|
(142 |
) |
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|
(44 |
) |
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|
(174 |
) |
|
|
(91 |
) |
Interest expense |
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2,673 |
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|
812 |
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3,595 |
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|
1,650 |
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Loss before income taxes |
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(63 |
) |
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(5,424 |
) |
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(4,091 |
) |
|
|
(7,789 |
) |
Income tax provision (benefit) |
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|
— |
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12 |
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— |
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(17,568 |
) |
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Net income (loss) |
|
$ |
(63 |
) |
|
$ |
(5,436 |
) |
|
$ |
(4,091 |
) |
|
$ |
9,779 |
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Net income (loss) per share: |
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|
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Basic |
|
$ |
(0.00 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.08 |
) |
|
$ |
0.20 |
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Diluted |
|
$ |
(0.00 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.08 |
) |
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$ |
0.19 |
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Weighted average number of shares
outstanding: |
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Basic |
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50,393 |
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49,731 |
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50,307 |
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49,632 |
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Diluted |
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50,393 |
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49,731 |
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50,307 |
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|
51,241 |
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See Notes to Condensed Consolidated Financial Statements.
6
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
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Twenty-Six Weeks Ended |
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June 29, |
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July 1, |
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2008 |
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2007 |
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Operating activities: |
|
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|
|
|
|
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Net income (loss) |
|
$ |
(4,091 |
) |
|
$ |
9,779 |
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities: |
|
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Depreciation and amortization |
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6,422 |
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|
6,757 |
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Non-cash restructuring charges |
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— |
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13 |
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Stock compensation expense |
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|
844 |
|
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|
940 |
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Amortized gain on sale leaseback |
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(63 |
) |
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(94 |
) |
(Gain) loss on sale of property and equipment |
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(1 |
) |
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|
53 |
|
Income taxes payable |
|
|
— |
|
|
|
(17,580 |
) |
Change in operating assets and liabilities |
|
|
10,190 |
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|
|
6,829 |
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|
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Net cash provided by operating activities |
|
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13,301 |
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|
6,697 |
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Investing activities: |
|
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Purchases of property and equipment, net |
|
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(2,786 |
) |
|
|
(7,033 |
) |
Net proceeds from sale of property and equipment |
|
|
8 |
|
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|
15 |
|
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Net cash used in investing activities |
|
|
(2,778 |
) |
|
|
(7,018 |
) |
|
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|
|
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Financing activities: |
|
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Net (payments) borrowings on long-term debt |
|
|
(14,000 |
) |
|
|
10,000 |
|
Net borrowings (payments) under revolving credit facility |
|
|
5,436 |
|
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|
(11,090 |
) |
Cash received from exercise of stock options |
|
|
297 |
|
|
|
582 |
|
|
|
|
|
|
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Net cash used in financing activities |
|
|
(8,267 |
) |
|
|
(508 |
) |
|
|
|
|
|
|
|
|
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Effect of exchange rate change on cash |
|
|
(2,049 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
|
|
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Net increase (decrease) in cash and cash equivalents |
|
|
207 |
|
|
|
(867 |
) |
|
|
|
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|
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Cash and cash equivalents: |
|
|
|
|
|
|
|
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Beginning balance |
|
|
1,426 |
|
|
|
1,305 |
|
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Ending balance |
|
$ |
1,633 |
|
|
$ |
438 |
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|
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|
See Notes to Condensed Consolidated Financial Statements.
7
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
1. Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements of APAC Customer
Services, Inc. and its subsidiaries (collectively, the Company) have been prepared in accordance
with accounting principles generally accepted in the United States (GAAP) 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 notes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of a normal recurring nature) considered
necessary for a fair presentation have been included. Interim consolidated financial statements
are not necessarily indicative of the financial position or operating results for an entire year.
The Company’s off-shore customer care centers use their local currency, the Philippine peso, as
their functional currency. Assets and liabilities of off-shore customer care centers have been
translated at period-end rates, and income and expenses have been translated using average exchange
rates for the respective periods. All inter-company transactions and balances have been
eliminated. The balance sheet at June 29, 2008 has been derived from the unaudited financial
statements at that date and includes all of the information and notes required by GAAP for interim
financial statements. These interim financial statements should be read in conjunction with the
audited financial statements and notes thereto included in Item 8 of Part II of the Company’s
Annual Report on Form 10-K for the fiscal year ended December 30, 2007. Copies of the Company’s
filings are available on a web site maintained by the SEC at http://www.sec.gov.
The Company operates on a thirteen week fiscal quarter that ends on the Sunday closest to June
30. The Company operates on a 52/53 week fiscal year that ends on the Sunday closest to
December 31.
2. New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157 (SFAS
No. 157) “Fair Value Measurements”, which defines fair value, establishes a framework for measuring
fair value in accordance with generally accepted accounting principles, and expands disclosures
about fair value measurements. In February 2008, the FASB issued Staff Position 157-2, “Effective
Date of FASB Statement No. 157”, which delays the effective date of SFAS No. 157 for non-financial
assets and liabilities, except for those that are recognized or disclosed at fair value in the
financial statements on a recurring basis, until fiscal years beginning after November 15, 2008.
The Company adopted SFAS 157 as of December 31, 2007, with the exception of the application of the
statement to non-recurring, non-financial assets and liabilities. The adoption of SFAS 157 did not
have a material impact on the Company’s consolidated financial statements. See Note 12, Fair Value
Measurements, for additional information.
In March 2008, the FASB issued Statement No. 161 (SFAS No. 161) “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133” to amend and expand the
disclosures about derivatives and hedging activities. The statement requires enhanced qualitative
disclosures about an entity’s objectives and strategies for using derivatives, and tabular
quantitative disclosures about the fair value of derivative instruments and gains and losses on
derivatives during the reporting period. SFAS No. 161 is effective for both fiscal years and
interim periods that begin after November 15, 2008. The Company is evaluating the effect that this
standard will have on its disclosures.
In April 2008, the FASB issued FASB Staff Position No. 142-3 (FSP FAS No. 142-3), “Determining the
Useful Life of Intangible Assets”. FSP FAS No. 142-3 amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under FASB Statement No. 142 (SFAS No. 142), “Goodwill and Other Intangible
Assets.” The intent of this FSP is to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141(R) “Business Combinations”. FSP FAS No.
142-3 is effective for fiscal years beginning after December 15, 2008. The Company is evaluating
the impact that FSP FAS No. 142-3 will have on its financial statements.
8
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
In May 2008, the FASB issued Statement No. 162 (SFAS No. 162), “The Hierarchy of Generally Accepted
Accounting Principles”. The standard is intended to improve financial reporting by identifying a
consistent framework, or hierarchy, for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with GAAP for nongovernmental entities.
Prior to the issuance of SFAS No. 162, GAAP hierarchy was defined in the American Institute of
Certified Public Accountants (AICPA) Statement on Auditing Standards (SAS) No. 69, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles”. SFAS No. 162 is
effective 60 days following the Security and Exchange Commission’s (SEC) approval of the Public
Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles.” The Company is currently
evaluating the provisions and guidance of SFAS No. 162 and does not expect that it will have a
material impact on the Company’s financial condition or results of operations.
3. Accrued Liabilities
The components of other current accrued liabilities included in the condensed consolidated balance
sheets are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
June 29, |
|
|
December 30, |
|
| |
|
2008 |
|
|
2007 |
|
Deferred rent |
|
$ |
3,223 |
|
|
$ |
4,094 |
|
Accrued workers’ compensation |
|
|
1,774 |
|
|
|
2,089 |
|
Accrued severance |
|
|
1,467 |
|
|
|
— |
|
Unrecognized loss on forward contracts |
|
|
1,450 |
|
|
|
— |
|
Accrued professional fees |
|
|
830 |
|
|
|
644 |
|
Accrued capital expenditures |
|
|
745 |
|
|
|
— |
|
Accrued restructuring charges |
|
|
574 |
|
|
|
1,756 |
|
Accrued property tax |
|
|
216 |
|
|
|
332 |
|
Other |
|
|
3,073 |
|
|
|
2,208 |
|
|
|
|
|
|
|
|
Total |
|
$ |
13,352 |
|
|
$ |
11,123 |
|
|
|
|
|
|
|
|
4. Goodwill and Other Intangible Assets
Under SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company is required and it is its
policy to test all existing goodwill for impairment at least annually and more frequently if
circumstances require. The Company tested the goodwill for impairment in the third quarter of
fiscal year 2007, resulting in no impairment being recorded. As of June 29, 2008 and December 30,
2007, the Company had $13.3 million of goodwill.
The identifiable intangible assets of the Company represent acquired customer relationships and
internally developed software. The acquired customer relationships have a gross carrying value of
$28.5 million and accumulated amortization of $24.0 million and $22.8 million as of June 29, 2008
and December 30 2007, respectively. The internally developed software has a gross carrying value of
$0.4 million as of June 29, 2008 and December 30, 2007 and accumulated amortization of $0.2 million
and $0.1 million as of June 29, 2008 and December 30, 2007, respectively. Under the provisions of
SFAS No. 142, the Company amortizes intangible assets with definite lives over their estimated
useful lives. The Company evaluates the remaining useful life of its acquired customer
relationships balance at least annually to determine whether events or circumstances warrant a
revision to the remaining amortization period. The customer relationship intangible assets are
amortized on a straight-line basis over the expected period of benefit of 12 years. The internally
developed software intangible assets are amortized on a straight-line basis over an expected period
of benefit of 3 to 5 years. Total amortization expense related to intangible assets was
$0.6 million for each of the thirteen weeks ended June 29, 2008 and July 1, 2007, and $1.2 million
for each of the twenty-six weeks ended June 29, 2008 and July 1, 2007. Annual amortization expense
is expected to be $2.4 million for fiscal years 2008 and 2009, $1.0 million in fiscal year 2010 and
less than $1.0 million in each of fiscal years 2011 and 2012.
9
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
5. Accounting for Stock-Based Compensation
At June 29, 2008, the Company had a share-based incentive compensation plan for employees and
non-employee directors, which authorized the granting of various equity-based incentive awards,
including stock options and non-vested common shares. The total number of common shares authorized
for issuance under the plan is 11.8 million, of which 1.8 million shares are available for future
grants at June 29, 2008.
Total stock-based compensation expense was $0.1 million and $0.5 million for the thirteen weeks
ended June 29, 2008 and July 1, 2007, respectively. For the twenty-six weeks ended June 29, 2008
and July 1, 2007, total stock-based compensation expense was $0.8 million and $0.9 million,
respectively. As of June 29, 2008, there was $1.7 million of unrecognized compensation cost
related to unvested awards that is expected to be recognized over a weighted-average period of
approximately 4 years.
A summary of the Company’s non-vested common share grant activity during the twenty-six weeks ended
June 29, 2008 is presented below:
| |
|
|
|
|
| |
|
Number of Shares |
|
Outstanding on December 30, 2007 |
|
|
366,758 |
|
Granted |
|
|
50,000 |
|
Exercised |
|
|
(298,199 |
) |
Forfeited |
|
|
(50,000 |
) |
Expired |
|
|
— |
|
|
|
|
|
Outstanding on June 29, 2008 |
|
|
68,559 |
|
|
|
|
|
During the thirteen weeks ended June 29, 2008, the Company did not award any non-vested common
shares to employees. During the thirteen weeks ended July 1, 2007, the Company awarded 6,000
non-vested common shares to employees at a weighted average value per share of $3.42. During the
twenty-six weeks ended June 29, 2008 and July 1 2007, respectively, the Company awarded 50,000 and
106,000 non-vested common shares to employees at a weighted average value per share of $1.10 and
$4.48, respectively. The majority of the non-vested common shares vest two years from the grant
date.
A summary of the Company’s stock option grant activity during the twenty-six weeks ended June 29,
2008 is presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
| |
|
Number of |
|
|
Grant Price |
|
|
Exercise Price Per |
|
|
Aggregate |
|
| |
|
Options |
|
|
Range Per Share |
|
|
Share |
|
|
Intrinsic Value |
|
Outstanding on December 30,
2007 |
|
|
6,495,396 |
|
|
$ |
0.85 – $11.63 |
|
|
$ |
2.22 |
|
|
|
|
|
Granted |
|
|
2,545,063 |
|
|
|
0.79 – 1.21 |
|
|
|
1.03 |
|
|
|
|
|
Exercised |
|
|
(140,250 |
) |
|
|
0.88 – 1.21 |
|
|
|
0.93 |
|
|
|
|
|
Forfeited |
|
|
(734,501 |
) |
|
|
0.85 – 4.60 |
|
|
|
1.53 |
|
|
|
|
|
Expired |
|
|
(572,131 |
) |
|
|
1.35 – 11.56 |
|
|
|
3.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on June 29, 2008 |
|
|
7,593,577 |
|
|
$ |
0.79 – $11.63 |
|
|
$ |
1.82 |
|
|
$ |
1,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable on June 29, 2008 |
|
|
4,199,683 |
|
|
$ |
0.85 – $11.63 |
|
|
$ |
2.15 |
|
|
$ |
441 |
|
10
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
Prior to April 4, 2007, options to purchase common shares were granted with an exercise price equal
to the average of the high and low market price of the Company’s common shares on The NASDAQ OMX
Group, Inc. on the date of the grant. Effective April 4, 2007, the 2005 Incentive Stock Plan was
amended to provide that the fair value for future option grants would be the closing price of the
common shares on The NASDAQ OMX Group, Inc. on the date of grant. Substantially all of the options
become exercisable between one to five years after the grant date and generally expire ten years
from the grant date.
6. Comprehensive Income (Loss)
Comprehensive income (loss) for the thirteen and twenty-six weeks ended June 29, 2008 and July 1,
2007, respectively, is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
| |
|
June 29, |
|
|
July 1, |
|
|
June 29, |
|
|
July 1, |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income (loss) |
|
$ |
(63 |
) |
|
$ |
(5,436 |
) |
|
$ |
(4,091 |
) |
|
$ |
9,779 |
|
Foreign currency translation adjustment |
|
|
(701 |
) |
|
|
352 |
|
|
|
(753 |
) |
|
|
519 |
|
Unrealized loss on forward contracts |
|
|
(1,526 |
) |
|
|
— |
|
|
|
(2,262 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
(2,290 |
) |
|
$ |
(5,084 |
) |
|
$ |
(7,106 |
) |
|
$ |
10,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The foreign currency translation adjustment relates to the impact of a change in exchange rates on
net assets located outside of the United States.
As of June 29, 2008, forward contracts to purchase 929 million Philippine pesos at a US dollar
notional of $21.7 million were outstanding. The net loss recognized in earnings on settled forward
contracts was $0.1 million for the thirteen weeks ended June 29, 2008 and the net gain recognized
in earnings on settled forward contracts was $0.3 million for the twenty-six weeks ended June 29,
2008. The gain and loss on settled forward contracts is recorded as a component of cost of
services. Unrealized loss in value of the outstanding forward contracts was $1.5 million and was
recorded in other liabilities as of June 29, 2008. The unrealized loss will be recognized in
earnings over the next 12 months as cash flows related to the intercompany payable are effectively
settled.
7. Legal Proceedings
The Company is subject to lawsuits, governmental investigations and claims arising out of the
routine conduct of its business. Management does not believe that the outcome of any pending
proceedings will have a material adverse effect on the Company’s business, results of operations,
liquidity, or financial condition. Although management does not believe that any such proceeding
will result in a material adverse effect, no assurance to that effect can be given.
8. Debt
As of December 30, 2007, the Company was party to two separate loan agreements: (i) a Second
Restated Credit Agreement with LaSalle Bank National Association (LaSalle), as agent, as amended,
and (ii) a Second Lien Loan Agreement with Atalaya Funding II, L.P. as lender and Atalaya
Administrative, LLC, as agent (Atalaya), as amended. The loan agreements provided the Company with
a $27.5 million revolving loan facility which expired in October 2010 (Revolving Loan Facility) and
a $15.0 million term loan which matured in January 2011 (Term Loan). For additional information
regarding the loan agreements, as amended, see Note 9 of the Notes to Consolidated Financial
Statements in Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended December
30, 2007 and the Company’s subsequent filing on Form 10-Q for the fiscal quarter ended March 30,
2008.
11
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
Interest rates on the Company’s borrowings under the Revolving Loan Facility with LaSalle during
the period ended May 5, 2008 ranged from 5.25% to 7.5%. Interest rates on the Company’s borrowings
under the Term Loan with Atalaya during the period ended May 5, 2008 ranged from 13.5% to 14.0%.
On May 5, 2008, the Company entered into a Revolving Credit and Security Agreement (Revolving Loan
Agreement) with PNC Bank National Association (PNC), as agent, and the financial institutions from
time to time parties thereto as lenders. The Revolving Loan Agreement provides the Company with a
$40.0 million revolving loan facility which expires in May 2011. Borrowings under the Revolving
Loan Agreement were used to repay in full the Company’s Revolving Loan Facility and Term Loan.
The Company’s ability to borrow under the Revolving Loan Agreement depends on the amount of
eligible accounts receivable from its clients. The Revolving Loan Agreement contains certain
financial covenants including limits on the amount of capital expenditures and maintenance of a
minimum fixed charge coverage ratio. Other covenants in the Revolving Loan Agreement prohibit (with
limited exceptions) the Company from incurring additional indebtedness, repurchasing outstanding
common shares, permitting liens, acquiring, selling or disposing of certain assets, engaging in
certain mergers and acquisitions, paying dividends or making certain restricted payments.
Borrowings under the Revolving Loan Agreement incur a floating interest rate based on the London
Interbank Offered Rate or LIBOR index rate or an alternate base rate which approximates the prime
rate defined in the Revolving Loan Agreement. The Revolving Loan Agreement is secured principally
by a grant of a first priority security interest in all of the Company’s personal property,
including its accounts receivable. In addition, the Company pays a commitment fee on the unused
portion of the Revolving Loan Agreement as well as fees on outstanding letters of credit.
In addition to borrowing against its eligible receivables, the Company may borrow an additional
$9.0 million which is supported by a letter of credit (Credit Enhancement Letter of Credit) which
was provided by TCS Global Holdings, L.P. (TCS), an affiliate of Theodore G. Schwartz, the
Company’s chairman and principal shareholder. The face amount of the Credit Enhancement Letter of
Credit may be reduced or entirely released by PNC under certain circumstances after PNC receives
the Company’s audited financial statements for the fiscal year ended December 28, 2008, and if the
Company achieves certain financial ratios and EBITDA and meets certain minimum availability
thresholds under the Revolving Loan Agreement.
In connection with the issuance of the Credit Enhancement Letter of Credit, the Company and TCS
entered into a Reimbursement and Security Agreement, dated May 5, 2008 (Reimbursement Agreement).
Under the terms of the Reimbursement Agreement, the Company paid $0.2 million in fees to TCS which
are being amortized over the term of the Credit Enhancement Letter of Credit. Additionally, the
Company pays TCS for providing the Credit Enhancement Letter of Credit an amount which varies
depending on the amount of borrowings under the Revolving Loan Agreement. PNC is entitled to draw
on the Credit Enhancement Letter of Credit under certain circumstances. In such event, the Company
is obligated to reimburse TCS for the total amount so drawn. Any unpaid reimbursement amounts due
under the Reimbursement Agreement incur interest at floating interest rate based on the LIBOR index
rate. The Company’s obligations under the Reimbursement Agreement are secured principally by a
grant of a second priority security interest in all of the Company’s personal property, including
accounts receivable. The Reimbursement Agreement also contains covenants substantially identical
to the covenants contained in the Revolving Loan Agreement.
On June 26, 2008, the Company entered into an amendment (the Amendment) to the Revolving Loan
Agreement in connection with the syndication of that facility. Pursuant to the terms of the
Amendment, the Company and PNC agreed to amend the definitions of applicable margin, obligations,
and unbilled eligible receivables.
12
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
Borrowings under the Revolving Loan Agreement totaled $17.7 million as of June 29, 2008. Interest
rates on the Company’s borrowings from May 6, 2008 through June 29, 2008 ranged from 4.98% to 5.5%
under the Revolving Loan Agreement and the Credit Enhancement Letter of Credit. The Company had
$11.0 million of unused borrowing capacity under the Revolving Loan Agreement as of June 29, 2008.
The Company was in compliance with its financial covenants as of June 29, 2008.
The Company expects that its cash balances, cash flow from operations and available borrowings
under its Revolving Loan Agreement will be sufficient to meet projected operating needs, fund any
planned capital expenditures, and repay debt obligations as they come due. The Company’s cash
flow is significantly impacted by its ability to collect its clients’ accounts receivable on a
timely basis. To the extent that the Company’s business with a single client or small group of
clients represents a more significant portion of its revenue, a delay in receiving payment could
materially adversely affect the availability of cash to fund operations. A significant change in
operating cash flow or a failure to achieve or sustain profitability could have a material adverse
effect on the Company’s liquidity and its ability to comply with the covenants in its Revolving
Loan Agreement. In addition, the Company’s failure to adhere to the financial and other covenants
could give rise to a default under the Revolving Loan Agreement which would have a material adverse
effect on the Company’s liquidity and financial condition. There can be no assurances that the
Company will be able to meet the financial and other covenants in its Revolving Loan Agreement.
9. Restructuring and Other Charges
Restructuring and other charges were $0.4 million and $2.8 million for the thirteen weeks and
twenty-six weeks ended June 29, 2008, respectively and were primarily related to severance charges
resulting from the elimination of operational and administrative positions and changes in the
senior executive team, partially offset by adjustments to the 2007 restructuring initiatives and
the 2005 restructuring initiatives. Restructuring and other charges were $1.6 million for the
thirteen and twenty-six weeks ended July 1, 2007.
Other Severance Charges
In January 2008, Robert Keller, the Company’s President and CEO, announced his intention to retire.
Additionally, in March 2008, the Company effectively restructured operations resulting in the
elimination of approximately 100 operational and administrative positions throughout the company.
Charges of $2.3 million related to these events were recorded in the first quarter of 2008. In May
2008, the Company announced its intent to further reduce approximately 30 operational and
administrative positions throughout the remainder of 2008 resulting in severance charges of $0.5
million for the thirteen weeks ended June 29, 2008. Severance charges and retirement obligations
of $2.8 million related to these events were recorded during the twenty-six weeks ended June 29,
2008. Cash payments totaling $1.0 million have been made through June 29, 2008 and remaining cash
payments of $1.8 million are payable through 2010.
2007 Restructuring Initiatives
In May 2007, the Company approved a plan to restructure certain operations during the second
quarter of 2007. The plan, which included downsizing space in its Tucson, Arizona customer care
center and eliminating certain administrative and operations positions within the Company, resulted
in restructuring charges of $1.2 million for the thirteen weeks ended July 1, 2007. These charges
included $0.6 million in lease termination and other costs and $0.6 million in severance costs
related to the elimination of five positions.
During the thirteen weeks ended June 29, 2008, the Company recorded $0.2 million of additional
restructuring costs as a result of delays in subletting space in its Tucson, Arizona customer care
center.
Cash payments totaling $1.2 million related to 2007 restructuring initiatives have been made
through June 29, 2008, $0.5 million of which occurred during the first half of fiscal 2008.
Remaining cash payments of $0.3 million, primarily related to severance costs and lease termination
costs, are payable through 2009.
13
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
2006 Restructuring Initiatives
The 2006 restructuring initiatives resulted from the closure of four customer care centers with
approximately 960 workstations. Cash payments totaling $1.8 million related to the 2006
restructuring initiative have been made through June 29, 2008. Remaining cash payments of less
than $0.1 million, related to real estate taxes, are payable through 2008.
2005 Restructuring Initiatives
The July 2005 restructuring initiative included costs associated with the reduction of the
Company’s corporate office space in Deerfield, Illinois and the closure of seven additional
customer care centers. During the thirteen weeks ended June 29, 2008, the Company reversed $0.2
million of restructuring costs associated with the 2005 restructuring charge as a result of early
termination on a portion of its leasehold agreement.
Cash payments totaling $7.4 million relating to the July 2005 restructuring initiative have been
paid through June 29, 2008, $0.7 million of which occurred during the first half of fiscal 2008.
Remaining cash payments of $0.3 million, primarily related to lease termination costs, are payable
in fiscal year 2008.
Following is a summary of the activity for the twenty-six weeks ended June 29, 2008 in current and
long-term reserves established in connection with the Company’s restructuring initiatives:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 30, |
|
|
Charges |
|
|
Asset |
|
|
Cash |
|
|
|
|
| |
|
2007 |
|
|
(Reversals) |
|
|
Write-off |
|
|
Payments |
|
|
June 29, 2008 |
|
2005 restructuring initiatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease obligations and other
costs |
|
$ |
1,123 |
|
|
$ |
(173 |
) |
|
$ |
— |
|
|
$ |
(694 |
) |
|
$ |
256 |
|
2006 restructuring initiatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease obligations and other
costs |
|
|
29 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
29 |
|
2007 restructuring initiatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance costs |
|
|
333 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(203 |
) |
|
|
129 |
|
Lease obligations and other
costs |
|
|
286 |
|
|
|
154 |
|
|
|
— |
|
|
|
(262 |
) |
|
|
178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,771 |
|
|
$ |
(20 |
) |
|
$ |
— |
|
|
$ |
(1,159 |
) |
|
$ |
592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Income Taxes
The Company accounts for income taxes using the asset and liability method. 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. A valuation allowance is 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
unless it believes it is more likely than not that the deductions giving rise to these
contingencies will be sustained if challenged by taxing authorities. Tax contingencies are not material to the financial statements.
As of June 29, 2008, the Company
is in a cumulative loss position for the prior twelve quarters. This was primarily the result of
losses incurred from the exited outbound customer acquisition business. Due to the uncertainty in
the Company’s ability to realize the benefit of its net deferred tax assets a valuation allowance
of $39.9 million is recorded as of June 29, 2008. The valuation allowance reported at December 30,
2007 was $37.5 million.
14
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
In October 2003, the Company received an $11.6 million cash tax refund associated with the
write-off for tax purposes in 2002 of its remaining investment in ITI Holdings, Inc. (ITI). The
Internal Revenue Service (IRS) audited the Company’s 2002 tax return and proposed an adjustment
that would disallow this deduction. The Company believed that it had sufficient support for the
deduction and filed an appeal contesting the proposal adjustment. On March 27, 2007, the Company
received written notification from the Appeals Officer that the IRS had reviewed the technical
merits of its position and was proposing to allow the deduction in its entirety. Therefore, the
Company reversed the reserve, including related accrued interest, in connection with this issue
resulting in an income tax benefit of $17.6 million for the thirteen weeks ended April 1, 2007. On
August 30, 2007, the Company received a closing letter from the IRS notifying it of the favorable
conclusion of the IRS audit.
The tax benefit associated with the loss before income taxes incurred for the thirteen weeks ended
June 29, 2008 of less than $0.1 million and the related deferred tax asset were offset with a
corresponding valuation allowance. This results in a zero effective income tax rate for the
thirteen weeks ended June 29, 2008. The effective tax rate for the thirteen weeks ended July 1,
2007 was also zero.
The tax benefit associated with the loss before income taxes incurred for the twenty-six weeks
ended June 29, 2008 of $1.6 million and the related deferred tax asset were offset with a
corresponding valuation allowance. This results in a zero effective income tax rate for the twenty-six weeks ended June 29, 2008. A tax benefit of $2.9 million and a related deferred tax asset
associated with the pre-tax loss incurred for the twenty-six weeks ended July 1, 2007 were offset
with a corresponding valuation allowance. This results in a zero effective income tax rate for the
twenty-six weeks ended July 1, 2007, excluding the impact of the reversal of the reserve for ITI.
The Company’s net operating loss carry forwards expire over the following periods:
| |
|
|
|
|
| |
|
Net Operating Loss |
|
| Expiration |
|
Carryforward |
|
2024 |
|
$ |
14,355 |
|
2025 |
|
|
13,901 |
|
2026 |
|
|
9,046 |
|
2027 |
|
|
12,588 |
|
2028 |
|
|
4,885 |
|
|
|
|
|
|
|
$ |
54,775 |
|
|
|
|
|
15
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
11. Earnings Per Share
Basic earnings per share are computed by dividing the Company’s net income (loss) by the weighted
average number of common shares outstanding. Diluted earnings per share are computed by dividing
the Company’s net income by the weighted average number of shares and dilutive potential common
shares outstanding during the period. The impact of any potentially dilutive securities is
excluded from the computation for the thirteen weeks ended June 29, 2008 and July 1, 2007 and the
twenty-six weeks ended June 29, 2008 as the Company recorded a net loss for these periods. The
following table sets forth the computation of basic and diluted earnings per share for the thirteen
and twenty-six weeks ended June 29, 2008 and July 1, 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
| |
|
June 29, |
|
|
July 1, |
|
|
June 29, |
|
|
July 1, |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
| |
|
(In thousands, except earnings per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(63 |
) |
|
$ |
(5,436 |
) |
|
$ |
(4,091 |
) |
|
$ |
9,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in basic per share
calculation |
|
|
50,393 |
|
|
|
49,731 |
|
|
|
50,307 |
|
|
|
49,632 |
|
Effects of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,198 |
|
Non-vested stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in diluted per
share calculation |
|
|
50,393 |
|
|
|
49,731 |
|
|
|
50,307 |
|
|
|
51,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.00 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.08 |
) |
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.00 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.08 |
) |
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. Fair Value Measurements
The Company adopted SFAS 157 as
of December 31, 2007, with the exception of the application of the
statement to non-recurring, non-financial assets and liabilities which becomes effective December
29, 2008. The adoption of SFAS 157 did not have a material impact on the Company’s fair value
measurements. SFAS 157 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants at the measurement date. SFAS 157
establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into
three broad levels as follows:
| |
• |
|
Level 1 – Quoted prices in active markets for identical assets or liabilities. |
| |
| |
• |
|
Level 2 – Inputs, other than the quoted prices in active markets, that are observable
either directly or indirectly. |
| |
| |
• |
|
Level 3 – Unobservable inputs based on the Company’s own assumptions. |
16
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
The following table presents the fair value hierarchy for those assets and liabilities measured at
fair value on a recurring basis as of June 29, 2008:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fair Value Measurements at June 29, 2008 Using |
|
| |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
| |
Cash and cash equivalents(1) |
|
$ |
1,633 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
| |
Foreign currency contracts, net liability(2) |
|
$ |
— |
|
|
$ |
1,450 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
Notes to Fair Value Measurements
| (1) |
Cash and cash equivalents: The carrying amount of these items approximates fair value at period
end. |
| |
| (2) |
Foreign currency contracts: The carrying amount of these items is based on valuations provided
by the counter-party institution, but there are no guaranteed selling prices for these forward
currency contracts. |
13. Subsequent Events
On July 21, 2008 a retail client of the Company’s executed an assignment for the benefit of
creditors to a trustee. The trustee is pursuing a sale of the company or its assets to a third
party buyer. The client represents approximately $4 million in annual revenue to the Company and
has outstanding accounts receivable of approximately $1 million as of June 29, 2008. The Company
has a reserve of approximately $0.4 million against this receivable which it believes is adequate.
The Company provides all of this client’s customer service and back office processing, as well as
the related information technology. Based upon discussions the Company has had with the trustee
and with potential buyers of this client’s business, it believes that the business will continue to
operate and that it will continue to provide these services necessary to the client’s operation.
If the business is not successfully sold as a going concern, or if the Company is unable to come to
terms to provide services with the buyer, it may adversely impact the Company’s ability to recover
the balance of this receivable, as well as its ability to realize future revenues from this
business.
17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our management’s discussion and analysis of financial condition and results of operations should be
read in conjunction with our condensed consolidated financial statements and related notes thereto
appearing elsewhere in this report and our audited consolidated financial statements which appear
in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended December 30, 2007.
Our management’s discussion and analysis contains “forward-looking statements”. All
forward-looking statements are inherently uncertain as they are based on various expectations and
assumptions about future events and are subject to known and unknown risks and uncertainties, and
other factors that may cause our actual results, performance, or achievements to be materially
different from those expressed or implied by the forward-looking statements. See “Forward Looking
Statements and Factors That May Affect Future Results” on page 3 of this Quarterly Report on Form
10-Q.
Overview
We are a leading provider of customer care services and solutions to market leaders in the
healthcare, business services, communications, publishing, travel and entertainment and financial
services industries. As part of our strategy, we have targeted primarily high growth business
segments, each with critical customer care needs and businesses with unique opportunities for
outsourced customer care. We seek opportunities with reliable revenue streams and clients that want
to work with a quality provider.
Our services are provided through customer care centers staffed with skilled customer service
representatives in domestic, off-shore, and client-owned locations. As of June 29, 2008 and July
1, 2007, we operated nine customer care centers in the United States, two of which are client-owned
facilities, and three off-shore customer care centers in the Philippines. As of June 29, 2008, our
domestic operations consisted of approximately 4,700 workstations and our off-shore operations
consisted of approximately 3,300 workstations. This compares to approximately 4,500 domestic workstations and approximately 2,300 off-shore workstations as of July 1, 2007. We completed the
construction of our third customer care center in the Philippines in the first quarter of 2007 and
added nearly 1,000 production seats in our off-shore facilities in the second half of 2007. In May
2007, we added over 675 seats domestically when we began managing a second facility for UPS in
Tampa, Florida.
Our high level growth strategy is to maximize the contribution of our existing capacity, diversify
our client base and expand our service offerings. We believe we are well positioned to continue to
improve our margins and realize the long-term potential of our business.
In February 2008, Michael P. Marrow was appointed our new President and Chief Executive Officer.
For 2008, our focus is on improving our financial performance by reducing costs and improving
efficiencies and on enhancing our quality and service delivery. Under Mr. Marrow’s leadership, we
began to take steps to further these objectives. During the 2008 second quarter, we restructured
operations resulting in the reduction of overhead costs and headcount, refinanced our debt, and
took steps to improve our operating efficiencies. We began to see an immediate impact from these
and other cost savings initiatives resulting in a gross profit margin of 17.7% for the thirteen
weeks ended June 29, 2008. This compares to a gross profit margin of 7.6% during the comparable
prior year period and 12.2% for the thirteen weeks ended March 30, 2008.
18
On June 12, 2008, our Cedar Rapids, Iowa facility was impacted by unprecedented flooding in the
area. Working hand in hand with our clients, we immediately implemented our business continuity
plans and temporarily relocated our Cedar Rapids customer care center and data center resulting in
minimal disruption to most of our affected clients and employees. We incurred operating expenses
of $0.2 million related to the Cedar Rapids flooding during the thirteen weeks ended June 29, 2008
which have been fully offset by insurance recoveries. Operating expenses of approximately $0.3
million have been incurred subsequently. We estimate the gross margin impact from lost revenue to
be approximately $1.0 million. We maintain property damage and business interruption insurance,
the proceeds of which will be recorded upon final settlement. We do not believe the ultimate
resolution of these events will be material to our financial position or business operations.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles
in the United States requires us to make estimates and judgments that affect the amounts reported
in the consolidated financial statements and accompanying notes. Certain of our accounting policies
are considered critical, due to the level of subjectivity and judgment necessary in applying these
policies and because the impact of these estimates and assumptions on our financial conditions and
operating performance may be material. On an ongoing basis, we evaluate our estimates and
judgments in these areas based on historic experience and other relevant factors. The estimates as
of the date of the financial statements reflect our best judgment giving consideration to all
currently available facts and circumstances. We believe our estimates and judgments are reasonable,
however, actual results and the timing of the recognition of such amounts could differ from those
estimates.
We have used methodologies that are consistent from year to year in all material respects. We have
identified the following accounting policies and estimates that we believe are most critical in the
preparation of our condensed consolidated financial statements: accounting for derivatives,
allowance for doubtful accounts, accounting for employee benefits, revenue recognition, intangible
assets, restructuring charges, accounting for stock-based compensation and income taxes. For
details concerning these critical accounting policies and estimates see Item 7 of Part II of our
Annual Report on Form 10-K for the fiscal year ended December 30, 2007, under the caption
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical
Accounting Policies and Estimates” and Note 3 to our audited consolidated financial statements
which appear in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended
December 30, 2007. Any deviation from these policies or estimates could have a material impact on
our condensed consolidated financial statements.
19
Results of Operations
The following table sets forth selected information about our results of operations for the
thirteen and twenty-six weeks ended June 29, 2008 and July 1, 2007, respectively. Certain
additional components of net revenue and cost of services have been included as we believe they
would enhance an understanding of our results of operations. All amounts in the table below are
presented in thousands.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
| |
|
June 29, |
|
|
July 1, |
|
|
Fav (Unfav) |
|
|
June 29, |
|
|
July 1, |
|
|
Fav (Unfav) |
|
| |
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
Net Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
45,117 |
|
|
$ |
43,739 |
|
|
|
3.2 |
% |
|
$ |
93,862 |
|
|
$ |
86,066 |
|
|
|
9.1 |
% |
Off-shore |
|
|
15,593 |
|
|
|
10,080 |
|
|
|
54.7 |
|
|
|
30,365 |
|
|
|
20,137 |
|
|
|
50.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
60,710 |
|
|
|
53,819 |
|
|
|
12.8 |
|
|
|
124,227 |
|
|
|
106,203 |
|
|
|
17.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct labor |
|
|
34,449 |
|
|
|
32,701 |
|
|
|
(5.3 |
) |
|
|
71,979 |
|
|
|
62,322 |
|
|
|
(15.5 |
) |
Other facility expenses |
|
|
15,529 |
|
|
|
17,028 |
|
|
|
8.8 |
|
|
|
33,745 |
|
|
|
33,474 |
|
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of services |
|
|
49,978 |
|
|
|
49,729 |
|
|
|
(0.5 |
) |
|
|
105,724 |
|
|
|
95,796 |
|
|
|
(10.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of revenue |
|
|
82.3 |
% |
|
|
92.4 |
% |
|
|
— |
|
|
|
85.1 |
% |
|
|
90.2 |
% |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross profit |
|
|
10,732 |
|
|
|
4,090 |
|
|
|
162.4 |
|
|
|
18,503 |
|
|
|
10,407 |
|
|
|
77.8 |
|
Gross profit margin |
|
|
17.7 |
% |
|
|
7.6 |
% |
|
|
— |
|
|
|
14.9 |
% |
|
|
9.8 |
% |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general &
administrative
expenses |
|
|
7,827 |
|
|
|
7,187 |
|
|
|
(8.9 |
) |
|
|
16,395 |
|
|
|
15,080 |
|
|
|
(8.7 |
) |
Restructuring and other
charges |
|
|
437 |
|
|
|
1,559 |
|
|
|
72.0 |
|
|
|
2,778 |
|
|
|
1,557 |
|
|
|
(78.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses . |
|
|
8,264 |
|
|
|
8,746 |
|
|
|
5.5 |
|
|
|
19,173 |
|
|
|
16,637 |
|
|
|
(15.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
2,468 |
|
|
|
(4,656 |
) |
|
|
153.0 |
|
|
|
(670 |
) |
|
|
(6,230 |
) |
|
|
89.2 |
|
Other income |
|
|
(142 |
) |
|
|
(44 |
) |
|
|
222.7 |
|
|
|
(174 |
) |
|
|
(91 |
) |
|
|
91.2 |
|
Interest expense |
|
|
2,673 |
|
|
|
812 |
|
|
|
(229.2 |
) |
|
|
3,595 |
|
|
|
1,650 |
|
|
|
(117.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(63 |
) |
|
|
(5,424 |
) |
|
|
98.8 |
|
|
|
(4,091 |
) |
|
|
(7,789 |
) |
|
|
47.5 |
|
Income tax benefit |
|
|
— |
|
|
|
12 |
|
|
|
* |
|
|
|
— |
|
|
|
(17,568 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(63 |
) |
|
$ |
(5,436 |
) |
|
|
98.8 |
|
|
$ |
(4,091 |
) |
|
$ |
9,779 |
|
|
|
(141.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| * |
|
Means that the percentage change is not meaningful |
Non-GAAP Financial Measures
To supplement our condensed consolidated financial statements presented in accordance with GAAP, we
use the following measures defined as non-GAAP financial measures: EBITDA and free cash flow. The
presentation of these non-GAAP financial measures is not intended to be considered in isolation or
as a substitute for the financial information presented in accordance with GAAP or as a measure of
liquidity. The items excluded from these non-GAAP financial measures are significant components of
our financial statements and must be considered in performing a comprehensive analysis of our
overall financial results.
We believe these non-GAAP financial measures provide meaningful supplemental information and are
useful in understanding our results of operations and analyzing trends because they exclude certain
charges such as interest, taxes and depreciation and amortization expenses that are not part of our
ordinary business operations.
20
EBITDA and free cash flow are measures used by our lenders, investors and analysts to evaluate our
financial performance and our ability to pay interest and repay debt. Each of these measures is
also indicative of our ability to fund the capital investments necessary for our continued growth.
We use these measures, together with our GAAP financial metrics, to assess our financial
performance, allocate resources, measure our performance against debt covenants, determine
management bonuses and evaluate our overall progress towards meeting our long-term financial
objectives.
We believe that these non-GAAP financial measures are useful to investors and analysts in allowing
for greater transparency with respect to the supplemental information used by us in our financial
and operational decision making. In addition, we believe investors, analysts and lenders benefit
from referring to these non-GAAP financial measures when assessing our performance and expectations
of our future performance. However, this information should not be used as a substitute for our
GAAP financial information; rather it should be used in conjunction with financial statement
information contained in our condensed consolidated financial statements presented in accordance
with GAAP.
We expect to use consistent methods for computation of non-GAAP financial measures. Our
calculations of non-GAAP financial measures may not be consistent with calculations of similar
measures used by other companies. The accompanying notes have more details on the GAAP financial
measures that are most directly comparable to our non-GAAP financial measures and the related
reconciliations between these financial measures.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended (1) |
|
|
Twenty-Six Weeks Ended |
|
| |
|
June 29, |
|
|
July 1, |
|
|
Fav (Unfav) |
|
|
June 29, |
|
|
July 1, |
|
|
Fav (Unfav) |
|
| |
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
| |
|
(Dollars in thousands except statistical data and notes) |
|
EBITDA (2) |
|
$ |
5,561 |
|
|
$ |
(1,079 |
) |
|
|
615.4 |
% |
|
$ |
5,926 |
|
|
$ |
618 |
|
|
|
858.9 |
% |
Free cash flow (3) |
|
|
3,533 |
|
|
|
(5,035 |
) |
|
|
170.2 |
|
|
|
3,140 |
|
|
|
(6,415 |
) |
|
|
148.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statistical information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of customer
care centers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
9 |
|
|
|
9 |
|
|
|
|
|
|
|
9 |
|
|
|
9 |
|
|
|
|
|
Off-shore |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
12 |
|
|
|
12 |
|
|
|
|
|
|
|
12 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Number of workstations,
end of period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
4,655 |
|
|
|
4,504 |
|
|
|
|
|
|
|
4,655 |
|
|
|
4,504 |
|
|
|
|
|
Off-shore |
|
|
3,259 |
|
|
|
2,338 |
|
|
|
|
|
|
|
3,259 |
|
|
|
2,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
7,914 |
|
|
|
6,842 |
|
|
|
|
|
|
|
7,914 |
|
|
|
6,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to Non-GAAP Financial Measures
| |
|
|
| (1) |
|
We operate on a thirteen week fiscal quarter that ends on the Sunday closest to June 30.
|
| |
|
|
| (2) |
|
We define EBITDA as net income (loss) plus the provision (benefit) for income taxes,
depreciation and amortization, and interest expense.
|
21
EBITDA can be reconciled to net income (loss), which we believe to be the most directly comparable
financial measure calculated and presented in accordance with GAAP, as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
| |
|
June 29, |
|
|
July 1, |
|
|
June 29, |
|
|
July 1, |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
| |
|
(Dollars in thousands) |
|
Net income (loss) |
|
$ |
(63 |
) |
|
$ |
(5,436 |
) |
|
$ |
(4,091 |
) |
|
$ |
9,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
2,673 |
|
|
|
812 |
|
|
|
3,595 |
|
|
|
1,650 |
|
Income tax
provision (benefit) |
|
|
— |
|
|
|
12 |
|
|
|
— |
|
|
|
(17,568 |
) |
Depreciation and
amortization |
|
|
2,951 |
|
|
|
3,533 |
|
|
|
6,422 |
|
|
|
6,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
5,561 |
|
|
$ |
(1,079 |
) |
|
$ |
5,926 |
|
|
$ |
618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (3) |
|
We define free cash flow as EBITDA less capital expenditures.
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
| |
|
June 29, |
|
|
July 1, |
|
|
June 29, |
|
|
July 1, |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
| |
|
(Dollars in thousands) |
|
EBITDA |
|
$ |
5,561 |
|
|
$ |
(1,079 |
) |
|
$ |
5,926 |
|
|
$ |
618 |
|
Capital expenditures |
|
|
(2,232 |
) |
|
|
(3,956 |
) |
|
|
(3,665 |
) |
|
|
(7,033 |
) |
Leasehold improvements funded by
landlord |
|
|
204 |
|
|
|
— |
|
|
|
879 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free Cash Flow |
|
$ |
3,533 |
|
|
$ |
(5,035 |
) |
|
$ |
3,140 |
|
|
$ |
(6,415 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow can be reconciled to the net cash provided by (used in) operating activities, which
we believe to be the most directly comparable financial measure calculated and presented in
accordance with GAAP, as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
| |
|
June 29, |
|
|
July 1, |
|
|
June 29, |
|
|
July 1, |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
| |
|
(Dollars in thousands) |
|
Net cash provided by operating
activities |
|
$ |
5,611 |
|
|
$ |
8,558 |
|
|
$ |
13,301 |
|
|
$ |
6,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and
equipment |
|
|
(2,028 |
) |
|
|
(3,956 |
) |
|
|
(2,786 |
) |
|
|
(7,033 |
) |
Income tax provision (benefit) |
|
|
— |
|
|
|
12 |
|
|
|
— |
|
|
|
(17,568 |
) |
Interest expense |
|
|
2,673 |
|
|
|
812 |
|
|
|
3,595 |
|
|
|
1,650 |
|
Amortized gain on sale
leaseback |
|
|
31 |
|
|
|
49 |
|
|
|
63 |
|
|
|
94 |
|
Gain (loss) on sale of
property and equipment |
|
|
1 |
|
|
|
(51 |
) |
|
|
1 |
|
|
|
(53 |
) |
Income taxes payable |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17,580 |
|
Changes in operating assets
and liabilities |
|
|
(2,671 |
) |
|
|
(9,900 |
) |
|
|
(10,190 |
) |
|
|
(6,829 |
) |
Stock compensation expense |
|
|
(84 |
) |
|
|
(544 |
) |
|
|
(844 |
) |
|
|
(940 |
) |
Non-cash restructuring charges |
|
|
— |
|
|
|
(15 |
) |
|
|
— |
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Free Cash Flow |
|
$ |
3,533 |
|
|
$ |
(5,035 |
) |
|
$ |
3,140 |
|
|
$ |
(6,415 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Comparison of Results of Operations for the Thirteen Weeks Ended June 29, 2008 and July 1, 2007
Net revenue was $60.7 million for the thirteen weeks ended June 29, 2008, a $6.9 million, or 12.8%
increase from $53.8 million for the thirteen weeks ended July 1, 2007. Domestic revenue increased
by $1.4 million or 3.2%, driven primarily by increased volume of $1.9 million and $1.7 million from
our telecommunications and business services verticals, respectively, partially offset by a $1.4
million decline in volume in our financial services vertical. Off-shore revenue increased by $5.5
million, or 54.7%, due to increased volume in our healthcare and publishing verticals of $2.9
million and $1.8 million, respectively.
Cost of services was $50.0 million for the thirteen weeks ended June 29, 2008, as compared to $49.7
million for the thirteen weeks ended July 1, 2007. Direct labor increased $1.7 million, or 5.3%,
primarily driven by higher volume off-shore. Facility costs decreased $1.5 million, or 8.8%, due
primarily to a $0.9 million decrease associated with the 2007 downsizing of our Tucson, Arizona and
Corpus Christi, Texas customer care centers and a $0.8 million decrease associated with cost
savings initiatives, offset by a $0.5 million increase in off-shore facility costs due to the
expansion of our third Philippine customer care center. As a percentage of revenue, cost of
services decreased to 82.3% for the thirteen weeks ended June 29, 2008, from 92.4% for the thirteen
weeks ended July 1, 2007, primarily driven by cost savings initiatives.
Gross profit increased $6.6 million, or 162.4%, to $10.7 million for the thirteen weeks ended June
29, 2008, as compared to $4.1 million for the thirteen weeks ended July 1, 2007. The improvement
was primarily the result of the reduction of costs of services and increased volume. Gross profit
margin increased to 17.7% for the thirteen weeks ended June 29, 2008, as compared to 7.6% for the
thirteen weeks ended July 1, 2007 primarily as a result of the reduction in cost of services as a
percentage of revenue.
Selling, general and administrative expenses were $7.8 million for the thirteen weeks ended June
29, 2008, as compared to $7.2 million for the thirteen weeks ended July 1, 2007. The $0.6 million
increase is primarily due to a $1.3 million increase in compensation and benefits for incentive
compensation, partially offset by lower salaries and wages and lower stock compensation expense.
Restructuring and other charges were $0.4 million for the thirteen weeks ended June 29, 2008,
primarily related to severance charges resulting from changes in our executive team and further
reductions in our operational and administrative headcount. Restructuring and other charges of
$1.6 million for the thirteen weeks ended July 1, 2007 included $1.2 million related to the
restructuring of certain operations during the second quarter of 2007 and an additional $0.4
million in restructuring charges primarily related to our July 2005 restructuring plan. For more
information regarding restructuring and other charges, see Note 9 of the condensed consolidated
financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Operating income was $2.5 million for the thirteen weeks ended June 29, 2008, as compared to an
operating loss of $4.7 million for the thirteen weeks ended July 1, 2007. The $7.2 million
improvement is the result of increased gross profit of $6.6 million and lower restructuring and
other charges of $1.2 million, partially offset by increased selling, general and administrative
expenses of $0.6 million.
Net interest expense was $2.7 million for the thirteen weeks ended June 29, 2008, an increase of
$1.9 million from $0.8 million for the thirteen weeks ended July 1, 2007 driven by the acceleration
of deferred financing charges and prepayment fees of $1.8 million due to the early repayment in May
2008 of our loan facilities with LaSalle Bank National Association (LaSalle) and Atalaya Funding
II, L.P. (Atalaya).
23
EBITDA increased $6.6 million to $5.6 million for the thirteen weeks ended June 29, 2008 from a
negative $1.1 million for the thirteen weeks ended July 1, 2007, as a result of the increase in
gross profit. More information concerning this non-GAAP financial measure, including the
definition of EBITDA and a reconciliation of this measure to the most directly comparable financial
measure calculated and presented in accordance with GAAP, can be found under the heading “Non-GAAP
Financial Measures” and the accompanying notes thereto appearing elsewhere in this Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
The tax benefit associated with the loss before income taxes incurred for the thirteen weeks ended
June 29, 2008 of less than $0.1 million and the related deferred tax asset were offset with a
corresponding valuation allowance. This resulted
in a zero effective income tax rate for the thirteen weeks ended June 29, 2008. The effective tax
rate for the thirteen weeks ended July 1, 2007 was also zero.
We recorded a net loss of $0.1 million for the thirteen weeks ended June 29, 2008, as compared to
net loss of $5.4 million for the thirteen weeks ended July 1, 2007. The improvement is driven
largely by a $6.6 million improvement in gross profit and lower restructuring and other charges,
partially offset by higher selling general and administrative expenses and increased interest
expense.
Comparison of Results of Operations for the Twenty-six Weeks Ended June 29, 2008 and July 1, 2007
Net revenue was $124.2 million for the twenty-six weeks ended June 29, 2008, an $18.0 million, or
17.0% increase from $106.2 million for the twenty-six weeks ended July 1, 2007. Domestic revenue
increased by $7.8 million or 9.1%, driven primarily by increased volume of $8.9 million and $2.3
million from our business services and telecommunications verticals, respectively, partially offset
by a $3.0 million decline in volume in our financial services vertical. Off-shore revenue
increased by $10.2 million, or 50.8%, due to increased volume in our healthcare and publishing
verticals of $7.3 million and $3.2 million, respectively.
Cost of services increased $9.9 million, or 10.4%, from $95.8 million for the twenty-six weeks
ended July 1, 2007 to $105.7 million for the twenty-six weeks ended June 29, 2008. Direct labor
increased $9.7 million, or 15.5%, primarily driven by increased volume, partially offset by
improved utilization domestically. Facility costs increased $0.3 million, due primarily to a $2.1
million increase in off-shore facility costs driven by the expansion of our third Philippine
customer care center, offset by a $1.8 million decrease associated with the 2007 downsizing of two
customer care centers. As a percentage of revenue, cost of services decreased to 85.1% for the
twenty-six weeks ended June 29, 2008, from 90.2% for the twenty-six weeks ended July 1, 2007,
primarily driven by cost savings initiatives.
Gross profit increased $8.1 million, or 77.8%, from $10.4 million for the twenty-six weeks ended
July 1, 2007 to $18.5 million for the twenty-six weeks ended June 29, 2008. The improvement was
the result of incremental gross profit from higher off-shore volume, increased gross profit
contribution from our business services vertical and cost savings associated with the downsizing of
two customer care centers in the second quarter of 2007. Gross profit margin increased to 14.9%
for the twenty-six weeks ended June 29, 2008, as compared to 9.8% for the twenty-six weeks ended
July 1, 2007 primarily as a result of the reduction in cost of services as a percentage of revenue.
Selling, general and administrative expenses were $16.4 million for the twenty-six weeks ended June
29, 2008, as compared to $15.1 million for the twenty-six weeks ended July 1, 2007. The $1.3
million increase is primarily due to a $1.5 million increase in compensation and benefits for
incentive compensation and increased recruiting fees of $0.3 million partially offset by lower
salaries and wages and lower stock compensation expense.
24
Restructuring and other charges were $2.8 million for the twenty-six weeks ended June 29, 2008, as
compared to $1.6 million for the twenty-six weeks ended July 1, 2007. During the twenty-six weeks
ended June 29, 2008, we recorded severance charges of $2.8 million resulting from the accrual of
severance payment obligations of $1.1 million to Robert Keller, our former CEO, upon his
retirement, the elimination of approximately 130 operations and administrative positions and
changes in our executive team. Restructuring and other charges of $1.6 million for the twenty-six
weeks ended July 1, 2007 included $1.2 million related to the restructuring of certain operations
during the second quarter of 2007 and an additional $0.4 million in restructuring charges primarily
related to our July 2005 restructuring plan. For more information regarding restructuring and
other charges, see Note 9 of the condensed consolidated financial statements appearing elsewhere in
this Quarterly Report on Form 10-Q.
Operating loss was $0.7 million for the twenty-six weeks ended June 29, 2008, as compared to $6.2
million for the twenty-six weeks ended July 1, 2007. The $5.5 million improvement was the result
of an $8.1 million increase in gross profit, partially offset by a $1.3 million increase in
selling, general and administrative expenses and a $1.2 million increase in restructuring and other
charges.
Net interest expense was $3.6 million for the twenty-six weeks ended June 29, 2008, an increase of
$1.9 million from $1.7 million for the twenty-six weeks ended July 1, 2007 driven by the
acceleration of deferred financing charges and prepayment fees of $1.8 million due to the early
repayment in May 2008 of our loan facilities with LaSalle and Atalaya.
EBITDA increased $5.3 million to $5.9 million for the twenty-six weeks ended June 29, 2008 from
$0.6 million for the twenty-six weeks ended July 1, 2007, driven by improved gross profit of $8.1
million, partially offset by increased selling, general and administrative costs of $1.3 million
and increased restructuring and other charges of $1.2 million. More information concerning this
non-GAAP financial measure, including the definition of EBITDA and a reconciliation of this measure
to the most directly comparable financial measure calculated and presented in accordance with GAAP,
can be found under the heading “Non-GAAP Financial Measures” and the accompanying notes thereto
appearing elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
The tax benefit associated with the loss before income taxes incurred for the twenty-six weeks
ended June 29, 2008 of $1.6 million and the related deferred tax asset were offset with a
corresponding valuation allowance. This resulted in a zero effective income tax rate for the
twenty-six weeks ended June 29, 2008. The effective tax rate for the twenty-six weeks ended July
1, 2007 was also zero. Our 2007 results reflect a $17.6 million income tax benefit resulting from
the favorable resolution of our IRS appeal. For more information regarding the IRS appeal, see
Note 10 of the condensed consolidated financial statements appearing elsewhere in this Quarterly
Report on Form 10-Q.
We recorded a net loss of $4.1 million for the twenty-six weeks ended June 29, 2008, as compared to
net income of $9.8 million for the twenty-six weeks ended July 1, 2007. The $13.9 million
reduction in net income was largely the result of the previously mentioned $17.6 million tax
benefit recorded in 2007, increased selling, general and administrative expenses, higher
restructuring and other charges and the $1.9 million increase in 2008 interest expense, partially
offset by the $8.1 million improvement in gross profit for the twenty-six weeks ended June 29,
2008.
Liquidity and Capital Resources
The following table sets forth our condensed consolidated statements of cash flow data for the
twenty-six weeks ended June 29, 2008 and July 1, 2007, respectively.
| |
|
|
|
|
|
|
|
|
| |
|
Twenty-Six Weeks Ended |
|
| |
|
June 29, |
|
|
July 1, |
|
| |
|
2008 |
|
|
2007 |
|
| |
|
(Dollars in thousands) |
|
Net cash provided by operating activities |
|
$ |
13,301 |
|
|
$ |
6,697 |
|
Net cash used in investing activities |
|
|
(2,778 |
) |
|
|
(7,018 |
) |
Net cash used in financing activities |
|
|
(8,267 |
) |
|
|
(508 |
) |
Effect of exchange rate changes on cash |
|
|
(2,049 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents |
|
$ |
207 |
|
|
$ |
(867 |
) |
|
|
|
|
|
|
|
25
Operating Activities
Net cash provided by operating activities increased $6.6 million for the twenty-six weeks ended
June 29, 2008, as compared to the twenty-six weeks ended July 1, 2007. The improvement is due
primarily to the improvement in gross profit and increases in operating liabilities related to
accrued severance and accrued incentive compensation, partially offset by increases in interest
expense, selling, general and administrative expenses and restructuring and other charges.
Investing Activities
Net cash used in investing activities was $2.8 million for the twenty-six weeks ended June 29,
2008, as compared to $7.0 million for the twenty-six weeks ended July 1, 2007. Spending for the
twenty-six weeks ended June 29, 2008 primarily consisted of $1.3 million in continued investment in
information technology equipment, $1.0 million for the build-out of our Davenport, Iowa customer
care center, net of funding from the landlord, and $0.5 million in capital expenditures related to
our third customer care center in the Philippines.
Spending for the twenty-six weeks ended July 1, 2007 primarily included capital expenditures
associated with the build out of our third customer care center in the Philippines.
Financing Activities
Net cash used in financing activities was $8.3 million for the twenty-six weeks ended June 29,
2008, as compared to $0.5 million for the twenty-six weeks ended July 1, 2007. The increase in
2008 is the result of net payments of $14.0 million and $12.3 million as repayment in full of our
outstanding term loan with Atalaya and our revolving loan facility with LaSalle, respectively,
partially offset by net borrowings of $17.7 million under our new Revolving Loan Agreement with PNC
Bank National Association (PNC) and $0.3 million cash received from the exercise of stock options.
Net cash used in financing activities for the twenty-six weeks ended July 1, 2007 included payments
of $11.1 million against the Revolving Loan Facility offset by borrowings of $10.0 million under
the Term Loan and $0.6 million in cash received from the exercise of stock options.
Bank Financing
During a portion of the twenty-six weeks ended June 29, 2008, we were party to two separate loan
agreements which provided us with a $27.5 million revolving loan facility which expired in October
2010 (Revolving Loan Facility) and a $15.0 million term loan which matured in January 2011 (Term
Loan). Our ability to borrow under the Revolving Loan Facility depended on the amount of eligible
accounts receivable from our clients and there were limitations on the concentration of these
accounts with a single client. In addition, our lender retained certain reserves against otherwise
available borrowing capacity. These loan agreements required us to comply with certain financial
and other covenants, including limitations on our ability to make capital expenditures, incur
additional indebtedness, repurchase outstanding common shares, permit liens, acquire, sell or
dispose of certain assets, engage in certain mergers and acquisitions, pay dividends and make
certain restricted payments.
On May 5, 2008, we entered into a Revolving Credit and Security Agreement (Revolving Loan
Agreement) with PNC, as agent, and the financial institutions from time to time parties thereto as
lenders. The Revolving Loan Agreement provides us with a $40.0 million revolving loan facility
which expires in May 2011. Borrowings under the Revolving Loan Agreement were used to repay in
full our Revolving Loan Facility and Term Loan.
26
Our ability to borrow under the Revolving Loan Agreement depends on the amount of eligible accounts
receivable from our clients. In addition to borrowing against our eligible receivables, we may
borrow an additional $9.0 million which is supported by a letter of credit (Credit Enhancement
Letter of Credit) which was provided by TCS Global Holdings, L.P. (TCS), an affiliate of Theodore
G. Schwartz, our chairman and principal shareholder. In connection with the issuance of the Credit
Enhancement Letter of Credit, we and TCS entered into a Reimbursement and Security Agreement, dated
May 5, 2008 (Reimbursement Agreement). For additional information regarding the Revolving Loan
Agreement and the Reimbursement Agreement, see Note 8 to the condensed consolidated financial
statements in Item 1 of this Quarterly Report on Form 10-Q.
Borrowings under the Revolving Loan Agreement with PNC totaled $17.7 million as of June 29, 2008.
We had $11.0 million of unused borrowing capacity under the Revolving Loan Agreement as of June 29,
2008. We were in compliance with our financial covenants as of June 29, 2008.
We expect that our cash balances, cash flows from operations and available borrowings under our new
Revolving Loan Agreement will be sufficient to meet projected operating needs, fund any planned
capital expenditures, and repay debt obligations as they come due. Our cash flow is significantly
impacted by our ability to collect our clients’ accounts receivable on a timely basis. To the
extent that our business with a single client or small group of clients represents a more
significant portion of our revenue, a delay in receiving payment could materially adversely affect
the availability of cash to fund operations. A significant change in operating cash flow or a
failure to achieve profitability could have a material adverse effect on our liquidity and our
ability to comply with the covenants in our Revolving Loan Agreement. In addition, our failure to
adhere to the financial and other covenants could give rise to a default under the Revolving Loan
Agreement which would have a material adverse effect on our liquidity and financial condition.
There can be no assurances that we will be able to meet the financial and other covenants in our
Revolving Loan Agreement.
Free Cash Flow
Free cash flow improved by $9.5 million to a positive $3.1 million for the twenty-six weeks ended
June 29, 2008 from a negative $6.4 million for the twenty-six weeks ended July 1, 2007, as a result
of the $5.3 million increase in EBITDA and a $4.2 million decline in net capital expenditures.
More information concerning this non-GAAP financial measure including the definition of free cash
flow and a reconciliation of this measure to the most directly comparable financial measure
calculated and presented in accordance with GAAP, can be found under the heading “Non-GAAP
Financial Measures” and the accompanying notes thereto appearing elsewhere in this Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
27
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Historically, we have been exposed to the impact of U.S. interest rate changes directly related to
our normal operating and funding activities and foreign currency exchange risk related to our
operating costs in the Philippines. Our Revolving Loan Agreement and Credit Enhancement Letter of
Credit bear interest at floating rates, subjecting us to interest rate risk. To date, the impact
from interest rate fluctuations has not been material. The impact from foreign currency exchange
rates has become significant due to the appreciation of the U.S. dollar relative to the Philippine
peso and the increase in cost of services due to our expanded operations in the Philippines. We
had not used derivatives to manage this risk prior to September 30, 2007. In October 2007, we
commenced a currency rate hedging program with the objective of mitigating the impact of
significant fluctuations in the U.S. dollar / Philippine peso exchange rate. The objective of the
hedge transaction is to mitigate the variability in cash flows and expenses over the period of the
hedge contracts due to the foreign currency risk associated with the repayment of the intercompany
accounts payable from the US operations to the Philippines representing the Philippines share of
revenue. As of June 29, 2008, forward contracts to purchase 929 million Philippine pesos at a US
dollar notional amount of $21.7 million were outstanding.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of the effectiveness
of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period
covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive
officer and our principal financial officer have concluded that, as of the end of such period, our
disclosure controls and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by us in the reports that we
file or submit under the Exchange Act.
Internal Control Over Financial Reporting
There have not been changes in our 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 thirteen weeks ended
June 29, 2008 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Inherent Limitations on the Effectiveness of Controls
Our management, including our principal executive officer and our principal financial officer, does
not expect that our disclosure controls and procedures or our internal control over financial
reporting will prevent or detect all errors and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within our Company have been detected.
These inherent limitations include the realities that judgments in decision-making can be faulty
and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented
by the individual acts of some persons, by collusion of two or more people, or by management
override of the controls. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions. Projections of
any controls’ effectiveness in future periods are subject to risks. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
28
Part II. Other Information
Item 1A. Risk Factors
For a detailed discussion of the risks and uncertainties associated with our business see Item 1A
of Part I of our Annual Report on Form 10-K for the fiscal year ended December 30, 2007 and Item 1A
of Part II of our Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2008. There
have been no material changes to these risk factors since the filing of our Quarterly Form 10-Q for
the fiscal quarter ended March 30, 2008.
Item 4. Submission of Matters to a Vote of Security Holders
| |
(a) |
|
The Annual Meeting of Shareholders of the Company was held on June 6, 2008. |
| |
| |
(b) |
|
The name of each director elected at the Annual Meeting of Shareholders is set forth
under (c) below. |
| |
| |
(c) |
|
Set forth below is the tabulation of the votes for each nominee for election as a
director of the Company. All votes against nominees were recorded by the inspector of
election as withheld. |
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Withhold Authority |
|
| Name |
|
For |
|
|
(including broker non-vote) |
|
Cindy K. Andreotti |
|
|
46,167,890 |
|
|
|
2,831,019 |
|
John C. Kraft |
|
|
46,208,100 |
|
|
|
2,790,809 |
|
Michael P. Marrow |
|
|
48,799,414 |
|
|
|
199,495 |
|
Bhaskar Menon |
|
|
46,227,830 |
|
|
|
2,771,079 |
|
John J. Park |
|
|
46,182,930 |
|
|
|
2,815,979 |
|
Theodore G. Schwartz |
|
|
48,472,702 |
|
|
|
526,207 |
|
Samuel K. Skinner |
|
|
46,505,630 |
|
|
|
2,493,279 |
|
John L. Workman |
|
|
46,551,331 |
|
|
|
2,447,578 |
|
Item 6. Exhibits
The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index attached
hereto.
29
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. and Subsidiaries
|
|
| Date: August 4, 2008 |
By: |
/s/ Michael P. Marrow
|
|
| |
|
Michael P. Marrow |
|
| |
|
President and
Chief Executive Officer
(Principal Executive Officer) |
|
| |
|
|
| Date: August 4, 2008 |
By: |
/s/ Andrew B. Szafran
|
|
| |
|
Andrew B. Szafran |
|
| |
|
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer) |
|
| |
|
|
| Date: August 4, 2008 |
By: |
/s/ Joseph R. Doolan
|
|
| |
|
Joseph R. Doolan |
|
| |
|
Vice President and Controller
(Principal Accounting Officer) |
|
30
Exhibit Index
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
|
|
|
|
| |
3.1 |
|
|
Articles of Incorporation of APAC Customer Services, Inc.,
incorporated by reference to APAC Customer Services, Inc.’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2006. |
| |
|
|
|
|
| |
3.2 |
|
|
Second Amended and Restated Bylaws of APAC Customer
Services, Inc., dated August 20, 2007, incorporated by reference
to APAC Customer Services, Inc.’s Current Report on Form 8-K,
dated August 22, 2007. |
| |
|
|
|
|
| |
4.1 |
|
|
Specimen Common Stock Certificate, incorporated by reference to
APAC Customer Services, Inc.’s Annual Report on Form 10-K for the
fiscal year ended December 29, 2002. |
| |
|
|
|
|
| |
31.1 |
|
|
Certification of Chief Executive Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
|
|
|
|
| |
31.2 |
|
|
Certification of Chief Financial Officer, 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. |
31